The Impact of State Anti-predatory Lending Laws on the Foreclosure Crisis

By the end of 2007, thirty states and the District of Columbia had passed some sort of subprime mortgage regulation statute, while the remaining states left the subprime mortgage market unregulated. Were these state mortgage laws effective in restraining risky mortgage lending and mitigating the surge in foreclosures? Our study takes advantage of this natural experiment and compares loan terms, mortgage foreclosures, and defaults in states with and without anti-predatory lending laws (APLs), using a sample of 1.2 million mortgage loans originated during the subprime boom and observed monthly through the end of 2008. Using these loan level data, we find that state APLs are associated with a 13% reduction in prepayment penalties and appear also to reduce the incidence of option adjustable-rate mortgage (ARM) loans under some conditions. The effects are particularly strong in the subprime market. APLs also reduce the risk of default, although results vary depending on the universe of loans analyzed and the specification of the APL. The degree of coverage and restrictions also seem to matter, with more stringent APLs having a stronger dampening effect on the origination of loans with riskier terms and subsequent default rates. This analysis, combined with other research, suggests that strong state APLs are an important tool for consumer protection and that federal preemption may have diluted their protective effect.