The Impact of State Anti-Predatory Lending Laws on the Foreclosure Crisis

By the end of 2007, thirty states and the District of Colombia had passed some sort of mortgage regulation statute, while the remaining states left the mortgage market unregulated. Were these state mortgage laws effective in restraining risky mortgage lending and mitigating the surge in foreclosures? Our study takes advantage of this natural experiment and compares loan terms, foreclosures and defaults in states with and without anti-predatory lending laws (“APLs”), using a sample of 1.2 million mortgage loans originated during the subprime boom and observed monthly through the end of 2008. Using these loan level data, we find that State APLs are associated with a 13 percent reduction in prepayment penalties and appear also to reduce the incidence of option ARM loans. APL’s also clearly affected the risk of default and foreclosure: they reduced the likelihood of a loan becoming 90 days delinquent by 15 percent. The degree of coverage and restrictions matter, with more stringent APLs having a stronger dampening effect on default rates. These results prove to be remarkably consistent, even after testing for different samples and law specifications. This analysis, combined with other research on the effect of APLs and federal preemption leads us to conclude that strong state APLs are an important tool for consumer protection and that state APLs should not be preempted by federal law.