A tale of three markets: The law and economics of predatory lending

Predatory lending - exploitative high-cost loans to naive borrowers - has dominated the headlines in recent years and has sent foreclosure rates soaring. There is fierce debate over how best to respond to this surge in predatory lending. It must be determined how incentive structures in the home-mor...

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Bibliographic Details
Published in:Texas law review 2002-05, Vol.80 (6), p.1255
Main Authors: Engel, Kathleen C, McCoy, Patricia A
Format: Article
Language:English
Subjects:
Commercial law
Corporate responsibility
Incentives
Mortgages
Predatory lending
Proposals
Subprime lending
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Summary:Predatory lending - exploitative high-cost loans to naive borrowers - has dominated the headlines in recent years and has sent foreclosure rates soaring. There is fierce debate over how best to respond to this surge in predatory lending. It must be determined how incentive structures in the home-mortgage market have fueled predatory lending and how these incentives can best be countered. This Article embarks on those tasks, arguing that the market incentives that historically led lenders to engage in credit rationing have given way to a market where lenders can profit from exploiting new information asymmetries to the detriment of unsophisticated borrowers. Further, the Article argues that government intervention is needed to curb these lending abuses by putting the burden of harm on those best able to bear the loss. Toward this end, a duty of suitability on lenders is proposed that is narrowly tailored to address the harms they cause through predatory lending.
ISSN:0040-4411
1942-857X