Publication DateFebruary 2012
Author(s)Alan White, Carolina Reid, Lei Ding, Roberto G. Quercia
Client/FunderNational State Attorneys General Program
Federal preemption of state mortgage lending regulations may result in an increase in mortgage default risk, thus limiting consumer protection in the residential mortgage market.
State anti-predatory lending laws (APLs) are designed to protect borrowers against predatory lending that can increase the risk of default and deplete the home equity held by borrowers.
Federal regulators instituted preemption that limited the scope and reach of state anti-predatory lending regulations for certain lenders. Based on the variation in state laws and the variation in the regulatory environment among lenders, this paper identifies the effects of federal preemption of state APLs on the quality of mortgages originated by preempted lenders.
The results provide evidence of a relatively higher increase in default risk among loans exempted from strong state anti-predatory laws. These results are most robust among refinance mortgages with adjustable interest rates—a large and highly dynamic market in the period of analysis.
The findings provide initial evidence that preemption of state mortgage lending regulations may result in an increase in mortgage default risk, thus limiting consumer protection in the residential mortgage market.