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Publication Date

October 2009


Alan White, Lei Ding, Roberto G. Quercia


National State Attorneys General Program

Executive Summary

Federal preemption of state anti-predatory lending laws has received increased scrutiny in recent debates over the subprime crisis. This is because federal laws regarding mortgage lending had been substantially less restrictive than many state laws in recent years and because lending by preempted lenders accounts for a significant share of the mortgage market.

As policy makers try to deal with mounting foreclosures, it is important to understand whether federal preemption is to blame, at least in part, for the current crisis. The overall goal of this study is to document the impact of state anti-predatory lending laws (APLs) and the impact of federal preemption, particularly the Office of the Comptroller of the Currency’s (OCC) preemption in 2004, which coincided with the explosion in subprime lending. We present a preliminary descriptive analysis in this Phase I report.

To examine the impact of both state anti-predatory lending laws and federal preemption, we developed a coding system that allows us to identify states with anti-predatory lending laws that are more or less restrictive than federal regulations and to examine the impact of specific restrictions contained in some state laws, such as regulation on a verification of a borrower’s ability to pay, the coverage of mortgage loans with highpoints and fees, and the restriction of prepayment penalties. The coding system provides a strong foundation for the descriptive analysis in this study.

Unlike most early studies on the impact of APLs, which focused primarily on subprime credit and its overall cost, this study looks at the link between state laws and mortgage default rates, specifically whether APLs are associated with lower rates of residential mortgage default.

Overall, we observe a lower default rate for neighborhoods in APL states, in states requiring verification of borrowers’ repayment ability, in states with broader coverage of subprime loans with high points and fees, and in states with more restrictive regulation on prepayment penalties. We believe that these findings are remarkable, since they suggest an important and yet unexplored link between APLs and foreclosures.

Moreover, given the wide range of factors influencing foreclosures, including house price declines, rising unemployment, and differences in state foreclosure processes, these descriptive statistics are likely to result in an underestimation of the positive impacts of APLs.

These findings also point to the need to understand how federal preemption affected the  effectiveness of state APLs. To provide a preliminary analysis of this question, we also undertake descriptive analyses of the impact of federal preemption on subprime loan originations. Using Home Mortgage Disclosure Act (HMDA) data, we compared trends in subprime application and origination before and after preemption by different types of institutions and for states with or without APLs.

Our a priori expectation was that after the OCC preemption, depository lenders, especially national banks, would increase their subprime activity in states with APLs because they were no longer required to abide by more stringent state regulations. Although the results provide some support to our contention, the nationwide results were too aggregated to capture the nuances of the interaction of preemption and APLs in different states. Moreover, the HMDA data is not perfectly suited to understanding changes in subprime lending after 2004. Using the HUD subprime lender
list is less than ideal since the distinction between prime and subprime lenders became increasingly blurred during this time period, while loan pricing information, which helps identify at least one subprime loan characteristic directly, was not made available in HMDA before 2004.

Because of the descriptive nature of this analysis, the findings here should be considered preliminary. Regression analysis is needed to derive more definite conclusions. In Phase II of the study, we will expand and improve upon the analysis in two ways. We will rely on more rigorous multivariate methods and use an enriched and expanded HMDA database. These and other techniques should allow us to isolate the impact of state antipredatory lending laws and the 2004 OCC preemption. With the expanded HMDA data, we should be able to examine detailed loan characteristics and the performance of preempted loans compared with those still covered by state laws. By focusing on a random sample of mortgages originated by different lenders before and after preemption and tracking their performance over time, we should be able to identify whether the 2004 ruling contributed to the foreclosure crisis that followed.

Topics(s): Default, Bankruptcy, & Foreclosure, Housing Policy, Mortgage Finance