A recent study finding that subprime lending "continues to thrive" in North Carolina under one of the strictest abusive lending laws in the country is flawed, according to two new academic studies which say the statute has, indeed, impeded the flow of credit in the Tarheel State.

The decline in the number of mortgages originated in North Carolina following passage of the state's new anti-predatory lending law "was significant and large," a paper by the University of Georgetown's Credit Research Center concluded.

Not only has lending slipped, the second paper concurred, but the fall off was caused by a decline in applications, not be a change in denial rates, suggesting to researchers that North Carolina's lenders have been marketing less aggressively since the law took effect in July 1999.

The two studies were presented at a recent CRC-sponsored subprime lending symposium in Washington.

Their conclusions are diametrically opposite those drawn by the Center for Responsible Lending, a North Carolina-based non-profit advocacy group which claimed the statute saved borrowers $100 million in 2000 and said the state's low-income borrowers continued "to have access to wide range of choices when selecting a home loan."

But the Georgetown researchers Gregory Elliehausen and Michael Staten say a "careful review of the CRL report reveals a different story."

The evidence presented in the North Carolina study not only does not support the conclusions, the researchers say, but often contradicts them. They also maintain that the Home Mortgage Disclosure Act data on which those conclusions are based "have serious weaknesses."

For one thing, HMDA data does not identify a particular loan as subprime, so subprime loans made by lenders who are not considered subprime lenders because the majority of their loans are made to borrowers with pristine credit are not counted, the Georgetown study said.

For another, the lending activities of many institutions are not counted because the institutions are not required to report under HMDA. And "even more problematic," they point out, is that HMDA data does not contain any information of risk characteristics of borrowers.

Based on their model, the Georgetown researchers found that subprime loan originations in North Carolina are off by 14 percent, and that "any reduction in predatory lending was achieved at the expense of many legitimate loans."

Their study said the magnitude of the decline was greatest on lower-income borrowers seeking first mortgages, but that those looking for second mortgages also suffered. It also found that the declines occurred only in North Carolina and only among low-income borrowers.

The Georgetown researchers used as their database 2.3 million closed-end subprime mortgage loans from nine member-companies of the American Financial Service Association.

"What's disturbing is the idea that states and cities considering laws or ordinances similar to North Carolina's may have seen the Center for Responsible Lending finds as proof or reassurance that they are doing the right thing," said AFSA spokesperson Lynne Strang.

"From the litigation we've been involved in at the city level, we've seen first hand many local officials who have good intentions but are short-sighted about the potential effects of highly restrictive mortgage regulations on credit availability."

The other paper by Keith Harvey of Boise State University and Peter Nigro of the Office of the Comptroller of the Currency found that the volumes of both subprime mortgage applications and originations declined in North Carolina when compared to those in a control group of four Southeastern states.

Their analysis also suggested that non-banks slowed their subprime activities at a faster rate, probably because they have greater exposure to the types of credits subject to the legislation.

"The results definitely suggest that non-bank lenders felt the impact of the law to a greater degree than their bank counterparts," they said.

Published: November 20, 2002

Use of this article without permission is a violation of federal copyright laws.

When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.