The term refers to loans with exceptionally high interest charges or unreasonable or deceptive terms, such as balloon payments or negative amortization. Anti-predatory lending laws are intended to curb the incidence of dishonest or fraudulent lending. Smith and Goodman examine two main types of state lending laws: those regulating "predatory lending" and those regulating the foreclosure process itself. In general, their data suggest that lenders have stricter borrowing requirements in states where it is more costly to foreclose, which leads to lower relative foreclosure rates.
Previous research into the effects of legislation on default rates has attempted to determine the impact on the borrower's decision to default, 2 while Smith and Goodman examine the effects of these laws on lenders' underwriting standards and acceptance rates. 1 Noting that default rates vary greatly by state, Smith and Goodman hypothesize that these variations may be caused by variations in state laws, which change the costs of foreclosure to lenders. Goodman explore another potential factor in foreclosure rates: differences in state laws regulating predatory lending and foreclosure proceedings. In a recent working paper from the Richmond Fed, one of the authors of this Economic Brief (Smith) and Allen C. Many of those factors developed during 2003-2006, and include falling or stagnant home prices, rising interest rates, lax underwriting, predatory lending, fraud, lack of borrower due diligence, and underlying economic conditions in certain regions. Higher-risk borrowers with "subprime" mortgages, loosely defined as a loan made with a higher interest rate than a traditional loan because the borrower is expected to have a relatively higher chance of defaulting, were disproportionately affected.įoreclosures may be both a signal and a cause of a weak economy, and concern about the effects of increasing foreclosure rates on both consumers and financial institutions has prompted research into the causes of the recent foreclosure wave. Many of these homeowners were faced with negative equity positions, while others had taken out loans that they were no longer able to afford or refinance. Since late 2006, the United States has experienced a decline in the housing market, including a large increase in the number of foreclosures. State-level legislation may also have played a role by making it more costly for lenders in some states to proceed to foreclose on defaulted mortgages. The terms of the loans that were made, the characteristics of borrowers, and local economic conditions, among other factors, all contributed significantly to differences in default rates. Problems in the housing sector have prompted research into the causes of default by borrowers.
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