MBA Study Shows Negative Effects of North Carolina Mortgage Lending Law Hit Minorities and Low-Income Borrowers the Hardest
September 14, 2004
Washington, D.C. (September 14, 2004) – The Mortgage Bankers Association (MBA) today released a study on the effects of the 1999 North Carolina anti-predatory lending law showing the law has caused a decline in lending among minority and low-income borrowers. In addition, the study demonstrates the North Carolina law has had negative effects on the availability of credit for all income and racial groups.
The study, conducted by Abt Associates Inc., Cambridge, Massachusetts, looked at lending volumes before and after the law was passed on a census-tract-by-census-tract basis and compares the results with what took place in states with economies similar to North Carolina's.
"The study reveals, vis-à-vis the anti-predatory lending bill, the North Carolina state legislature has imposed a modern-day form of redlining on its citizens by choking off mortgage credit to minority and low-income neighborhoods," said Robert M. Couch, CMB, MBA's chairman and president and chief executive officer of Birmingham, Alabama-based New South Federal Savings Bank.
The study analyzed the changes in lending in North Carolina and neighboring states of Tennessee and South Carolina before and after passage of the North Carolina law. Abt Associates looked at lending volumes on a neighborhood-by-neighborhood basis for prime and subprime lenders. Among the study's major findings:
- There was a 1.2 percent decline in overall lending in predominately minority neighborhoods in North Carolina after passage of the law, compared with a 5.2 percent increase in minority neighborhoods in the comparison states. Loans by subprime lenders declined 8.1 percent and loans by prime lenders increased 0.7 percent. In the comparison states, loans by subprime lenders increased 4.6 percent and loans by prime lenders increased 5.4 percent. [Exhibit 8]
- Subprime lending grew at a slower rate in North Carolina than in the comparison states for all neighborhoods regardless of racial or income composition, but prime lending in the predominately white neighborhoods grew sufficiently so that the growth of total lending in predominately white neighborhoods matched the growth in the comparison states. [Exhibit 8]
- There was a decline of 11.4 percent in subprime refinance loans in North Carolina, compared with a 4.0 percent increase in the comparison states. However, subprime loans to purchase homes also grew at a much slower pace in North Carolina than in the comparison states, up 123.9 percent versus 145.8 percent. Thus, provisions in the North Carolina laws primarily aimed at refinance practices caused subprime lenders to withdraw completely from North Carolina and reduced credit available for purchasing a home. [Exhibit 9]
- While overall subprime lending decreased in North Carolina, subprime lending by firms owned by federally regulated financial institutions increased. While lending by independent subprime firms dropped 41.5 percent, lending by subsidiaries of bank- or thrift-owned companies increased 110.5 percent. A similar pattern occurred in the comparison states, although not of the same magnitude. This trend suggests that whatever increases in subprime lending took place did so under the presumption of a federal pre-emption of the North Carolina law and a potential spread of that law. This outcome reduces consumer choice and competition. [Exhibit 12]
"Despite the good intentions of its supporters, the North Carolina law has choked off credit to large numbers of North Carolina residents," continued Couch. "We know fraudulent operators exist, and we abhor abusive lending practices. While no one has been able to quantify the size of the abusive lending problem, beyond citing anecdotes, this study shows that the size of the problem was nowhere near the size of the reduction in lending that has taken place in North Carolina."The study also gave rise to another important discovery: Lending in North Carolina would have been even lower had it not been for increased lending by bank and thrift-owned subprime firms, which were essentially exempt from the provisions of the North Carolina law.