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State Lending Laws Work without Cutting Off Credit, Study Shows

Thursday, February 23, 2006

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The Best Value in the Subprime Market: State Predatory Lending Reforms (PDF 432kb)

A study by the Center for Responsible Lending proves that laws against predatory lending thwart abusive lenders while in many cases increasing availability of credit for people who need it most.

"The Best Value in the Subprime Market: State Predatory Lending Reforms" is the most comprehensive study of its kind. Researchers examined more than 6 million subprime mortgages from 1998 through 2004, or three-quarters of all the loans in the subprime market during those years.

States with the strongest laws -- Massachusetts, New Jersey, New Mexico, New York, North Carolina, and West Virginia -- showed the largest declines in loans with predatory terms.

Predatory loans in many of the 28 states with some kind of reforms against predatory lending dropped by almost a third. In Massachusetts alone, that meant almost 600 fewer abusive loans a month.

The study found that these laws didn't decrease the number of loans available. That refutes industry claims that legislation chokes off credit in the subprime mortgage market, where people with credit problems borrow and where most predatory lenders operate.

Finally, the study found that borrowers in states with predatory lending regulation pay about the same or even lower interest rates for subprime mortgages.

This is surprising since predatory lending reforms often focus on reducing fees with the expectation that lenders will shift compensation to marginally higher interest rates, which are more transparent.

Interest rates in Iowa, due in large part to its strong law on prepayment penalties, declined more than 28 basis points on fixed-rate mortgages in the subprime market. In Massachusetts and New York, borrowers with a $200,000 mortgage can save up to $3,000 over the first three years.

"Our law is tough but fair," said Massachusetts State Rep. John F. Quinn, former chairman of the influential House banking committee. "We've all heard the myths that helping consumers hurts the market. Well, this study shows that we can put that tired act to bed."

Yet legislation pending in Congress would erase these state laws and replace them with a weak federal law. Rep. Bob Ney, Republican of Ohio, introduced that bill.

"This study demonstrates that critics who claim anti-predatory lending laws will dry up people's access to credit are just plain wrong. This research shows that sound legislation curbs abusive lending, and it does not reduce responsible lending," said Iowa Attorney General Tom Miller, "And that leads to one more conclusion: consumers would be harmed if federal law preempted state regulation."

Predatory mortgage lending costs Americans more than $9 billion a year, the Center for Responsible Lending estimates. It robs people who can least afford it of the hard-won equity in their homes, and sometimes it costs them their home itself. It ruins people's credit and even throws families into bankruptcy and out on the street. It threatens fragile neighborhoods and puts a dent in local economies.

The Center, with consumer groups, civil rights organizations, unions and others are supporting the Miller-Watt-Frank bill in Congress, which would beef up the anemic federal law against predatory mortgage lending and let states go still further if they think it necessary to protect consumers.

"For years, the debate over predatory lending has been conducted in an information vacuum," said Keith Ernst, Senior Policy Counsel at the Center for Responsible Lending, who supervised the study. "Now we know, beyond a doubt, that these laws work, and that they don't harm consumers.

"We are at a whole new stage in the debate."

For more information, contact Michael Flagg at 202 349-1862 or; or Sharon Reuss, 919 313-8527 or