Law Commons^™

Rethinking Disclosure In A World Of Risk-Based Pricing, Patricia Mccoy

Patricia A. McCoy

In response to subprime loan abuses, it is common for policymakers to exhort consumers to comparison-shop for residential mortgages. This policy prescription ignores the fact that price revelation works differently in the prime and subprime markets, impeding search in subprime. In the prime market, lenders reveal firm prices for free, without requiring consumers to first submit loan applications. This dynamic, combined with Truth-in-Lending Act (TILA) disclosures that standardize prices, make it easy to comparison-shop for prime mortgages. In contrast, in the subprime market featuring risk-based pricing, consumers must reveal their creditworthiness before lenders can determine loan prices, which allows lenders …

Turning A Blind Eye: Wall Street Finance Of Predatory Lending, Kathleen Engel, Patricia Mccoy

Patricia A. McCoy

Today, Wall Street finances up to eighty percent of subprime home loans through securitization. The subprime sector, which is designed for borrowers with blemished credit, has been dogged by predatory lending charges, many of which have been substantiated. As subprime securitization has grown, so have charges that securitization turns a blind eye to financing abusive loans. In this paper, we examine why secondary market discipline has failed to halt the securitization of predatory loans.

When investors buy securities backed by predatory loans, they face a classic lemons problem in the form of credit risk, prepayment risk, and litigation risk. Securitization …

The Cra Implications Of Predatory Lending, Kathleen Engel, Patricia Mccoy

Patricia A. McCoy

Traditionally, policymakers, communities, and industry have regarded the Community Reinvestment Act ("CRA") as a positive mandate for banks and thrifts to do good by increasing investment in low- and moderate-income ("LMI") neighborhoods. When Congress enacted CRA, it was inconceivable that LMI neighborhoods might eventually receive too much credit in the form of abusive mortgages. However, by the late 1990s, predatory mortgages- exploitative high-cost loans to gullible borrowers-were ravaging the inner cities. We address the question: given the surge in predatory lending, how should CRA respond? CRA and federal subsidies to regulated lenders can create perverse incentives for lenders to engage …

The Home Mortgage Foreclosure Crisis: Lessons Learned

Patricia A. McCoy

From 2007 through 2011, the United States housing market suffered a severe imbalance in supply and demand due to an excessive number both of foreclosed homes and homes awaiting foreclosure in the shadow housing inventory. Foreclosure prevention can help reduce the shadow housing inventory by keeping troubled mortgages from entering that inventory to begin with. The loan modification experience post-2008 yielded four main lessons about the best way to optimize foreclosure prevention. First, servicers should design loan modifications to lower monthly payments, including through principal reduction whenever appropriate. Second, servicers should evaluate loss mitigation as soon as possible following delinquency. …