In a working paper released last month, Morgan Rose, a researcher from the OCC, analyzes a set of subprime loans originated in Chicago to determine the impact of selected lending terms on the likelihood of foreclosure. The study finds that loans with prepayment penalties and balloon payments are 22 to 117 percent more likely to foreclose than those without such terms. However, after an extended analysis, the author concludes that the impact of those terms on foreclosure varies widely. He therefore advocates for regulatory tightening of underwriting and pricing practices, as opposed to legislation that targets specific loan terms. The conclusions of the Rose paper are unconvincing for several reasons:
- Limited data and variables undercut the report's sweeping conclusions.
- The findings are contradicted by a larger, national study.
- Abusive loan terms targeted by predatory-lending laws have negative consequences beyond foreclosures.