One of the hallmarks of the U.S. financial system is that it has become increasingly “democratized.” Encouraged by government policies and spurred by market forces, financial institutions and markets over time have gradually expanded credit to borrowers who in earlier times could not have qualified for credit. In mortgage markets especially, the government has played an important catalytic role: creating a secondary market in mortgages through various “government-sponsored” enterprises, extending federal insurance to mortgages for low- and moderate-income (LMI) homebuyers, and by imposing “community reinvestment” obligations on depository institutions that are aimed at encouraging lending to LMI borrowers and residents of LMI geographic areas. In the 1990s, the growth of the “subprime” lending market – among lenders and the investment banks that have “securitized” the loans – has led to a major increase in mortgage lending to low income households, and especially minorities. As a result, approximately two-thirds of Americans now own their own homes – the highest rate of homeownership in our history.
Nonetheless, increasing attention has been paid in recent years to various abusive practices in the subprime lending market that have been collectively labeled as “predatory lending.” Although the term itself has not been precisely defined, it has come generally to refer to mortgages extended under terms that are more onerous to borrowers than if they were more fully informed about the loans themselves and the alternative sources of finance that may be open to them. In response, the Congress has enacted legislation cracking down on certain especially unfair lending practices, while imposing reporting obligations on both depository and non-depository lenders designed to shed sunlight on the extent of high-cost lending. In November and December 2000, the Federal Reserve – the principal federal regulator charged with collecting and pub licizing this information – issued two proposals to expand the coverage of these reporting requirements.
This report highlights the potential danger to the populations thought to be most victimized by predatory lending – minority and low-income individua ls and families generally – of already enacted or proposed state and local ordinances or states that extend beyond federal law. In effect, these regulatory provisions constitute a new type of “usury” statutes, which once were prevalent throughout the country, but have since been abandoned – except in this new guise as an attack on predatory lending. Moreover, the implicit connection drawn in some of these laws (or their preambles) between “high cost” lending, which appropriately reflect the risks of lending to customers outside the prime market, and “predatory” lending, which is inherently abusive and already punishable under federal law, is simply incorrect.