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Publication Date

March 2010


Alan White, Carolina Reid, Lei Ding, Roberto G. Quercia

Many aspects of subprime lending and other exotic mortgage products are now widely recognized in retrospect to have contributed to the current foreclosure crisis. However, some state and local authorities identified these concerns early on.

As far back as 1999, North Carolina implemented the first anti-predatory law (APL) designed to expand consumer protections. By the end of 2007, 30 states and the District of Colombia had passed some sort of mortgage regulation statute. Most of these were modeled after the Homeownership Equity Protection Act (HOEPA) of 1994, although many were broader in coverage and more restrictive than the federal legislation.

There has been some debate about the effect and consequences of APLs, and research is important to identify what worked in the midst of all that went wrong. This report firmly concludes that state APLs provided an important safeguard against predatory mortgage lending.

Unfortunately, federal regulators excused some mortgage lenders from state oversight immediately preceding the boom in subprime lending. In 2004, the Office of the Comptroller of the Currency (OCC) joined the Office of Thrift Supervision (OTS) in ruling that nationally chartered banks (like the OTS-regulated thrifts) were not subject to these state regulations.

Consequently, preemption deprived some borrowers of additional protections that would have encouraged better underwriting and likely reduced the level of foreclosures.

A companion report, The Preemption Effect: The Impact of Federal Preemption of State Anti-predatory Lending Laws on the Foreclosure Crisis, analyzes the impact of OCC preemption.

The proven record of success of state APLs should encourage additional states to adopt stricter mortgage regulations appropriate to their markets. However, more state legislation will be less effective if it can be preempted by federal regulators.

The results of these studies support the argument that consumer protections should not be reduced to the least common denominator. Instead, reasonable federal regulation should act as a floor for consumer protection from which states may build more stringent legislation if desired based on local market conditions.

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