Laws against predatory lending work without cutting off credit, according to a study released by the Center for Responsible Lending, a nonpartisan research and policy organization.
States with the strongest predatory lending laws — Massachusetts, New Jersey, New Mexico, New York, North Carolina and West Virginia — showed the largest declines in loans with predatory terms, according to the study, “The Best Value in the Subprime Market: State Predatory Lending Reforms,” which examined more than 6 million subprime mortgages from 1998 through 2004, or three-quarters of all the loans in the subprime market during those years.
Predatory lending laws have stirred controversy in some states because critics have said tight restrictions would limit the number of subprime loans available.
The study, however, claims that these laws didn’t decrease the number of loans available. “This study demonstrates that critics who claim anti-predatory-lending laws will dry up people’s access to credit are just plain wrong,” Iowa Attorney General Tom Miller said in a statement.
Predatory loans in many of the 28 states with some kind of reforms against predatory lending dropped by almost a third, according to the research. In Massachusetts, that meant almost 600 fewer abusive loans a month.
Borrowers in states with predatory lending regulation pay about the same or lower interest rates for subprime mortgages, according to the study. Predatory lending reforms often focus on reducing fees with the expectation that lenders will shift compensation to marginally higher interest rates, which are more transparent.
Interest rates in Iowa, due in large part to its strong law on prepayment penalties, declined more than 28 basis points on fixed-rate mortgages in the subprime market, the study found. And in Massachusetts and New York, borrowers with a $200,000 mortgage can save up to $3,000 over the first three years.
Predatory mortgage lending costs Americans more than $9 billion a year, the Center for Responsible Lending estimates.
The Center, with consumer groups, civil rights organizations, unions and others are supporting the Miller-Watt-Frank bill in Congress, which would beef up the anemic federal law against predatory mortgage lending and let states go further if they think it is necessary to protect consumers.
The report can be downloaded at the Center for Responsible Lending’s Web site.
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