Volume 15, Issue 3

2004

This article examines changes in subprime mortgage originations before and after the implementation of North Carolina's Predatory Lending Law. Previous studies have noted a decline in overall subprime lending. This was to be expected, since the law was intended to reduce the number of predatory or abusive subprime loans. But which components of subprime lending declined, which remained stable or increased, and what happpned to those loans that the law defines as predatory?

 

Using a database of 3.3 million loans from 1998 to 2002, we find that the reduction that occurred after the law took effect was entirely due to a decline in refinancing loans and that almost 90 percent of this decline can be traced to a reduction in predatory loans. The law is doing what it was intended to do: eliminate abusive loans without restricting the supply of subprime mortgage capital for borrowers with blemished credit records.