Are relative solutions to abusive mortgage lending practices throwing out the baby with the bathwater?

Subprime mortgage lending is controversial. Its critics see excessive prices, unfair terms and "predatory" practices. Proponents see a much narrower set of problems. Legislative and regulatory solutions to perceive problems are being implemented piecemeal across states and even local jurisdictions. Unfortunately, little careful empirical work has been done to identify either extent of the alleged abuses or the costs of proposed reforms. ; This article presents new evidence about how the subprime mortgage market works. It suggests that legislative "reform” efforts in some cases are reducing availability and raise the price of legitimate loans to subprime borrowers without stopping the abuse and fraud the critics decry. It also suggests that a focus on increased deceptive practices enforcement rather than significant new controls on loan terms and pricing will do less harm than the proposed reforms, while also more effectively stopping the fraud and abuse motivating reform. ; After reviewing a major “model bill” that has provided a template for reform proposals across the country, the article weighs the databases available for empirical research on subprime lending. The paper then presents a profile of subprime borrowers and subprime loans to see who is using subprime credit, examines subprime loan pricing and performance to identify evidence of market failure that would justify strong regulatory intervention, and presents new evidence on the actual effect that reform legislation has had on the availability and pricing of mortgage credit in North Carolina, where "reform" was enacted in 1999. The paper concludes with a discussion of the policy implications of this new empirical evidence.