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.

Here’s an excerpt from the study:

“This study looks at the link between state laws and mortgage default rates, specifically whether APLs are associated with lower rates of residential mortgage default. Overall, we observe a lower default rate for neighborhoods in APL states, in states requiring verification of borrowers’ repayment ability, in states with broader coverage of subprime loans with high points and fees, and in states 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 findings also point to the need to understand how federal preemption affected the effectiveness of state APLs.”

Ironically, former NYS attorney general and governor Eliot Spitzer called attention to this in early 2008: Spitzer wrote that the 2004 decision to preempt states made the White House the Predatory Lenders’ Partner in Crime:

“Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers’ ability to repay, making loans with deceptive “teaser” rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.”

Of the many foibles, errors of judgment, and otherwise questionable ideological decisions of the Bush administration, this probably has the most significant and damaging effects, at least as it relates to the current credit crisis.


States with Anti-predatory Lending Laws (Pre-2008)

APL states


STATE ANTI-PREDATORY LENDING LAWS: Impact and Federal Preemption Phase I Descriptive Analysis
DRAFT: Federal preemption of state anti-predatory lending laws
Lei Ding, Wayne State University
Roberto G. Quercia, University of North Carolina at Chapel Hill
Alan M. White, Valparaiso University
University of North Carolina at Chapel Hill, October 2009


Center for Community Capital
College of Arts and Sciences
The University of North Carolina at Chapel Hill


The UNC paper was funded by a grant from The National State Attorneys General Program at Columbia Law School,  which received funding from the Consumer Protection Fund of the North Carolina Department of Justice.

See also:
Predatory Lenders’ Partner in Crime
How the Bush Administration Stopped the States From Stepping In to Help Consumers
Eliot Spitzer
Washington Post, February 14, 2008


Category: Credit, Legal, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “STUDY: Federal Pre-emption of State Anti-Predatory Lending Laws Led to More Mortgage Defaults”

  1. I discuss the preemption (briefly) in Bailout Nation

  2. wunsacon says:

    Since cash and credit are fungible (up until writedowns), issuing “loans that will not be repaid” is *counterfeiting*. Therefore, “anti-Predatory Lending” regulation was also, in effect, “anti-counterfeiting” regulation.

    So, for the better part of this decade, the federal government abdicated its responsibility to combat counterfeiting. It even prevented others (state govs) from protecting our credit-money system.

    Where are the massive RICO indictments against counterfeiters?

    And, please, let’s start referring to all those unpaid “AAA-rated” loans as “counterfeit loans”. To call them “toxic assets” is complete rubbish, as it omits the overtone of criminal culpability — of which there is plenty.

  3. Michael M says:

    William Black, a former federal regulator during the Savings & Loan crisis and a professor of economics and law at the University of Missouri-Kansas City, tells it like it is:


    Money quotes:
    “Geithner who has been wrong about everything in his career”
    “As long as the leader is some kind-of clown, the agency will fail”
    “It’s been two-and-half years since the secondary markets collapsed, and there is zero meaningful regulatory reform adopted by legislation”

  4. jc says:

    I’m wondering what event will precipitate our next financial panic, I think the FDIC running short on funds will liquidate a bunch of foreclosures it gets from shutting down a bunch of small & mid size banks and they’ll crater the RE mkt in a couple geographic areas and start a stampede with the Big Banksters rushing to liquidate their foreclosures too

  5. flashpoint says:

    Like Nixon, the Bushes were never conservatives when it came to government’s role or size. Thus the preemption of states’ rights was not a surprise. The willingness of almost every Congress to aggrandize the government shows the degree to which statism is normative, which is merely a con game by the rich to gain power by using the ruse of helping the poor whom they first impoverished.

    The only times recently Congress scaled back at least the growth of the government were under Reagan’s first term when with popular support he badgered Congress into it, and after the 1994 elections when the House simply refused to fund more expansion. And what followed both were also the best few years in the economy until the pig found the strawberries again.

  6. Dan Duncan says:

    I don’t know why you chose that map of the states. The study actually has 2 maps…and the more appropriate one for this article would be Figure 1 from the study– the map that shows states with “effective” anti-predatory laws (APL). The map you’re showing here is Figure 2 and it shows states with both effective and ineffective APLs. The study primarily concerns itself with the states in Figure 1 compared to the others. Specifically, the authors simply use North Carolina as the main “effective” APL template.

    The study includes Calif and Michigan as having “effective” APLs…a lot of good the effective APLs did those states. Which, of course, explains why the authors of the study admit the following:

    “Overall, there is strong evidence that the introduction of the first state anti-predatory lending law in North Carolina reduced the number of applications for and originations of subprime loans. Nationally, however, research has found no consistent relationship between APLs and subprime activities.”

    Of course, the authors further hedge and qualify—what is really an insignificant study—by labeling it as a “Phase I Study”…with more to come later. Stay tuned!

    The fact is: Default rates are much more of a function of falling real estate values…much more so than APLs….The authors do not convincingly demonstrate that APLs had anything to do with the parabolic ride of real estate values in the worst hit states.


    BR: You seemed to have missed the point — these APLs were HALTED in 2004 — just as the subprime lending was hitting the hockey stick ramp up portion of its growth.

    As to the map, the study has 2 maps 4 tables, and 10 charts — I could have grabbed anyone of them top break up the sea of text — this one was prettiest.

    But thanks for missing the main point of the study!

  7. riley says:

    “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).”

    the only difference between a democrat and republican is what part of your life they want to use government to control. i’m glad both parties know what is best for us.

  8. toddie.g says:

    Thank you BR for pointing out yet another example of the Bush Administration’s culpability in leading to the economic abyss that we face. Amazing how no thought was given to the long term implications of irresponsible lending on a massive scale, not to mention the absolute hypocrisy of overruling state’s rights.

  9. willid3 says:

    financial follies 2.0

    NEWSWEEK: A few weeks ago marked the one-year anniversary of the bankruptcy of Lehman Brothers. Since the financial collapse, there have been no indictments. The Dow is ready to hit 10,000 again. Where is the outrage?

    Black: During the Saving & Loans crisis, we had over 1,000 convictions that involved insiders and gigantic borrowers. Now we have zero. The FBI did not even begin to investigate the large subprime lenders until March 2007. People would be upset if they had the facts, or if you asked them how many criminal referrals there were for mortgage fraud. (There were 65,000 last year.) Meanwhile, the administration is saying there is no problem and that the financial crisis is over. That’s the exact opposite of what you want to say and do if you want dramatic resources to change things.

  10. speaking of Spitzer’s “calling attention to this issue” in ’008..

    “As Chuck Baldwin asked in “Thoughts on the Spitzer Sex Scandal” posted
    here the other day,

    “Why did the hammer fall on Governor Spitzer now? … The Republican and
    Democrat parties alike are awash in sexual immorality – both
    heterosexual and homosexual. And 99% of this debauchery is never
    reported. The guilty politicos are never ‘caught’, never ‘outed’.

    “So, why was Governor Spitzer ‘caught’? Don’t forget that Spitzer has
    been carrying on this way for at least ten years. Suddenly, now, he is
    found out.

    “They say that Governor Spitzer was Client 9 for this particular hooker.
    So, who are clients 1-8? And who are clients 10-100? Why do we not know
    their names? Anyone able to afford this prostitute’s price of $1,000 per
    hour has to be someone of means. Who were they?

    “Were the other clients CEOs of Fortune 500 companies? If so, which
    ones? Were they congressmen or senators? If so, who? Were they White
    House executives? Were they Pentagon brass? Were they media celebrities?
    If so, what are their names? Were they foreign diplomats? If so, who are
    they, and from which countries did they come? Do you get my point?

    “How is it that in this elaborate FBI sting, only Governor Eliot Spitzer
    was ‘caught’?
    “…There is an old saying inside the Beltway, “When it comes to politics, there are no accidents or coincidences.” There is a reason for everything that goes on in Washington, D.C. That is something you can take to the old proverbial bank. It’s just that unimportant people such as you and me are not privy to what those reasons are…”

  11. jc says:

    Spitzer was forced from office but Paterson wasn’t for the same transgressions, why??????????

  12. Bushwood says:

    An interesting topic which actually leads me to think of one state in particular lending laws, Texas. Specifically Texas had some of the toughest cash-out refi laws in the country due to a prior boom/crash caused by I believe oil speculators buying up land. I’m trying to think back to the specifics as its been a few years since I’ve worked in the mortgage industry, but needless to say, it was extremely hard for a homeowner to get a cash-out refiance, which in turn helped to prevent a homeowner from using their house as an ATM. This in turn could have contributed to Texas’ relatively small increase in property values, I think the max I saw for the state in a year was maybe 7-10% range, whereas California/Arizona/Nevada was in the 40% range.
    One of the main contributors to the run up in property prices was the refi boom from 2002 to about 2003 due to rates being at 6% (low for the time). People would often call into their bank and over the phone they could drop their payment (they’d also have to show up at a title office to sign the papers) so needless to say it was easy. So when they were also told they could take out $50k-100k and keep their payments the same in a cash-out refi most couldn’t resist, they could buy that nice car, boat, pool, or make a great “investment” in another property…well except in Texas where is wasn’t so easy.
    So needless to say, I’d contend that it wasn’t nessecary anti-preditory laws, but cash-out refi restrictions that really helped to contribute to less dramatic losses in the Texas housing market.

  13. bsneath says:

    This was a crime.

    If each State had been allowed to regulate their mortgage industries, then abuses would have come to the surface much earlier. Instead, the Federal Gov’t (aka Bush the Idiot) caved in to banking interests and perpetuated the financing schemes that have permanently destroyed our standards of living.

    I am certain that a few Countrywide sweetheart mortgages to key Senators helped to grease the skids.

    And you wonder why we have lost faith in America and its institutions?

    It should also be a lesson to all of us as to why we do not want to let power and authority to become concentrated. (As in “absolute power corrupts absolutely”).

  14. jc says:

    OT -The next big thing.A couple months ago we all rumunated about the next big thing.This article speculates up to 5 million new jobs with “cleantech”.

    “What we’re about to see is every bit as big as the telecom revolution that gave birth to the Internet and cell phones,” Tuck says. “It’s going to create as many jobs and as much wealth for this country, if they get it right. Big, Google-sized companies are going to be born in this era, and we hope to be one of them.”

    I think one collateral product of the smart grid will be commercial broadband service overlaid on the smart grid,a third competitor (sometimes the first or second broadband provider in rural settings) to phone & cable cos, the utilities trojan horse.


  15. bsneath says:


    “cleantech” – is a marketing term to sway over the pseudo-intelligent and enviro-religious amongst us.

    All of these technologies have potential, but only if they are further developed to the point where they are cost competitive and increase productivity. Otherwise we simply have yet another government subsidy program where we drain our limited resources away from other more productive applications.

    I am all in favor of R&D in alternative energy, power storage technologies, even jump starting nascent industries, but I do not see uncompetitive technologies that are dependent upon either government subsidies or government market manipulations ever becoming “the next big thing” until they first become economically competitive.

    It is just the way it is.

  16. alfred e says:

    Tulips were once the next big thing, as was telecom.

    This info spells out quite simply the bankster elite BananAmerica truth.

    States were over-ridden so the TBTF could operate with impunity in all states, slicing and dicing fraud for profit, and passing it on to dupes, thanks to the fraudster rating agencies.

    Remember the old Steve Martin bit, how to make a million dollars and pay no taxes?

    Well now it’s up to a billion. But the answer has changed.

    First, hire a K-street lobbyist.

    Then shovel several million to one or more of our elite elected public officials. And then wait for the wheels of democracy to bleed the sheeple and the naive yet once again.

    Except the Chinese weren’t naive. It fueled their economy.

  17. jc,

    simply, BPL is nothing new, that ability has been able to be deployed for some time now..
    one thing that has held it up is a ‘regulatory dogfight’ @ FCC (read: Cable y TelCo pushback)

    also, ‘Smart Grids’, as currently envisioned, are, merely, the CNS for the body able to ‘persistantly surveil’..
    if we, really, wanted to ‘get greener’, we’d take a page from these boys (and girls)..

    we should note: Over 1/2 of the electricity generated Never lights a Bulb, heats Water, or cools a House–it is lost in Transmission..much like the M. Engineers coveting the ‘frictionless bearing’, the E. Engineers covet the ‘lossless circuit’..

    past that, this http://www.bespacific.com/ if we could be so lucky, should be a daily read..she’ll e|mail a weekday snapshot..

  18. Greg0658 says:

    “Spitzer was forced from office but …” I still wonder if Elliot hired her to model Valentines Day gear for the misses .. all a ruse to turn himself in/out .. after bedtime convers “Elliot dear .. they aren’t paying you enough for this shit”

  19. Rikky says:

    >>the only difference between a democrat and republican is what part of your life they want to use government to control.

    well said riley. until you accept this you’ll never see the glass hidden in the grass.

  20. Greg0658 says:

    lets take this a couple of steps further .. cause I can .. Freedom
    now if Sara pulled this supposed Spitzer move .. “Slut”
    and if the Spitzers didn’t go this route .. and sells a powerful position .. “Insider Trading” .. to the pokey with ya

  21. [...] So I was left banging my head against my desktop on being reminded that a Republican administration preempted state anti-predatory lending laws: [...]

  22. VennData says:

    It’s not the regulations, it’s who’s regulating that causes these problems. More Bush failures. When are GOP genuflectors going to wake up to this nonsense?

  23. Brett Tibbitts says:

    Great post, Barry. But I do disagree with this:

    ” 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). ”

    Where is there any evidence that Bush was (is) either a Federalist or a Conservative?

  24. Lord says:

    What do you expect when predators control the government.

  25. [...] 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 [...]

  26. jc says:

    MEH, The cableco/telco duopoly used theit hamster stooges to stymie BPL but once the smart grid is in place it will be simple for Google, Cisco, GE to overlay commercial broadband on the hybrid wireless/powerline networks that are being created. Choice is good!

  27. jc,

    choice is usually good. the choice you’re describing is, needlessly, costly, both Economically, and Financially.

    the ‘smart grid’ is a boondoggle, at best, the CNS of the Panoptic State, at worst..

  28. whtu says:

    So Spitzer “ironically” noticed in 2008? What about McCain on May 25, 2006? “If Congress does not act, American Taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole.”

    Let’s not dump this all on Bush. There is plenty of youtube video showing Maxine Waters, Barney Frank and many other democrats lauding the great accomplishments of Freddie and Fannie under Franklin Raines. Making comments like we should be making more of these types of loans and saying they see “no problem.”