As shown in the appendix, Staten finds that originations of subprime mortgage loans (especially first-lien loans) in North Carolina plummeted after passage of the 1999 law, both absolutely and relatively to its neighbors, and that the decline was almost exclusively in the supply of loans available to low- and moderate-income bor- rowers (those most dependent on high-cost credit). The response to the North Carolina law provides clear evidence of the chilling effect of antipredatory laws on the supply of subprime mortgage loans to low-income borrowers. This is a very real threat and one that should be seri- ously considered by policymakers at all levels of government, especially in light of the multiple, successful efforts that Federal law in particular has made to increase lending in recent years to minorities and low-income borrowers. In the meantime, Congress should provide the Federal agencies charged with enforcing existing statutes with sufficient re- sources to carry out their mandates, as well as to support ongoing coun- seling efforts to educate vulnerable consumers about the alternatives open to them in the credit market and the dangers of signing mortgages with un- duly onerous terms. Limits on the ability of States to regulate consumer lenders head- quartered outside their State were undermined by the 1978 Marquette National Bank case (see DeMuth, 1986). These measures were crucial contributors to the democratization of consumer fi- nance, and particularly, mortgage finance in recent years.
The Marquette case opened a flood of competition in credit card lending, which led the way to estab- lishing a deep market in consumer credit receivables and the new techniques for credit scoring — innovations which have increased the supply and reduced the cost of consumer credit. The 1982 Parity Act expanded the range of competition in consumer mortgage fi- nance preempting State prohibitions on alternative mortgages originated by both de- pository and nondepository institutions. In particular, as I understand this law, it effectively preempts State usury laws as applied to subprime mortgages. Because mortgage lending relies on real estate as security, it can be provided more inexpen- sively than credit card loans or other unsecured consumer credit (Calomiris and Mason, 1998). Thus the 1982 Act provided an important benefit to consumers over and above the beneficial undermining bad credit payday loans Idaho of State usury laws after the Marquette case. But the new stealth usury laws of North Carolina, Dayton, and Washington DC, and similar proposals elsewhere, pose a new threat. If Congress fails to restore the preemption principle in the subprime mortgage market established in 1982, then lenders will be driven out of the high-risk end of the market, and therefore, many consumers will be driven out of the mortgage market and into higher-cost, less de- sirable credit markets (credit cards, pawn shops, and worse). Other Prohibitions I have already argued against further regulatory or statutory limits on prepay- ment penalties, or prohibition of single-premium credit insurance, in favor of alter- native approaches to the abuses that sometimes accompany these features.
I am also opposed to the many proposals that would prevent borrowers from agreeing to mandatory binding arbitration to resolve loan disputes. If an individual wishes to commit to binding arbitration, that commitment reduces the costs to lenders of originating mortgages, and in the competitive mortgage market, that cost is passed on to consumers. Conclusion For the most part, predatory lending practices can be addressed by focusing ef- forts on better enforcing laws against fraud, improving disclosure rules, offering Government-financed counseling, and placing a few well thought out limits on credit 89 industry practices.
The Fed already has the authority and the expertise to formulate those rules and is in the process of doing so, based on a new data collection effort that will permit an informed and balanced approach to regulating subprime lending. Members of Congress, and especially Members of this Committee, also should speak out in defense of honest subprime lenders, of which there are many.
The pos- sible passage of State and city usury statutes is not the only threat to the supply of subprime loans.
There is also the possibility that bad publicity, orchestrated by community groups, itself could force some lenders to exit the market.
Some community organizations have been waging a smear campaign against subprime lenders.
To the extent that zealous community groups, whether out of noble or selfish bad credit payday loans Idaho intent, succeed in smearing subprime lenders as a group, the public relations consequences will have a chilling effect on the supply of subprime credit. The second casualty will be access to credit for the poor. Evidence on Specialization in Private Debt Contracting. Gramlich at the Federal Reserve Bank of Philadelphia Community and Consumer Affairs Depart- ment Conference on Predatory Lending.
Curbing Predatory Home Mortgage Lending: A Joint Report. In the discussion of single-premium credit insurance, I argued that the present value cost of single-premium insurance was lower than that of monthly insurance. That argument was based on my misinterpretation of the bad credit payday loans Idaho quotes I had received from Assurant Group.
I certainly do not believe that the miscommunication between Assurant and me was the result of any willful attempt on their part to mislead me. In fact, as you correctly guessed in your comment on my testimony, the cost figure they quoted me is paid over 30 years even though the coverage lasts only five years. As a result of further discussions I had with several people at Assurant and elsewhere after testifying, I have altered several aspects of my testimony on the question of regulating single-premium insurance. The thrust of my recommendation remains the same - regulate, but do not prohibit, single-premium insurance. If properly regulated, this product may have a useful place in the industry. I know that many critics see its use as prima facie evidence of dishonesty by lenders.
It is possible, however, that part of its current attraction, in spite of its high relative price, reflects the regulation of the pricing of monthly insurance. Defenders of single-premium insurance argue that the regulated price of monthly insurance is set too low, and thus only single-premium insurance is readily available for all borrowers.