As s consequence of deregulation, the availability of credit to low-income and high-risk customers expanded in 1990s, many of whom would previously have had difficulty qualifying for mortgage credit. The personal loan and credit card sectors have had fairly loose but stable regulations. However, abuses have occurred in the real estate lending market. The “predatory lending practices” have led to an increase in regulation in an attempt to deal with these issues. In July 1999, North Carolina became the first state to enact comprehensive legislation to curb the problem predatory lending. Many states and local governments have proposed laws containing provisions similar to and even more restrictive than those in the North Carolina law. The North Carolina law’s definition for high-cost loans covers more loans than the federal law, and its restrictions on such loans are more severe, increasing the cost of making mortgage loans to higher risk segments of the North Carolina market. Several empirical studies have shown that after accounting for a variety of factors affecting supply or demand, creditors did indeed sharply restrict lending to higher risk customers, but not to customers in neighboring states or to lower risk customers after the passage of the North Carolina law. Creditors rationed the highest risk customers in response to the higher costs imposed by the North Carolina law. The declines in high-risk lending attributed to the law suggest that passage of anti-predatory legislation may take back some of the benefits of increased availability of mortgage credit that low-income and high-risk consumers obtained in the 1990s. The regulatory remedy to predatory lending may unintentionally harm many of its potential beneficiaries.
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