Article:

Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 TEXAS L. REV. 1255 (2002).

Abstract:

Professors Engel and McCoy examine the increasingly problematic practice of predatory lending in which lenders exploit naïve borrowers with high cost loans.  Changes in the financial services market, such as increases in capital available for mortgages and new incentives to lend to low or moderate income borrowers, have resulted in the disappearance of the traditional credit rationing system and the emergence of predatory lenders.  Engel and McCoy argue that there are now three markets for home mortgages: prime, legitimate subprime, and predatory.  The readily available remedies for predatory lending, such as contract, antifraud statutes, disclosure laws, consumer education and counseling, price regulation, and antidiscrimination laws, are ineffective.  Instead, the authors recommend a duty of suitability for subprime mortgage lending.  This proposed requirement draws from concepts imbedded in securities and insurance law, but is narrowly tailored to address the harms caused by predatory lending.  A duty of suitability would allow the federal government and aggrieved borrowers to sue for loan reformation, disgorgement, and damages, thus putting the burden of harm on those best able to bear the loss.  In addition, Engel and McCoy suggest the creation of an industry self-regulatory organization under federal supervision to develop best-practices rules.  In their view, this proposed program curbs predatory lending without discouraging beneficial market activity.