Th E Law a N D Ec O N O M I C S O F Re M E D I E S F O R Pr E D at O Ry Le N D I N G

Over the past decade, there has been a significant increase in the phenomenon known as ”predatory lending.” In a forthcoming paper, we argue that predatory lending emerged when market incentives that historically led lenders to engage in credit rationing gave way to a market where lenders could easily exploit unsophisticated borrowers. Our specific focus is on the home loan market, i.e., closed-end mortgages secured by first or subordinate liens on borrowers' homes. This executive summary of the paper proceeds in three parts. In the first section, we identify six problems associated with various lending practices that have been characterized as predatory. We define predatory lending as a syndrome of abusive loan terms or practices that involve one or more of these six problems. In the second part, we describe information asymmetries that formerly led to credit rationing. We then identify how changes in the financial services market have altered the conventional home mortgage market. In particular, we argue that an increase in the amount of capital available for mortgages, increased incentives for lenders to specialize in lending to low-and moderate-income borrowers, and opportunities for deception — a result, in part, of securitization — have enabled predatory lenders to thrive.