OCTOBER 2004

New Studies Show Harm
From Anti-Predatory Lending Laws

Evidence continues to mount that some state laws intended to curb abusive mortgage lending are causing significant reductions in the supply of subprime mortgage credit. Two new studies of laws in North Carolina and New Jersey were released in September.

The Mortgage Bankers Association released a study conducted by the consulting firm Abt Associates (Cambridge, MA) that used Home Mortgage Disclosure Act (HMDA) data to analyze the impact of North Carolina's 1999 anti-predatory lending law. The Abt study examined mortgage loan origination volumes across neighborhoods before and after passage of the law, where neighborhoods were defined by U.S. Census Bureau census tracts. On average, census tracts represent neighborhoods of about 4,000 people. The study compared pre and post-law patterns in North Carolina neighborhoods with neighborhoods in the surrounding states of Georgia, South Carolina, Tennessee and Virginia. Highlights of the findings include:

• Growth in loan volumes among subprime lenders in North Carolina through 2002 had not kept pace with growth in control group states, particularly among refinance loans.

• The largest differences in growth rates between North Carolina and surrounding states were in predominantly white neighborhoods and moderate-income neighborhoods, but the only absolute declines during the period occurred in North Carolina's predominantly minority and low-income neighborhoods.

• Declines in loan volumes in North Carolina relative to the surrounding states appeared to be attributable to declines in application volumes, not increases in denial rates.

The National Home Equity Mortgage Association released a study conducted by two professors at the University of Virginia that found that New Jersey's anti-predatory lending law had crimped the supply of subprime loans available in the state. The study, authored by Richard F. DeMong and Richard G. Netemeyer, found that a smaller percentage of mortgage loans made in New Jersey during the first quarter of 2004 were subprime relative to Pennsylvania, and New Jersey borrowers needed a higher average credit score and significantly higher incomes to qualify for mortgage loans than was the case for borrowers in Pennsylvania. In an earlier study released last spring, the same authors found that the New Jersey law had caused a $1billion drop in mortgage originations in the first two months following its enactment.