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Review & Outlook: 'Predatory' Politics

Publication Date: 
November 27, 2007
The Wall Street Journal

Professor Marcus Cole's recent article on predatory lending laws is quoted in this Wall Street Journal criticism of the Mortgage Reform and Anti-Predatory Lending Act of 2007, a bill passed by the U.S. House of Representatives:

...The bill bars banks and securitizers from "steering any consumer to a loan that the consumer lacks a reasonable ability to repay, does not provide a net tangible benefit, or has predatory characteristics."

...This legislation comes at the worst possible moment for the ailing U.S. housing market...

Now the credit screws are so tight that low-income homebuyers without stellar credit ratings are finding it nearly impossible to get any home loan -- which will further drag down home values. The broader danger is that this lending aversion will limit credit even for higher-income home buyers who have less than pristine credit histories.

That has been precisely the effect of similar "anti-predatory lending" laws at the state level. A recent study by Marcus Cole of Stanford Law School investigated these "consumer protection" laws in Georgia, Illinois and North Carolina, and found a sharp decline in new loans to moderate-income borrowers.

Consider the Illinois "Fairness in Lending Act." That 2005 law required credit counseling and byzantine regulatory requirements on loans made in the Chicago-area to "at risk" communities. The result was a 45% fall in home sales in these neighborhoods. "Instead of protecting hardworking would-be homeowners from predatory lending, the new law protected them from credit," Mr. Cole says. "Within just a few months more than 30 mortgage lenders refused to lend on homes purchased in the targeted zip-codes." He adds that "Home prices plummeted, draining relatively poor people of what little equity they had in their homes." That's fairness for you.