Academic journal article Texas Law Review

Toward One Competitive and Fair Mortgage Market: Suggested Reforms in A Tale of Three Markets Point in the Right Direction

Academic journal article Texas Law Review

Toward One Competitive and Fair Mortgage Market: Suggested Reforms in A Tale of Three Markets Point in the Right Direction

Article excerpt

I. Introduction

Predatory lending, unfortunately, is not a new phenomenon.1 What is new involves both bad news and good news. The bad news is that predatory lending in both the mortgage and nonmortgage markets has grown exponentially in the last decade, leaving a much deeper and more widespread financial havoc in its wake.2 The good news is that, on the mortgage side, Congress, federal agencies, consumer and housing advocates, and the public have focused on this national scandal and made some headway in addressing predatory lending.

Toward this end, Congress passed the Home Ownership and Equity Protection Act (HOEPA), effective in 1995.3 HOEPA creates a special class of regulated closed-end loans. If the annual percentage rate exceeds certain treasury securities by more than 8% for first lien loans, or if certain points and fees exceed 8% of the total loan amount, the Act is triggered.4 These loans are subject to special disclosure requirements and, more critically, to restrictions on substantive terms that are commonly used by abusive lenders, and those who bring them these loans,5 to manipulate the cost of these transactions. Significantly, certain types of creditor behavior are also restricted. Unfortunately, the triggers under HOEPA are so high that many abusive loans are not regulated, even though the Federal Reserve Board recently expanded coverage.6

Some states have enacted "home loan protection" or "fair lending" statutes or regulations to fill in the gaps left by HOEPA. New Mexico, New Jersey, New York, and North Carolina currently provide the greatest protection for their citizens.7 Georgia enacted an even stronger law last year but, by March 2003, the legislature had gutted some of its most significant protections after the governor, a strong proponent, lost his election in November.8 Arkansas, California, the District of Columbia, Illinois, Massachusetts, and Texas are other jurisdictions that regulate abusive mortgage loans, though not to the same degree.9 In contrast, new laws in Connecticut, Florida, Ohio, and Pennsylvania are likely to have little real effect on predatory practices in those states.10 Much work remains from the consumer's perspective. Any gains may be undermined, at least in Congress, given the political changes wrought by the 2002 elections.11 Despite the federal scene, pressure continues in some states to push forward consumer protection legislation.

The other good news is that researchers and academics have begun to study and report about predatory mortgage lending. High quality research and articles assist in fueling and defining the public policy debate in a positive way. Much of the research to date has involved matching Home Mortgage Disclosure Act (HMDA) data for subprime lenders with census track information in order to draw inferences about the lending patterns to minority borrowers living in low, moderate, and upper income neighborhoods.12 These studies uniformly reveal that minority borrowers, regardless of income, are much more likely to be sold subprime-ergo, more expensive-loans than their white counterparts.13

Drawing upon these studies and other related research, the recently published A Tale of Three Markets: The Law and Economics of Predatory Lending is a landmark analysis of the mortgage marketplace, its successes and disturbing failures, and the remedies needed to curb its abusive aspects.14 The contribution of Professors Engel and McCoy to the body of critical thinking about predatory mortgage lending cannot be overstated.15 In my view, the important advances of this work number at least three.

First, these authors are the first to thoroughly describe the reality of the mortgage marketplace in today's world-one that is segmented and treats borrowers very differently depending upon whether their mortgage was placed in the prime, subprime, or predatory market.16 These and other market dynamics are carefully articulated and meticulously documented. …

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