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A "Flip" Look at Predatory Lending: Will the Fed's Revised Regulation Z End Abusive Refinancing Practices? |
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Michael J. Pyle [View as PDF]
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112 Yale L.J. 1919 (2003)
The regulation of predatory loans can be a tedious business. The whole topic redounds of such yawn-inducing terms as "single-premium credit insurance" and "negative amortization." Yet the human costs of predatory lending are no less real for all the financial jargon that masks them. Thousands of Americans, especially minorities and the elderly, have lost their homes due to sharp lending practices. The effective regulation of such abusive lending, while not a very sexy endeavor, could markedly improve the quality of life for some of the nation's most vulnerable people. This reality has led thirteen states and several major cities to undertake statutory and regulatory reform efforts in the past three years. The Federal Reserve Board (Fed), too, has attempted to rein in predatory lending through the recent promulgation of its revised standards under Regulation Z.
This Comment will attempt to analyze the potential efficacy of the Fed's effort by examining a specific portion of the revised Regulation Z, namely, its prohibition of so-called loan "flipping." This rule forbids the refinancing of any "high-cost loan" within one year of its initiation, unless that refinancing is "in the borrower's interest." The prosecutorial discretion embedded within the new federal antiflipping provision represents a potential improvement over the previous generation of predatory lending regulations. This is because a discretionary standard better enables regulators and judges to end illegitimate mortgage refinancings, while still permitting others to go forward when warranted by individual circumstances. Such a result can improve both the justice and efficiency of the regulatory regime. Even so, like all other regulatory systems relying on prosecutorial discretion, also present is the opportunity for over- and underenforcement. In the case of the antiflipping provision, most of the worry has been that the standard will be overenforced and cause the market for legitimate subprime loans to dry up. This Comment argues that this fear is overstated and that the real worry is underenforcement.
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