Don't Cure Predatory Lending by Killing Subprime

By Peterson, James R. | ABA Banking Journal, May 2001 | Go to article overview

Don't Cure Predatory Lending by Killing Subprime


Peterson, James R., ABA Banking Journal


New ABA report urges caution in solving the problem

Gouging consumers for mortgage dollars is a black mark on the banking industry, even though the bad guys usually aren't bankers. But what's to be done?

Nobody doubts that predatory lending is on the increase and everyone knows it is tied to the growth in subprime lending. From 1994 to 1999, the dollar volume of subprime mortgage originations increased by a near factor of five, from $45 billion to $160 billion. But bankers fear that wrong-headed attempts to curtail the predatory lending problem could reverse this trend.

This bad dream could be coming true already. The number of subprime securitizations began to decline in 1999 (see chart), although this decline could be attributed to any number of market factors.

The predatory lending problem has prompted the American Bankers Association to publish a new report. This informative document, written by Robert Litan, director of the Brookings Institution's economic studies program, urges a patient, more prudent approach to curing predatory lending practices.

Although bankers now are facing a slew of new anti-predatory lending initiatives on both federal and state levels, the report reveals that virtually all of the nefarious practices under review are already against federal law. What's more, the report claims any additional legislation risks the loss of funding to those marginal but credit-worthy borrowers who need it most.

Litan is critical of new lending laws in North Carolina and Chicago and proposals in other cities, urging an exclusive federal response as the only way to deal with the problem. …

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