A new report suggests that the the Bush administration's hard push to preempt state anti-predatory lending laws may have added fuel to the fire of the mortgage crisis.
Barry Ritholtz first had news of the study by the University Of North Carolina at Chapel Hill (check out his blog here) -- and he suggests the Bush administration added fuel to the mortgage crisis by stripping states of their power to reign in lenders that prey on unsuspecting borrowers. Anti-predatory lending laws, Rithholtz points out, usually limit fees and prepayment penalties and require banks to secure proof of a borrower's ability to repay loans,
No surprise, then, that states with these restrictions had far fewer defaults. That is, until the Bush administration stepped in. Here's Ritholtz:
Why did the US preempt state APL laws? There was the ideological belief that states were interfering with profits and "financial innovation:" In February 2004, the Bush White House, working through the Office of the Comptroller of the Currency (OCC) officially preempted national banks from state laws regulating mortgage credit, including state anti-predatory lending laws. (This was far broader than the 1996 regulatory preemption by the Office of Thrift Supervision (OTS) applied to federally chartered S&Ls).The Bush White House claimed that banks should "only be subject to federal laws regulating mortgage credit."
To be fair, the report states that in 1996, during the Clinton administration, the Office of Thrift Supervision preempted federally-chartered savings banks from state anti-predatory lending laws.
Here's more from the report:
Overall, we observed a lower default rate for neighborhoods in the APL states, in states with requirement on the verification of borrowers' repayment ability, in states with broader coverage of subprime loans with high points and fees, and in those with more restrictive regulation on prepayment penalties. We believe that these findings are remarkable, since they suggest an important and yet unexplored link between APLs and foreclosures. Moreover, given the wide range of factors influencing foreclosures, including house price declines, rising unemployment, and differences in state foreclosure processes, these descriptive statistics are likely to result in an underestimation of the positive impacts of APLs. These descriptive findings lend weight to our contention that federal preemption of more stringent state APLs may have allowed national banks and federal thrifts to increase their origination of loans with risky characteristics.
READ the entire report: