A new research report out of University of North Carolina at Chapel Hill looks at the impact of federal preemption of state Anti-Predatory Lending laws. The key factor was the decision by the Bush White House in 2004 to preempt state lending standards.
You will be not be surprised at the net results.
States that have Anti-Predatory Lending (APL) laws are associated with a lower rate of mortgage defaults than non-APL states. Typically, Anti-Predatory Lending laws require verification of borrowers' repayment ability, as well as include limits on fees, rates and prepayment penalties. States without these restrictions and verification requirements have higher default rates.
The report concluded that in States where the APLs "require a lender to consider a borrower's ability to pay and ban prepayment penalties" there are "significantly lower default rates."
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."
Recall that when out of power, Federalists and Conservatives strongly argued that state rights must be respected and that smaller federal government intervention was the intent of the country's founders. (Funny how those arguments faded once they obtained power).
What happened once the preemption took effect? The results were predictable: The share of high-cost loans that were preempted in APL states increased from 16 percent in 2004 to 46 percent in 2007. These high cost/sub-prime loans defaulted in unusually higher numbers. Hence, suggests the study, such preemption is to blame, at least in part, for the current foreclosure crisis.
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