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Predatory mortgage lending

  • Philip Bond
  • David K. Musto
  • Bilge Yilmaz
Registered author(s):

    Regulators express growing concern over predatory loans, which we take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, we identify the circumstances in which it arises both with and without competition. We find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. We use our model to analyze the effects of legislative interventions.

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2008/wp08-24.pdf
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    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 08-24.

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    Date of creation: 2008
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    Handle: RePEc:fip:fedpwp:08-24
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    1. Villeneuve, Bertrand, 2005. "Competition between insurers with superior information," European Economic Review, Elsevier, vol. 49(2), pages 321-340, February.
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    7. Kathleen C. Engel & Patricia A. McCoy, 2001. "The law and economics of remedies of predatory lending," Proceedings 790, Federal Reserve Bank of Chicago.
    8. Giang Ho & Anthony Pennington-Cross, 2006. "The impact of local predatory lending laws on the flow of subprime credit," Working Papers 2006-009, Federal Reserve Bank of St. Louis.
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    14. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
    15. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
    16. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    17. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(2), pages 205-31, October.
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    19. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
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