Predatory Lending

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…a Compendium of Works on: 

Predatory Lending 

Luke 6:34-36 

Proverbs 22:7 | Exodus 22:25 

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Matthew 5:42 

“Helping Individuals, Organizations & Communities 

Achieve Their Full Potential” 

Special Edition| AF – August 2021

Walk by Faith; Serve with Abandon 

Expect to Win! 

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The Advocacy Foundation, Inc. 

Helping Individuals, Organizations & Communities 

Achieve Their Full Potential 

Since its founding in 2003, The Advocacy Foundation has become recognized as an effective 

provider of support to those who receive our services, having real impact within the communities 

we serve. We are currently engaged in community and faith-based collaborative initiatives, 

having the overall objective of eradicating all forms of youth violence and correcting injustices 

everywhere. In carrying-out these initiatives, we have adopted the evidence-based strategic 

framework developed and implemented by the Office of Juvenile Justice & Delinquency 

Prevention (OJJDP). 

The stated objectives are: 

1. Community Mobilization; 

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Moreover, it is our most fundamental belief that in order to be effective, prevention and 

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Dedication 

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Every publication in our many series’ is dedicated to everyone, absolutely everyone, who by 

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We pray that you will bear in mind: 

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Jesus looked at them intently and said, “Humanly speaking, it is impossible. 

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To all of us who daily look past our circumstances, and naysayers, to what the Lord says we will 

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The Transformative Justice Project 

Eradicating Juvenile Delinquency Requires a Multi-Disciplinary Approach 

The Juvenile Justice system is incredibly 

overloaded, and Solutions-Based programs are 

woefully underfunded. Our precious children, 

therefore, particularly young people of color, often 

get the “swift” version of justice whenever they 

come into contact with the law. 

Decisions to build prison facilities are often based 

on elementary school test results, and our country 

incarcerates more of its young than any other 

nation on earth. So we at The Foundation labor to 

pull our young people out of the “school to prison” 

pipeline, and we then coordinate the efforts of the 

legal, psychological, governmental and 

educational professionals needed to bring an end 

to delinquency. 

We also educate families, police, local businesses, 

elected officials, clergy, and schools and other 

stakeholders about transforming whole communities, and we labor to change their 

thinking about the causes of delinquency with the goal of helping them embrace the 

idea of restoration for the young people in our care who demonstrate repentance for 

their 

mistakes. 

The way we accomplish all this is a follows: 

1. We vigorously advocate for charges reductions, wherever possible, in the 

adjudicatory (court) process, with the ultimate goal of expungement or pardon, in order 

to maximize the chances for our clients to graduate high school and progress into 

college, military service or the workforce without the stigma of a criminal record; 

2. We then enroll each young person into an Evidence-Based, Data-Driven 

Restorative Justice program designed to facilitate their rehabilitation and subsequent 

reintegration back into the community; 

3. While those projects are operating, we conduct a wide variety of ComeUnity- 

ReEngineering seminars and workshops on topics ranging from Juvenile Justice to 

Parental Rights, to Domestic issues to Police friendly contacts, to mental health 

intervention, to CBO and FBO accountability and compliance; 

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4. Throughout the process, we encourage and maintain frequent personal contact 

between all parties; 

5 Throughout the process we conduct a continuum of events and fundraisers 

designed to facilitate collaboration among professionals and community stakeholders; 

and finally 

6. 1 We disseminate Quarterly publications, like our e-Advocate series Newsletter 

and our e-Advocate Quarterly electronic Magazine to all regular donors in order to 

facilitate a lifelong learning process on the ever-evolving developments in the Justice 

system. 

And in addition to the help we provide for our young clients and their families, we also 

facilitate Community Engagement through the Restorative Justice process, 

thereby balancing the interests of local businesses, schools, clergy, social assistance 

organizations, elected officials, law enforcement entities, and all interested 

stakeholders. Through these efforts, relationships are rebuilt & strengthened, local 

businesses and communities are enhanced & protected from victimization, young 

careers are developed, and our precious young people are kept out of the prison 

pipeline. 

Additionally, we develop Transformative “Void Resistance” (TVR) initiatives to elevate 

concerns of our successes resulting in economic hardship for those employed by the 

penal system. 

TVR is an innovative-comprehensive process that works in conjunction with our 

Transformative Justice initiatives to transition the original use and purpose of current 

systems into positive social impact operations, which systematically retrains current 

staff, renovates facilities, creates new employment opportunities, increases salaries and 

is data proven to enhance employee’s mental wellbeing and overall quality of life – an 

exponential Transformative Social Impact benefit for ALL community stakeholders. 

This is a massive undertaking, and we need all the help and financial support you can 

give! We plan to help 75 young persons per quarter-year (aggregating to a total of 250 

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Thank you in advance for your support! 

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1. The national average cost to taxpayers for minimum-security youth incarceration, 

is around $43,000.00 per child, per year. 

2. The average annual cost to taxpayers for maximum-security youth incarceration 

is well over $148,000.00 per child, per year. 

- (US News and World Report, December 9, 2014); 

3. In every jurisdiction in the nation, the Plea Bargain rate is above 99%. 

The Judicial system engages in a tri-partite balancing task in every single one of these 

matters, seeking to balance Rehabilitative Justice with Community Protection and 

Judicial Economy, and, although the practitioners work very hard to achieve positive 

outcomes, the scales are nowhere near balanced where people of color are involved. 

We must reverse this trend, which is right now working very much against the best 

interests of our young. 

Our young people do not belong behind bars. 

- Jack Johnson 

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The Advocacy Foundation, Inc. 

Helping Individuals, Organizations & Communities 

Achieve Their Full Potential 

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“Turning the Improbable Into the Exceptional” 

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Biblical Authority 

______ 

Luke 6:34-36 (NIV) 

34 

And if you lend to those from whom you expect repayment, what credit is that to 

you? Even sinners lend to sinners, expecting to be repaid in full. 35 But love your 

enemies, do good to them, and lend to them without expecting to get anything back. 

Then your reward will be great, and you will be children of the Most High, because he is 

kind to the ungrateful and wicked. 36 Be merciful, just as your Father is merciful. 

Proverbs 22:7 

7 

The rich rule over the poor, and the borrower is slave to the lender. 

Exodus 22:25 

25 

“If you lend money to one of my people among you who is needy, do not treat it like a 

business deal; charge no interest. 

Deuteronomy 23:19 

19 

Do not charge a fellow Israelite interest, whether on money or food or anything else 

that may earn interest. 

Deuteronomy 15:6 

6 

For the Lord your God will bless you as he has promised, and you will lend to many 

nations but will borrow from none. You will rule over many nations but none will rule 

over you. 

Leviticus 25:36-37 

36 

Do not take interest or any profit from them, but fear your God, so that they may 

continue to live among you. 37 You must not lend them money at interest or sell them 

food at a profit. 

Matthew 5:42 

42 

Give to the one who asks you, and do not turn away from the one who wants to 

borrow from you. 

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Table of Contents 

…a compilation of works on 


Biblical Authority 

I. Introduction: Predatory and Subprime Lending……………………. 17 

II. 

The Poverty Industry, Economic Inequality, 

and Redlining ………………………………………………… 31 

III. Aporophobia and Economic Discrimination……………………….. 87 

IV. Payday Lending………………………………………………………. 95 

V. Refund Anticipation Lending……….………………………………. 111 

VI. Title Loans……………………………………………………………. 117 

VII. Loan Sharks………..………………………………………………… 123 

VIII. Usury………………………………......……………………………… 133 

IX. References……………………………………………………............ 147 

______ 

Attachments 

A. What Is Predatory Lending? 

B. Predatory Lending and The Subprime Crisis 

C. Subprime and Predatory Lending in Rural America 

Copyright © 2018 The Advocacy Foundation, Inc. All Rights Reserved. 

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This work is not meant to be a piece of original academic 

analysis, but rather draws very heavily on the work of 

scholars in a diverse range of fields. All material drawn upon 

is referenced appropriately. 

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I. Introduction 

Predatory and Subprime Lending 

Predatory Lending is practices at lending organizations during a loan origination 

process that are characterized by critics as unfair, deceptive, or fraudulent. While there 

are no legal definitions in the United States for predatory lending per se, a 2006 audit 

report from the 

office of 

inspector 

general of the 

Federal 

Deposit 

Insurance 

Corporation 

(FDIC) broadly 

defines 

predatory 

lending as 

"imposing 

unfair and 

abusive loan 

terms on 

borrowers", 

though "unfair" 

and "abusive" 

were not 

specifically defined. Though there are laws against some of the specific practices 

commonly identified as predatory, various federal agencies use the phrase as a catchall 

term for many specific illegal activities in the loan industry. Predatory lending should 

not be confused with predatory mortgage servicing which is mortgage practices 

described by critics as unfair, deceptive, or fraudulent practices during the loan or 

mortgage servicing process, post loan origination. 

One less contentious definition of the term is proposed by an investing website as "the 

practice of a lender deceptively convincing borrowers to agree to unfair and abusive 

loan terms, or systematically violating those terms in ways that make it difficult for the 

borrower to defend against". Other types of lending sometimes also referred to as 

predatory include payday loans, certain types of credit cards, mainly subprime, or other 

forms of (again, often subprime) consumer debt, and overdraft loans, when the interest 

rates are considered unreasonably high. Although predatory lenders are most likely to 

target the less educated, the poor, racial minorities, and the elderly, victims of predatory 

lending are represented across all demographics. 

Page 17 of 181

Predatory lending typically occurs on loans backed by some kind of collateral, such as a 

car or house, so that if the borrower defaults on the loan, the lender can repossess or 

foreclose and profit by selling the repossessed or foreclosed property. Lenders may be 

accused of tricking a borrower into believing that an interest rate is lower than it actually 

is, or that the borrower's ability to pay is greater than it actually is. The lender, or others 

as agents of the lender, may well profit from repossession or foreclosure upon the 

collateral. 

Abusive or Unfair Lending Practices 

There are many lending practices which have been called abusive and labeled with the 

term "predatory lending". There is a great deal of dispute between lenders and 

consumer groups as to what exactly constitutes "unfair" or "predatory" practices, but the 

following are sometimes cited: 

 

 

 

 

Unjustified Risk-Based Pricing. This is the practice of charging more (in the 

form of higher interest rates and fees) for extending credit to borrowers identified 

by the lender as posing a greater credit risk. The lending industry argues that 

risk-based pricing is a legitimate practice; since a greater percentage of loans 

made to less creditworthy borrowers can be expected to go into default, higher 

prices are necessary to obtain the same yield on the portfolio as a whole. Some 

consumer groups argue that higher prices paid by more vulnerable consumers 

cannot always be justified by increased credit risk. 

Single-Premium Credit Insurance. This is the purchase of insurance which will 

pay off the loan in case the homebuyer dies. It is more expensive than other 

forms of insurance because it does not involve any medical checkups, but 

customers almost always are not shown their choices, because usually the 

lender is not licensed to sell other forms of insurance. In addition, this insurance 

is usually financed into the loan which causes the loan to be more expensive, but 

at the same time encourages people to buy the insurance because they do not 

have to pay up front. 

Failure to Present The Loan Price as Negotiable. Many lenders will negotiate 

the price structure of the loan with borrowers. In some situations, borrowers can 

even negotiate an outright reduction in the interest rate or other charges on the 

loan. Consumer advocates argue that borrowers, especially unsophisticated 

borrowers, are not aware of their ability to negotiate and might even be under the 

mistaken impression that the lender is placing the borrower's interests above its 

own. Thus, many borrowers do not take advantage of their ability to negotiate. 

Failure to Clearly and Accurately Disclose Terms and Conditions, 

particularly in cases where an unsophisticated borrower is involved. Mortgage 

loans are complex transactions involving multiple parties and dozens of pages of 

legal documents. In the most egregious of predatory cases, lenders or brokers 

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have not only misled borrowers but have also altered documents after they have 

been signed. 

 

Short-Term Loans with Disproportionally High Fees, such as payday loans, 

credit card late fees, checking account overdraft fees, and Tax Refund 

Anticipation Loans, where the fee paid for advancing the money for a short 

period of time works out to an annual interest rate significantly in excess of the 

market rate for high-risk loans. The originators of such loans dispute that the fees 

are interest. 

 

Servicing Agent and Securitization Abuses. The mortgage servicing agent is 

the entity that receives the mortgage payment, maintains the payment records, 

provides borrowers with account statements, imposes late charges when the 

payment is late, and pursues delinquent borrowers. A securitization is a financial 

transaction in which assets, especially debt instruments, are pooled and 

securities representing interests in the pool are issued. Most loans are subject to 

being bundled and sold, and the rights to act as servicing agent sold, without the 

consent of the borrower. A federal statute requires notice to the borrower of a 

change in servicing agent, but does not protect the borrower from being held 

delinquent on the note for payments made to the servicing agent who fails to 

forward the payments to the owner of the note, especially if that servicing agent 

goes bankrupt, and borrowers who have made all payments on time can find 

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themselves being foreclosed on and becoming unsecured creditors of the 

servicing agent. Foreclosures can sometimes be conducted without proper notice 

to the borrower. In some states (see Texas Rule of Civil Procedure 746), there is 

no defense against eviction, forcing the borrower to move and incur the expense 

of hiring a lawyer and finding another place to live while litigating the claim of the 

"new owner" to own the house, especially after it is resold one or more times. 

 

When the debtor demands, under the best evidence rule, that the current claimed 

note owner produce the original note with the debtor's signature on it, the note 

owner typically is unable or unwilling to do so, and tries to establish his claim with 

an affidavit that it is the owner, without proving it is the "holder in due course", the 

traditional standard for a debt claim, and the courts often allow them to do that. In 

the meantime, the note continues to be traded, its physical whereabouts difficult 

to discover. 

OCC Advisory Letter AL 2003-2 describes predatory lending as including the following: 

 

 

 

 

 

 

 

 

 

Loan "flipping" – frequent refinancings that result in little or no economic benefit 

to the borrower and are undertaken with the primary or sole objective of 

generating additional loan fees, prepayment penalties, and fees from the 

financing of credit-related products; 

Refinancings of special subsidized mortgages that result in the loss of beneficial 

loan terms; 

"Packing" of excessive and sometimes "hidden" fees in the amount financed; 

Using loan terms or structures – such as negative amortization – to make it more 

difficult or impossible for borrowers to reduce or repay their indebtedness; 

Using balloon payments to conceal the true burden of the financing and to force 

borrowers into costly refinancing transactions or foreclosures; 

Targeting inappropriate or excessively expensive credit products to older 

borrowers, to persons who are not financially sophisticated or who may be 

otherwise vulnerable to abusive practices, and to persons who could qualify for 

mainstream credit products and terms; 

Inadequate disclosure of the true costs, risks and, where necessary, 

appropriateness to the borrower of loan transactions; 

The offering of single premium credit life insurance; and 

The use of mandatory arbitration clauses. 

Page 20 of 181

Predatory Lending Towards Minority Groups 

Many minority communities have been excluded from loans in the past, they are and 

have been more vulnerable to deception. Oftentimes, they are targeted because of 

these vulnerabilities. Organizations and agencies including ACORN, HUD, the 

American Civil Liberties Union, United for a Fair Economy and more prove that 

predatory loans are disproportionately made in poor and minority neighborhoods. 

Brokers and lenders preyed on these neighborhoods with the knowledge that these 

people were often denied for loans and the demand for loans were high. Lenders called 

these neighborhoods never-never land. This created the subprime predatory lending 

world. 

Subprime lenders specialize in B, C, and D paper. Predatory lending is the practice of 

overcharging a borrower for rates and fees, average fee should be 1%, these lenders 

were charging borrowers over 5%. 

Consumers without challenged credit loans should be underwritten with prime lenders. 

In 2004 69% of borrowers were from subprime lending. The 2007 mortgage drop and 

economy fail were from over lending. 

Page 21 of 181

Organizations such as AARP, Inner City Press, and ACORN have worked to stop what 

they describe as predatory lending. ACORN has targeted specific companies such as 

HSBC Finance, successfully forcing them to change their practices. 

Some subprime lending practices have raised concerns about mortgage discrimination 

on the basis of race. African Americans and other minorities are being 

disproportionately led to sub-prime mortgages with higher interest rates than their white 

counterparts. Even when median income levels were comparable, home buyers in 

minority neighborhoods were more likely to get a loan from a subprime lender, though 

not necessarily a sub-prime loan. 

Other Targeted Groups 

In addition, studies by leading consumer groups have concluded that women have 

become a key component to the subprime mortgage crunch. Professor Anita F. Hill 

wrote that a large percentage of first-time home buyers were women, and that loan 

officers took advantage of the lack of financial knowledge of many female loan 

applicants. Consumers believe that they are protected by consumer protection laws, 

when their lender is really operating wholly outside the laws. Refer to 15 U.S.C. 1601 

and 12 C.F.R. 226. 

Media investigations have disclosed that mortgage lenders used bait-and-switch 

salesmanship and fraud to take advantage of borrowers during the home-loan boom. In 

February 2005, for example, reporters Michael Hudson and Scott Reckard broke a story 

in the Los Angeles Times about "boiler room" sales tactics at Ameriquest Mortgage, the 

nation’s largest subprime lender. 

Hudson and Reckard cited interviews and court statements by 32 former Ameriquest 

employees who said the company had abused its customers and broken the law, 

"deceiving borrowers about the terms of their loans, forging documents, falsifying 

appraisals and fabricating borrowers' income to qualify them for loans they couldn't 

afford". Ameriquest later agreed to pay a $325 million predatory lending settlement with 

state authorities across the nation. 

Disputes over predatory lending 

Some subprime lending advocates, such as the National Home Equity Mortgage 

Association (NHEMA), say many practices commonly called "predatory," particularly the 

practice of risk-based pricing, are not actually predatory, and that many laws aimed at 

reducing "predatory lending" significantly restrict the availability of mortgage finance to 

lower-income borrowers. Such parties consider predatory lending a pejorative term. 

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Underlying Issues 

There are many underlying issues in the predatory lending debate: 

 

Judicial Practices: Some argue that much of the problem arises from a 

tendency of the courts to favor lenders, and to shift the burden of proof of 

compliance with the terms of the debt instrument to the debtor. According to this 

argument, it should not be the duty of the borrower to make sure his payments 

are getting to the current note-owner, but to make evidence that all payments 

were made to the last known agent for collection sufficient to block or reverse 

repossession or foreclosure, and eviction, and to cancel the debt if the current 

note owner cannot prove he is the "holder in due course" by producing the actual 

original debt instrument in court. 

 

Risk-Based Pricing: The basic idea is that borrowers who are thought of as 

more likely to default on their loans should pay higher interest rates and finance 

charges to compensate lenders for the increased risk. In essence, high returns 

motivate lenders to lend to a group they might not otherwise lend to – "subprime" 

or risky borrowers. Advocates of this system believe that it would be unfair – or a 

poor business strategy – to raise interest rates globally to accommodate risky 

borrowers, thus penalizing low-risk borrowers who are unlikely to default. 

Opponents argue that the practice tends to disproportionately create capital 

gains for the affluent while oppressing working-class borrowers with modest 

Page 23 of 181

financial resources. Some people consider risk-based pricing to be unfair in 

principle. Lenders contend that interest rates are generally set fairly considering 

the risk that the lender assumes, and that competition between lenders will 

ensure availability of appropriately-priced loans to high-risk customers. Still 

others feel that while the rates themselves may be justifiable with respect to the 

risks, it is irresponsible for lenders to encourage or allow borrowers with credit 

problems to take out high-priced loans. For all of its pros and cons, risk-based 

pricing remains a universal practice in bond markets and the insurance industry, 

and it is implied in the stock market and in many other open-market venues; it is 

only controversial in the case of consumer loans. 

 

 

 

Competition: Some believe that risk-based pricing is fair but feel that many 

loans charge prices far above the risk, using the risk as an excuse to overcharge. 

These criticisms are not levied on all products, but only on those specifically 

deemed predatory. Proponents counter that competition among lenders should 

prevent or reduce overcharging. 

Financial Education: Many observers feel that competition in the markets 

served by what critics describe as "predatory lenders" is not affected by price 

because the targeted consumers are completely uneducated about the time 

value of money and the concept of Annual percentage rate, a different measure 

of price than what many are used to. Recent research looked at a legislative 

experiment in which the State of Illinois, which required “high-risk” mortgage 

applicants acquiring or refinancing properties in 10 specific zip codes to submit 

loan offers from state-licensed lenders to review by HUD-certified financial 

counselors. The experiment found that the legislation pushed some borrowers to 

choose less risky loan products in order to avoid counseling. 

Caveat Emptor: There is an underlying debate about whether a lender should be 

allowed to charge whatever it wants for a service, even if there is no evidence 

that it attempted to deceive the consumer about the price. At issue here is the 

belief that lending is a commodity and that the lending community has an almost 

fiduciary duty to advise the borrower that funds can be obtained more cheaply. 

Also at issue are certain financial products which appear to be profitable only due 

to adverse selection or a lack of knowledge on the part of the customers relative 

to the lenders. For example, some people allege that credit insurance would not 

be profitable to lending companies if only those customers who had the right "fit" 

for the product actually bought it (i.e., only those customers who were not able to 

get the generally cheaper term life insurance). Regardless, the majority of U.S. 

courts have refused to treat the lender-borrower relationship as a fiduciary one 

and declined to impose a duty of care upon lenders in the making of loans. Thus, 

once the lender has complied with all relevant statutory disclosure obligations, it 

remains solely the borrower's problem to ascertain whether the loan they are 

getting is the right fit for them. 

Predatory Borrowing 

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In an article in the January 17, 2008 New York Times, George Mason University economics 

professor Tyler Cowen described "predatory borrowing" as potentially a larger problem than 

predatory lending: 

"As much as 70 percent of recent early payment defaults had fraudulent 

misrepresentations on their original loan applications, according to one recent study. 

The research was done by BasePoint Analytics, which helps banks and lenders identify 

fraudulent transactions; the study looked at more than three million loans from 1997 to 

2006, with a majority from 2005 to 2006. Applications with misrepresentations were also 

five times as likely to go into default. Many of the frauds were simple rather than 

ingenious. In some cases, borrowers who were asked to state their incomes just lied, 

sometimes reporting five times actual income; other borrowers falsified income 

documents by using computers." 

It should be noted that mortgage applications are usually completed by mortgage 

brokers or lenders' in-house loan officers, rather than by borrowers themselves, making 

it difficult for borrowers to control the information that was submitted with their 

applications. 

A stated income loan application is done by the borrower, and no proof of income is 

needed. When the broker files the loan, they have to go by whatever income is stated. 

This opened the doors for borrowers to be approved for loans that they otherwise would 

not qualify for, or afford. However, lawsuits and testimony from former industry insiders 

Page 25 of 181

indicated that mortgage company employees frequently were behind overstatements of 

borrower income on mortgage applications. 

Borrowers had little or no ability to manipulate other key data points that were frequently 

falsified during the mortgage process. These included credit scores, home appraisals 

and loan-to-value ratios. These were all factors that were under the control of mortgage 

professionals. In 2012, for example, New York Attorney General Eric Schneiderman 

reached a $7.8 million settlement of allegations that a leading appraisal management 

firm had helped inflate real estate appraisals on a wide scale basis in order to help a 

major lender push through more loan deals. The attorney general office's lawsuit 

alleged that eAppraiseIT, which did more than 260,000 appraisals nationally for 

Washington Mutual, caved to pressure from WaMu loan officers to select pliable 

appraisers who were willing to submit inflated property valuations. 

Several commentators have dismissed the notion of "predatory borrowing", accusing 

those making this argument as being apologists for the lack of lending standards and 

other excesses during the credit bubble. 

Predatory servicing is also a component of predatory lending, characterized by unfair, 

deceptive, or fraudulent practices by a lender or another company that services a loan 

on behalf of the lender, after the loan is granted. Those practices include also charging 

excessive and unsubstantiated fees and expenses for servicing the loan, wrongfully 

disclosing credit defaults by a borrower, harassing a borrower for repayment and 

refusing to act in good faith in working with a borrower to effectuate a mortgage 

modification as required by federal law. 

Legislation 

In many countries, legislation aims to control this, but research has found ambiguous 

results, including finding that high-cost mortgage applications can possibly rise after 

adoption of laws against predatory lending. 

United States 

Many laws at both the Federal and state government level are aimed at preventing 

predatory lending. Although not specifically anti-predatory in nature, the Federal Truth in 

Lending Act requires certain disclosures of APR and loan terms. Also, in 1994 section 

32 of the Truth in Lending Act, entitled the Home Ownership and Equity Protection Act 

of 1994, was created. This law is devoted to identifying certain high-cost, potentially 

predatory mortgage loans and reining in their terms. Twenty-five states have passed 

anti-predatory lending laws. Arkansas, Georgia, Illinois, Maine, Massachusetts, North 

Carolina, New York, New Jersey, New Mexico and South Carolina are among those 

states considered to have the strongest laws. Other states with predatory lending laws 

include: California, Colorado, Connecticut, Florida, Kentucky, Maine, Maryland, Nevada, 

Page 26 of 181

Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Wisconsin, and West Virginia. 

These laws usually describe one or more classes of "high-cost" or "covered" loans, 

which are defined by the fees charged to the borrower at origination or the APR. While 

lenders are not prohibited from making "high-cost" or "covered" loans, a number of 

additional restrictions are placed on these loans, and the penalties for noncompliance 

can be substantial. 

________ 

Subprime Lending 

In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and 

second-chance lending) means making loans to people who may have difficulty 

maintaining the repayment schedule, 

sometimes reflecting setbacks, such 

as unemployment, divorce, medical 

emergencies, etc. Historically, 

subprime borrowers were defined as 

having FICO scores below 600, 

although "this has varied over time 

and circumstances." 

These loans are characterized by 

higher interest rates, poor quality 

collateral, and less favorable terms 

in order to compensate for higher 

credit risk. Many subprime loans 

were packaged into mortgagebacked 

securities (MBS) and 

ultimately defaulted, contributing to 

the financial crisis of 2007–2008. 

Proponents of subprime lending maintain that the practice extends credit to people who 

would otherwise not have access to the credit market. Professor Harvey S. Rosen of 

Princeton University explained, "The main thing that innovations in the mortgage market 

have done over the past 30 years is to let in the excluded: the young, the discriminated 

against, the people without a lot of money in the bank to use for a down payment." 

Defining Subprime Risk 

The term subprime refers to the credit quality of particular borrowers, who have 

weakened credit histories and a greater risk of loan default than prime borrowers. As 

people become economically active, records are created relating to their borrowing, 

earning and lending history. This is called a credit rating; although covered by privacy 

laws, the information is readily available to people with a need to know (in some 

countries, loan applications specifically allow the lender to access such records). 

Page 27 of 181

Subprime borrowers have credit ratings that might include: 

 

 

 

 

 

 

limited debt experience (so the lender's assessor simply does not know, and 

assumes the worst), or 

no possession of property assets that could be used as security (for the lender to 

sell in case of default) 

excessive debt (the known income of the individual or family is unlikely to be 

enough to pay living expenses + interest + repayment), 

a history of late or sometimes missed payments so that the loan period had to be 

extended, 

failures to pay debts completely (default debt), and 

any legal judgments such as "orders to pay" or bankruptcy (sometimes known in 

Britain as county court judgments or CCJs). 

Lenders' standards for determining risk categories may also consider the size of the 

proposed loan, and also take into account the way the loan and the repayment plan is 

structured, if it is a conventional repayment loan, a mortgage loan, an endowment 

mortgage, an interest-only loan, a standard repayment loan, an amortized loan, a credit 

card limit or some other arrangement. The originator is also taken into consideration. 

Because of this, it was possible for a loan to a borrower with "prime" characteristics 

(e.g. high credit score, low debt) to be classified as subprime. 

Student Loans 

In the United States the amount of student loan debt recently surpassed credit card 

debt, hitting the $1 trillion mark in 2012. However, that $1 trillion rapidly grew by 50% to 

$1.5 trillion as of 2018. In other countries such loans are underwritten by governments 

or sponsors. Many student loans are structured in special ways because of the difficulty 

of predicting students' future earnings. 

These structures may be in the form of soft loans, income-sensitive repayment loans, 

income-contingent repayment loans and so on. Because student loans provide 

repayment records for credit rating, and may also indicate their earning potential, 

student loan default can cause serious problems later in life as an individual wishes to 

make a substantial purchase on credit such as purchasing a vehicle or buying a house, 

since defaulters are likely to be classified as subprime, which means the loan may be 

refused or more difficult to arrange and certainly more expensive than for someone with 

a perfect repayment record. 

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United States 

Although there is no single, standard definition, in the United States subprime loans are 

usually classified as those where the borrower has a FICO score below 640. The term 

was popularized by the media during the subprime mortgage crisis or "credit crunch" of 

2007. Those loans which do not meet Fannie Mae or Freddie Mac underwriting 

guidelines for prime mortgages are called "non-conforming" loans. As such, they cannot 

be packaged into Fannie Mae or Freddie Mac MBS. 

A borrower with an outstanding record of repayment on time and in full will get what is 

called an A-paper loan. Borrowers with less-than-perfect credit 'scores' might be rated 

as meriting an A-minus, B-paper, C-paper or D-paper loan, with interest payments 

progressively increased for less reliable payers to allow the company to 'share the risk' 

of default equitably among all its borrowers. Between A-paper and subprime in risk is 

Alt-A. 

A-minus is related to Alt-A, with some lenders categorizing them the same, but A-minus 

is traditionally defined as mortgage borrowers with a FICO score of below 680 while Alt- 

A is traditionally defined as loans lacking full documentation. The value of U.S. 

subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 

7.5 million first-lien subprime mortgages outstanding. 

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Canada 

The sub-prime market did not take hold in Canada to the extent that it did in the U.S., 

where the vast majority of mortgages were originated by third parties and then 

packaged and sold to investors who often did not understand the associated risk. 

Subprime Crisis 

The subprime mortgage crisis arose from 'bundling' American subprime and American 

regular mortgages into MBSs that were traditionally isolated from, and sold in a 

separate market from, prime loans. These 'bundles' of mixed (prime and subprime) 

mortgages were based on asset-backed securities so the 'probable' rate of return 

looked superb (since subprime lenders pay higher premiums on loans secured against 

saleable real-estate, which was commonly assumed "could not fail"). Many subprime 

mortgages had a low initial interest rate for the first two or three years and those who 

defaulted were 'swapped' regularly at first, but finally, a bigger share of borrowers began 

to default in staggering numbers. The inflated house-price bubble burst, property 

valuations plummeted and the real rate of return on investment could not be estimated, 

and so confidence in these instruments collapsed, and all less than prime mortgages 

were considered to be almost worthless toxic assets, regardless of their actual 

composition or performance. Because of the "originate-to-distribute" model followed by 

many subprime mortgage originators, there was little monitoring of credit quality and 

little effort at remediation when these mortgages became troubled. 

To avoid high initial mortgage payments, many subprime borrowers took out adjustablerate 

mortgages (or ARMs) that give them a lower initial interest rate. But with potential 

annual adjustments of 2% or more per year, these loans can end up costing much 

more. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of 

about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable 

period ends) equates to a payment of $4,220. A 6-percentage-point increase (from 4% 

to 10%) in the rate caused slightly more than a 75% increase in the payment. This is 

even more apparent when the lifetime cost of the loan is considered (though most 

people will want to refinance their loans periodically). The total cost of the above loan at 

4% is $864,000, while the higher rate of 10% would incur a lifetime cost of $1,367,280. 

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II. The Poverty Industry, Economic 

Inequality, and Redlining 

The Poverty Industry 

The terms Poverty Industry or Poverty Business refer to a wide range of 

money-making activities that attract a large portion of their business from the poor 

because they are poor. Businesses in the poverty industry often include payday loan 

centers, pawnshops, rent-to-own centers, casinos, liquor stores, lotteries, tobacco 

stores, credit card companies, and bail-bond services. Illegal ventures such as 

loansharking might also be included. The poverty industry makes roughly US$33 billion 

a year in the United States. In 2010, elected American federal officials received more 

than $1.5 million in campaign contributions from poverty-industry donors. 

Income Inequality 

Economic Inequality is the difference found in various measures of economic wellbeing 

among individuals in a group, among groups in a population, or among countries. 

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Economic inequality sometimes refers to income inequality, wealth inequality, or the 

wealth gap. Economists generally focus on economic disparity in three metrics: wealth, 

income, and consumption. The issue of economic inequality is relevant to notions of 

equity, equality of outcome, and equality of opportunity. 

Economic inequality varies between societies, historical periods, economic structures 

and systems. The term can refer to cross-sectional distribution of income or wealth at 

any particular period, or to changes of income and wealth over longer periods of time. 

There are various numerical indices for measuring economic inequality. A widely used 

index is the Gini coefficient, but there are also many other methods. 

Research suggests that greater inequality hinders the duration of growth but not its rate. 

Whereas globalization has reduced global inequality (between nations), it has increased 

inequality within nations. 

Empirical Measurements of Inequality 

The first set of income distribution statistics for the United States covering the period 

from (1913–48) was published in 1952 by Simon Kuznets, Shares of Upper Income 

Groups in Income and Savings. It relied on US federal income tax returns and Kuznets's 

own estimates of US national income, National Income: A Summary of Findings (1946). 

Others who contributed to development of accurate income distribution statistics during 

the early 20th century were John Whitefield Kendrick in the United States, Arthur 

Bowley and Colin Clark in the UK, and L. Dugé de Bernonville in France. 

Economists generally consider three metrics of economic dispersion: wealth, income, 

and consumption. A skilled professional may have low wealth and low income as 

student, low wealth and high earnings in the beginning of the career, and high wealth 

and low earnings after the career. People's preferences determine whether they 

consume earnings immediately or defer consumption to the future. The distinction is 

also important at the level of economy: 

 

 

There are economies with high income inequality and relatively low wealth 

inequality (such as Japan and Italy). 

There are economies with relatively low income inequality and high wealth 

inequality (such as Switzerland and Denmark). 

There are different ways to measure income inequality and wealth inequality. Different 

choices lead to different results. The Organisation for Economic Co-operation and 

Development (OECD) provides data on the following eight types of income inequality: 

 

 

Dispersion of hourly wages among full-time (or full-time equivalent) workers 

Wage dispersion among workers – E.g. annual wages, including wages from 

part-time work or work during only part of the year. 

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Individual earnings inequality among all workers – Includes the self-employed. 

Individual earnings inequality among the entire working-age population – 

Includes those who are inactive, e.g. students, unemployed, early pensioners, 

etc. 

 

 

 

 

Household earnings inequality – Includes the earnings of all household 

members. 

Household market income inequality – Includes incomes from capital, savings 

and private transfers. 

Household disposable income inequality – Includes public cash transfers 

received and direct taxes paid. 

Household adjusted disposable income inequality – Includes publicly provided 

services. 

There are many challenges in comparing data between economies, or in a single 

economy in different years. Examples of challenges include: 

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Data can be based on joint taxation of couples (e.g. France, Germany, Ireland, 

Netherlands, Portugal and Switzerland) or individual taxation (e.g. Australia, 

Canada, Italy, Japan, New Zealand, Spain, the UK). 

The tax authorities generally only collect information on income that is potentially 

taxable. 

The precise definition of gross income varies from country to country. There are 

differences when it comes to inclusion of pension entitlements and other savings, 

and benefits such as employer provided health insurance. 

Differences when it comes under-declaration of income and/or wealth in tax 

filings. 

A special event like an exit from business may lead to a very high income in one 

year, but much lower income in other years of the person's lifetime. 

Much income and wealth in non-western countries is obtained or held extralegally 

through black market and underground activities such as unregistered 

businesses, informal property ownership arrangements, etc. 

Measurements 

Share of income of the top 1% for 

selected developed countries, 1975 

to 2015 

it concluded that following factors had a role: 

In 1820, the ratio between 

the income of the top and 

bottom 20 percent of the 

world's population was three 

to one. By 1991, it was 

eighty-six to one. A 2011 

study titled "Divided we 

Stand: Why Inequality Keeps 

Rising" by the Organisation 

for Economic Co-operation 

and Development (OECD) 

sought to explain the causes 

for this rising inequality by 

investigating economic 

inequality in OECD countries; 

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Changes in the structure of households can play an important role. Singleheaded 

households in OECD countries have risen from an average of 15% in the 

late 1980s to 20% in the mid-2000s, resulting in higher inequality. 

Assortative mating refers to the phenomenon of people marrying people with 

similar background, for example doctors marrying doctors rather than nurses. 

OECD found out that 40% of couples where both partners work belonged to the 

same or neighboring earnings deciles compared with 33% some 20 years before. 

 

 

 

 

In the bottom percentiles number of hours worked has decreased. 

The main reason for increasing inequality seems to be the difference between 

the demand for and supply of skills. 

Income inequality in OECD countries is at its highest level for the past half 

century. The ratio between the bottom 10% and the top 10% has increased from 

1:7, to 1:9 in 25 years. 

There are tentative signs of a possible convergence of inequality levels towards a 

common and higher average level across OECD countries. 

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With very few exceptions (France, Japan, and Spain), the wages of the 10% 

best-paid workers have risen relative to those of the 10% lowest paid. 

A 2011 OECD study investigated economic inequality in Argentina, Brazil, China, India, 

Indonesia, Russia and South Africa. It concluded that key sources of inequality in these 

countries include "a large, persistent informal sector, widespread regional divides (e.g. 

urban-rural), gaps in access to education, and barriers to employment and career 

progression for women." 

A study by the World Institute for Development Economics Research at United Nations 

University reports that the richest 1% of adults alone owned 40% of global assets in the 

year 2000. The three richest people in the world possess more financial assets than the 

lowest 48 nations combined. The combined wealth of the "10 million dollar millionaires" 

grew to nearly $41 trillion in 2008. A January 2014 report by Oxfam claims that the 85 

wealthiest individuals in the world have a combined wealth equal to that of the bottom 

50% of the world's population, or about 3.5 billion people. According to a Los Angeles 

Times analysis of the report, the wealthiest 1% owns 46% of the world's wealth; the 85 

richest people, a small part of the wealthiest 1%, own about 0.7% of the human 

population's wealth, which is the same as the bottom half of the population. In January 

2015, Oxfam reported that the wealthiest 1 percent will own more than half of the global 

wealth by 2016. An October 2014 study by Credit Suisse also claims that the top 1% 

now own nearly half of the world's wealth and that the accelerating disparity could 

trigger a recession. 

In October 2015, Credit Suisse published a study which shows global inequality 

continues to increase, and that half of the world's wealth is now in the hands of those in 

the top percentile, whose assets each exceed $759,900. A 2016 report by Oxfam claims 

that the 62 wealthiest individuals own as much wealth as the poorer half of the global 

population combined. Oxfam's claims have however been questioned on the basis of 

the methodology used: by using net wealth (adding up assets and subtracting debts), 

the Oxfam report, for instance, finds that there are more poor people in the United 

States and Western Europe than in China (due to a greater tendency to take on debts). 

Anthony Shorrocks, the lead author of the Credit Suisse report which is one of the 

sources of Oxfam's data, considers the criticism about debt to be a "silly argument" and 

"a non-issue . . . a diversion." Oxfam's 2017 report says the top eight billionaires have 

as much wealth as the bottom half of the global population, and that rising inequality is 

suppressing wages, as businesses are focused on delivering higher returns to wealthy 

owners and executives. In 2018, the Oxfam report said that the wealth gap continued to 

widen in 2017, with 82% of global wealth generated going to the wealthiest 1%. 

According to PolitiFact the top 400 richest Americans "have more wealth than half of all 

Americans combined." According to The New York Times on July 22, 2014, the "richest 

1 percent in the United States now own more wealth than the bottom 90 percent". 

Inherited wealth may help explain why many Americans who have become rich may 

have had a "substantial head start". In September 2012, according to the Institute for 

Policy Studies (IPS), "over 60 percent" of the Forbes richest 400 Americans "grew up in 

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substantial privilege". A 2017 report by the IPS said that three individuals, Jeff Bezos, 

Bill Gates and Warren Buffett, own as much wealth as the bottom half of the population, 

or 160 million people, and that the growing disparity between the wealthy and the poor 

has created a "moral crisis", noting that "we have not witnessed such extreme levels of 

concentrated wealth and power since the first gilded age a century ago." In 2016, the 

world's billionaires increased their combined global wealth to a record $6 trillion. 

The existing data and estimates suggest a large increase in international (and more 

generally inter-macro-regional) component between 1820 and 1960. It might have 

slightly decreased since that time at the expense of increasing inequality within 

countries. 

The United Nations Development Program in 2014 asserted that greater investments in 

social security, jobs and laws that protect vulnerable populations are necessary to 

prevent widening income inequality ... . 

There is a significant difference in the measured wealth distribution and the public's 

understanding of wealth distribution. Michael Norton of the Harvard Business School 

and Dan Ariely of the Department of Psychology at Duke University found this to be true 

in their research, done in 2011. The actual wealth going to the top quintile in 2011 was 

around 84% where as the average amount of wealth that the general public estimated 

to go to the top quintile was around 58%. 

Page 37 of 181

Two researchers claim that global income inequality is decreasing, due to strong 

economic growth in developing countries. However, the OECD reported in 2015 that 

income inequality is higher than it has ever been within OECD member nations and is at 

increased levels in many emerging economies. According to a June 2015 report by the 

International Monetary Fund: 

Widening income inequality is the defining challenge of our time. In advanced 

economies, the gap between the rich and poor is at its highest level in decades. 

Inequality trends have been more mixed in emerging markets and developing countries 

(EMDCs), with some countries experiencing declining inequality, but pervasive 

inequities in access to education, health care, and finance remain. 

In October 2017, the IMF warned that inequality within nations, in spite of global 

inequality falling in recent decades, has risen so sharply that it threatens economic 

growth and could result in further political polarization. The Fund's Fiscal Monitor report 

said that "progressive taxation and transfers are key components of efficient fiscal 

redistribution." 

Wealth Distribution within Individual Countries 

The following table shows information about wealth distribution in different countries, 

from a 2013 report by Crédit Suisse. Wealth can be negative for people who are in debt, 

and if there are enough people in debt in a country, the Gini coefficient can be greater 

than 100%, as seen in the case of Denmark. The Gini coefficients for wealth are often 

much higher than those for income. This is the case for example in Scandinavian 

countries such as Sweden and Finland. For example, in Sweden about 24% of 

households have negative wealth (or zero). This seems to be due to factors such as 

social insurance programmes (welfare) and the public pension scheme. [49] 

Global Wealth Distribution - Wealth 

patterns within countries. 

From information provided by the 

Credit Suisse, Research Institute's 

"Global Wealth Databook", published 

2013. 

Countries' income inequality according to 

their most recent reported Gini index values 

(often 10+ years old) as of 2014: 

red = high, green = low inequality 

Income Distribution within Individual Countries 

A Gini index value above 50 is considered high; countries including Brazil, Colombia, 

South Africa, Botswana, and Honduras can be found in this category. A Gini index value 

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of 30 or above is considered medium; countries including Vietnam, Mexico, Poland, The 

United States, Argentina, Russia and Uruguay can be found in this category. A Gini 

index value lower than 30 is considered low; countries including Austria, Germany, 

Denmark, Slovenia, Sweden and Ukraine can be found in this category. 

Causes 

There are various reasons for economic inequality within societies. Recent growth in 

overall income inequality, at least within the OECD countries, has been driven mostly by 

increasing inequality in wages and salaries. 

Economist Thomas Piketty argues that widening economic disparity is an inevitable 

phenomenon of free market capitalism when the rate of return of capital (r) is greater 

than the rate of growth of the economy (g). 

Common factors thought to impact economic inequality include: 

 

labor market outcomes 

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globalization, by: 

o 

o 

o 

o 

o 

suppressing wages in low-skill jobs due to a surplus of low-skill labor in 

developing countries 

increasing the market size and the rewards for people and firms 

succeeding in a particular niche 

providing more investment opportunities for already-wealthy people 

increasing international influence 

decreasing domestic influence 

 

 

 

 

 

 

 

 

 

 

 

 

policy reforms 

extra-legal ownership of property (real estate and business) 

more regressive taxation 

plutocracy 

computerization, automation and increased technology, which means more skills 

are required to obtain a moderate or high wage 

ethnic discrimination 

gender discrimination 

nepotism 

variation in natural ability 

neoliberalism 

Growing acceptance of very high CEO salaries, e.g. in the United States since 

the 1960s 

Land speculation – Followers of Henry George believe that landlords and land 

speculators derive excess wealth and income from the tendency of land to 

increase exponentially with development and at a much higher rate than 

population growth. Their solution is to tax land value, though not necessarily 

structures or other improvements. This concept is known as Georgism. 

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Theoretical Frameworks 

Neoclassical Economics 

Neoclassical economics views inequalities in the distribution of income as arising from 

differences in value added by labor, capital and land. Within labor income distribution is 

due to differences in value added by different classifications of workers. In this 

perspective, wages and profits are determined by the marginal value added of each 

economic actor (worker, capitalist/business owner, landlord). Thus, in a market 

economy, inequality is a reflection of the productivity gap between highly-paid 

professions and lower-paid professions. 

Marxian Economics 

Marxian economics attributes rising inequality to job automation and capital deepening 

within capitalism. The process of job automation conflicts with the capitalist property 

form and its attendant system of wage labor. 

In Marxian analysis, capitalist firms increasingly substitute capital equipment for labor 

inputs (workers) under competitive pressure to reduce costs and maximize profits. Over 

the long-term, this trend increases the organic composition of capital, meaning that less 

workers are required in proportion to capital inputs, increasing unemployment (the 

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"reserve army of labor"). This process exerts a downward pressure on wages. The 

substitution of capital equipment for labor (mechanization and automation) raises the 

productivity of each worker, resulting in a situation of relatively stagnant wages for the 

working class amidst rising levels of property income for the capitalist class. 

Labor Market 

A major cause of economic inequality within modern market economies is the 

determination of wages by the market. Where competition is imperfect; information 

unevenly distributed; opportunities to acquire education and skills unequal market 

failure results. Since many such imperfect conditions exist in virtually every market, 

there is in fact little presumption that markets are in general efficient. This means that 

there is an enormous potential role for government to correct such market failures. 

In a purely capitalist mode of production (i.e. where professional and labor organizations 

cannot limit the number of workers) the workers wages will not be controlled by these 

organizations, or by the employer, but rather by the market. Wages work in the same 

way as prices for any other good. Thus, wages can be considered as a function of 

market price of skill. And therefore, inequality is driven by this price. Under the law of 

supply and demand, the price of skill is determined by a race between the demand for 

the skilled worker and the supply of the skilled worker. "On the other hand, markets can 

also concentrate wealth, pass environmental costs on to society, and abuse workers 

and consumers." "Markets, by themselves, even when they are stable, often lead to 

high levels of inequality, outcomes that are widely viewed as unfair." Employers who 

offer a below market wage will find that their business is chronically understaffed. Their 

competitors will take advantage of the situation by offering a higher wage the best of 

their labor. For a businessman who has the profit motive as the prime interest, it is a 

losing proposition to offer below or above market wages to workers. 

A job where there are many workers willing to work a large amount of time (high supply) 

competing for a job that few require (low demand) will result in a low wage for that job. 

This is because competition between workers drives down the wage. An example of this 

would be jobs such as dish-washing or customer service. Competition amongst workers 

tends to drive down wages due to the expendable nature of the worker in relation to his 

or her particular job. A job where there are few able or willing workers (low supply), but 

a large need for the positions (high demand), will result in high wages for that job. This 

is because competition between employers for employees will drive up the wage. 

Examples of this would include jobs that require highly developed skills, rare abilities, or 

a high level of risk. Competition amongst employers tends to drive up wages due to the 

nature of the job, since there is a relative shortage of workers for the particular position. 

Professional and labor organizations may limit the supply of workers which results in 

higher demand and greater incomes for members. Members may also receive higher 

wages through collective bargaining, political influence, or corruption. 

These supply and demand interactions result in a gradation of wage levels within 

society that significantly influence economic inequality. Polarization of wages does not 

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explain the accumulation of wealth and very high incomes among the 1%. Joseph 

Stiglitz believes that "It is plain that markets must be tamed and tempered to make sure 

they work to the benefit of most citizens." 

On the other hand, higher economic inequality tends to increase entrepreneurship rates 

at the individual level (self-employment). However, most of it is often based on 

necessity rather than opportunity. Necessity-based entrepreneurship is motivated by 

survival needs such as income for food and shelter ("push" motivations), whereas 

opportunity-based entrepreneurship is driven by achievement-oriented motivations 

("pull") such as vocation and more likely to involve the pursue of new products, 

services, or underserved market needs. The economic impact of the former type of 

entrepreneurialism tends to be redistributive while the latter is expected to foster 

technological progress and thus have a more positive impact on economic growth. 

Taxes 

Another cause is the rate at which income is taxed coupled with the progressivity of the 

tax system. A progressive tax is a tax by which the tax rate increases as the taxable 

base amount increases. In a progressive tax system, the level of the top tax rate will 

often have a direct impact on the level of inequality within a society, either increasing it 

or decreasing it, provided that income does not change as a result of the change in tax 

regime. Additionally, steeper tax progressivity applied to social spending can result in a 

more equal distribution of income across the board. The difference between the Gini 

index for an income distribution before taxation and the Gini index after taxation is an 

indicator for the effects of such taxation. 

There is debate between politicians and economists over the role of tax policy in 

mitigating or exacerbating wealth inequality. Economists such as Paul Krugman, Peter 

Orszag, and Emmanuel Saez have argued that tax policy in the post World War II era 

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has indeed increased income inequality by enabling the wealthiest Americans far 

greater access to capital than lower-income ones. 

A paper by economists Annette Alstadsæter, Niels Johannesen and Gabriel Zucman, 

which used data from HSBC Switzerland ("Swiss leaks") and Mossack Fonseca 

("Panama Papers"), found that "on average about 3% of personal taxes are evaded in 

Scandinavia, but this figure rises to about 30% in the top 0.01% of the wealth 

distribution... Taking tax evasion into account increases the rise in inequality seen in tax 

data since the 1970s markedly, highlighting the need to move beyond tax data to 

capture income and wealth at the top, even in countries where tax compliance is 

generally high. We also find that after reducing tax evasion—by using tax amnesties— 

tax evaders do not legally avoid taxes more. This result suggests that fighting tax 

evasion can be an effective way to collect more tax revenue from the ultra-wealthy." 

In its October 2017 report, the International Monetary Fund argued that increasing taxes 

on the top 1% of income earners would reduce economic inequality without hindering 

economic growth. 

Education 

An important factor in the creation of inequality is variation in individuals' access to 

education. Education, especially in an area where there is a high demand for workers, 

creates high wages for those with this education, however, increases in education first 

increase and then decrease growth as well as income inequality. As a result, those who 

are unable to afford an education, or choose not to pursue optional education, generally 

receive much lower wages. The justification for this is that a lack of education leads 

directly to lower incomes, and thus lower aggregate savings and investment. 

Conversely, education raises incomes and promotes growth because it helps to unleash 

the productive potential of the poor. 

In 2014, economists with the Standard & Poor's rating agency concluded that the 

widening disparity between the U.S.'s wealthiest citizens and the rest of the nation had 

slowed its recovery from the 2008–09 recession and made it more prone to boom-andbust 

cycles. To partially remedy the wealth gap and the resulting slow growth, S&P 

recommended increasing access to education. It estimated that if the average United 

States worker had completed just one more year of school, it would add an additional 

$105 billion in growth to the country's economy over five years. 

During the mass high school education movement from 1910–40, there was an increase 

in skilled workers, which led to a decrease in the price of skilled labor. High school 

education during the period was designed to equip students with necessary skill sets to 

be able to perform at work. In fact, it differs from the present high school education, 

which is regarded as a stepping-stone to acquire college and advanced degrees. This 

decrease in wages caused a period of compression and decreased inequality between 

skilled and unskilled workers. Education is very important for the growth of the 

economy, however educational inequality in gender also influence towards the 

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economy. Lagerlof and Galor stated that gender inequality in education can result to low 

economic growth, and continued gender inequality in education, thus creating a poverty 

trap. It is suggested that a large gap in male and female education may indicate 

backwardness and so may be associated with lower economic growth, which can 

explain why there is economic inequality between countries. 

More of Barro studies also find that female secondary education is positively associated 

with growth. His findings show that countries with low female education; increasing it 

has little effect on economic growth, however in countries with high female education, 

increasing it significantly boosts economic growth. More and better education is a 

prerequisite for rapid economic development around the world. Education stimulates 

economic growth and improves people's lives through many channels. 

By increasing the efficiency of the labour force it create better conditions for good 

governance, improving health and enhancing equality. Labor market success is linked 

to schooling achievement, the consequences of widening disparities in schooling is 

likely to be further increases in earnings inequality 

The United States funds education through property taxes, which can lead to large 

discrepancies in the amount of funding a public school may receive. Often, but not 

always, this results in more funding for schools attended by children from wealthier 

parents. As of 2015 the United States, Israel, and Turkey are the only three OECD 

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countries where the government spends more on schools in rich neighborhoods than in 

poor neighborhoods. 

Economic Liberalism, Deregulation and Decline of Unions 

John Schmitt and Ben Zipperer (2006) of the CEPR point to economic liberalism and 

the reduction of business regulation along with the decline of union membership as one 

of the causes of economic inequality. In an analysis of the effects of intensive Anglo- 

American liberal policies in comparison to continental European liberalism, where 

unions have remained strong, they concluded "The U.S. economic and social model is 

associated with substantial levels of social exclusion, including high levels of income 

inequality, high relative and absolute poverty rates, poor and unequal educational 

outcomes, poor health outcomes, and high rates of crime and incarceration. At the 

same time, the available evidence provides little support for the view that U.S.-style 

labor market flexibility dramatically improves labor-market outcomes. Despite popular 

prejudices to the contrary, the U.S. economy consistently affords a lower level of 

economic mobility than all the continental European countries for which data is 

available." 

Sociologist Jake Rosenfield of the University of Washington argues that the decline of 

organized labor in the United States has played a more significant role in expanding the 

income gap than technological changes and globalization, which were also experienced 

by other industrialized nations that didn't experience steep surges in inequality. He 

points out that nations with high rates of unionization, particularly in Scandinavia, have 

very low levels of inequality, and concludes "the historical pattern is clear; the crossnational 

pattern is clear: high inequality goes hand-in-hand with weak labor movements 

and vice-versa." 

A 2015 study by the International Monetary Fund found that the decline of unionization 

in many advanced economies starting in the 1980s has fueled rising income inequality. 

In 2016, researchers at the IMF concluded that neoliberal policies imposed by economic 

elites have exacerbated inequality to such an extent that it is slowing economic growth 

and "jeopardizing durable expansion." Their report highlights "three disquieting 

conclusions": 

 

 

 

The benefits in terms of increased growth seem fairly difficult to establish when 

looking at a broad group of countries. 

The costs in terms of increased inequality are prominent. Such costs epitomize 

the trade-off between the growth and equity effects of some aspects of the 

neoliberal agenda. 

Increased inequality in turn hurts the level and sustainability of growth. Even if 

growth is the sole or main purpose of the neoliberal agenda, advocates of that 

agenda still need to pay attention to the distributional effects. 

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On the other hand, Jonathan Rothwell notes that studying the "increase in the income 

share of the top 1 percent" in countries in the OECD between 1980 and 2014 finds "no 

correlation across countries" between the change in inequality and change in labor's 

share of GDP. Both inequality and labor's share of GDP have risen in the UK, while in 

the Netherlands labor's share has fallen and inequality is unchanged. 

Information Technology 

The growth in importance of information technology has been credited with increasing 

income inequality. Technology has been called "the main driver of the recent increases 

in inequality" by Erik Brynjolfsson, of MIT. In arguing against this explanation, Jonathan 

Rothwell notes that if technological advancement is measured by high rates of 

invention, there is a negative correlation between it and inequality. Countries with high 

invention rates — "as measured by patent applications filed under the Patent 

Cooperation Treaty" — exhibit lower inequality than those with less. In one country, the 

United States, "salaries of engineers and software developers rarely reach" above 

$390,000/year (the lower limit for the top 1% earners). 

Globalization 

Change in real income between 1988 and 2008 

at various income percentiles of global income 

distribution. 

Trade liberalization may shift 

economic inequality from a global to 

a domestic scale. When rich 

countries trade with poor countries, 

the low-skilled workers in the rich 

countries may see reduced wages 

as a result of the competition, while low-skilled workers in the poor countries may see 

increased wages. Trade economist Paul Krugman estimates that trade liberalisation has 

had a measurable effect on the rising inequality in the United States. He attributes this 

trend to increased trade with poor countries and the fragmentation of the means of 

production, resulting in low skilled jobs becoming more tradeable. However, he 

concedes that the effect of trade on inequality in America is minor when compared to 

other causes, such as technological innovation, a view shared by other experts. 

Empirical economists Max Roser and Jesus Crespo-Cuaresma find support in the data 

that international trade is increasing income inequality. They empirically confirm the 

predictions of the Stolper–Samuelson theorem regarding the effects of international 

trade on the distribution of incomes. Lawrence Katz estimates that trade has only 

accounted for 5-15% of rising income inequality. Robert Lawrence argues that 

technological innovation and automation has meant that low-skilled jobs have been 

replaced by machine labor in wealthier nations, and that wealthier countries no longer 

have significant numbers of low-skilled manufacturing workers that could be affected by 

competition from poor countries. 

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Economist Branko Milanovic analyzed global income inequality, comparing 1988 and 

2008. His analysis indicated that the global top 1% and the middle classes of the 

emerging economies (e.g., China, India, Indonesia, Brazil and Egypt) were the main 

winners of globalization during that time. The real (inflation adjusted) income of the 

global top 1% increased approximately 60%, while the middle classes of the emerging 

economies (those around the 50th percentile of the global income distribution in 1988) 

rose 70-80%. On the other hand, those in the middle class of the developed world 

(those in the 75th to 90th percentile in 1988, such as the American middle class) 

experienced little real income gains. The richest 1% contains 60 million persons 

globally, including 30 million Americans (i.e., the top 12% of Americans by income were 

in the global top 1% in 2008). 

Jonathan Rothwell argues that there is a negative not a positive correlation between 

trade and inequality when different countries are compared. Trade makes up a relatively 

small part of the relatively unequal US economy, while Denmark and the Netherlands 

have high levels of both equality and dependence on imports. 

Gender 

The gender gap in median earnings of full-time 

employees according to the OECD 2015 

In many countries, there is a gender 

pay gap in favor of males in the labor 

market. Several factors other than 

discrimination may contribute to this 

gap. On average, women are more 

likely than men to consider factors 

other than pay when looking for 

work, and may be less willing to 

travel or relocate. Thomas Sowell, in his book Knowledge and Decisions, claims that 

this difference is due to women not taking jobs due to marriage or pregnancy, but 

income studies show that that does not explain the entire difference. A U.S. Census's 

report stated that in US once other factors are accounted for there is still a difference in 

earnings between women and men. The income gap in other countries ranges from 

53% in Botswana to -40% in Bahrain. 

Gender inequality and discrimination is argued to cause and perpetuate poverty and 

vulnerability in society as a whole. Gender Equity Indices seek to provide the tools to 

demonstrate this feature of equity. 

19th century socialists like Robert Owen, William Thompson, Anna Wheeler and August 

Bebel argued that the economic inequality between genders was the leading cause of 

economic inequality; however Karl Marx and Fredrick Engels believed that the inequality 

between social classes was the larger cause of inequality. 

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Economic Development 

A Kuznets Curve 

Economist Simon Kuznets argued that 

levels of economic inequality are in large 

part the result of stages of development. 

According to Kuznets, countries with low 

levels of development have relatively 

equal distributions of wealth. As a 

country develops, it acquires more 

capital, which leads to the owners of this 

capital having more wealth and income and introducing inequality. Eventually, through 

various possible redistribution mechanisms such as social welfare programs, more 

developed countries move back to lower levels of inequality. 

Plotting the relationship between level of income and inequality, Kuznets saw middleincome 

developing economies level of inequality bulging out to form what is now known 

as the Kuznets curve. Kuznets demonstrated this relationship using cross-sectional 

data. However, more recent testing of this theory with superior panel data has shown it 

to be very weak. Kuznets' curve predicts that income inequality will eventually decrease 

given time. 

As an example, income inequality did fall in the United States during its High school 

movement from 1910 to 1940 and thereafter. However, recent data shows that the level 

of income inequality began to rise after the 1970s. This does not necessarily disprove 

Kuznets' theory. It may be possible that another Kuznets' cycle is occurring, specifically 

the move from the manufacturing sector to the service sector. This implies that it may 

be possible for multiple Kuznets' cycles to be in effect at any given time. 

Individual Preferences 

Related to cultural issues, diversity of preferences within a society may contribute to 

economic inequality. When faced with the choice between working harder to earn more 

money or enjoying more leisure time, equally capable individuals with identical earning 

potential may choose different strategies. The trade-off between work and leisure is 

particularly important in the supply side of the labor market in labor economics. 

Likewise, individuals in a society often have different levels of risk aversion. When 

equally-able individuals undertake risky activities with the potential of large payoffs, 

such as starting new businesses, some ventures succeed and some fail. The presence 

of both successful and unsuccessful ventures in a society results in economic inequality 

even when all individuals are identical. 

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Wealth Concentration 

Wealth concentration is the process by which, under certain conditions, newly created 

wealth concentrates in the possession of already-wealthy individuals or entities. 

Accordingly, those who already hold wealth have the means to invest in new sources of 

creating wealth or to otherwise leverage the accumulation of wealth, thus are the 

beneficiaries of the new wealth. Over time, wealth condensation can significantly 

contribute to the persistence of inequality within society. Thomas Piketty in his book 

Capital in the Twenty-First Century argues that the fundamental force for divergence is 

the usually greater return of capital (r) than economic growth (g), and that larger 

fortunes generate higher returns. 

As of 2017, there were 2,754 U.S. dollar billionaires worldwide, with a combined wealth 

of over US$9.2 trillion, up from US$2.4 trillion in 2009. 

Rent Seeking 

Economist Joseph Stiglitz argues that rather than explaining concentrations of wealth 

and income, market forces should serve as a brake on such concentration, which may 

better be explained by the non-market force known as "rent-seeking". While the market 

will bid up compensation for rare and desired skills to reward wealth creation, greater 

productivity, etc., it will also prevent successful entrepreneurs from earning excess 

profits by fostering competition to cut prices, profits and large compensation. A better 

explainer of growing inequality, according to Stiglitz, is the use of political power 

generated by wealth by certain groups to shape government policies financially 

beneficial to them. This process, known to economists as rent-seeking, brings income 

not from creation of wealth but from "grabbing a larger share of the wealth that would 

otherwise have been produced without their effort" 

Rent seeking is often thought to be the province of societies with weak institutions and 

weak rule of law, but Stiglitz believes there is no shortage of it in developed societies 

such as the United States. Examples of rent seeking leading to inequality include: 

 

 

 

the obtaining of public resources by "rent-collectors" at below market prices 

(such as granting public land to railroads or selling mineral resources for a 

nominal price in the US) 

selling services and products to the public at above market prices (medicare drug 

benefit in the US that prohibits government from negotiating prices of drugs with 

the drug companies, costing the US government an estimated $50 billion or more 

per year) 

securing government tolerance of monopoly power (The richest person in the 

world in 2011, Carlos Slim, controlled Mexico's newly privatized 

telecommunication industry). 

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Since rent seeking aims to "pluck the goose to obtain the largest amount of feathers 

with the least possible amount of hissing" – it is by nature obscure, avoiding public 

spotlight in legal fine print, or camouflaged its extraction with widely accepted 

rationalizations (markets are naturally competitive and so need no government 

regulation against monopolies). 

Jonathan Rothwell also argues for rent seeking at least in the form of "regulatory 

barriers that shelter" the sectors of "professional services, finance and insurance, and 

health care" from competition are a major source of the growth in inequality, at least in 

the US. 

Finance Industry 

Jamie Galbraith argues that 

countries with larger financial 

sectors have greater 

inequality, and the link is not 

an accident. 

Effects 

Effects of inequality 

researchers have found 

include higher rates of health 

and social problems, and 

lower rates of social goods, a 

lower level of economic utility in society from resources devoted on high-end 

consumption, and even a lower level of economic growth when human capital is 

neglected for high-end consumption. For the top 21 industrialised countries, counting 

each person equally, life expectancy is lower in more unequal countries (r = -.907). A 

similar relationship exists among US states (r = -.620). 

2013 Economics Nobel prize winner Robert J. Shiller said that rising inequality in the 

United States and elsewhere is the most important problem. 

The economic stratification of society into "elites" and "masses" played a central role in 

the collapse of other advanced civilizations such as the Roman, Han and Gupta 

empires. 

Creation of The Welfare State 

Some, such as Alberto Alesina and Dani Rodrik, argue that economic inequality creates 

demand for redistribution and the creation of welfare states. A 2014 study questions this 

relationship, finding that "inequality did not favour the development of social policy 

between 1880 and 1930. On the contrary, social policy developed more easily in 

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countries that were previously more egalitarian, suggesting that unequal societies were 

in a sort of inequality trap, where inequality itself was an obstacle to redistribution." 

Democracy 

According to a 2017 review study in the Annual Review of Political Science by Stanford 

University political scientist Kenneth Scheve and New York University political scientist 

David Stasavage, "the simple conjectures that democracy produces wealth equality and 

that wealth inequality leads to democratic failure are not supported by the evidence." 

Health 

British researchers Richard G. Wilkinson and Kate Pickett have found higher rates of 

health and social problems (obesity, mental illness, homicides, teenage births, 

incarceration, child conflict, drug use), and lower rates of social goods (life expectancy 

by country, educational performance, trust among strangers, women's status, social 

mobility, even numbers of patents issued) in countries and states with higher inequality. 

Using statistics from 23 developed countries and the 50 states of the US, they found 

social/health problems lower in countries like Japan and Finland and states like Utah 

and New Hampshire with high levels of equality, than in countries (US and UK) and 

states (Mississippi and New York) with large differences in household income. 

For most of human history higher material living standards – full stomachs, access to 

clean water and warmth from fuel – led to better health and longer lives. This pattern of 

higher incomes-longer lives still holds among poorer countries, where life expectancy 

increases rapidly as per capita income increases, but in recent decades it has slowed 

down among middle income countries and plateaued among the richest thirty or so 

countries in the world. Americans live no longer on average (about 77 years in 2004) 

than Greeks (78 years) or New Zealanders (78), though the USA has a higher GDP per 

capita. Life expectancy in Sweden (80 years) and Japan (82) – where income was more 

equally distributed – was longer. 

In recent years the characteristic that has strongly correlated with health in developed 

countries is income inequality. Creating an index of "Health and Social Problems" from 

nine factors, authors Richard Wilkinson and Kate Pickett found health and social 

problems "more common in countries with bigger income inequalities", and more 

common among states in the US with larger income inequalities. Other studies have 

confirmed this relationship. The UNICEF index of "child well-being in rich countries", 

studying 40 indicators in 22 countries, correlates with greater equality but not per capita 

income. 

Pickett and Wilkinson argue that inequality and social stratification lead to higher levels 

of psychosocial stress and status anxiety which can lead to depression, chemical 

dependency, less community life, parenting problems and stress-related diseases. 

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In their book, Social Epidemiology, Ichiro Kawachi and S.V. Subramanian found that 

impoverished individuals simply cannot lead healthy lives as easily as the wealthy. They 

are unable to secure adequate nutrition for their families, cannot pay utility bills to keep 

themselves warm during the winter or cold during heat waves, and lack sufficient 

housing. 

National income inequality is positively 

related to the country's rate of 

schizophrenia. 

Social Cohesion 

Research has shown an inverse link 

between income inequality and 

social cohesion. In more equal 

societies, people are much more 

likely to trust each other, 

measures of social capital 

(the benefits of goodwill, 

fellowship, mutual 

sympathy and social 

connectedness 

among 

groups who 

make up a 

units) 

greater 

social 

suggest 

community 

involvement, and 

homicide rates are 

consistently lower. 

trust in 

Comparing results 

from the question 

"would others take 

advantage of you if 

they got the chance?" 

in U.S General Social 

Survey and statistics 

on income inequality, 

Eric Uslaner and 

Mitchell Brown found 

there is a high correlation between the amount of 

society and the amount of income equality. A 

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2008 article by Andersen and Fetner also found a strong relationship between economic 

inequality within and across countries and tolerance for 35 democracies. 

In two studies Robert Putnam established links between social capital and economic 

inequality. His most important studies established these links in both the United States 

and in Italy. His explanation for this relationship is that 

Community and equality are mutually reinforcing... Social capital and economic inequality 

moved in tandem through most of the twentieth century. In terms of the distribution of 

wealth and income, America in the 1950s and 1960s was more egalitarian than it had 

been in more than a century... [T]hose same decades were also the high point of social 

connectedness and civic engagement. Record highs in equality and social capital 

coincided. Conversely, the last third of the twentieth century was a time of growing 

inequality and eroding social capital... The timing of the two trends is striking: somewhere 

around 1965–70 America reversed course and started becoming both less just 

economically and less well connected socially and politically. 

Albrekt Larsen has advanced this explanation by a comparative study of how trust 

increased in Denmark and Sweden in the latter part of the 20th century while it 

decreased in the US and UK. It is argued that inequality levels influence how citizens 

imagine the trustworthiness of fellow citizens. In this model social trust is not about 

relations to people you meet (as in Putnam's model) but about people you imagine. 

The economist Joseph Stiglitz has argued that economic inequality has led to distrust of 

business and government. 

Crime 

Crime rate has also been shown to be correlated with inequality in society. Most studies 

looking into the relationship have concentrated on homicides – since homicides are 

almost identically defined across all nations and jurisdictions. There have been over fifty 

studies showing tendencies for violence to be more common in societies where income 

differences are larger. Research has been conducted comparing developed countries 

with undeveloped countries, as well as studying areas within countries. Daly et al. 2001 

found that among U.S. states and Canadian provinces there is a tenfold difference in 

homicide rates related to inequality. They estimated that about half of all variation in 

homicide rates can be accounted for by differences in the amount of inequality in each 

province or state. Fajnzylber et al. (2002) found a similar relationship worldwide. Among 

comments in academic literature on the relationship between homicides and inequality 

are: 

 

 

The most consistent finding in cross-national research on homicides has been 

that of a positive association between income inequality and homicides. 

Economic inequality is positively and significantly related to rates of homicide 

despite an extensive list of conceptually relevant controls. The fact that this 

relationship is found with the most recent data and using a different measure of 

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economic inequality from previous research, suggests that the finding is very 

robust. 

A 2016 study, controlling for different factors than previous studies, challenges the 

aforementioned findings. The study finds "little evidence of a significant empirical link 

between overall inequality and crime", and that "the previously reported positive 

correlation between violent crime and economic inequality is largely driven by economic 

segregation across neighborhoods instead of within-neighborhood inequality". 

Social, Cultural, and Civic Participation 

Higher income inequality led to less of all forms of social, cultural, and civic participation 

among the less wealthy. When inequality is higher the poor do not shift to less 

expensive forms of participation. 

Utility, Economic Welfare, and Distributive Efficiency 

Following the utilitarian principle of seeking the greatest good for the greatest number – 

economic inequality is problematic. A house that provides less utility to a millionaire as a 

summer home than it would to a homeless family of five, is an example of reduced 

"distributive efficiency" within society, that decreases marginal utility of wealth and thus 

the sum total of personal utility. An additional dollar spent by a poor person will go to 

things providing a great deal of utility to that person, such as basic necessities like food, 

water, and healthcare; while, an additional dollar spent by a much richer person will very 

likely go to luxury items providing relatively less utility to that person. Thus, the marginal 

utility of wealth per person ("the additional dollar") decreases as a person becomes 

richer. From this standpoint, for any given amount of wealth in society, a society with 

more equality will have higher aggregate utility. Some studies have found evidence for 

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this theory, noting that in societies where inequality is lower, population-wide 

satisfaction and happiness tend to be higher. 

Philosopher David Schmidtz argues that maximizing the sum of individual utilities will 

harm incentives to produce. 

A society that takes Joe Rich's second unit [of corn] is taking that unit away from 

someone who . . . has nothing better to do than plant it and giving it to someone who . . 

. does have something better to do with it. That sounds good, but in the process, the 

society takes seed corn out of production and diverts it to food, thereby cannibalizing 

itself. 

However, in addition to the diminishing marginal utility of unequal distribution, Pigou and 

others point out that a "keeping up with the Joneses" effect among the well off may lead 

to greater inequality and use of resources for no greater return in utility. 

A larger proportion of the satisfaction yielded by the incomes of rich people comes from 

their relative, rather than from their absolute, amount. This part of it will not be 

destroyed if the incomes of all rich people are diminished together. The loss of 

economic welfare suffered by the rich when command over resources is transferred 

from them to the poor will, therefore, be substantially smaller relatively to the gain of 

economic welfare to the poor than a consideration of the law of diminishing utility taken 

by itself suggests. 

When the goal is to own the biggest yacht – rather than a boat with certain features – 

there is no greater benefit from owning 100 metre long boat than a 20 m one as long as 

it is bigger than your rival. Economist Robert H. Frank compare the situation to that of 

male elks who use their antlers to spar with other males for mating rights. 

The pressure to have bigger ones than your rivals leads to an arms race that consumes 

resources that could have been used more efficiently for other things, such as fighting 

off disease. As a result, every male ends up with a cumbersome and expensive pair of 

antlers, ... and "life is more miserable for bull elk as a group." 

Aggregate Demand, Consumption and Debt 

Conservative researchers have argued that income inequality is not significant because 

consumption, rather than income should be the measure of inequality, and inequality of 

consumption is less extreme than inequality of income in the US. According to Johnson, 

Smeeding, and Tory, consumption inequality was actually lower in 2001 than it was in 

1986. The debate is summarized in "The Hidden Prosperity of the Poor" by journalist 

Thomas B. Edsall. Other studies have not found consumption inequality less dramatic 

than household income inequality, and the CBO's study found consumption data not 

"adequately" capturing "consumption by high-income households" as it does their 

income, though it did agree that household consumption numbers show more equal 

distribution than household income. 

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Others dispute the importance of consumption over income, pointing out that if middle 

and lower income are consuming more than they earn it is because they are saving less 

or going deeper into debt. Income inequality has been the driving factor in the growing 

household debt, as high earners bid up the price of real estate and middle income 

earners go deeper into debt trying to maintain what once was a middle class lifestyle. 

Central Banking economist 

Raghuram Rajan argues that 

"systematic economic inequalities, 

within the United States and around 

the world, have created deep 

financial 'fault lines' that have made 

[financial] crises more likely to 

happen than in the past" – the 

Financial crisis of 2007–08 being 

the most recent example. To 

compensate for stagnating and 

declining purchasing power, political pressure has developed to extend easier credit to 

the lower and middle income earners – particularly to buy homes – and easier credit in 

general to keep unemployment rates low. This has given the American economy a 

tendency to go "from bubble to bubble" fueled by unsustainable monetary stimulation. 

Monopolization of Labor, Consolidation, and Competition 

Greater income inequality can lead to monopolization of the labor force, resulting in 

fewer employers requiring fewer workers. Remaining employers can consolidate and 

take advantage of the relative lack of competition, leading to less consumer choice, 

market abuses, and relatively higher real prices. 

Economic Incentives 

Some economists believe that one of the main reasons that inequality might induce 

economic incentive is because material well-being and conspicuous consumption relate 

to status. In this view, high stratification of income (high inequality) creates high 

amounts of social stratification, leading to greater competition for status. 

One of the first writers to note this relationship, Adam Smith, recognized "regard" as one 

of the major driving forces behind economic activity. From The Theory of Moral 

Sentiments in 1759: 

[W]hat is the end of avarice and ambition, of the pursuit of wealth, of power, and preeminence? 

Is it to supply the necessities of nature? The wages of the meanest labourer 

can supply them... [W]hy should those who have been educated in the higher ranks of 

life, regard it as worse than death, to be reduced to live, even without labour, upon the 

same simple fare with him, to dwell under the same lowly roof, and to be clothed in the 

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same humble attire? From whence, then, arises that emulation which runs through all 

the different ranks of men, and what are the advantages which we propose by that great 

purpose of human life which we call bettering our condition? To be observed, to be 

attended to, to be taken notice of with sympathy, complacency, and approbation, are all 

the advantages which we can propose to derive from it. It is the vanity, not the ease, or 

the pleasure, which interests us. 

Modern sociologists and economists such as Juliet Schor and Robert H. Frank have 

studied the extent to which economic activity is fueled by the ability of consumption to 

represent social status. Schor, in The Overspent American, argues that the increasing 

inequality during the 1980s and 1990s strongly accounts for increasing aspirations of 

income, increased consumption, decreased savings, and increased debt. 

In the book Luxury Fever, Robert H. Frank argues that satisfaction with levels of income 

is much more strongly affected by how someone's income compares with others than its 

absolute level. Frank gives the example of instructions to a yacht architect by a 

customer – shipping magnate Stavros Niarchos – to make Niarchos' new yacht 50 feet 

longer than that of rival magnate Aristotle Onassis. Niarchos did not specify or 

reportedly even know the exact length of Onassis's yacht. 

Pre-2000 Studies 

Economic Growth 

A 1999 review in the Journal of Economic Literature states high inequality lowers 

growth, perhaps because it increases social and political instability. The article also 

says: 

Somewhat unusually for the growth literature, studies have tended to concur in finding a 

negative effect of high inequality on subsequent growth. The evidence has not been 

accepted by all: some writers point out the concentration of richer countries at the lower 

end of the inequality spectrum, the poor quality of the distribution data, and the lack of 

robustness to fixed effects specifications. At least, though, it has become extremely 

difficult to build a case that inequality is good for growth. This in itself represents a 

considerable advance. Given the indications that inequality is harmful for growth, 

attention has moved on to the likely mechanisms.... the literature seems to be moving ... 

towards an examination of the effects of inequality on fertility rates, investment in 

education, and political stability. 

A 1992 World Bank report published in the Journal of Development Economics said that 

Inequality is negatively, and robustly, correlated with growth. This result is not highly 

dependent upon assumptions about either the form of the growth regression or the 

measure of inequality...Although statistically significant, the magnitude of the 

relationship between inequality and growth is relatively small. 

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NYU economist William Baumol found that substantial inequality does not stimulate 

growth because poverty reduces labor force productivity. Economists Dierk Herzer and 

Sebastian Vollmer found that increased income inequality reduces economic growth, 

but growth itself increases income inequality. 

Berg and Ostry of the International Monetary Fund found that of the factors affecting the 

duration of growth spells (not the rate of growth) in developed and developing countries, 

income equality is more beneficial than trade openness, sound political institutions, or 

foreign investment. 

In 1993, Galor and Zeira showed that inequality in the presence of credit market 

imperfections has a long lasting detrimental effect on human capital formation and 

economic development. A 1996 study by Perotti examined the channels through which 

inequality may affect economic growth. He showed that, in accordance with the credit 

market imperfection approach, inequality is associated with lower level of human capital 

formation (education, experience, and apprenticeship) and higher level of fertility, and 

thereby lower levels of growth. He found that inequality is associated with higher levels 

of redistributive taxation, which is associated with lower levels of growth from reductions 

in private savings and investment. Perotti concluded that, "more equal societies have 

lower fertility rates and higher rates of investment in education. Both are reflected in 

higher rates of growth. Also, very unequal societies tend to be politically and socially 

unstable, which is reflected in lower rates of investment and therefore growth." 

Research by Harvard economist Robert Barro, found that there is "little overall relation 

between income inequality and rates of growth and investment". According to work by 

Barro in 1999 and 2000, high levels of inequality reduce growth in relatively poor 

countries but encourage growth in richer countries. A study of Swedish counties 

between 1960 and 2000 found a positive impact of inequality on growth with lead times 

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of five years or less, but no correlation after ten years. Studies of larger data sets have 

found no correlations for any fixed lead time, and a negative impact on the duration of 

growth. 

Some theories developed in the 1970s established possible avenues through which 

inequality may have a positive effect on economic development. According to a 1955 

review, savings by the wealthy, if these increase with inequality, were thought to offset 

reduced consumer demand. 

Post-2000 Studies 

According to International Monetary Fund economists, inequality in wealth and income 

is negatively correlated with the duration of economic growth spells (not the rate of 

growth). High levels of inequality prevent not just economic prosperity, but also the 

quality of a country's institutions and high levels of education. According to IMF staff 

economists, "if the income share of the top 20 percent (the rich) increases, then GDP 

growth actually declines over the medium term, suggesting that the benefits do not 

trickle down. In contrast, an increase in the income share of the bottom 20 percent (the 

poor) is associated with higher GDP growth. The poor and the middle class matter the 

most for growth via a number of interrelated economic, social, and political channels." 

However, further work done in 2015 by Sutirtha Bagchia and Jan Svejnar suggests that 

it is only inequality caused by corruption and cronyism that harms growth. When they 

control for the fact that some inequality is caused by billionaires using their political 

connections, then inequality caused by market forces does not seem to have an effect 

on growth. 

Economist Joseph Stiglitz presented evidence in 2009 that both global inequality and 

inequality within countries prevent growth by limiting aggregate demand. Economist 

Branko Milanovic, wrote in 2001 that, "The view that income inequality harms growth – 

or that improved equality can help sustain growth – has become more widely held in 

recent years. ... The main reason for this shift is the increasing importance of human 

capital in development. When physical capital mattered most, savings and investments 

were key. Then it was important to have a large contingent of rich people who could 

save a greater proportion of their income than the poor and invest it in physical capital. 

But now that human capital is scarcer than machines, widespread education has 

become the secret to growth." 

Studies on income inequality and growth have sometimes found evidence confirming 

the Kuznets curve hypothesis, which states that with economic development, inequality 

first increases, then decreases. Economist Thomas Piketty challenges this notion, 

claiming that from 1914 to 1945 wars and "violent economic and political shocks" 

reduced inequality. Moreover, Piketty argues that the "magical" Kuznets curve 

hypothesis, with its emphasis on the balancing of economic growth in the long run, 

cannot account for the significant increase in economic inequality throughout the 

developed world since the 1970s. However, Kristin Forbes found that if country-specific 

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effects were eliminated by using panel estimation, then income inequality does have a 

significant positive relationship with economic growth. This relationship held across 

different "samples, variable definitions, and model specifications." Historian Walter 

Scheidel, who builds on Piketty's thesis that it has been violent shocks that have 

reduced inequality in The Great Leveler (2017), contends that "the preponderance of 

the evidence fails to support the idea of a systematic relationship between economic 

growth and income inequality as first envisioned by Kuznets sixty years ago." 

A 2012 study published by Inyong Shin of Asia University found that economic 

inequality in the developed world has a very different effect on economic growth than in 

the developing world, saying that "higher inequality can retard growth in the early stage 

of economic development", but that "higher inequality can encourage growth in a near 

steady state". 

A 2013 report on Nigeria suggests that growth has risen with increased income 

inequality. Some theories popular from the 1950s to 2011 argued that inequality had a 

positive effect on economic development. However, Abhijit Banerjee and Esther Duflo 

argue that analyses based on comparing yearly equality figures to yearly growth rates 

were misleading because it takes several years for effects to manifest as changes to 

economic growth. IMF economists found a strong association between lower levels of 

inequality in developing countries and sustained periods of economic growth. 

Developing countries with high inequality have "succeeded in initiating growth at high 

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ates for a few years" but "longer growth spells are robustly associated with more 

equality in the income distribution." 

An OECD study in 2015, found that internationally "countries where income inequality is 

decreasing grow faster than those with rising inequality", and noted that "a lack of 

investment in education by the poor is the main factor behind inequality hurting growth" 

A 2016 meta-analysis found that "the effect of inequality on growth is negative and more 

pronounced in less developed countries than in rich countries". 

A 2017 study argued that there were both positive and negative effects of inequality: 

"When inequality is associated with political instability and social unrest, rent seeking 

and distortive policies, lower capacities for investment in human capital, and a stagnant 

domestic market, it is mostly expected to harm long-run economic performance, as 

suggested by many authors. Accordingly, improving income distribution is expected to 

foster long-run economic growth, especially in low-income countries where the levels of 

inequality are usually very high. However, some degree of inequality can also be good, 

as has been theoretically argued in the literature and as empirically suggested in this 

study. A degree of inequality can play a beneficial role for economic growth when that 

inequality is driven by market forces and related to hard work and growth-enhancing 

incentives like risk taking, innovation, capital investment, and agglomeration economies. 

The challenge for policy makers is to control structural inequality, which reduces the 

country's capacities for economic development, while at the same time keeping in place 

those positive incentives that are also necessary for growth." 

Mechanisms 

According to economist Branko Milanovic, while traditionally economists thought 

inequality was good for growth 

The view that income inequality harms growth – or that improved equality can help 

sustain growth – has become more widely held in recent years. ... The main reason for 

this shift is the increasing importance of human capital in development. When physical 

capital mattered most, savings and investments were key. Then it was important to 

have a large contingent of rich people who could save a greater proportion of their 

income than the poor and invest it in physical capital. But now that human capital is 

scarcer than machines, widespread education has become the secret to growth. 

"Broadly accessible education" is both difficult to achieve when income distribution is 

uneven and tends to reduce "income gaps between skilled and unskilled labor." 

The sovereign-debt economic problems of the late twenty-oughts do not seem to be 

correlated to redistribution policies in Europe. With the exception of Ireland, the 

countries at risk of default in 2011 (Greece, Italy, Spain, Portugal) were notable for their 

high Gini-measured levels of income inequality compared to other European countries. 

As measured by the Gini index, Greece as of 2008 had more income inequality than the 

economically healthy Germany. 

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Equitable Growth 

While acknowledging the central role economic growth can potentially play in human 

development, poverty reduction and the achievement of the Millennium Development 

Goals, it is becoming widely understood among the development community that 

special efforts must be made to ensure poorer sections of society are able to participate 

in economic growth. The effect of economic growth on poverty reduction – the growth 

elasticity of poverty – can depend on the existing level of inequality. For instance, with 

low inequality a country with a growth rate of 2% per head and 40% of its population 

living in poverty, can halve poverty in ten years, but a country with high inequality would 

take nearly 60 years to achieve the same reduction. In the words of the Secretary 

General of the United Nations Ban Ki-Moon: "While economic growth is necessary, it is 

not sufficient for progress on reducing poverty." Competition policy intending to prevent 

companies from abusing market power contributes to inclusive growth. 

Housing 

In many poor and developing countries, much land and housing is held outside the 

formal or legal property ownership registration system. Much unregistered property is 

held in informal form through various associations and other arrangements. Reasons for 

extra-legal ownership include excessive bureaucratic red tape in buying property and 

building, In some countries it can take over 200 steps and up to 14 years to build on 

government land. Other causes of extra-legal property are failures to notarize 

transaction documents or having documents notarized but failing to have them recorded 

with the official agency. 

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Rent controls in Brazil dramatically reduced the percentage of legal housing compared 

to extra-legal housing, which had a much better supply to demand balance. 

A number of researchers (David Rodda, Jacob Vigdor, and Janna Matlack), argue that a 

shortage of affordable housing – at least in the US – is caused in part by income 

inequality. David Rodda noted that from 1984 and 1991, the number of quality rental 

units decreased as the demand for higher quality housing increased (Rhoda 1994:148). 

Through gentrification of older neighborhoods, for example, in East New York, rental 

prices increased rapidly as landlords found new residents willing to pay higher market 

rate for housing and left lower income families without rental units. The ad valorem 

property tax policy combined with rising prices made it difficult or impossible for low 

income residents to keep pace. 

Aspirational Consumption and Household Risk 

Firstly, certain costs are difficult to avoid and are shared by everyone, such as the costs 

of housing, pensions, education and health care. If the state does not provide these 

services, then for those on lower incomes, the costs must be borrowed and often those 

on lower incomes are those who are worse equipped to manage their finances. 

Secondly, aspirational consumption describes the process of middle income earners 

aspiring to achieve the standards of living enjoyed by their wealthier counterparts and 

one method of achieving this aspiration is by taking on debt. The result leads to even 

greater inequality and potential economic instability. 

Poverty 

Oxfam asserts that worsening inequality is impeding the fight against global poverty. A 

2013 report from the group stated that the $240 billion added to the fortunes of the 

world's richest billionaires in 2012 was enough to end extreme poverty four times over. 

Oxfam Executive Director Jeremy Hobbs said that "We can no longer pretend that the 

creation of wealth for a few will inevitably benefit the many – too often the reverse is 

true." 

Jared Bernstein and Elise Gould of the Economic Policy Institute suggest that poverty in 

the United States could have been significantly mitigated if inequality had not increased 

over the last few decades. 

Environment 

Multiple arguments can be made about the relationship between poverty and the 

environment. In some cases, alleviating poverty can result in detrimental environmental 

affects or exacerbate degradation; the smaller the economic inequality, the more waste 

and pollution is created, resulting in many cases, in more environmental degradation. 

This can be explained by the fact that as the poor people in the society become more 

wealthy, it increases their yearly carbon emissions. This relation is expressed by the 

Environmental Kuznets Curve (EKC). It should be noted here however that in certain 

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cases, with great economic inequality, there is nonetheless not more waste and 

pollution created as the waste/pollution is cleaned up better afterwards (water 

treatment, filtering, ... ) Also note that the whole of the increase in environmental 

degradation is the result of the increase of emissions per person being multiplied by a 

multiplier. If there were fewer people, however, this multiplier would be lower, and thus 

the amount of environmental degradation would be lower as well. As such, the current 

high level of population has a large impact on this as well. If (as WWF argued), 

population levels would start to drop to a sustainable level (1/3 of current levels, so 

about 2 billion people), human inequality can be addressed/corrected, while still not 

resulting in an increase of environmental damage. 

On the other hand, other sources argue that alleviating poverty will reap positive 

progressions on the environment, especially with technological advances in energy 

efficiency. Urbanization, for instance, can "reduce the area in which humans impact the 

environment, thereby protecting nature elsewhere." Through concentration human 

societies, urbanized regions can allow for more allocated reserves for wildlife. 

Moreover, through urbanization, such societies have a higher standard of living that can 

promote environmental health with better food, technology, education, and more. The 

argument that links poverty alleviation to environmental conservation outlines the idea 

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that "gross inequalities that exist between rich and poor in the world have created a 

situation where many people have to sacrifice environmental thinking just to stay alive." 

Political Influence 

In 2015, a study by Lahtinen and Wass suggested that low social mobility reduces 

turnout among lower classes. 

War, Terrorism and Political Instability 

One study finds that income inequality increases political instability: "more unequal 

societies are more politically unstable". A 2016 study finds that interregional inequality 

increases terrorism. Another 2016 study finds that inequality between social classes 

increases the likelihood of coups but not civil wars. A lack of reliable data makes it 

difficult to study the relationship between inequality and political violence. 

John A. Hobson, Rosa Luxemburg, and Vladimir Lenin argued that WWI was caused by 

inequality. Economist Branko Milanovic claims that there is credence to this argument in 

his 2016 book Global Inequality: A New Approach for the Age of Globalization. 

Fairness vs. Equality 

Perspectives 

According to Christina Starmans et al. (Nature Hum. Beh., 2017), the research literature 

contains no evidence on people having an aversion on inequality. In all studies 

analyzed, the subjects preferred fair distributions to equal distributions, in both 

laboratory and real-world situations. In public, researchers may loosely speak of 

equality instead of fairness, when referring to studies where fairness happens to 

coincide with equality, but in many studies fairness is carefully separated from equality 

and the results are univocal. Already very young children seem to prefer fairness over 

equality. 

When people were asked, what would be the wealth of each quintile in their ideal 

society, they gave a 50-fold sum to the richest quintile than to the poorest quintile. The 

preference for inequality increases in adolescence, and so do the capabilities to favor 

fortune, effort and ability in the distribution. 

Preference for unequal distribution has been developed to the human race possibly 

because it allows for better co-operation and allows a person to work with a more 

productive person so that both parties benefit from the co-operation. Inequality also 

solves the problems of free-riders, cheaters and ill-behaving people. 

In many societies, such as the USSR, the distribution lead to anger, as it was felt too 

equal, unfair. In the current U.S., many feel that the distribution is unfair in being too 

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unequal. In both cases, the cause is unfairness, not inequality, the researchers 

conclude. 

Socialist Perspectives 

Socialists attribute the vast disparities in wealth to the private ownership of the means of 

production by a class of owners, creating a situation where a small portion of the 

population lives off unearned property income by virtue of ownership titles in capital 

equipment, financial assets and corporate stock. By contrast, the vast majority of the 

population is dependent on income in the form of a wage or salary. In order to rectify 

this situation, socialists argue that the means of production should be socially owned so 

that income differentials would be reflective of individual contributions to the social 

product. 

Marxist socialists ultimately predict the emergence of a communist society based on the 

common ownership of the means of production, where each individual citizen would 

have free access to the articles of consumption (From each according to his ability, to 

each according to his need). According to Marxist philosophy, equality in the sense of 

free access is essential for freeing individuals from dependent relationships, thereby 

allowing them to transcend alienation. 

Meritocracy 

Meritocracy favors an eventual society where an individual's success is a direct function 

of his merit, or contribution. Economic inequality would be a natural consequence of the 

wide range in individual skill, talent and effort in human population. David Landes stated 

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that the progression of Western economic development that led to the Industrial 

Revolution was facilitated by men advancing through their own merit rather than 

because of family or political connections. 

Liberal Perspectives 

Most modern social liberals, including centrist or left-of-center political groups, believe 

that the capitalist economic system should be fundamentally preserved, but the status 

quo regarding the income gap must be reformed. Social liberals favor a capitalist 

system with active Keynesian macroeconomic policies and progressive taxation (to 

even out differences in income inequality). 

However, contemporary classical liberals and libertarians generally do not take a stance 

on wealth inequality, but believe in equality under the law regardless of whether it leads 

to unequal wealth distribution. In 1966 Ludwig von Mises, a prominent figure in the 

Austrian School of economic thought, explains: 

The liberal champions of equality under the law were fully aware of the fact that men are 

born unequal and that it is precisely their inequality that generates social cooperation 

and civilization. Equality under the law was in their opinion not designed to correct the 

inexorable facts of the universe and to make natural inequality disappear. It was, on the 

contrary, the device to secure for the whole of mankind the maximum of benefits it can 

derive from it. Henceforth no man-made institutions should prevent a man from attaining 

that station in which he can best serve his fellow citizens. 

Robert Nozick argued that government redistributes wealth by force (usually in the form 

of taxation), and that the ideal moral society would be one where all individuals are free 

from force. However, Nozick recognized that some modern economic inequalities were 

the result of forceful taking of property, and a certain amount of redistribution would be 

justified to compensate for this force but not because of the inequalities themselves. 

John Rawls argued in A Theory of Justice that inequalities in the distribution of wealth 

are only justified when they improve society as a whole, including the poorest members. 

Rawls does not discuss the full implications of his theory of justice. Some see Rawls's 

argument as a justification for capitalism since even the poorest members of society 

theoretically benefit from increased innovations under capitalism; others believe only a 

strong welfare state can satisfy Rawls's theory of justice. 

Classical liberal Milton Friedman believed that if government action is taken in pursuit of 

economic equality then political freedom would suffer. In a famous quote, he said: 

A society that puts equality before freedom will get neither. A society that puts freedom 

before equality will get a high degree of both. 

Economist Tyler Cowen has argued that though income inequality has increased within 

nations, globally it has fallen over the last 20 years. He argues that though income 

inequality may make individual nations worse off, overall, the world has improved as 

global inequality has been reduced. 

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Social Justice Arguments 

Patrick Diamond and Anthony Giddens (professors of Economics and Sociology, 

respectively) hold that 'pure meritocracy is incoherent because, without redistribution, 

one generation's successful individuals would become the next generation's embedded 

caste, hoarding the wealth they had accumulated'. 

They also state that social justice requires redistribution of high incomes and large 

concentrations of wealth in a way that spreads it more widely, in order to "recognise the 

contribution made by all sections of the community to building the nation's wealth." 

(Patrick Diamond and Anthony Giddens, June 27, 2005, New Statesman) 

Pope Francis stated in his Evangelii gaudium, that "as long as the problems of the poor 

are not radically resolved by rejecting the absolute autonomy of markets and financial 

speculation and by attacking the structural causes of inequality, no solution will be found 

for the world's problems or, for that matter, to any problems." He later declared that 

"inequality is the root of social evil." 

When income inequality is low, aggregate demand will be relatively high, because more 

people who want ordinary consumer goods and services will be able to afford them, 

while the labor force will not be as relatively monopolized by the wealthy. 

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Effects on Social Welfare 

In most western democracies, the desire to eliminate or reduce economic inequality is 

generally associated with the political left. One practical argument in favor of reduction 

is the idea that economic inequality reduces social cohesion and increases social 

unrest, thereby weakening the society. There is evidence that this is true (see inequity 

aversion) and it is intuitive, at least for small face-to-face groups of people. Alberto 

Alesina, Rafael Di Tella, and Robert MacCulloch find that inequality negatively affects 

happiness in Europe but not in the United States. 

It has also been argued that economic inequality invariably translates to political 

inequality, which further aggravates the problem. Even in cases where an increase in 

economic inequality makes nobody economically poorer, an increased inequality of 

resources is disadvantageous, as increased economic inequality can lead to a power 

shift due to an increased inequality in the ability to participate in democratic processes. 

Capabilities Approach 

The capabilities approach – sometimes called the human development approach – 

looks at income inequality and poverty as form of "capability deprivation". Unlike 

neoliberalism, which "defines well-being as utility maximization", economic growth and 

income are considered a means to an end rather than the end itself. Its goal is to 

"wid[en] people's choices and the level of their achieved well-being" through increasing 

functionings (the things a person values doing), capabilities (the freedom to enjoy 

functionings) and agency (the ability to pursue valued goals). 

When a person's capabilities are lowered, they are in some way deprived of earning as 

much income as they would otherwise. An old, ill man cannot earn as much as a 

healthy young man; gender roles and customs may prevent a woman from receiving an 

education or working outside the home. There may be an epidemic that causes 

widespread panic, or there could be rampant violence in the area that prevents people 

from going to work for fear of their lives. As a result, income and economic inequality 

increases, and it becomes more difficult to reduce the gap without additional aid. To 

prevent such inequality, this approach believes it's important to have political freedom, 

economic facilities, social opportunities, transparency guarantees, and protective 

security to ensure that people aren't denied their functionings, capabilities, and agency 

and can thus work towards a better relevant income. 

Policy Responses Intended to Mitigate 

No business which depends for existence on paying less than living wages to its 

workers has any right to continue in this country. 

—President Franklin Delano Roosevelt, 1933 

A 2011 OECD study makes a number of suggestions to its member countries, including: 

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Well-targeted income-support policies. 

Facilitate and encourage access to employment. 

Better job-related training and education for the low-skilled (on-the-job training) 

would help to boost their productivity potential and future earnings. 

Better access to formal education. 

Progressive taxation reduces absolute income inequality when the higher rates on 

higher-income individuals are paid and not evaded, and transfer payments and social 

safety nets result in progressive government spending. Wage ratio legislation has also 

been proposed as a means of reducing income inequality. The OECD asserts that 

public spending is vital in reducing the ever-expanding wealth gap. 

The economists Emmanuel Saez and Thomas Piketty recommend much higher top 

marginal tax rates on the wealthy, up to 50 percent, or 70 percent or even 90 percent. 

Ralph Nader, Jeffrey Sachs, the United Front Against Austerity, among others, call for a 

financial transactions tax (also known as the Robin Hood tax) to bolster the social safety 

net and the public sector. 

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The Economist wrote in December 2013: "A minimum wage, providing it is not set too 

high, could thus boost pay with no ill effects on jobs....America's federal minimum wage, 

at 38% of median income, is one of the rich world's lowest. Some studies find no harm 

to employment from federal of state minimum wages, others see a small one, but none 

finds any serious damage." 

General limitations on and taxation of rent-seeking are popular across the political 

spectrum. 

Public policy responses addressing causes and effects of income inequality in the US 

include: progressive tax incidence adjustments, strengthening social safety net 

provisions such as Aid to Families with Dependent Children, welfare, the food stamp 

program, Social Security, Medicare, and Medicaid, organizing community interest 

groups, increasing and reforming higher education subsidies, increasing infrastructure 

spending, and placing limits on and taxing rent-seeking. 

A 2017 study in the Journal of Political Economy by Daron Acemogu, James Robinson 

and Thierry Verdier argues that American "cutthroat" capitalism and inequality gives rise 

to technology and innovation that more "cuddly" forms of capitalism cannot. As a result, 

"the diversity of institutions we observe among relatively advanced countries, ranging 

from greater inequality and risk-taking in the United States to the more egalitarian 

societies supported by a strong safety net in Scandinavia, rather than reflecting 

differences in fundamentals between the citizens of these societies, may emerge as a 

mutually self-reinforcing world equilibrium. If so, in this equilibrium, "we cannot all be like 

the Scandinavians," because Scandinavian capitalism depends in part on the 

knowledge spillovers created by the more cutthroat American capitalism." A 2012 

working paper by the same authors, making similar arguments, was challenged by Lane 

Kenworthy, who posited that, among other things, the Nordic countries are consistently 

ranked as some of the world's most innovative countries by the World Economic 

Forum's Global Competitiveness Index, with Sweden ranking as the most innovative 

nation, followed by Finland, for 2012–2013; the U.S. ranked sixth. 

Mitigating Factors 

Countries with a left-leaning legislature generally have lower levels of inequality. Many 

factors constrain economic inequality – they may be divided into two classes: 

government sponsored, and market driven. The relative merits and effectiveness of 

each approach is a subject of debate. 

Typical government initiatives to reduce economic inequality include: 

 

Public education: increasing the supply of skilled labor and reducing income 

inequality due to education differentials. 

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Progressive taxation: the rich are taxed proportionally more than the poor, 

reducing the amount of income inequality in society if the change in taxation does 

not cause changes in income. 

Market forces outside of government intervention that can reduce economic inequality 

include: 

 

propensity to spend: with rising wealth & income, a person may spend more. In 

an extreme example, if one person owned everything, they would immediately 

need to hire people to maintain their properties, thus reducing the wealth 

concentration. 

Research shows that since 1300, the only periods with significant declines in wealth 

inequality in Europe were the Black Death and the two World Wars. Historian Walter 

Scheidel posits that, since the stone age, only extreme violence, catastrophes and 

upheaval in the form of total war, Communist revolution, pestilence and state collapse 

have significantly reduced inequality. 

He has stated that "only all-out thermonuclear war might fundamentally reset the 

existing distribution of resources" and that "peaceful policy reform may well prove 

unequal to the growing challenges ahead." 

________ 

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Redlining 

In the United States and Canada, redlining is the systematic denial of various services 

to residents of specific, often racially associated, neighborhoods or communities, either 

directly or through the selective raising of prices. While the best known examples of 

redlining have involved denial of financial services such as banking or insurance, other 

services such as health care or even supermarkets have been denied to residents. In 

the case of retail businesses like supermarkets, purposely locating impractically far 

away from said residents results in a redlining effect. Reverse redlining occurs when a 

lender or insurer targets particular neighborhoods that are predominantly nonwhite, not 

to deny residents loans or insurance, but rather to charge them more than in a nonredlined 

neighborhood where there is more competition. 

In the 1960s, sociologist John McKnight coined the term "redlining" to describe the 

discriminatory practice of fencing off areas where banks would avoid investments based 

on community demographics. During the heyday of redlining, the areas most frequently 

discriminated against were black inner city neighborhoods. For example, in Atlanta in 

the 1980s, a Pulitzer Prize-winning series of articles by investigative reporter Bill 

Dedman showed that banks would often lend to lower-income whites but not to middleincome 

or upper-income blacks. The use of blacklists is a related mechanism also used 

by redliners to keep track of groups, areas, and people that the discriminating party 

feels should be denied business or aid or other transactions. In the academic literature, 

redlining falls under the broader category of credit rationing. 

History 

Although informal discrimination and segregation had existed in the United States, the 

specific practice called "redlining" began with the National Housing Act of 1934, which 

established the Federal Housing Administration (FHA). Racial segregation and 

discrimination against minorities and minority communities pre-existed this policy. The 

implementation of this federal policy aggravated the decay of minority inner-city 

neighborhoods caused by the withholding of mortgage capital, and made it even more 

difficult for neighborhoods to attract and retain families able to purchase homes. The 

assumptions in redlining resulted in a large increase in residential racial segregation 

and urban decay in the United States. 

In 1935, the Federal Home Loan Bank Board (FHLBB) asked Home Owners' Loan 

Corporation (HOLC) to look at 239 cities and create "residential security maps" to 

indicate the level of security for real-estate investments in each surveyed city. On the 

maps, the newest areas—those considered desirable for lending purposes—were 

outlined in green and known as "Type A". These were typically affluent suburbs on the 

outskirts of cities. "Type B" neighborhoods, outlined in blue, were considered "Still 

Desirable", whereas older "Type C" were labeled "Declining" and outlined in yellow. 

"Type D" neighborhoods were outlined in red and were considered the most risky for 

mortgage support. These neighborhoods tended to be the older districts in the center of 

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cities; often they were also black neighborhoods. Urban planning historians theorize that 

the maps were used by private and public entities for years afterward to deny loans to 

people in black communities. But, recent research has indicated that the HOLC did not 

redline in its own lending activities and that the racist language reflected the bias of the 

private sector and experts hired to conduct the appraisals. 

Some redlined maps were also created by private organizations, such as J.M. Brewer's 

1934 map of Philadelphia. Private organizations created maps designed to meet the 

requirements of the Federal Housing Administration's underwriting manual. The lenders 

had to consider FHA standards if they wanted to receive FHA insurance for their loans. 

FHA appraisal manuals instructed banks to steer clear of areas with "inharmonious 

racial groups", and recommended that municipalities enact racially restrictive zoning 

ordinances. 

Following a National Housing Conference in 1973, a group of Chicago community 

organizations led by The Northwest Community Organization (NCO) formed National 

People's Action (NPA), to broaden the fight against disinvestment and mortgage 

redlining in neighborhoods all over the country. This organization, led by Chicago 

housewife Gale Cincotta and Shel Trapp, a professional community organizer, targeted 

The Federal Home Loan Bank Board, the governing authority over federally chartered 

Savings & Loan institutions (S&L) that held at that time the bulk of the country's home 

mortgages. NPA embarked on an effort to build a national coalition of urban community 

organizations to pass a national disclosure regulation or law to require banks to reveal 

their lending patterns. 

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For many years, urban community organizations had battled neighborhood decay by 

attacking blockbusting, forcing landlords to maintain properties, and requiring cities to 

board up and tear down abandoned properties. These actions addressed the short-term 

issues of neighborhood decline. Neighborhood leaders began to learn that these issues 

and conditions were symptoms of a disinvestment that was the true, though hidden, 

underlying cause of these problems. They changed their strategy as more data was 

gathered. 

With the help of NPA, a coalition of loosely affiliated community organizations began to 

form. At the Third Annual Housing Conference held in Chicago in 1974, eight hundred 

delegates representing 25 states and 35 cities attended. The strategy focused on the 

Federal Home Loan Bank Board (FHLBB), which oversaw S&L's in cities all over the 

country. 

In 1974, Chicago's Metropolitan Area Housing Association (MAHA), made up of 

representatives of local organizations, succeeded in having the Illinois State Legislature 

pass laws mandating disclosure and outlawing redlining. In Massachusetts, organizers 

allied with NPA confronted a unique situation. Over 90% of home mortgages were held 

by state-chartered savings banks. A Jamaica Plain neighborhood organization pushed 

the disinvestment issue into the statewide gubernatorial race. The Jamaica Plain 

Banking & Mortgage Committee and its citywide affiliate, The Boston Anti-redlining 

Coalition (BARC), won a commitment from Democratic candidate Michael S. Dukakis to 

order statewide disclosure through the Massachusetts State Banking Commission. After 

Dukakis was elected, his new Banking Commissioner ordered banks to disclose 

mortgage-lending patterns by ZIP code. The suspected redlining was revealed. 

NPA and its affiliates achieved disclosure of lending practices with the passage of The 

Home Mortgage Disclosure Act of 1975. The required transparency and review of loan 

practices began to change lending practices. NPA began to work on reinvestment in 

areas that had been neglected. Their support helped gain passage in 1977 of the 

Community Reinvestment Act. 

Effect 

According to blackpast.org contributor Brent Gaspaire: 

As a consequence of redlining, neighborhoods that local banks deemed unfit for 

investment were left underdeveloped or in disrepair. Attempts to improve these 

neighborhoods with even relatively small-scale business ventures were commonly 

obstructed by financial institutions that continued to label the underwriting as too risky or 

simply rejected them outright. When existing businesses collapsed, new ones were not 

allowed to replace them, often leaving entire blocks empty and crumbling. Consequently, 

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African Americans in those neighborhoods were frequently limited in their access to 

banking, healthcare, retail merchandise, and even groceries. 

Redlining paralyzed the housing market, lowered property values in certain areas and 

encouraged landlord abandonment. As abandonment increased, the population density 

became lower. Abandoned buildings served as havens for drug dealing and other illegal 

activity, increasing social problems and reluctance of people to invest in these areas. 

Because areas were redlined residents in them were unable to obtain loans to improve 

their homes or get loans to move to a different area. Obviously, the neighborhoods had 

zero investment while neighborhoods around them improved. When the GI Bill was 

created during World War II, veterans who once lived in redlined areas were unable to 

get zero interest loans to build new homes like the rest of the returning soldiers. This 

forced them to stay in the areas that were poor and uninvested in while the rest of 

America was growing and moving to the suburbs. Around the same time the GI Bill was 

created, the Federal Highway Act was also created. Because the areas that were 

redlined were so poor, many cities chose to destroy these areas to create the highways. 

The residents were displaced and forced to move into different uninvested 

neighborhoods while their homes and businesses were destroyed by the highways. 

A 2017 study by Federal Reserve Bank of Chicago economists found that the practice 

of redlining—the practice whereby banks discriminated against the inhabitants of certain 

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neighborhoods—had a persistent adverse impact on the neighborhoods, with redlining 

affecting homeownership rates, home values and credit scores in 2010. Since many 

African-Americans could not access conventional home loans, they had to turn to 

predatory lenders (who charged high interest rates). Due to lower home ownership 

rates, slumlords were able to rent out apartments that would otherwise be owned.mk 

Court System 

Challenges 

The U.S. Department of Housing and Urban Development announced a $200 million 

settlement with Associated Bank over redlining in Chicago and Milwaukee in May 2015. 

The three-year HUD observation led to the complaint that the bank purposely rejected 

mortgage applications from black and Latino applicants. The final settlement required 

AB to open branches in non-white neighborhoods, just like HCSB. 

New York Attorney General Eric Schneiderman announced a settlement with Evans 

Bank for $825,000 on September 10, 2015. An investigation had uncovered the erasure 

of black neighborhoods from mortgage lending maps. According to Schneiderman, of 

the over 1,100 mortgage applications the bank received between 2009 and 2012, only 

four were from African Americans. Following this investigation, the Buffalo News 

reported that more banks could be investigated for the same reasons in the near future. 

The most notable examples of such DOJ and HUD settlements have focused heavily on 

community banks in large metropolitan areas, but banks in other regions have been the 

subject of such orders as well, including First United Security Bank in Thomasville, 

Alabama, and Community State Bank in Saginaw, Michigan. 

The United States Department of Justice announced a $33 million settlement with 

Hudson City Savings Bank, which services New Jersey, New York, and Pennsylvania, 

on September 24, 2015. The six-year DOJ investigation had proven that the company 

was intentionally avoiding granting mortgages to Latinos and African Americans and 

purposely avoided expanding into minority-majority communities. The Justice 

Department called it the "largest residential mortgage redlining settlement in its history." 

As a part of the settlement agreement, HCSB was forced to open branches in non-white 

communities. 

As U.S. Attorney Paul Fishman explained to Emily Badger for The Washington Post, "[i]f 

you lived in a majority-black or Hispanic neighborhood and you wanted to apply for a 

mortgage, Hudson City Savings Bank was not the place to go." The enforcement 

agencies cited additional evidence of discrimination Hudson City's broker selection 

practices, noting that the bank received 80 percent of its mortgage applications from 

mortgage brokers but that the brokers with whom the bank worked were not located in 

majority African-American and Hispanic areas. 

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Legislative Action 

In the United States, the Fair Housing Act of 1968 was passed to fight the practice. 

According to the Department of Housing and Urban Development "The Fair Housing Act 

makes it unlawful to discriminate in the terms, conditions, or privileges of sale of a 

dwelling because of race or national origin. The Act also makes it unlawful for any 

person or other entity whose business includes residential real estate-related 

transactions to discriminate against any person in making available such a transaction, 

or in the terms or conditions of such a transaction, because of race or national origin." 

The Office of Fair Housing and Equal Opportunity was tasked with administering and 

enforcing this law. Anyone who suspects that their neighborhood has been redlined is 

able to file a housing discrimination complaint. 

The Community Reinvestment Act passed by Congress in 1977 to reduce 

discriminatory credit practices against low-income neighborhoods further required banks 

to apply the same lending criteria in all communities. Although open redlining was made 

illegal in the 1970s through community reinvestment legislation, the practice may have 

continued in less overt ways. AIDS activists allege redlining of health insurance against 

the LGBT community in response to the AIDS crisis. 

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Community Organizations 

ShoreBank, a community-development bank in Chicago's South Shore neighborhood, 

was a part of the private-sector fight against redlining. Founded in 1973, ShoreBank 

sought to combat racist lending practices in Chicago's African-American communities by 

providing financial services, especially mortgage loans, to local residents. In a 1992 

speech, then-Presidential candidate Bill Clinton called ShoreBank "the most important 

bank in America." 

On August 20, 2010, the bank was declared insolvent, closed by regulators and most of 

its assets were acquired by Urban Partnership Bank. 

In the mid-1970s, community organizations, under the banner of the NPA, worked to 

fight against redlining in South Austin, Illinois. One of these organisations was SACCC 

(South Austin Coalition Community Council), formed to restore South Austin's 

neighbourhood and to fight against financial institutions accused of propagating 

redlining. This got the attention of insurance regulators in the Illinois Department of 

Insurance, as well as federal officers enforcing anti-racial discrimination laws. 

Brick and Mortar 

Current Issues 

Retail 

Retail redlining is a spatially discriminatory practice among retailers. Taxicab services 

and delivery food may not serve certain areas, based on their ethnic-minority 

composition and assumptions about business (and perceived crime), rather than data 

and economic criteria, such as the potential profitability of operating in those areas. 

Consequently, consumers in these areas are vulnerable to prices set by fewer retailers. 

They may be exploited by retailers who charge higher prices and/or offer them inferior 

goods. 

Online 

A 2012 study by the Wall Street Journal found that Staples, Home Depot, Rosetta Stone 

and some other online retailers displayed different prices to customers in different 

locations (distinct from shipping prices). Staples based discounts on proximity to 

competitors like OfficeMax and Office Depot. This generally resulted in higher prices for 

customers in more rural areas, who were on average less wealthy than customers 

seeing lower prices. 

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Liquorlining 

Some service providers target low-income neighborhoods for nuisance sales. When 

those services are believed to have adverse effects on a community, they may 

considered to be a form of "reverse redlining." The term "liquorlining" is sometimes used 

to describe high densities of liquor stores in low income and/or minority communities 

relative to surrounding areas. High densities of liquor stores are associated with crime 

and public health issues, which may in turn drive away supermarkets, grocery stores, 

and other retail outlets, contributing to low levels of economic development. Controlled 

for income, nonwhites face higher concentrations of liquor stores than do whites. 

Financial Services 

Student Loans 

In December 2007, a class action lawsuit was brought against student loan lending 

giant Sallie Mae in the United States District Court for the District of Connecticut. The 

class alleged that Sallie Mae discriminated against African American and Hispanic 

private student loan applicants. 

The case alleged that the factors Sallie Mae used to underwrite private student loans 

caused a disparate impact on students attending schools with higher minority 

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populations. The suit also alleged that Sallie Mae failed to properly disclose loan terms 

to private student loan borrowers. 

The lawsuit was settled in 2011. The terms of the settlement included Sallie Mae 

agreeing to make a $500,000 donation to the United Negro College Fund and the 

attorneys for the plaintiffs receiving $1.8 million in attorneys' fees. 

Credit Cards 

Credit card redlining is a spatially discriminatory practice among credit card issuers, of 

providing different amounts of credit to different areas, based on their ethnic-minority 

composition, rather than on economic criteria, such as the potential profitability of 

operating in those areas. Scholars assess certain policies, such as credit card issuers 

reducing credit lines of individuals with a record of purchases at retailers frequented by 

so-called "high-risk" customers, to be akin to redlining. 

Insurance 

Gregory D. Squires wrote in 2003 that data showed that race continues to affect the 

policies and practices of the insurance industry. Racial profiling or redlining has a long 

history in the property-insurance industry in the United States. From a review of industry 

underwriting and marketing materials, court documents, and research by government 

agencies, industry and community groups, and academics, it is clear that race has long 

affected and continues to affect the policies and practices of the insurance industry. 

Home-insurance agents may try to assess the ethnicity of a potential customer just by 

telephone, affecting what services they offer to inquiries about purchasing a home 

insurance policy. 

This type of discrimination is called linguistic profiling. There have also been concerns 

raised about redlining in the automotive insurance industry. Reviews of insurance 

scores based on credit are shown to have unequal results by ethnic group. The Ohio 

Department of Insurance in the early 21st century allows insurance providers to use 

maps and collection of demographic data by ZIP code in determining insurance rates. 

The FHEO Director of Investigations at the Department of Housing and Urban 

Development, Sara Pratt, wrote: 

Like other forms of discrimination, the history of insurance redlining began in conscious, 

overt racial discrimination practiced openly and with significant community support in 

communities throughout the country. There was documented overt discrimination in 

practices relating to residential housing—from the appraisal manuals which established 

an articulated "policy" of preferences based on race, religion and national origin. to 

lending practices which only made loans available in certain parts of town or to certain 

borrowers, to the decision-making process in loans and insurance which allowed the 

insertion of discriminatory assessments into final decisions about either. 

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Mortgages 

Reverse Redlining occurs when a lender or insurer particularly targets minority 

consumers, not to deny them loans or insurance, but to charge them more than would 

be charged to a similarly situated white consumer, specifically marketing the most 

expensive and onerous loan products. These communities had largely been ignored by 

most lenders just a couple of decades earlier. In the 2000s some financial institutions 

considered black communities as suitable for subprime mortgages. Wells Fargo 

partnered with churches in black communities, where the pastor would deliver "wealth 

building" seminars in their sermons, and the bank would make a donation to the church 

in return for every new mortgage application. Working-class blacks wanted a part of the 

nation's home-owning trend. Instead of contributing to homeownership and community 

progress, predatory lending practices through reverse redlining stripped the equity 

homeowners struggled to build and drained the wealth of those communities for the 

enrichment of financial firms. The growth of subprime lending (higher cost loans to 

borrowers with flaws on their credit records) prior to the 2008 financial crisis, coupled 

with growing law enforcement activity in those areas, clearly showed a surge in a range 

of manipulative practices. Not all subprime loans were predatory, but virtually all 

predatory loans were subprime. Some subprime loans certainly benefit high-risk 

borrowers who would not qualify for conventional, prime loans. Predatory loans, 

however, charge unreasonably higher rates and fees by compared to the risk, trapping 

homeowners in unaffordable debt and often costing them their homes and life savings. 

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A survey of two districts of similar incomes, one being largely white and the other largely 

black, found that bank branches in the black community offered largely subprime loans 

and almost no prime loans. Studies found out that high-income blacks were almost 

twice as likely to end up with subprime home-purchase mortgages as did low-income 

whites. Some loan officers referred to blacks as "mud people" and to subprime lending 

as "ghetto loans." A lower savings rate and a distrust of banks, stemming from a legacy 

of redlining, may help explain why there are fewer branches in minority neighborhoods. 

In the early 21st century, brokers and telemarketers actively pushed subprime 

mortgages. A majority of the loans were refinance transactions, allowing homeowners to 

take cash out of their appreciating property or pay off credit card and other debt. 

Redlining has helped preserve segregated living patterns for blacks and whites in the 

United States, as discrimination is often contingent on the racial composition of 

neighborhoods and the race of the applicant. Lending institutions such as Wells Fargo 

have been shown to treat black mortgage applicants differently when they are buying 

homes in white neighborhoods than when buying homes in black neighborhoods. 

Dan Immergluck writes that in 2002 small businesses in black neighborhoods received 

fewer loans, even after accounting for business density, business size, industrial mix, 

neighborhood income, and the credit quality of local businesses. 

Several state attorneys general have begun investigating these practices, which may 

violate fair lending laws. The NAACP filed a class-action lawsuit charging systematic 

racial discrimination by more than a dozen banks. 

Environmental racism 

Policies related to redlining and urban decay can also act as a form of environmental 

racism, which in turn affect public health. Urban minority communities may face 

environmental racism in the form of parks that are smaller, less accessible and of 

poorer quality than those in more affluent or white areas in some cities. This may have 

an indirect effect on health, since young people have fewer places to play, and adults 

have fewer opportunities for exercise. 

Robert Wallace writes that the pattern of the AIDS outbreak during the 80s was affected 

by the outcomes of a program of "planned shrinkage" directed at African-American and 

Hispanic communities. It was implemented through systematic denial of municipal 

services, particularly fire protection resources, essential to maintain urban levels of 

population density and ensure community stability. Institutionalized racism affects 

general health care as well as the quality of AIDS health intervention and services in 

minority communities. The over-representation of minorities in various disease 

categories, including AIDS, is partially related to environmental racism. The national 

response to the AIDS epidemic in minority communities was slow during the 80s and 

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90s, showing an insensitivity to ethnic diversity in prevention efforts and AIDS health 

services. 

Workforce 

Workers living in American inner cities have more difficulty finding jobs than do 

suburban workers. 

Fair Housing Act 

Combating Redlining 

The Fair Housing Act (also known as the Civil Rights Act) of 1968 was passed in order 

to help protect minority individuals from the discriminatory practices of financial 

institutions and agents. 

Guidelines 

The Human Relations Commissions of Pennsylvania adopted guidelines regarding 

redlining. The guidelines demonstrate practices that are to be prohibited in the selling of 

property to people. 

Culture 

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The film Revolution '67 examines the practice of redlining that occurred in Newark, New 

Jersey in the 1960s. 

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III. Aprophobia and 

Economic Discrimination 

The Aporophobia (from the Spanish aporofobia, and this from the Ancient Greek 

άπορος (á-poros), without resources, indigent, poor, and φόβος (phobos), fear) refers to 

the fear towards poverty and towards the poor people. It is the disgust and hostility 

towards poor people, without resources or helpless. 

The concept of aporophobia was coined in the 1990s by the philosopher Adela Cortina, 

professor of Ethics and Political Philosophy at the University of Valencia, to differentiate 

this attitude from xenophobia, which only refers to the rejection of foreigners and 

racism, which is discrimination by ethnic groups. The difference between aporophobia 

and xenophobia or racism is that socially there is no discrimination or marginalization of 

immigrants or members of other ethnic groups when these people have assets, 

economic resources and/or social and media relevance. 

The aporophobia consists, therefore, in a feeling of fear and in an attitude of rejection of 

the poor, the lack of means, the helpless. Such feeling and such attitude are acquired. 

________ 

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Economic Discrimination is discrimination based on economic factors. These 

factors can include job availability, wages, the prices and/or availability of goods and 

services, and the amount of capital investment funding available to minorities for 

business. This can include discrimination against workers, consumers, and minorityowned 

businesses. 

It is not the same as price discrimination, the practice by which monopolists (and to a 

lesser extent oligopolists and monopolistic competitors) charge different buyers different 

prices based on their willingness to pay. 

History 

A recognition of economic discrimination began in the British Railway Clauses 

Consolidation Act of 1845, which prohibited a common carrier from charging one person 

more for carrying freight than was charged to another customer for the same service. In 

nineteenth-century English and American common law, discrimination was 

characterized as improper distinctions in economic transactions; in addition to the above 

issue in the British Railway Clauses, a hotelier capriciously refusing to give rooms to a 

particular patron would constitute economic discrimination. These early laws were 

designed to protect discrimination from Protestants who might discriminate against 

Catholics or Christians who might discriminate against Jews. 

By the early twentieth century, economic discrimination was broadened to include 

biased or unequal terms against other companies or competing companies. The 

Robinson-Patman Act (1936), which prevents sellers of commodities in interstate 

commerce from discriminating in price between purchasers of goods of like grade and 

quality, was designed to prevent vertically integrated trusts from driving smaller 

competitors out of the market through economies of scale. 

It was not until 1941, when President Franklin D. Roosevelt issued an executive order 

forbidding discrimination in employment by a company working under a government 

defense contract, that economic discrimination took on the overtones it has today, which 

is discrimination against minorities. By 1960, anti-trust laws and interstate commerce 

laws had effectively regulated inter-corporate discrimination so problematic in the late 

nineteenth and early twentieth centuries, but the problem of discrimination on an 

economic basis against minorities had become widespread. 

Causes 

There is a wide range of theory concerned with the root causes of economic 

discrimination. Economic discrimination is unique from most other kinds of 

discrimination because only a small portion of it is due to racism, but rather is due to 

what has been called a "cynical realization that minorities are not always your best 

customers". There are three main causes that most economic theorists agree are likely 

root causes. 

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Animosity 

Racism, sexism, ageism, and dislike for another's religion, ethnicity or nationality has 

always been a component of economic discrimination, much like all other forms of 

discrimination. 

Most discrimination in the US and Europe is claimed to be in terms of racial and ethnic 

discrimination—mostly blacks and Hispanics in the USA, Muslims in Europe. In most 

parts of the world, women are held to lower positions, lower pay, and restricted 

opportunities of land ownership or economic incentive to enter businesses or start them. 

This form of economic discrimination is usually leveled at whatever groups are held to 

be "in power" at the time. For example, in America, discrimination is often considered to 

be the province of Caucasians, while in Saudi Arabia, it's men who are considered 

discriminatory. One study suggests that the increase in equal opportunity lawsuits has 

reduced this kind of discrimination in America by a large amount. 

Cost/Revenue 

There is a certain opportunity cost in dealing with some minorities, particularly in highly 

divided nations or nations where discrimination is tolerated. 

A second common reason for this kind of discrimination is when the worker or consumer 

is not cost-efficient. For example, some stores in the US Northwest do not stock ethnic 

foods, despite requests for such, since they feel the cost is too high for too low a return. 

Additionally, the illegal immigration debate in the US has resulted in some businesses 

refusing to hire such workers based on the likelihood that they would be fined and 

litigated against. 

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Efficiency 

In some cases, minorities are discriminated against simply because it is inefficient to 

make a concerted effort at a fair allocation. For example, in countries where minorities 

make up a very small part of the population, or are on average less educated than the 

population average, there is rarely an attempt to focus on employment of minorities. 

The Equal Opportunity Employment act in the US has almost reduced this sort of 

rationale for discrimination to nothing, according to recent studies. 

The relations between economic theory, efficiency and discrimination, or "discriminatory 

tastes" are much more problematic. 

Forms 

There are several forms of economic discrimination. The most common form of 

discrimination is wage inequality, followed by unequal hiring practices. But there is also 

discrimination against minority consumers and minority businesses in a number of 

areas, and religious or ethnic discrimination in countries outside of the United States. 

Against Workers 

Most forms of discrimination against minorities involve lower wages and unequal hiring 

practices. 

Wage Discrimination 

Several studies have shown that, in the United States, several minority groups, 

including black men and women, Hispanic men and women, and white women, suffer 

from decreased wage earning for the same job with the same performance levels and 

responsibilities as white males. Numbers vary wildly from study to study, but most 

indicate a gap from 5 to 15% lower earnings on average, between a white male worker 

and a black or Hispanic man or a woman of any race with equivalent educational 

background and qualifications. 

A recent study indicated that black wages in the US have fluctuated between 70% and 

80% of white wages for the entire period from 1954–1999, and that wage increases for 

that period of time for blacks and white women increased at half the rate of that of white 

males. Other studies show similar patterns for Hispanics. Studies involving women 

found similar or even worse rates. 

Overseas, another study indicated that Muslims earned almost 25% less on average 

than whites in France, Germany, and England, while in South America, mixed-race 

blacks earned half of what Hispanics did in Brazil. 

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Most wage discrimination is masked by the fact that it tends to occur in lower-paying 

positions and involves minorities who may not feel empowered to file a discrimination 

lawsuit or complain. 

UK - On 10 October 2018 the Prime Minister, Theresa May, launched a three month 

consultation with businesses on how large businesses would have to report the pay gap 

between staff of different ethnicities 

Hiring Discrimination 

Hiring discrimination is similar to wage 

discrimination in its pattern. It typically 

consists of employers choosing to hire 

a certain race candidate over a minority 

candidate, or a male candidate over a 

female candidate, to fill a position. A 

study of employment patterns in the US 

indicated that the number of hiring 

discrimination cases has increased 

fivefold in the past 20 years. However, their percentage as a whole fraction of the 

workforce hirings has decreased almost as drastically. With the stiff laws against 

discrimination in hiring, companies are very careful in who they hire and do not hire. 

Even so, studies have shown that it is easier for a white male to get a job than it is for 

an equally qualified man of color or woman of any race. Many positions are cycled, 

where a company fills a position with a worker and then lays them off and hires a new 

person, repeating until they find someone they feel is "suitable"—which is often not a 

minority. 

While hiring discrimination is the most highly visible aspect of economic discrimination, 

it is often the most uncommon. Increasingly strong measures against discrimination 

have made hiring discrimination much more difficult for employers to engage in. 

However this is only the case in formal hiring arrangements, with corporations or others 

subject to public scrutiny and overview. 

Private hiring, such as apprenticeships of electricians, plumbers, carpenters, and other 

trades is almost entirely broken down along racial lines, with almost no women in these 

fields and most minorities training those of their own race. 

Against Consumers 

Most discrimination against consumers has been decreased due to stiffer laws against 

such practices, but still continues, both in the US and in Europe. The most common 

forms of such discrimination are price and service discrimination. 

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Discrimination Based On Price 

Discrimination based on price is charging different prices for goods and services to 

different people based on their race, ethnicity, religion, or sex. It should not be confused 

with the separate economic concept of price discrimination. Discrimination based on 

price includes, but is not limited to: 

 

 

 

 

increased costs for basic services (health care, repair, etc.) 

increased costs for per diem charges (such as charging one person $40 while 

charging another person $100 for exactly the same service provided) 

not offering deals, sales, rebates, etc. to minorities 

higher rates for insurance for minorities 

Most charges of discrimination based on price are difficult to verify, without significant 

documentation. Studies indicate that less than 10% of all discrimination based on price 

is actually reported to any authority or regulatory body, and much of this is through 

class-action lawsuits. Furthermore, while a number of monitoring services and 

consumer interest groups take an interest in this form of discrimination, there is very 

little they can do to change it. Most discrimination based on price occurs in situations 

without a standardized price list that can be compared against. In the cases of per diem 

charges, this is easily concealed as few consumers can exchange estimates and work 

rates, and even if they do the business in question can claim that the services provided 

had different baseline costs, conditions, etc. 

Discrimination based on price in areas where special sales and deals simply are not 

offered can be justified by limiting them to those with strong credit ratings or those with 

past business with the company in question. 

Services Discrimination 

Although price discrimination mentions services, service discrimination is when certain 

services are not offered at all to minorities, or are offered only inferior versions. 

According to at least one study, most consumer discrimination falls into this category, 

since it is more difficult to verify and prove. Some assertions of discrimination have 

included: 

 

 

 

offering only high-cost plans for insurance or refusal to cover minorities 

refusing to offer financing to minorities 

denial of service 

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Against Businesses 

Minority owned businesses can also experience discrimination, both from suppliers and 

from banks and other sources of capital financing. In the US, there are tax benefits and 

even public relations benefits from having minority-owned businesses, so most 

instances of this occur outside of the United States. 

Women of color are starting businesses at rates three to five times faster than all other 

businesses, according to an article from Babson college on "State of Businesses 

Owned by Women of Color" (Press release). Newswise. May 9, 2008. Retrieved 2008- 

05-12. However, once in business, their growth lags behind all other firms, according to 

the results of a multi-year study conducted by the Center for Women's Business 

Research in partnership with Babson College exploring the impact of race and gender 

on the growth of businesses owned by women who are African-American, Asian, Latina 

and other ethnicities. 

Discrete Usage Discrimination 

This form of discrimination covers suppliers providing substandard goods to a business, 

or price gouging the business on purchases and resupply orders. 

Capital Investment Discrimination 

A more significant source of perceived discrimination is in capital investment markets. 

Banks are often accused of not providing loans and other financial instruments for innercity 

minority owned businesses. Most research indicates that the banking industry as a 

whole is systemic in its abuse of the legal system in avoidance of "high risk" loans to 

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minorities, pointing out that banks cannot provide facts backing up their assertions that 

they deny such loans to a high failure rate. 

On the other hand, most financial institutions and some economists feel that all too 

often, banks are accused unfairly of discrimination against minority owned businesses 

when said business is simply not worth such a credit risk, and that no one would find 

such a decision discriminatory if the business were not minority owned. These charges 

of reverse racism or prejudicial analysis are a longstanding source of controversy in the 

study of economic discrimination. 

Global Economic Discrimination 

An increasing number of economists and international commerce theorists have 

suggested that economic discrimination goes far beyond the bounds of individuals or 

businesses. The largest scale forms of economic discrimination, and the widest ranging, 

affect entire nations or global regions. Many consider that an open world economic 

system (globalization), which includes world bodies such as the International Monetary 

Fund (IMF), World Bank, and International Bank for Reconstruction and Development 

(IBRD), places countries at risk by practicing explicitly discriminatory techniques such 

as bilateral and regional bargaining, as well as asymmetrical trade balances and the 

maintaining of cheap force labor. Trade policies like the North American Free Trade 

Agreement (NAFTA) and General Agreement on Tariffs and Trade (GATT) are often 

regarded as financial measures serving to economically oppress third world nations. 

This could include: 

 

 

 

 

 

Unfavorable terms for monetary support from world banking institutions 

Coercive diplomacy to supplant local, regional or national leaders in favor of 

those who will act as demanded by foreign investors 

Increased prices for supplying basic medical supplies to nations based on ethnic 

or religious basis 

Refusal of trade agreements 

Restrictive trade agreements 

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IV. Payday Lending 

A Payday Loan (also called a payday advance, salary loan, payroll loan, small 

dollar loan, short term, or cash advance loan) is a small, short-term unsecured loan, 

"regardless of whether repayment of loans is linked to a borrower's payday." The loans 

are also sometimes referred to as "cash advances," though that term can also refer to 

cash provided against a prearranged line of credit such as a credit card. Payday 

advance loans rely on the consumer having previous payroll and employment records. 

Legislation regarding payday loans varies widely between different countries, and in 

federal systems, between different states or provinces. 

To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit 

the annual percentage rate (APR) that any lender, including payday lenders, can 

charge. Some jurisdictions outlaw payday lending entirely, and some have very few 

restrictions on payday lenders. In the United States, the rates of these loans used to be 

restricted in most states by the Uniform Small Loan Laws (USLL), with 36–40% APR 

generally the norm. 

There are many different ways to calculate annual percentage rate of a loan. Depending 

on which method is used, the rate calculated may differ dramatically; e.g., for a $15 

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charge on a $100 14-day payday loan, it could be (from the borrower's perspective) 

anywhere from 391% to 3,733%. 

Although some have noted that these loans appear to carry substantial risk to the 

lender, it has been shown that these loans carry no more long term risk for the lender 

than other forms of credit. These studies seem to be confirmed by the United States 

Securities and Exchange Commission filings of at least one lender, who notes a chargeoff 

rate of 3.2%. 

The Loan Process 

The basic loan process involves a lender providing a short-term unsecured loan to be 

repaid at the borrower's next payday. Typically, some verification of employment or 

income is involved (via pay stubs and bank statements), although according to one 

source, some payday lenders do not verify income or run credit checks. Individual 

companies and franchises have their own underwriting criteria. 

In the traditional retail model, borrowers visit a payday lending store and secure a small 

cash loan, with payment due in full at the borrower's next paycheck. The borrower 

writes a postdated check to the lender in the full amount of the loan plus fees. On the 

maturity date, the borrower is expected to return to the store to repay the loan in person. 

If the borrower does not repay the loan in person, the lender may redeem the check. If 

the account is short on funds to cover the check, the borrower may now face a bounced 

check fee from their bank in addition to the costs of the loan, and the loan may incur 

additional fees or an increased interest rate (or both) as a result of the failure to pay. 

In the more recent innovation of online payday loans, consumers complete the loan 

application online (or in some instances via fax, especially where documentation is 

required). The funds are then transferred by direct deposit to the borrower's account, 

and the loan repayment and/or the finance charge is electronically withdrawn on the 

borrower's next payday. 

User Demographics and Reasons for Borrowing 

According to a study by The Pew Charitable Trusts, "Most payday loan borrowers [in the 

United States] are white, female, and are 25 to 44 years old. However, after controlling 

for other characteristics, there are five groups that have higher odds of having used a 

payday loan: those without a four-year college degree; home renters; African 

Americans; those earning below $40,000 annually; and those who are separated or 

divorced." Most borrowers use payday loans to cover ordinary living expenses over the 

course of months, not unexpected emergencies over the course of weeks. The average 

borrower is indebted about five months of the year. 

This reinforces the findings of the U.S. Federal Deposit Insurance Corporation (FDIC) 

study from 2011 which found black and Hispanic families, recent immigrants, and single 

parents were more likely to use payday loans. In addition, their reasons for using these 

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products were not as suggested by the payday industry for one time expenses, but to 

meet normal recurring obligations. 

Research for the Illinois Department of Financial and Professional Regulation found that 

a majority of Illinois payday loan borrowers earn $30,000 or less per year. Texas' Office 

of the Consumer Credit Commissioner collected data on 2012 payday loan usage, and 

found that refinances accounted for $2.01 billion in loan volume, compared with $1.08 

billion in initial loan volume. The report did not include information about annual 

indebtedness. A letter to the editor from an industry expert argued that other studies 

have found that consumers fare better when payday loans are available to them. Pew's 

reports have focused on how payday lending can be improved, but have not assessed 

whether consumers fare better with or without access to high-interest loans. Pew's 

demographic analysis was based on a random-digit-dialing (RDD) survey of 33,576 

people, including 1,855 payday loan borrowers. 

In another study, by Gregory Elliehausen, Division of Research of the Federal Reserve 

System and Financial Services Research Program at the George Washington University 

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School of Business, 41% earn between $25,000 and $50,000, and 39% report incomes 

of $40,000 or more. 18% have an income below $25,000. 

Criticism 

In the UK Sarah-Jayne Clifton of the Jubilee Debt Campaign said, “austerity, low wages, 

and insecure work are driving people to take on high cost debt from rip-off lenders just 

to put food on the table. We need the government to take urgent action, not only to rein 

in rip-off lenders, but also to tackle the cost of living crisis and cuts to social protection 

that are driving people towards the loan sharks in the first place.” 

Draining Money From Low-Income Communities 

The likelihood that a family will use a payday loan increases if they are unbanked or 

underbanked, or lack access to a traditional deposit bank account. In an American 

context the families who will use a payday loan are disproportionately either of black or 

Hispanic descent, recent immigrants, and/or under-educated. These individuals are 

least able to secure normal, lower-interest-rate forms of credit. Since payday lending 

operations charge higher interest-rates than traditional banks, they have the effect of 

depleting the assets of low-income communities. The Insight Center, a consumer 

advocacy group, reported in 2013 that payday lending cost U.S communities $774 

million a year. 

A report from the Federal Reserve Bank of New York concluded that, "We ... test 

whether payday lending fits our definition of predatory. We find that in states with higher 

payday loan limits, less educated households and households with uncertain income 

are less likely to be denied credit, but are not more likely to miss a debt payment. 

Absent higher delinquency, the extra credit from payday lenders does not fit our 

definition of predatory." The caveat to this is that with a term of under 30 days there are 

no payments, and the lender is more than willing to roll the loan over at the end of the 

period upon payment of another fee. The report goes on to note that payday loans are 

extremely expensive, and borrowers who take a payday loan are at a disadvantage in 

comparison to the lender, a reversal of the normal consumer lending information 

asymmetry, where the lender must underwrite the loan to assess creditworthiness. 

A recent law journal note summarized the justifications for regulating payday lending. 

The summary notes that while it is difficult to quantify the impact on specific consumers, 

there are external parties who are clearly affected by the decision of a borrower to get a 

payday loan. Most directly impacted are the holders of other low interest debt from the 

same borrower, which now is less likely to be paid off since the limited income is first 

used to pay the fee associated with the payday loan. The external costs of this product 

can be expanded to include the businesses that are not patronized by the cashstrapped 

payday customer to the children and family who are left with fewer resources 

than before the loan. The external costs alone, forced on people given no choice in the 

matter, may be enough justification for stronger regulation even assuming that the 

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orrower him or herself understood the full implications of the decision to seek a payday 

loan. 

Advertising Practices 

In May 2008, the debt charity Credit Action made a complaint to the United Kingdom 

Office of Fair Trading (OFT) that payday lenders were placing advertising which violated 

advertising regulations on the social network website Facebook. The main complaint 

was that the APR was either not displayed at all or not displayed prominently enough, 

which is clearly required by UK advertising standards. 

In 2016, Google announced that it would ban all ads for payday loans from its systems, 

defined as loans requiring repayment within 60 days or (in the US) having an APR of 

36% or more. 

Unauthorized Clone Firms 

In August 2015, the Financial Conduct Authority (FCA) of the United Kingdom has 

announced that there have been an increase of unauthorized firms, also known as 

'clone firms', using the name of other genuine companies to offer payday loan services. 

Therefore, acting as a clone of the original company, such as the case of Payday Loans 

Now. 

The FCA strongly advised to verify financial firms by using the Financial Services 

Register, prior to participating in any sort of monetary engagement. 

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Aggressive Collection Practices 

In US law, a payday lender can use only the same industry standard collection practices 

used to collect other debts, specifically standards listed under the Fair Debt Collection 

Practices Act (FDCPA). The FDCPA prohibits debt collectors from using abusive, unfair, 

and deceptive practices to collect from debtors. Such practices include calling before 

8 o'clock in the morning or after 9 o'clock at night, or calling debtors at work. 

In many cases, borrowers write a post-dated check (check with a future date) to the 

lender; if the borrowers don't have enough money in their account by the check's date, 

their check will bounce. In Texas, payday lenders are prohibited from suing a borrower 

for theft if the check is post-dated. One payday lender in the state instead gets their 

customers to write checks dated for the day the loan is given. Customers borrow money 

because they don't have any, so the lender accepts the check knowing that it would 

bounce on the check's date. If the borrower fails to pay on the due date, the lender sues 

the borrower for writing a hot check. 

Payday lenders will attempt to collect on the consumer's obligation first by simply 

requesting payment. If internal collection fails, some payday lenders may outsource the 

debt collection, or sell the debt to a third party. 

A small percentage of payday lenders have, in the past, threatened delinquent 

borrowers with criminal prosecution for check fraud. This practice is illegal in many 

jurisdictions and has been denounced by the Community Financial Services Association 

of America, the industry's trade association. 

Pricing Structure of Payday Loans 

The payday lending industry argues that conventional interest rates for lower dollar 

amounts and shorter terms would not be profitable. For example, a $100 one-week 

loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, 

which would fail to match loan processing costs. Research shows that, on average, 

payday loan prices moved upward, and that such moves were "consistent with implicit 

collusion facilitated by price focal points". 

Consumer advocates and other experts argue, however, that payday loans appear to 

exist in a classic market failure. In a perfect market of competing sellers and buyers 

seeking to trade in a rational manner, pricing fluctuates based on the capacity of the 

market. Payday lenders have no incentive to price their loans competitively since loans 

are not capable of being patented. 

Thus, if a lender chooses to innovate and reduce cost to borrowers in order to secure a 

larger share of the market the competing lenders will instantly do the same, negating 

the effect. For this reason, among others, all lenders in the payday marketplace charge 

at or very near the maximum fees and rates allowed by local law. 

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Industry Profitability 

Proponents' Stance and Counterarguments 

In a profitability analysis by Fordham Journal of Corporate & Financial Law, it was 

determined that the average profit margin from seven publicly traded payday lending 

companies (including pawn shops) in the U.S. was 7.63%, and for pure payday lenders 

it was 3.57%. These averages are less than those of other traditional lending institutions 

such as credit unions and banks. 

Comparatively the profit margin of Starbucks for the measured time period was just over 

9%, and comparison lenders had an average profit margin of 13.04%. These 

comparison lenders were mainstream companies: Capital One, GE Capital, HSBC, 

Money Tree, and American Express Credit. 

Charges Are In Line With Costs 

A study by the FDIC Center for Financial Research found that "operating costs are not 

that out of line with the size of advance fees" collected and that, after subtracting fixed 

operating costs and "unusually high rate of default losses," payday loans "may not 

necessarily yield extraordinary profits." 

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However, despite the tendency to characterize payday loan default rates as high, 

several researchers have noted that this is an artifact of the normal short term of the 

payday product, and that during the term of loans with longer periods there are 

frequently points where the borrower is in default and then becomes current again. 

Actual charge offs are no more frequent than with traditional forms of credit, as the 

majority of payday loans are rolled over into new loans repeatedly without any payment 

applied to the original principal. 

The propensity for very low default rates seems to be an incentive for investors 

interested in payday lenders. In the Advance America 10-k SEC filing from December 

2011 they note that their agreement with investors, "limits the average of actual chargeoffs 

incurred during each fiscal month to a maximum of 4.50% of the average amount of 

adjusted transaction receivables outstanding at the end of each fiscal month during the 

prior twelve consecutive months". They go on to note that for 2011 their average 

monthly receivables were $287.1 million and their average charge-off was $9.3 million, 

or 3.2%. In comparison with traditional lenders, payday firms also save on costs by not 

engaging in traditional forms of underwriting, relying on their easy rollover terms and the 

small size of each individual loan as method of diversification eliminating the need for 

verifying each borrower's ability to repay. It is perhaps due to this that payday lenders 

rarely exhibit any real effort to verify that the borrower will be able to pay the principal on 

their payday in addition to their other debt obligations. 

Markets Provide Services Otherwise Unavailable 

Proponents of minimal regulations for payday loan businesses argue that some 

individuals that require the use of payday loans have already exhausted other 

alternatives. Such consumers could potentially be forced to illegal sources if not for 

payday loans. Tom Lehman, an advocate of payday lending, said: 

"... payday lending services extend small amounts of uncollateralized credit to high-risk 

borrowers, and provide loans to poor households when other financial institutions will 

not. Throughout the past decade, this "democratization of credit" has made small loans 

available to mass sectors of the population, and particularly the poor, that would not 

have had access to credit of any kind in the past." 

These arguments are countered in two ways. First, the history of borrowers turning to 

illegal or dangerous sources of credit seems to have little basis in fact according to 

Robert Mayer's 2012 "Loan Sharks, Interest-Rate Caps, and Deregulation". Outside of 

specific contexts, interest rates caps had the effect of allowing small loans in most areas 

without an increase of "loan sharking". Next, since 80% of payday borrowers will roll 

their loan over at least one time because their income prevents them from paying the 

principal within the repayment period, they often report turning to friends or family 

members to help repay the loan according to a 2012 report from the Center for 

Financial Services Innovation. In addition, there appears to be no evidence of unmet 

demand for small dollar credit in states which prohibit or strictly limit payday lending. 

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A 2012 report produced by the Cato Institute found that the cost of the loans is 

overstated, and that payday lenders offer a product traditional lenders simply refuse to 

offer. However, the report is based on 40 survey responses collected at a payday 

storefront location. The report's author, Victor Stango, was on the board of the 

Consumer Credit Research Foundation (CCRF) until 2015, an organization funded by 

payday lenders, and received $18,000 in payments from CCRF in 2013. 

Household Welfare Increased 

A staff report released by the Federal Reserve Bank of New York concluded that 

payday loans should not be categorized as "predatory" since they may improve 

household welfare. "Defining and Detecting Predatory Lending" reports "if payday 

lenders raise household welfare by relaxing credit constraints, anti-predatory legislation 

may lower it." The author of the report, Donald P. Morgan, defined predatory lending as 

"a welfare reducing provision of credit." However, he also noted that the loans are very 

expensive, and that they are likely to be made to under-educated households or 

households of uncertain income. 

Brian Melzer of the Kellogg School of Management at Northwestern University found 

that payday loan users did suffer a reduction in their household financial situation, as 

the high costs of repeated rollover loans impacted their ability to pay recurring bills such 

as utilities and rent. This assumes a payday user will rollover their loan rather than 

Page 103 of 181

epay it, which has been shown both by the FDIC and the Consumer Finance Protection 

bureau in large sample studies of payday consumers. 

Petru Stelian Stoianovici, a researcher from Charles River Associates, and Michael T. 

Maloney, an economics professor from Clemson University, found "no empirical 

evidence that payday lending leads to more bankruptcy filings, which casts doubt on the 

debt trap argument against payday lending." 

The report was reinforced by a Federal Reserve Board (FRB) 2014 study which found 

that while bankruptcies did double among users of payday loans, the increase was too 

small to be considered significant. The same FRB researchers found that payday usage 

had no positive or negative impact on household welfare as measured by credit score 

changes over time. 

Aid In Disaster Areas 

A 2009 study by University of Chicago Booth School of Business Professor Adair Morse 

found that in natural disaster areas where payday loans were readily available 

consumers fared better than those in disaster zones where payday lending was not 

present. Not only were fewer foreclosures recorded, but such categories as birth rate 

were not affected adversely by comparison. Moreover, Morse's study found that fewer 

people in areas served by payday lenders were treated for drug and alcohol addiction. 

Australia 

Country Specific 

Prior to 2009 regulation of consumer credit was primarily conducted by the states and 

territories. Some states such as New South Wales and Queensland legislated effective 

annual interest rate caps of 48%. In 2008 the Australian states and territories referred 

powers of consumer credit to the Commonwealth. In 2009 the National Consumer 

Credit Protection Act 2009 (Cth) was introduced, which initially treated payday lenders 

no differently from all other lenders. In 2013 Parliament tightened regulation on the 

payday lending further introducing the Consumer Credit and Corporations Legislation 

Amendment (Enhancements) Act 2012 (Cth) which imposed an effective APR cap of 

48% for all consumer credit contracts (inclusive of all fees and charges). Payday 

lenders who provided a loan falling within the definition of a small amount credit contract 

(SACC), defined as a contract provided by a non authorised-deposit taking institution for 

less than $2,000 for a term between 16 days and 1 year, are permitted to charge a 20% 

establishment fee in addition to monthly (or part thereof) fee of 4% (effective 48% p.a.). 

Payday lenders who provide a loan falling within the definition of a medium amount 

credit contract (MACC), defined as a credit contract provided by a non-deposit taking 

institution for between $2,000–$5,000 may charge a $400 establishment fee in addition 

to the statutory interest rate cap of 48%. Payday lenders are still required to comply with 

Responsible lending obligations applying to all creditors. Unlike other jurisdictions 

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Australian payday lenders providing SACC or MACC products are not required to 

display their fees as an effective annual interest rate percentage. 

Canada 

Bill C28 supersedes the Criminal Code of Canada for the purpose of exempting Payday 

loan companies from the law, if the provinces passed legislation to govern payday 

loans. Payday loans in Canada are governed by the individual provinces. All provinces, 

except Newfoundland and Labrador, have passed legislation. For example, in Ontario 

loans have a maximum rate of 14,299% Effective Annual Rate ("EAR")($21 per $100, 

over 2 weeks). As of 2017, major payday lenders have reduced the rate to $18 per 

$100, over 2 weeks. 

UK 

The Financial Conduct Authority (FCA) estimates that there are more than 50,000 credit 

firms that come under its widened remit, of which 200 are payday lenders. Payday loans 

in the United Kingdom are a rapidly growing industry, with four times as many people 

using such loans in 2009 compared to 2006 – in 2009 1.2 million people took out 4.1 

million loans, with total lending amounting to £1.2 billion. In 2012, it is estimated that the 

market was worth £2.2 billion and that the average loan size was around £270. Twothirds 

of borrowers have annual incomes below £25,000. There are no restrictions on 

the interest rates payday loan companies can charge, although they are required by law 

to state the effective annual percentage rate (APR). In the early 2010s there was much 

criticism in Parliament of payday lenders. 

In 2014 several firms were reprimanded and required to pay compensation for illegal 

practices; Wonga.com for using letters untruthfully purporting to be from solicitors to 

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demand payment—a formal police investigation for fraud was being considered in 

2014—and Cash Genie, owned by multinational EZCorp, for a string of problems with 

the way it had imposed charges and collected money from borrowers who were in 

arrears. 

Changes In The UK Law 

On 1 April 2014 there was a major overhaul in the way payday loans are issued and 

repaid. 

First of all the FCA will be making sure all lenders can abide by two main goals; 

 

 

"to ensure that firms only lend to borrowers who can afford it", and 

"to increase borrowers' awareness of the cost and risk of borrowing unaffordably 

and ways to help if they have financial difficulties". 

On top of the main goals Martin Wheatley, the FCA’s chief executive officer, said: 

“For the many people that struggle to repay their payday loans every year this is a giant 

leap forward. From January next year, if you borrow £100 for 30 days and pay back on 

time, you will not pay more than £24 in fees and charges and someone taking the same 

loan for fourteen days will pay no more than £11.20. That’s a significant saving. 

"For those who struggle with their repayments, we are ensuring that someone borrowing 

£100 will never pay back more than £200 in any circumstance. 

"There have been many strong and competing views to take into account, but I am 

confident we have found the right balance. 

"Alongside our other new rules for payday firms – affordability tests and limits on 

rollovers and continuous payment authorities – the cap will help drive up standards in a 

sector that badly needs to improve how it treats its customers.” 

In order to achieve these goals the FCA has proposed the following: 

 

 

Initial cost cap of 0.8% per day, 

Fixed default fees capped at £15, and 

Total cost cap of 100%. 

United States 

Payday loans are legal in 27 states, and 9 others allows some form of short term 

storefront lending with restrictions. The remaining 14 and the District of Columbia forbid 

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the practice. The annual percentage rate (APR) is also limited in some jurisdictions to 

prevent usury. And in some states, there are laws limiting the number of loans a 

borrower can take at a single time. 

As for federal regulation, the Dodd–Frank Wall Street Reform and Consumer Protection 

Act gave the Consumer Financial Protection Bureau (CFPB) specific authority to 

regulate all payday lenders, regardless of size. Also, the Military Lending Act imposes a 

36% rate cap on tax refund loans and certain payday and auto title loans made to active 

duty armed forces members and their covered dependents, and prohibits certain terms 

in such loans. 

The CFPB has issued several enforcement actions against payday lenders for reasons 

such as violating the prohibition on lending to military members and aggressive 

collection tactics. The CFPB also operates a website to answer questions about payday 

lending. In addition, some states have aggressively pursued lenders they felt violate 

their state laws. 

Payday lenders have made effective use of the sovereign status of Native American 

reservations, often forming partnerships with members of a tribe to offer loans over the 

Internet which evade state law. However, the Federal Trade Commission has begun the 

aggressively monitor these lenders as well. While some tribal lenders are operated by 

Native Americans, there is also evidence many are simply a creation of so-called "renta-tribe" 

schemes, where a non-Native company sets up operations on tribal land. 

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Alternatives to Payday Loans 

Variations and Alternatives 

Other options are available to most payday loan customers. These include 

pawnbrokers, credit union loans with lower interest and more stringent terms which take 

longer to gain approval, employee access to earned but unpaid wages, credit payment 

plans, paycheck cash advances from employers ("advance on salary"), auto pawn 

loans, bank overdraft protection, cash advances from credit cards, emergency 

community assistance plans, small consumer loans, installment loans and direct loans 

from family or friends. The Pew Charitable Trusts found in 2013 their study on the ways 

in which users pay off payday loans that borrowers often took a payday loan to avoid 

one of these alternatives, only to turn to one of them to pay off the payday loan. 

If the consumer owns their own vehicle, an auto title loan would be an alternative for a 

payday loan, as auto title loans use the equity of the vehicle as the credit instead of 

payment history and employment history. 

Other alternatives include the Pentagon Federal Credit Union Foundation (PenFed 

Foundation) Asset Recovery Kit (ARK) program. 

Basic banking services are also often provided through their postal systems. 

Comparisons Payday Lenders Make 

Payday lenders do not compare their interest rates to those of mainstream lenders. 

Instead, they compare their fees to the overdraft, late payment, penalty fees and other 

fees that will be incurred if the customer is unable to secure any credit whatsoever. 

The lenders may list a different set of alternatives (with costs expressed as APRs for 

two-week terms, even though these alternatives do not compound their interest or have 

longer terms): 

 

 

 

 

$100 payday advance with a $15 fee = 391% APR 

$100 bounced check with $54 NSF/merchant fees = 1,409% APR 

$100 credit card balance with a $37 late fee = 965% APR 

$100 utility bill with $46 late/reconnect fees = 1,203% APR 

Variations on Payday Lending 

A minority of mainstream banks and TxtLoan companies lending short-term credit over 

mobile phone text messaging offer virtual credit advances for customers whose 

paychecks or other funds are deposited electronically into their accounts. The terms are 

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similar to those of a payday loan; a customer receives a predetermined cash credit 

available for immediate withdrawal. The amount is deducted, along with a fee, usually 

about 10 percent of the amount borrowed, when the next direct deposit is posted to the 

customer's account. After the programs attracted regulatory attention, Wells Fargo 

called its fee "voluntary" and offered to waive it for any reason. It later scaled back the 

program in several states. Wells Fargo currently offers its version of a payday loan, 

called "Direct Deposit Advance," which charges 120% APR. Similarly, the BBC reported 

in 2010 that controversial TxtLoan charges 10% for 7-days advance which is available 

for approved customers instantly over a text message. 

Income tax refund anticipation loans are not technically payday loans (because they are 

repayable upon receipt of the borrower's income tax refund, not at his next payday), but 

they have similar credit and cost characteristics. A car title loan is secured by the 

borrower's car, but are available only to borrowers who hold clear title (i.e., no other 

loans) to a vehicle. The maximum amount of the loan is some fraction of the resale 

value of the car. A similar credit facility seen in the UK is a logbook loan secured against 

a car's logbook, which the lender retains. These loans may be available on slightly 

better terms than an unsecured payday loan, since they are less risky to the lender. If 

the borrower defaults, then the lender can attempt to recover costs by repossessing and 

reselling the car. 

Postal Banking 

Many countries offer basic banking services through their postal systems. The United 

States Post Office Department offered such as service in the past. Called the United 

Page 109 of 181

States Postal Savings System it was discontinued in 1967. In January 2014 the Office 

of the Inspector General of the United States Postal Service issued a white paper 

suggesting that the USPS could offer banking services, to include small dollar loans for 

under 30% APR. Support and criticism quickly followed; opponents of postal banking 

argued that as payday lenders would be forced out of business due to competition, the 

plan is nothing more than a scheme to support postal employees. 

Page 110 of 181

V. Refund Anticipation Lending 

Refund anticipation loan (RAL) is a short-term consumer loan in the United States 

provided by a third party against an expected tax refund for the duration it takes the tax 

authority to pay the refund. The loan term was usually about two to three weeks, related 

to the time it took the U.S. Internal Revenue Service to deposit refunds in electronic 

accounts. The loans were designed to make the refund available in as little as 24 hours. 

They were secured by a taxpayer's expected tax refund, and designed to offer 

customers quicker access to funds. 

The costs to the borrower could be significant compared to other lending and some 

consumer organizations warned consumers of the risk involved in this type of loan. 

They are a largely discontinued financial product and beginning with the 2013 tax filing 

season, they have been largely replaced with the similar refund anticipation checks 

(RAC), as well as a hodge podge of other financial products. 

RACs are temporary accounts which wait for the client's IRS tax refund, and which also 

provides a way for the client to pay for tax preparation out of the refund. Both financial 

products have similar fees and similar risks of third-party bank "cross-collection". 

A similar process in Canada to a RAL is termed "tax rebate discounting". 

United States 

In the United States prior to the 2013 tax filing season, taxpayers could apply for a 

refund anticipation loan through a paid professional tax preparation service, where a fee 

is typically charged for the preparation of the tax return. Internal Revenue Service rules 

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prohibit basing this fee on the amount of the expected refund. An additional fee was 

usually charged for the services of originating a bank product and establishing a shortterm 

bank account. By law this fee must be the same on both loan and non-loan bank 

products, and in 2004 the average fee was $32. The bank through which the loan was 

made charges finance charges. 

According to the National Consumer Law Center, 12 million taxpayers used a RAL in 

2004. With e-filing and IRS partnerships that help consumers e-file for free, U.S. 

taxpayers can generally receive their tax refunds within three weeks and sometimes as 

quickly as ten to fourteen days if they choose to receive their refund via direct deposit. 

As of 2017, 70% of US taxpayers have access to free e-file and tax preparation 

services. This rendered RALs less attractive to some. 

History 

RALs began in 1985 when Ronald Smith, an Accountant in Virginia Beach, VA started 

the practice of Refund Advance Loans at his accounting firm, Action Accounting & 

Taxes located at 5441 Virginia Beach Blvd. This service of Loans On Tax Refunds was 

advertised widely through WYAH, TV and on Cox Cable in the Hampton Roads area by 

Action Accounting & Taxes in 1985, 1986 and 1987. The Advance Refund Loans 

became a huge business success from the start and a sensation in the area in 1986 

and 1987 and was the first and only firm in the United States that was offering that 

service according to the IRS. In 1986 a salesman from Charlie Falk's Auto on Virginia 

Beach Blvd, where today Town Centre now exits, asked Mr. Smith if they could make 

an arrangement where Action Accounting & Taxes could prepare taxes for customers 

seeking to purchase cars in order to supplement their down payments on used or new 

car purchases. Mr. Smith agreed to this idea and that was the beginning of Loans on 

Tax Refunds being used in conjunction with car financing and that practice then quickly 

spread throughout the area and then throughout the entire United States. Mr. Smith was 

the first one to invent, organize and pioneer the process of Tax Refund Loans in this 

way and went on to make millions in this business. The financing was originally fully 

handled by Joel S. Coplon and Company, a small private financing company closely 

connected with Mr. Smith at the time. Action Accounting and Taxes, the firm that Mr. 

Smith owned, was one mile from where John Hewitt was just starting a new business 

venture. Mr. Hewitt had just recently purchased Mel Jackson's Tax Service which was a 

run down group of offices throughout the Hampton Road's area. Mr. Hewitt began to 

offer Refund Anticipation Loans in 1988 and built a national franchise out of the idea 

which funded and built Jackson Hewitt Tax Service. Then in 1989 H & R Block joined in 

the industry and it became a billion dollar industry across the United States being 

coopted into thousands of different accounting firms and tax practices across the United 

States and abroad. It was reported in 1989 that H & R Block had doubled it's business 

at over 4,000 locations due to the introduction of this new Refund Loan Service. It later 

spread to Canada as well through Liberty Tax Service and in time this company moved 

into the United States market as well offering the same service. The proliferation of this 

tax loan practice coincided with the introduction of electronic filing which IRS introduced 

electronic filing as a way to decrease its cost of operation. Previous to this time refunds 

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would take on average two to three months to come back from the IRS which is why the 

Loan on Tax Refund also known as Refund Anticipations Loan business flourished. In 

1988, Mr. Smith as well as Mr. Coplon were jointly sued by the Attorney General of 

Virginia in a Richmond State Court for charging usurious interest. Mr. Smith was 

eventually dismissed from the case and it was reported by the State's Attorney at the 

time that the reason for his dismissal from the case was that Mr. Smith was "not 

culpable". 

A tax preparer would, within 24 hours of submission, receive from the IRS confirmation 

that the submission was free of mathematical errors, and that the filer had no liens or 

delinquent federal student loans. This meant that there was good chance that the IRS 

would pay the refund within weeks, barring fraudulent income reporting. At that point the 

preparer would issue the filer a check for the amount of the expected refund minus a 

commission. In 1995, the New York Times reported that Beneficial's $30 electronic filing 

fee and $59 loan fee amounted to a 250 percent APR on a refund of $1,000. 

Exploitation of the system had begun by the early 1990s; filers misreported their income 

to inflate their refund. As a result of this, and also to discourage filers from this rather 

uneconomical offer, in 1994 the IRS stopped providing tax preparers a confirmation that 

a deposit would take place for a certain amount and that it would begin sending refunds 

directly to taxpayers instead of banks that made the loan, but not having the desired 

effects, the confirmations were re-instated the following year. 

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Controversy 

According to the Consumer Federation of America and the National Consumer Law 

Center, RALs are controversial because, like payday loans and title loans, RALs are 

high-profit, low-risk loans marketed toward the working poor. A 2006 study by the NCLC 

and the Consumer Federation of America found that "Based upon the prices for RALs in 

2006, a consumer can expect to pay about $100 in order to get a RAL for the average 

refund of about $2,150 from a commercial tax preparation chain this year". 

Opponents of RALs, like the National Consumer Law Center, argue that the profit 

motive of the lender results in RALs being issued too often to low-income individuals 

who are made to believe the wait for their refund is longer than it really is, who do not 

realize they are taking a loan, do not understand the high interest rates charged by the 

loan (often exceeding 100% APR until the last two tax filing seasons), and who do not 

actually need the funds immediately. 

Third-Party Cross-Collection of Bank Debt ("Previous Debt") for Both Rals and 

RACs 

As part of applying for both financial products, the client is directing his or her refund to 

the account-issuing bank. Cross-collection occurs in cases where the bank uses this 

occasion to collect debt owed another bank. As the IRS Taxpayer Advocate described 

the practice in 2006: "if a taxpayer owes money on a defaulted RAL to Bank A and 

subsequently attempts to buy another RAL from Bank B, Bank B is authorized to collect 

the outstanding debt from the RAL proceeds, transmit the funds to Bank A". It is 

somewhat unclear how broad is the type of debt for which banks cross-collect. This 

practice is often not adequately disclosed to the tax preparation client. As a lawsuit filing 

against H&R Block by the California Attorney General in February 2006 stated, "H&R 

Block does not adequately tell such customers about any alleged debts, or that when 

they sign the new RAL application, they agree to automatic debt collection—including 

collection on alleged RAL-related debts from other tax preparers or banks. These 

applications are denied, and the customer's anticipated refund is used to pay off the 

debt, plus a fee". Tax prep firms often vaguely refer to this practice merely as "previous 

debt". 

This risk exists even if the client is only using the RAC account for purposes of taking 

the tax preparation fees out of the refund. 

Jan. 2011: IRS Will Not Be Providing "Debt Indicator" 

On August 5, 2010, the IRS announced that for the upcoming 2011 tax filing season, 

the agency would no longer be providing preparers and associated financial institutions 

with the "debt indicator" (a one-letter code that discloses whether or not the taxpayer 

owes back taxes and whether or not the taxpayer owes federally collected obligations 

such as child support, student loans, etc.). 

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Taxpayers themselves will continue to have access to information about their refund 

through the "Where's My Refund?" feature at the irs.gov website. 

In the same news release, the IRS stated it was exploring ways to allow filers to directly 

split off part of the refund to pay for professional tax preparation, possibly starting in 

January 2012. The IRS is asking for input from filers, consumer advocates, and those in 

the tax preparation community regarding whether this would be cost-effective. 

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Jan. 2013: Major U.S. Banks Stop Offering Rals 

Beginning with the 2013 tax season, major U.S. banks will no longer be offering RALs. 

They will instead be offering the similar financial products of RACs, which are not loans 

but are rather temporary accounts which sit empty waiting for the client's IRS refund. 

Page 116 of 181

VI. Title Loans 

A Title Loan (also known as a car title loan) is a type of secured loan where 

borrowers can use their vehicle title as collateral. Borrowers who get title loans must 

allow a lender to place a lien on their car title, and temporarily surrender the hard copy 

of their vehicle title, in exchange for a loan amount. When the loan is repaid, the lien is 

removed and the car title is returned to its owner. If the borrower defaults on their 

payments then the lender is liable to repossess the vehicle and sell it to repay the 

borrowers’ outstanding debt. 

These loans are typically short- 

term, and tend to carry higher 

interest rates than other sources of credit. 

Lenders typically do 

not check the credit history 

of borrowers for these loans 

and only consider the 

value and 

condition of the 

vehicle 

that 

is being used 

to secure it. 

Despite the secured nature 

of the loan, lenders argue that the 

comparatively high rates of interest 

that they charge are necessary. As 

evidence for this, they 

point to the increased 

risk of default on a type of loan that is used almost exclusively by borrowers who are 

already experiencing financial difficulties. 

Most title loans can be acquired in 15 minutes or less on loan amounts as little as $100. 

Most other financial institutions will not loan under $1,000 to someone without any credit 

as they deem these not profitable and too risky. In addition to verifying the borrower's 

collateral, many lenders verify that the borrower is employed or has some source of 

regular income. The lenders do not generally consider the borrower's credit score. 

History 

Title loans first emerged in the early 1990s and opened a new market to individuals with 

poor credit and have grown increasingly popular, according to studies by the Center for 

Responsible Lending and Consumer Federation of America. They are the cousin of 

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unsecured loans, such as payday loans. Since borrowers use their car titles to secure 

the loans, there’s risk that the borrower can lose their vehicle by defaulting on their 

payments due to personal circumstances or high interest rates, which almost always 

have APR in the triple digits—what are sometimes called “balloon payments”. 

Alternative title lending exist in many states known as car title pawn or auto pawn as 

they are called. Similar to a traditional car title loan, a car title pawn uses both the car 

title and the physical vehicle (which is usually stored by the lender) to secure the loan 

much like any secured loan works, and there are the same risk and factors involved for 

the borrower but in most cases they will receive more cash in the transaction since the 

lender has both the vehicle and title in their possession. 

Process 

A borrower will seek the services of a lender either online or at a store location. In order 

to secure the loan the borrower will need to have certain forms of identification such as 

a valid government-issued ID like a driver’s license, proof of income, some form of mail 

to prove residency, car registration, a lien-free car title in their name, references, and 

car insurance, though not all states require lenders to show proof of auto insurance. 

The maximum amount of the loan is determined by the collateral. Typical lenders will 

offer up to half of the car's resale value, though some will go higher. Most lenders use 

Kelley Blue Book to find the resale value of vehicles. The borrower must hold clear title 

to the car; this means that the car must be paid in full with no liens or current financing. 

Most lenders will also require the borrower to have full insurance on the vehicle. 

Depending on the state where the lender is located, interest rates may range from 36% 

to well over 100%. Payment schedules vary but at the very least the borrower has to 

pay the interest due at each due date. At the end of the term of the loan, the full 

outstanding amount may be due in a single payment. If the borrower is unable to repay 

the loan at this time, then they can roll the balance over, and take out a new title loan. 

Government regulation often limits the total number of times that a borrower can roll the 

loan over, so that they do not remain perpetually in debt. 

If the borrower cannot pay back the loan or is late with his or her payments, the title loan 

lender may seek to take possession of the car and sell it to offset what is owed. 

Typically lenders choose this option as a last resort because it may take months to 

recover the vehicle, and repossession, auction, and court costs all decrease the amount 

of money they are able to recoup. During this time, the lender is not collecting payments 

yet the vehicle is depreciating. Most states require the title loan lender to hold the 

vehicle for 30 days to allow the borrower to recover it by paying the balance. Typically, 

any amount from the sale over the existing loan balance is returned to the defaulter. 

Today, the internet has revolutionized how companies can reach their clientele, and 

many title loan companies offer online applications for pre-approval or approval on title 

loans. These applications require much of the same information and still may require a 

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orrower to visit a store to pick up their money, usually in the form of a check. When 

filling out these applications, they may ask for things like the vehicle's Vehicle 

Identification Number (VIN) and/or insurance policy numbers. 

Loan Calculation 

The amount a borrower can be loaned is dependent on the worth of their vehicle. A 

lender will typically look up the auction value of the car being used as collateral and 

offer a loan that’s between 30% and 50% of the worth of the vehicle. This leaves 

lenders a cushion to make profit if ever they need to repossess the vehicle and sell it at 

auction, in the event the borrower defaults. 

States Offering 

Title Loans 

Title loans are not 

offered in all states. 

Some states have 

made them illegal 

because they are 

considered a welfarereducing 

provision of 

credit, or predatory 

lending. Other states, 

like Montana, have 

begun placing strict 

regulations on title 

loans by not allowing 

the APR to reach 

above 36%, down from the previous 400%. However, Montana has recently voted 

against allowing title loans in the state. 

In 2008, New Hampshire passed a law capping APR at 36%. Some companies claim 

their average loan amounts to be between $300 and $500, and had to shut down their 

store fronts in that state, or their business entirely, because their business could not 

survive on a low APR for low loan amounts. Since then, the law has been reversed and 

new growth in the title loan industry has emerged, allowing title loan lenders to charge 

25% interest a month, or roughly 300% APR. 

States continue to vote on legislation allowing or disallowing title loans. Some states 

have no limit on the APR that title loan companies can charge, while others continue to 

crack down and push for stricter regulation. Early in 2012, Illinois recently voted to cap 

APR on title loans at 36%, with other provisions that would limit the title loan industry in 

the state. The vote did not pass, but voters and politicians in Illinois and other states 

continue in their convictions to regulate or outlaw title loans. 

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Demographic of Small-Dollar-Credit Consumers 

Small-dollar-credit (SDC) refers to services offered by payday and title loan industries. 

In 2012, a study was conducted by the Center for Financial Services Innovation. 

According to the study, SDC consumers are generally less educated, have more 

children, and are based in the South, where there is a greater concentration of 

unbanked or underbanked people. In addition, there’s a healthy spread of SDC 

consumers with a range of salaries—showing 20% of SDC consumers have a 

household income between $50,000 and $75,000. However, 45% of respondents to the 

survey would classify themselves as “poor”. 

Controversy 

In a BBC article, a spokesman for a company offering short-term loans says that APR is 

not a valid model when assessing costs associated with short-term subprime loans, and 

that the charges are appropriate for the convenience of quickly obtaining a short-term 

loan. Instead, the APR model is better for assessing costs associated with a middle- or 

long-term loan options. 

The high interest rates on title loans are justified by defenders of the industry, stating 

that the higher interest rates are necessary for the lending companies to turn profit. The 

borrowers are considered "high risk" and may default on their debt. Therefore, the 

higher interest rates are a means of securing profit even if the borrower defaults, and 

ensures the company sees a positive rate of return. 

Criticism 

Critics of title loans contend that the business model seeks and traps impoverished 

individuals with ridiculous interest rates by lenders who aren’t entirely transparent 

regarding the payments. This practice lends confusion and so some borrowers are 

unaware of the situation that getting a small-dollar-credit loan puts them in. However, 

they are already locked in the loan and have no means of escaping other than paying 

the loan off or losing their vehicle. 

The practice has been compared to loan sharking, because the interest rates are so 

high. 

Even though states are placing stringent restrictions on things like interest rates that can 

be charged, regulating the practices of companies offering short-term loans, like payday 

loans or title loans, proves to be a difficult endeavor. The Consumer Financial 

Protection Bureau and the Federal Trade Commission, both federal regulatory agencies 

responsible for enforcing federal law with non-banking institutions, admit that they do 

not have the authority to enforce the Military Lending Act, which states that military 

members and their families can pay an APR no higher than 36%, while banning loans to 

service members that would be secured through their banking accounts, vehicles, or 

paychecks. 

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Some lenders can move around the Military Lending Act's restrictions by offering openended 

credit loans instead of title loans or payday loans. This allows them to continue 

charging triple-digit APR on their loans. 

Some groups, such 

as the Texas Fair 

Lending Alliance, 

present title loans 

and payday loans 

as a form of 

entrapment, where 

taking out one of 

these means that 

borrowers will find 

themselves cycling 

further into debt 

with less chances of 

getting out of debt 

when compared to 

not taking the loan 

out at all, 

contending that 

75% of payday 

loans are taken out 

within two weeks of 

the previous loan in 

order to fill the gap 

in finances from 

when the loan was 

originally taken out. 

In 2001, Texas 

passed a law 

capping interest 

rates on title loans 

and payday loans. 

However, lenders 

are getting around 

the restrictions by exploiting loopholes allowing them to lend for the same purposes, 

with high-interest rates, disguised as loan brokers or as a Credit Services Organization 

(CSO). 

The Vice President of state policy at the Center for Responsible Lending in Durham, 

North Carolina argues that the car title loan model is built around loans that are 

impossible to repay. He goes on to cite a 2007 study by the Center for Responsible 

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Lending which shows that 20% of title loan borrowers in Chicago had taken out a loan in 

order to repay a previous loan to the same lender. 

Evidence from The Pew Charitable Trusts cite a need for consumers to be better 

informed. The Pew report states that of the more than 2 million consumers who obtain 

title loans, one out of nine consumers default on their loans, and notes that 

repossession affects approximately 5 to 9 percent of borrowers who default. 

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VII. Loan Sharks 

A Loan Shark is a (person) who offers loans at extremely high interest rates, has 

cruel (or strict) terms of collection upon failure, and operates outside off the street 

(outside of local authority). The term usually refers to illegal activity, but may also refer 

to predatory lending with extremely high interest rates such as payday or title loans. 

An unintended consequence of poverty alleviation initiatives can be that loan sharks 

borrow from formal microfinance lenders and lend on to poor borrowers. Loan sharks 

sometimes enforce repayment by blackmail or threats of violence. Historically, many 

moneylenders skirted between legal and criminal activity. In the recent western world, 

loan sharks have been a feature of the criminal underworld. 

19th-Century Salary Lenders 

United States 

In late 19th-century America, the low legal interest rates made small loans unprofitable, 

and small-time lending was viewed as irresponsible by society. Banks and other major 

financial institutions thus stayed away from small-time lending. There were, however, 

plenty of small lenders offering loans at profitable but illegally high interest rates. They 

presented themselves as legitimate and operated openly out of offices. They only 

sought customers who had a steady and respectable job, a regular income and a 

reputation to protect. This made them less likely to leave the area before they paid their 

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debt and more likely to have a legitimate reason for borrowing money. Gamblers, 

criminals, and other disreputable, unreliable types were avoided. They made the 

borrower fill out and sign seemingly legitimate contracts. Though these contracts were 

not legally enforceable, they at least were proof of the loan, which the lender could use 

to blackmail a defaulter. 

To force a defaulter into paying, the lender might threaten legal action. This was a bluff, 

since the loan was illegal. The lender preyed on the borrower's ignorance of the law. 

Alternatively, the lender resorted to public shaming, exploiting the social stigma of being 

in debt to a loan shark. They were able to complain to the defaulter's employer, because 

many employers would fire employees who were mired in debt, because of the risk of 

them stealing from the employer to repay debts. They were able to send agents to stand 

outside the defaulter's home, loudly denouncing him, perhaps vandalizing his home with 

graffiti or notices. Whether out of gullibility or embarrassment, the borrower usually 

succumbed and paid. 

Many customers were employees of large firms, such as railways or public works. 

Larger organizations were more likely to fire employees for being in debt, as their rules 

were more impersonal, which made blackmail easier. It was easier for lenders to learn 

which large organizations did this as opposed to collecting information on the multitude 

of smaller firms. Larger firms had more job security and the greater possibility of 

promotion, so employees sacrificed more to ensure they were not fired. The loan shark 

could also bribe a large firm's paymaster to provide information on its many employees. 

Regular salaries and paydays made negotiating repayment plans simpler. 

The size of the loan and the repayment plan were often tailored to suit the borrower's 

means. The smaller the loan, the higher the interest rate was, as the costs of tracking 

and pursuing a defaulter (the overhead) were the same whatever the size of the loan. 

The attitudes of lenders to defaulters also varied: some were lenient and reasonable, 

readily granting extensions and slow to harass, while others unscrupulously tried to milk 

all they could from the borrower (e.g. imposing late fees). 

Because salary lending was a disreputable trade, the owners of these firms often hid 

from public view, hiring managers to run their offices indirectly. To further avoid 

attracting attention, when expanding his trade to other cities, an owner would often 

found new firms with different names rather than expanding his existing firm into a very 

noticeable leviathan. 

The penalties for being an illegal lender were mild. Illegal lending was a misdemeanor, 

and the penalty was forfeiture of the interest and perhaps the principal as well. But 

these were only ever imposed if the borrower sued, which he typically could not afford 

to do. 

Opposition to salary lenders was spearheaded by social elites, such as businessmen 

and charity organizations. Businessmen were encouraged not to fire employees who 

were indebted to loan sharks, as they unwittingly supported the industry by providing 

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lenders with a means of blackmailing their customers ("pay up or we'll tell your boss and 

you'll be fired"). Charities provided legal support to troubled borrowers. This fight 

culminated in the drafting of the Uniform Small Loan Law, which brought into existence 

a new class of licensed lender. The law was enacted, first in several states in 1917, and 

was adopted by all but a handful of states by the middle of the 20th century. The model 

statute mandated consumer protections and capped the interest rate on loans of $300 

or less at 3.5% a month (42% a year), a profitable level for small loans. Lenders had to 

give the customer copies of all signed documents. Additional charges such as late fees 

were banned. The lender could no longer receive power of attorney or confession of 

judgment over a customer. These licensing laws made it impossible for usurious lenders 

to pass themselves off as legal. Small loans also started becoming more socially 

acceptable, and banks and other larger institutions started offering them as well. 

20th-Century Gangsters 

In the 1920s and 1930s, American prosecutors began to notice the emergence of a new 

breed of illegal lender that used violence to enforce debts. The new small lender laws 

had made it almost impossible to intimidate customers with a veneer of legality, and 

many customers were less vulnerable to shaming because they were either selfemployed 

or already disreputable. 

Thus, violence was an important tool, though not their only one. These loan sharks 

operated more informally than salary lenders, which meant more discretion for the 

lender and less paperwork and bureaucracy for the customer. They were also willing to 

serve high-risk borrowers that legal lenders wouldn't touch. 

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Threats of violence were rarely followed through, however. One possible reason is that 

injuring a borrower could have meant he couldn't work and thus could never pay off his 

debt. Many regular borrowers realized the threats were mostly bluffs and that they could 

get away with delinquent payments. A more certain consequence was that the 

delinquent borrower would be cut off from future loans, which was serious for those who 

regularly relied on loan sharks. 

One important market for violent loan sharks was illegal gambling operators, who 

couldn't expose themselves to the law to collect debts legally. They cooperated with 

loan sharks to supply credit and collect payments from their punters. Thieves and other 

criminals, whose fortunes were frequently in flux, were also served, and these 

connections also allowed the loan sharks to operate as fences. [13] Another type of highrisk 

customer was the small businessman in dire financial straits who couldn't qualify for 

a legal loan. 

Violent loansharking was typically run by criminal syndicates, such as the Mafia. Many 

of these were former bootleggers who needed a new line of work after the end of 

Prohibition. Towards the 1960s, loan sharks grew ever more coordinated, and could 

pool information on borrowers to better size up risks and ensure a borrower did not try 

to pay off one loan by borrowing from another loan shark. The fearsome reputation of 

the Mafia or similar large gang made the loan shark's threat of violence more credible. 

Mafia Links 

Origins In "Salary Buying", 1920-Criminalization 

Although the reform law was intended to starve the loan sharks into extinction, this 

species of predatory lender thrived and evolved. After high-rate salary lending was 

outlawed, some bootleg vendors recast the product as "salary buying". They claimed 

they were not making loans but were purchasing future wages at a discount. This form 

of loansharking proliferated through the 1920s and into the 1930s until a new draft of 

the Uniform Small Loan Law closed the loophole through which the salary buyers had 

slipped. [14] Salary-buying loan sharks continued to operate in some southern states after 

World War II because the usury rate was set so low that licensed personal finance 

companies could not do business there. 

Post-Criminalization 

Organized crime began to enter the cash advance business in the 1930s, after high-rate 

lending was criminalized by the Uniform Small Loan Law. The first reports of mob 

loansharking surfaced in New York City in 1935, and for 15 years, underworld money 

lending was apparently restricted to that city. There is no record of syndicate "juice" 

operations in Chicago, for instance, until the 1950s. 

In the beginning, underworld loansharking was a small loan business, catering to the 

same populations served by the salary lenders and buyers. Those who turned to the 

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ootleg lenders could not get credit at the licensed companies because their incomes 

were too low or they were deemed poor risks. The firms operating within the usury cap 

turned away roughly half of all applicants and tended to make larger loans to married 

men with steady jobs and decent incomes. 

Those who could not get a legal loan at 36% or 42% a year could secure a cash 

advance from a mobster at the going rate of 10% or 20% a week for small loans. Since 

the mob loans were not usually secured with legal instruments, debtors pledged their 

bodies as collateral. 

In its early phase, a large fraction of mob loansharking consisted of payday lending. 

Many of the customers were office clerks and factory hands. The loan fund for these 

operations came from the proceeds of the numbers racket and was distributed by the 

top bosses to the lower echelon loan sharks at the rate of 1% or 2% a week. The 1952 

B-flick Loan Shark, starring George Raft, offers a glimpse of mob payday lending. The 

waterfront in Brooklyn was another site of extensive underworld payday advance 

operations around mid-century. 

1960s Heyday–Present 

Over time, mob loan sharks moved away from such labor intensive rackets. By the 

1960s, the preferred clientele was small and medium-sized businesses. Business 

customers had the advantage of possessing assets that could be seized in case of 

default, or used to engage in fraud or to launder money. Gamblers were another 

lucrative market, as were other criminals who needed financing for their operations. By 

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the 1970s, mob salary lending operations seemed to have withered away in the United 

States. 

At its height in the 1960s, underworld loansharking was estimated to be the second 

most lucrative franchise of organized crime in the United States after illegal gambling. 

Newspapers in the 1960s were filled with sensational stories of debtors beaten, 

harassed, and sometimes murdered by mob loan sharks. Yet careful studies of the 

business have raised doubts about the frequency with which violence was employed in 

practice. Relations between creditor and debtor could be amicable, even when the "vig" 

or "juice" was exorbitant, because each needed the other. FBI agents in one city 

interviewed 115 customers of a mob loan business but turned up only one debtor who 

had been threatened. None had been beaten. 

Non-Mafia Sharks 

Organized crime has never had a monopoly on black market lending. Plenty of vestpocket 

lenders operated outside the jurisdiction of organized crime, charging usurious 

rates of interest for cash advances. These informal networks of credit rarely came to the 

attention of the authorities but flourished in populations not served by licensed lenders. 

Even today, after the rise of corporate payday lending in the United States, unlicensed 

loan sharks continue to operate in immigrant enclaves and low-income neighborhoods. 

They lend money to people who work in the informal sector or who are deemed to be 

too risky even by the check-cashing creditors. Some beat delinquents while others seize 

assets instead. Their rates run from 10% to 20% a week, just like the mob loan sharks 

of days gone by. 

US Loan Sharks 

USA has a loan shark law, the maximum rate is set. Roman University Law was (or is) 

tied to usury laws for most of European legal history. Beyond that, more recently, USA 

has maximum rates for credit lenders and for 1st and 2nd mortgage lenders and auto 

loans too. In modern times it was said "you can't get a loan unless you don't need the 

money", however recently the legal focus has been in preventing lending by institutions 

who know the persons will fail to pay - a thing called "predatory lending" (which is a 

different topic). 

UK loan sharks 

The research by the government and other agencies estimates that 165,000 to 200,000 

people are indebted to loan sharks in the United Kingdom. Illicit loan sharking is treated 

as a high-level crime by law enforcement, due to its links to organized crime and the 

serious violence involved. Payday loans with high interest rates are legal in many 

cases, and have been described as "legal loan sharking" (in that the creditor is legally 

registered, pays taxes and contributions, and can reclaim remittance if taking the case 

to adjudication; likewise there is no threat of harm to the debtor). 

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Loan Sharks in Ireland 

The Central Bank of Ireland were criticized by for doing nothing to protect those on low 

incomes, the vulnerable or have low levels of financial literacy from loan sharks when it 

emerged that up to 100,000 of the 360,000 loans given by moneylenders broke the law. 

Non-Standard Lenders In The United States 

In the United States, there are lenders licensed to serve borrowers who cannot qualify 

for standard loans from mainstream sources. These smaller, non-standard lenders often 

operate in cash, whereas mainstream lenders increasingly operate only electronically 

and will not serve borrowers who do not have bank accounts. Terms such as sub-prime 

lending, "non-standard consumer credit", and payday loans are often used in 

connection with this type of consumer finance. The availability of these services has 

made illegal, exploitative loan sharks rarer, but these legal lenders have also been 

accused of behaving in an exploitative manner. For example, payday loan operations 

have come under fire for charging inflated "service charges" for their services of cashing 

a "payday advance", effectively a short-term (no more than one or two weeks) loan for 

which charges may run 3–5% of the principal amount. By claiming to be charging for the 

"service" of cashing a paycheck, instead of merely charging interest for a short-term 

loan, laws that strictly regulate moneylending costs can be effectively bypassed. 

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Payday lending 

Licensed payday advance businesses, which lend money at high rates of interest on the 

security of a postdated check, are often described as loan sharks by their critics due to 

high interest rates that trap debtors, stopping short of illegal lending and violent 

collection practices. Today's payday loan is a close cousin of the early 20th century 

salary loan, the product to which the "shark" epithet was originally applied, but they are 

now legalised in some states. 

A 2001 comparison of short-term lending rates charged by the Chicago Outfit organized 

crime syndicate and payday lenders in California revealed that, depending on when a 

payday loan was paid back by a borrower (generally 1–14 days), the interest rate 

charged for a payday loan could be considerably higher than the interest rate of a 

similar loan made by the organized crime syndicate. 

Yamikinyu in Japan 

The regulation of moneylenders is typically much looser than that of banks. In Japan, 

the Moneylending Control Law requires only registration in each prefecture. In Japan, 

as the decades-long depression lingers, banks are reluctant to spare money and 

regulation becomes tighter, illegal moneylending has become a social issue. Illegal 

moneylenders typically charge an interest of 30 or 50% in 10 days (in Japanese, these 

are called "to-san" ('to' meaning ten and 'san' meaning three) or "to-go" ('to' meaning ten 

and 'go' meaning five)), which is about 1.442 million % or 267.5 million % per annum. 

This is against the law that sets the maximum interest rate at 20%. They usually do 

business with those who cannot get more money from banks, legitimate consumer 

loans, or credit cards. 

Ah Long in Malaysia and Singapore 

Ah Long (derived from the Cantonese phrase ' 大耳窿 ' ("big ear hole")) is a colloquial 

term for illegal loan sharks in Malaysia and Singapore. They lend money to people who 

are unable to obtain loans from banks or other legal sources, mostly targeting habitual 

gamblers. Often, they discreetly advertise by sticking notices, mostly on lamp posts and 

utility boxes around a neighbourhood, thus vandalising public property, as authorities 

must remove such advertisements. They charge high interest rates (generally about 

40% per month/fortnight) according to Anti-Crime, Drug and Social Development 

Voluntary Organisation and frequently threaten violence (and administer it) towards 

those who fail to pay on time. 

Ah Long tactics 

When a person fails to pay on time, the Ah Long will set fire, spray paint, splash, or 

write threats in paint or markers on the walls of the property of that person as a threat of 

violence and to scare, and perhaps shame, the borrower into repaying the loan. A 

common use of painting includes the characters "O$P$" meaning "owe money, pay 

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money", as well as the debtors' unit number. According to local police authorities, there 

have been cases where borrowers and their family members were beaten or had their 

property damaged or destroyed, and some victims have committed suicide. 

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VIII. Usury 

Usury (/ˈjuːʒəri/) is, as defined today, the practice of making unethical or immoral 

monetary loans that unfairly enrich the lender. Originally, usury meant interest of any 

kind. A loan may be considered usurious because of excessive or abusive interest rates 

or other factors. Historically, in some Christian societies, and in many Islamic societies 

even today, charging any interest at all would be considered usury. Someone who 

practices usury can be called a usurer, but a more common term in contemporary 

English is loan shark. 

The term may be used in a moral sense—condemning, taking advantage of others' 

misfortunes—or in a legal sense where interest rates may be regulated by law. 

Historically, some cultures (e.g., Christianity in much of Medieval Europe, and Islam in 

many parts of the world today) have regarded charging any interest for loans as sinful. 

Some of the earliest known condemnations of usury come from the Vedic texts of India. 

Similar condemnations are found in religious texts from Buddhism, Judaism, 

Christianity, and Islam (the term is riba in Arabic and ribbit in Hebrew). At times, many 

nations from ancient Greece to ancient Rome have outlawed loans with any interest. 

Though the Roman Empire eventually allowed loans with carefully restricted interest 

rates, the Catholic Church in medieval Europe banned the charging of interest at any 

rate (as well as charging a fee for the use of money, such as at a bureau de change). 

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Historical Meaning 

Banking during the Roman Empire was different from modern banking. During the 

Principate, most banking activities were conducted by private individuals who operated 

as large banking firms do today. Anybody that had any available liquid assets and 

wished to lend it out could easily do so. 

The annual rates of interest on loans varied in the range of 4–12 percent, but when the 

interest rate was higher, it typically was not 15–16 percent but either 24 percent or 48 

percent. The apparent absence of intermediate rates suggests that the Romans may 

have had difficulty calculating the interest on anything other than mathematically 

convenient rates. They quoted them on a monthly basis, and the most common rates 

were multiples of twelve. Monthly rates tended to range from simple fractions to 3–4 

percent, perhaps because lenders used Roman numerals. 

Moneylending during this period was largely a matter of private loans advanced to 

persons persistently in debt or temporarily so until harvest time. Mostly, it was 

undertaken by exceedingly rich men prepared to take on a high risk if the profit looked 

good; interest rates were fixed privately and were almost entirely unrestricted by law. 

Investment was always regarded as a matter of seeking personal profit, often on a large 

scale. Banking was of the small, back-street variety, run by the urban lower-middle 

class of petty shopkeepers. By the 3rd century, acute currency problems in the Empire 

drove such banking into decline. The rich who were in a position to take advantage of 

the situation became the moneylenders when the increasing tax demands in the last 

declining days of the Empire crippled and eventually destroyed the peasant class by 

reducing tenant-farmers to serfs. It was evident that usury meant exploitation of the 

poor. 

The First Council of Nicaea, in 325, forbade clergy from engaging in usury [9] (canon 17). 

At the time, usury was interest of any kind, and the canon forbade the clergy to lend 

money at interest rates even as low as 1 percent per year. Later ecumenical councils 

applied this regulation to the laity. 

Lateran III decreed that persons who accepted interest on loans could receive neither 

the sacraments nor Christian burial. Pope Clement V made the belief in the right to 

usury a heresy in 1311, and abolished all secular legislation which allowed it. Pope 

Sixtus V condemned the practice of charging interest as "detestable to God and man, 

damned by the sacred canons, and contrary to Christian charity." 

Theological historian John Noonan argues that "the doctrine [of usury] was enunciated 

by popes, expressed by three ecumenical councils, proclaimed by bishops, and taught 

unanimously by theologians." 

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Certain negative historical renditions of usury carry with them social connotations of 

perceived "unjust" or "discriminatory" lending practices. The historian Paul Johnson, 

comments: 

Most early religious systems in the ancient Near East, and the secular codes arising 

from them, did not forbid usury. These societies regarded inanimate matter as alive, like 

plants, animals and people, and capable of reproducing itself. Hence if you lent 'food 

money', or monetary tokens of any kind, it was legitimate to charge interest. Food 

money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 

BC, if not earlier. ...Among the Mesopotamians, Hittites, Phoenicians and Egyptians, 

interest was legal and often fixed by the state. But the Hebrew took a different view of 

the matter. 

The Hebrew Bible regulates interest taking. Interest can be charged to strangers but not 

between Hebrews. 

Deuteronomy 23:19 Thou shalt not lend upon interest to thy brother: interest of money, 

interest of victuals, interest of any thing that is lent upon interest. 

Deuteronomy 23:20 Unto a foreigner thou mayest lend upon interest; but unto thy 

brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all 

that thou puttest thy hand unto, in the land whither thou goest in to possess it. 

Israelites were forbidden to charge interest on loans made to other Israelites, but 

allowed to charge interest on transactions with non-Israelites, as the latter were often 

amongst the Israelites for the purpose of business anyway; but in general, it was seen 

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as advantageous to avoid getting into debt at all, to avoid being bound to someone else. 

Debt was to be avoided and not used to finance consumption, but only taken on when in 

need; however, the laws against usury were among many laws which the prophets 

condemn the people for breaking. 

Johnson contends that the Torah treats lending as philanthropy in a poor community 

whose aim was collective survival, but which is not obliged to be charitable towards 

outsiders. 

A great deal of Jewish legal scholarship in the Dark and the Middle Ages was devoted 

to making business dealings fair, honest and efficient. 

Usury (in the original sense of any interest) was at times denounced by a number of 

religious leaders and philosophers in the ancient world, including Moses, Plato, 

Aristotle, Cato, Cicero, Seneca, Aquinas, Muhammad, Jesus, Philo and Gautama 

Buddha. For example, Cato said: 

"And what do you think of usury?"—"What do you think of murder?" 

Interest of any kind is forbidden in Islam. As such, specialized codes of banking have 

developed to cater to investors wishing to obey Qur'anic law. (See Islamic banking) 

As the Jews were ostracized from most professions by local rulers, the Western 

churches and the guilds, they were pushed into marginal occupations considered 

socially inferior, such as tax and rent collecting and moneylending. Natural tensions 

between creditors and debtors were added to social, political, religious, and economic 

strains. 

...financial oppression of Jews tended to occur in areas where they were most disliked, 

and if Jews reacted by concentrating on moneylending to non-Jews, the unpopularity— 

and so, of course, the pressure—would increase. Thus the Jews became an element in 

a vicious circle. The Christians, on the basis of the Biblical rulings, condemned interesttaking 

absolutely, and from 1179 those who practiced it were excommunicated. Catholic 

autocrats frequently imposed the harshest financial burdens on the Jews. The Jews 

reacted by engaging in the one business where Christian laws actually discriminated in 

their favor, and became identified with the hated trade of moneylending. 

In England, the departing Crusaders were joined by crowds of debtors in the massacres 

of Jews at London and York in 1189–1190. In 1275, Edward I of England passed the 

Statute of the Jewry which made usury illegal and linked it to blasphemy, in order to 

seize the assets of the violators. Scores of English Jews were arrested, 300 were 

hanged and their property went to the Crown. In 1290, all Jews were to be expelled 

from England, allowed to take only what they could carry; the rest of their property 

became the Crown's. Usury was cited as the official reason for the Edict of Expulsion; 

however, not all Jews were expelled: it was easy to avoid expulsion by converting to 

Christianity. Many other crowned heads of Europe expelled the Jews, although again 

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converts to Christianity were no longer considered Jewish (see the articles on marranos 

or crypto-Judaism). 

The growth of the Lombard bankers and pawnbrokers, who moved from city to city, was 

along the pilgrim routes. 

Die Wucherfrage is the title of a Lutheran Church–Missouri Synod 

work against usury from 1869. Usury is condemned in 19thcentury 

Missouri Synod doctrinal statements. 

In the 16th century, short-term interest rates dropped dramatically (from around 20–30% 

p.a. to around 9–10% p.a.). This was caused by refined commercial techniques, 

increased capital availability, the Reformation, and other reasons. The lower rates 

weakened religious scruples about lending at interest, although the debate did not 

cease altogether. 

The papal prohibition on usury meant that it was a sin to charge interest on a money 

loan. As set forth by Thomas Aquinas, the natural essence of money was as a measure 

of value or intermediary in exchange. The increase of money through usury violated this 

essence and according to the same Thomistic analysis, a just transaction was one 

characterized by an equality of exchange, one where each side received exactly his 

due. Interest on a loan, in excess of the principal, would violate the balance of an 

exchange between debtor and creditor and was therefore unjust. 

Charles Eisenstein has argued that pivotal change in the English-speaking world came 

with lawful rights to charge interest on lent money, particularly the 1545 Act, "An Act 

Against Usurie" (37 H. viii 9) of King Henry VIII of England. 

Judaism 

Religious Context 

Jews are forbidden from usury in dealing with fellow Jews, and this lending is to be 

considered tzedakah, or charity. However, there are permissions to charge interest on 

loans to non-Jews. This is outlined in the Jewish scriptures of the Torah, which 

Christians hold as part of the Old Testament, and other books of the Tanakh. From the 

Jewish Publication Society's 1917 Tanakh, with Christian verse numbers, where 

different, in parentheses: 

Exodus 22:24 (25)—If thou lend money to any of My people, even to the poor with thee, 

thou shalt not be to him as a creditor; neither shall ye lay upon him interest. 

Leviticus 25:36— Take thou no interest of him or increase; but fear thy God; that thy 

brother may live with thee. 

Leviticus 25:37— Thou shalt not give him thy money upon interest, nor give him thy 

victuals for increase. 

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Deuteronomy 23:20 (19)—Thou shalt not lend upon interest to thy brother: interest of 

money, interest of victuals, interest of anything that is lent upon interest. 

Deuteronomy 23:21 (20)—Unto a foreigner thou mayest lend upon interest; but unto thy 

brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all 

that thou puttest thy hand unto, in the land whither thou goest in to possess it. 

Ezekiel 18:17—that hath withdrawn his hand from the poor, that hath not received 

interest nor increase, hath executed Mine ordinances, hath walked in My statutes; he 

shall not die for the iniquity of his father, he shall surely live. 

Psalm 15:5—He that putteth not out his money on interest, nor taketh a bribe against 

the innocent. He that doeth these things shall never be moved. 

Several historical rulings in Jewish law have mitigated the allowances for usury toward 

non-Jews. For instance, the 15th-century commentator Rabbi Isaac Abrabanel specified 

that the rubric for allowing interest does not apply to Christians or Muslims, because 

their faith systems have a common ethical basis originating from Judaism. The medieval 

commentator Rabbi David Kimchi extended this principle to non-Jews who show 

consideration for Jews, saying they should be treated with the same consideration when 

they borrow. 

Islam 

The following quotations are English translations from the Qur'an: 

Those who charge usury are in the same position as those controlled by the devil's 

influence. This is because they claim that usury is the same as commerce. However, God 

permits commerce, and prohibits usury. Thus, whoever heeds this commandment from 

his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests 

with God. As for those who persist in usury, they incur Hell, wherein they abide forever 

(Al-Baqarah 2:275) 

God condemns usury, and blesses charities. God dislikes every sinning disbeliever. 

Those who believe and do good works and establish worship and pay the poor-due, 

their reward is with their Lord and there shall no fear come upon them neither shall they 

grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if 

you are believers. If you do not, then expect a war from God and His messenger. But if 

you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. 

If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, 

it would be better for you, if you only knew. (Al-Baqarah 2:276-280) 

O you who believe, you shall not take usury, compounded over and over. Observe God, 

that you may succeed. (Al-'Imran 3:130) 

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And for practicing usury, which was forbidden, and for consuming the people's money 

illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 

4:161) 

The usury that is practiced to increase some people's wealth, does not gain anything at 

God. But if people give to charity, seeking God's pleasure, these are the ones who 

receive their reward many fold. (Ar-Rum 30:39) 

The attitude of Muhammad to usury is articulated in his Last Sermon 

O People, just as you regard this month, this day, this city as Sacred, so regard the life 

and property of every Muslim as a sacred trust. Return the goods entrusted to you to 

their rightful owners. Hurt no one so that no one may hurt you. Remember that you will 

indeed meet your LORD, and that HE will indeed reckon your deeds. ALLAH has 

forbidden you to take usury (interest), therefore all interest obligation shall henceforth be 

waived. Your capital, however, is yours to keep. You will neither inflict nor suffer any 

inequity. Allah has Judged that there shall be no interest and that all the interest due to 

Abbas ibn 'Abd'al Muttalib (Prophet's uncle) shall henceforth be waived... 

Christianity 

The first of the scholastic Christian theologians, Saint Anselm of Canterbury, led the 

shift in thought that labeled charging interest the same as theft. Previously usury had 

been seen as a lack of charity. 

St. Thomas Aquinas, the leading scholastic theologian of the Roman Catholic Church, 

argued charging of interest is wrong because it amounts to "double charging", charging 

for both the thing and the use of the thing. Aquinas said this would be morally wrong in 

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the same way as if one sold a bottle of wine, charged for the bottle of wine, and then 

charged for the person using the wine to actually drink it. Similarly, one cannot charge 

for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is 

what usury does. Money is a medium of exchange, and is used up when it is spent. To 

charge for the money and for its use (by spending) is therefore to charge for the money 

twice. It is also to sell time since the usurer charges, in effect, for the time that the 

money is in the hands of the borrower. Time, however, is not a commodity that anyone 

can charge. In condemning usury Aquinas was much influenced by the recently 

rediscovered philosophical writings of Aristotle and his desire to assimilate Greek 

philosophy with Christian theology. Aquinas argued that in the case of usury, as in other 

aspects of Christian revelation, Christian doctrine is reinforced by Aristotelian natural 

law rationalism. Aristotle's argument is that interest is unnatural, since money, as a 

sterile element, cannot naturally reproduce itself. Thus, usury conflicts with natural law 

just as it offends Christian revelation: see Thought of Thomas Aquinas. 

Outlawing usury did not prevent investment, but stipulated that in order for the investor 

to share in the profit he must share the risk. In short he must be a joint-venturer. Simply 

to invest the money and expect it to be returned regardless of the success of the 

venture was to make money simply by having money and not by taking any risk or by 

doing any work or by any effort or sacrifice at all, which is usury. St Thomas quotes 

Aristotle as saying that "to live by usury is exceedingly unnatural". Islam likewise 

condemns usury but allowed commerce (Al-Baqarah 2:275) - an alternative that 

suggests investment and sharing of profit and loss instead of sharing only profit through 

interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. 

(Deut 23:19-20) St Thomas allows, however, charges for actual services provided. Thus 

a banker or credit-lender could charge for such actual work or effort as he did carry out 

e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth 

Council of the Lateran, expressly allowed such charges in respect of credit-unions run 

for the benefit of the poor known as "montes pietatis". 

In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging 

interest was not immoral. The most important of these was lucrum cessans (profits 

given up) which allowed for the lender to charge interest "to compensate him for profit 

foregone in investing the money himself." (Rothbard 1995, p. 46) This idea is very 

similar to opportunity cost. Many scholastic thinkers who argued for a ban on interest 

charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi 

and St. Bernardino of Siena). However, Hostiensis' exceptions, including for lucrum 

cessans, were never accepted as official by the Roman Catholic Church. 

The Roman Catholic Church has always condemned usury, but in modern times, with 

the rise of capitalism and the disestablishment of the Catholic Church in majority 

Catholic countries, this prohibition on usury has not been enforced. 

Pope Benedict XIV's encyclical Vix Pervenit gives the reasons why usury is sinful: 

The nature of the sin called usury has its proper place and origin in a loan contract… 

[which] demands, by its very nature, that one return to another only as much as he has 

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eceived. The sin rests on the fact that sometimes the creditor desires more than he has 

given…, but any gain which exceeds the amount he gave is illicit and usurious. 

One cannot condone the sin of usury by arguing that the gain is not great or excessive, 

but rather moderate or small; neither can it be condoned by arguing that the borrower is 

rich; nor even by arguing that the money borrowed is not left idle, but is spent usefully… 

Usury in Literature 

Other Contexts 

In The Divine Comedy Dante places the usurers in the inner ring of the seventh circle of 

hell. 

Interest on loans, and the contrasting views on the morality of that practice held by Jews 

and Christians, is central to the plot of Shakespeare's play "The Merchant of Venice". 

Antonio is the merchant of the title, a Christian, who is forced by circumstance to borrow 

money from Shylock, a Jew. 

Shylock customarily charges interest on loans, seeing it as good business, while 

Antonio does not, viewing it as morally wrong. When Antonio defaults on his loan, 

Shylock famously demands the agreed upon penalty-a measured quantity of muscle 

from Antonio's chest. 

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This is the source of the phrase "a pound of flesh" often used to describe the dear price 

of a loan or business transaction. Shakespeare's play is a vivid portrait of the competing 

views of loans and use of interest, as well as the cultural strife between Jews and 

Christians that overlaps it. 

By the 18th century, usury was more often treated as a metaphor than a crime in itself, 

so Jeremy Bentham's Defense of Usury was not as shocking as it would have appeared 

two centuries earlier. 

In Honoré de Balzac's 1830 novel Gobseck, the title character, who is a usurer, is 

described as both "petty and great—a miser and a philosopher..." [39] The character 

Daniel Quilp in The Old Curiosity Shop by Charles Dickens is a usurer. 

In the early 20th century Ezra Pound's anti-usury poetry was not primarily based on the 

moral injustice of interest payments but on the fact that excess capital was no longer 

devoted to artistic patronage, as it could now be used for capitalist business investment. 

Usury and The law 

Usury law 

Magna Carta commands, "If any one has taken anything, whether much or little, by way 

of loan from Jews, and if he dies before that debt is paid, the debt shall not carry usury 

so long as the heir is under age, from whomsoever he may hold. And if that debt falls 

into our hands, we will take only the principal contained in the note." 

"When money is lent on a contract to receive not only the principal sum again, but also 

an increase by way of compensation for the use, the increase is called interest by those 

who think it lawful, and usury by those who do not." (William Blackstone's 

Commentaries on the Laws of England). 

United States 

Usury laws are state laws that specify the maximum legal interest rate at which loans 

can be made. In the United States, the primary legal power to regulate usury rests 

primarily with the states. Each U.S. state has its own statute that dictates how much 

interest can be charged before it is considered usurious or unlawful. 

If a lender charges above the lawful interest rate, a court will not allow the lender to sue 

to recover the unlawfully high interest, and some states will apply all payments made on 

the debt to the principal balance. In some states, such as New York), usurious loans are 

voided ab initio. 

The making of usurious loans is often called loan sharking. That term is sometimes also 

applied to the practice of making consumer loans without a license in jurisdictions that 

requires lenders to be licensed. 

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Federal Regulation 

On a federal level, Congress has never attempted to federally regulate interest rates on 

purely private transactions, but on the basis of past U.S. Supreme Court decisions, 

arguably the U.S. Congress might have the power to do so under the interstate 

commerce clause of Article I of the Constitution. 

Congress imposed a federal criminal penalty for unlawful interest rates through the 

Racketeer Influenced and Corrupt Organizations Act (RICO Statute), and its definition of 

"unlawful debt", which makes it a potential federal felony to lend money at an interest 

rate more than twice the local state usury rate and then try to collect that debt. 

It is a federal offense to use violence or threats to collect usurious interest (or any other 

sort). 

Separate federal rules apply to most banks. The U.S. Supreme Court held unanimously 

in the 1978 case, Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., 

that the National Banking Act of 1863 allowed nationally chartered banks to charge the 

legal rate of interest in their state regardless of the borrower's state of residence. 

In 1980, Congress passed the Depository Institutions Deregulation and Monetary 

Control Act. Among the Act's provisions, it exempted federally chartered savings banks, 

installment plan sellers and chartered loan companies from state usury limits. Combined 

with the Marquette decision that applied to National Banks, this effectively overrode all 

state and local usury laws. The 1968 Truth in Lending Act does not regulate rates, 

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except for some mortgages, but requires uniform or standardized disclosure of costs 

and charges. 

In the 1996 Smiley v. Citibank case, the Supreme Court further limited states' power to 

regulate credit card fees and extended the reach of the Marquette decision. The court 

held that the word "interest" used in the 1863 banking law included fees and, therefore, 

states could not regulate fees. 

Some members of Congress have tried to create a federal usury statute that would limit 

the maximum allowable interest rate, but the measures have not progressed. In July 

2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act, was signed 

into law by President Obama. The act provides for a Consumer Financial Protection 

Bureau to regulate some credit practices but has no interest rate limit. 

Texas 

State law in Texas also includes a provision for contracting for, charging, or receiving 

charges exceeding twice the amount authorized (A/K/A "double usury"). A person who 

violates this provision is liable to the obligor as an additional penalty for all principal or 

principal balance, as well as interest or time price differential. A person who is liable is 

also liable for reasonable attorney's fees incurred by the obligor. 

Canada 

Canada's Criminal Code limits the interest rate to 60% per year. The law is broadly 

written and Canada's courts have often intervened to remove ambiguity. 

Japan 

Japan has various laws restricting interest rates. Under civil law, the maximum interest 

rate is between 15% and 20% per year depending upon the principal amount (larger 

amounts having a lower maximum rate). Interest in excess of 20% is subject to criminal 

penalties (the criminal law maximum was 29.2% until it was lowered by legislation in 

2010). Default interest on late payments may be charged at up to 1.46 times the 

ordinary maximum (i.e., 21.9% to 29.2%), while pawn shops may charge interest of up 

to 9% per month (i.e., 108% per year, however, if the loan extends more than the 

normal short-term pawn shop loan, the 9% per month rate compounded can make the 

annual rate in excess of 180%, before then most of these transaction would result in 

any goods pawned being forfeited). 

Islamic Banking 

Avoidance Mechanisms and Interest-Free Lending 

In a partnership or joint venture where money is lent, the creditor only provides the 

capital yet is guaranteed a fixed amount of profit. The debtor, however, puts in time and 

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effort, but is made to bear the risk of loss. Muslim scholars argue that such practice is 

unjust. As an alternative to usury, Islam strongly encourages charity and direct 

investment in which the creditor shares whatever profit or loss the business may incur 

(in modern terms, this amounts to an equity stake in the business). 

Non-Recourse Mortgages 

A non-recourse loan is secured by the value of property (usually real estate) owned by 

the debtor. However, unlike other loans, which oblige the debtor to repay the amount 

borrowed, a non-recourse loan is fully satisfied merely by the transfer of the property to 

the creditor, even if the property has declined in value and is worth less than the amount 

borrowed. When such a loan is created, the creditor bears the risk that the property will 

decline sharply in value (in which case the creditor is repaid with property worth less 

than the amount borrowed), and the debtor does not bear the risk of decrease in 

property value (because the debtor is guaranteed the right to use the property, 

regardless of value, to satisfy the debt.) 

Interest-Free Banks 

The JAK members bank is a usury-free saving and loaning system. 

Interest-Free Micro-Lending 

Growth of the Internet internationally has enabled both business micro-lending through 

sites such as Kickstarter as well as through global micro-lending charities where lenders 

make small sums of money available on zero-interest terms. Persons lending money to 

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on-line micro-lending charity Kiva for example do not get paid any interest, although the 

end users to whom the loans are made may be charged interest by Kiva's partners in 

the country where the loan is used. 

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IX. References 

1. https://en.wikipedia.org/wiki/Predatory_lending 

2. https://en.wikipedia.org/wiki/Subprime_lending 

3. https://en.wikipedia.org/wiki/Poverty_industry 

4. https://en.wikipedia.org/wiki/Economic_inequality 

5. https://en.wikipedia.org/wiki/Redlining 

6. https://en.wikipedia.org/wiki/Aporophobia 

7. https://en.wikipedia.org/wiki/Economic_discrimination 

8. https://en.wikipedia.org/wiki/Payday_loan 

9. https://en.wikipedia.org/wiki/Refund_anticipation_loan 

10. https://en.wikipedia.org/wiki/Title_loan 

11. https://en.wikipedia.org/wiki/Loan_shark 

12. https://en.wikipedia.org/wiki/Usury 

13. http://www.neoc.ne.gov/education/pdf/PredatoryLending.pdf 

14. https://www.nber.org/papers/w19550.pdf 

15. http://www.ruralhome.org/storage/documents/predatoryandsubprime.pdf 

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Page 150 of 181

Attachment A 

What Is Predatory Lending? 

Page 151 of 181

What is Predatory Lending? 


The Truth In Lending Act defines predatory lending as extending credit to a consumer based on 

the consumer’s collateral if, considering the consumers current and expected income, the 

consumer will be unable to make the scheduled payments to repay their obligation. In other 

words, predatory lending is lending to a homeowner in order to generate a claim on the 

equity of his or her house. There are various definitions for predatory lending, but in very 

general terms predatory lending is a process, often starting with misleading sales tactics, that 

culminates in the origination of a loan to a borrower who is paying too much in fees, interest or 

insurance. This person may not fully understand or may not be aware of all the provisions of the 

contact; and generally they do not have the financial capacity to repay the loan. 

All Sub Prime Lenders are Not Predatory Lenders 

While sub prime lenders charge higher interest rates and fees than conventional lenders, these 

fees usually correspond to a higher degree of risk to the borrower. However, there are some sub 

prime lenders who engage in unethical predatory lending practices based on excessive rates and 

fees. These lenders distort the commonly used sales and underwriting tools to the detriment of 

the borrowers. 

Who Is the Target of Predatory Lenders? 

Predatory lenders look for homeowners who have substantial equity in their homes, but need 

cash or have poor credit. Predatory lenders thrive on a consumers need for immediate cash or 

lack of familiarity with the standard credit products and practices. To be considered an ideal 

target of a predatory lender, the individual will have minimal cash flow and savings, a large 

amount of equity in their homes and limited experience with financial services, or even may be 

on a fixed income. Geographically speaking, these people prey on residents of lower income 

communities, minorities, women and elder individuals who are disproportionately victims of 

predatory lenders. 

Tactics that Predatory Lenders Use 

Predatory lenders use a variety of tactics to generate a claim of a homeowner’s equity. Some of 

these tactics are high interest rates and high points. Also, there are balloon payments and 

negative amortization; packing or padding costs and fees; flipping; high LTV loans, and locking 

borrowers in.

How We Can Protect Ourselves from Predatory Lenders 

There are a few simple steps that homeowners can take to protect themselves. 

1. Follow the basic rule of buyer beware; never sign a contact or any piece of paper without 

reading it; 

2. Carefully and fully understand what it obligates you to do; if possible, get an attorney or 

trusted financial advisor to review it before you sign it. 

3. Don’t agree to a loan if you don’t think you can make the payments; 

4. For any loan, make sure you understand all of the terms before you sign it; 

5. If the annual percentage rate of the loan is a lot higher than the interest rate quoted on the 

loan, there may be unnecessary fees attached; compare the APR and interest rate on your 

loan with the APR and interest rate offered by conventional bankers; 

6. Shop around, don’t let anyone rush you into a decision on a loan or home improvement 

contract; go first to a conventional bank if you need a loan; 

7. Don’t agree to a loan without knowing the amount of closing cost, fees and other upfront 

costs; 

These are simply a few of the things you can do; there are a lot more. Education is the key to 

avoid becoming the victim of a predatory lender.

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Attachment B 


and The Subprime Crisis 

Page 153 of 181

NBER WORKING PAPER SERIES 

PREDATORY LENDING AND THE SUBPRIME CRISIS 

Sumit Agarwal 

Gene Amromin 

Itzhak Ben-David 

Souphala Chomsisengphet 

Douglas D. Evanoff 

Working Paper 19550 

http://www.nber.org/papers/w19550 

NATIONAL BUREAU OF ECONOMIC RESEARCH 

1050 Massachusetts Avenue 

Cambridge, MA 02138 

October 2013 

We thank Caitlin Kearns for outstanding research assistance. We thank Amit Seru and an anonymous 

referee for important and insightful comments. Thanks are also due to participants at numerous conferences 

and seminars for their helpful feedback. Ben-David’s research is supported by the Dice Center and 

the Neil Klatskin Chair in Finance and Real Estate. The views in this paper are those of the authors 

and may not reflect those of the Federal Reserve System, the Federal Reserve Bank of Chicago, the 

Office of the Comptroller of the Currency, or the National Bureau of Economic Research. 

NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed 

or been subject to the review by the NBER Board of Directors that accompanies official 

NBER publications. 

© 2013 by Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, and Douglas 

D. Evanoff. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted 

without explicit permission provided that full credit, including © notice, is given to the source.

Predatory Lending and the Subprime Crisis 

Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, and Douglas 

D. Evanoff 

NBER Working Paper No. 19550 

October 2013 

JEL No. D14,D18 

ABSTRACT 

We measure the effect of an anti-predatory pilot program (Chicago, 2006) on mortgage default rates 

to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, 

risky borrowers and/or risky mortgage contracts triggered review sessions by housing counselors who 

shared their findings with the state regulator. The pilot cut market activity in half, largely through 

the exit of lenders specializing in risky loans and through decline in the share of subprime borrowers. 

Our results suggest that predatory lending practices contributed to high mortgage default rates among 

subprime borrowers, raising them by about a third. 

Sumit Agarwal 

Associate Professor of Finance and Real Estate 

NUS Business School 

Mochtar Raidy Building, BIZ1 

15 Kent Ridge Road 

Singapore, 119245 

ushakri@yahoo.com 

Gene Amromin 

Federal Reserve Bank of Chicago 

230 South LaSalle Street 

Chicago, IL 60604-1413 

gamromin@frbchi.org 

Souphala Chomsisengphet 

Office of the Comptroller of the Currency 

Department of Treasury 

Washington, DC. 

souphala.chomsisengphet@occ.treas.gov 

Douglas D. Evanoff 

Federal Reserve Bank of Chicago 

230 South LaSalle Street 

Chicago, IL 60604-1413 

devanoff@frbchi.org 

Itzhak Ben-David 

Fisher College of Business 

The Ohio State University 

2100 Neil Avenue 

Columbus, OH 43210 

and NBER 

bendavid@fisher.osu.edu

1. Introduction 

Predatory lending has been the focus of intense academic and policy debate surrounding 

the recent housing crisis. Predatory lending—commonly defined as imposing unfair and abusive 

loan terms on borrowers, often through aggressive sales tactics, or loans that contain terms and 

conditions that ultimately harm borrowers (GAO, 2004; FDIC, 2006)—has also captured much 

media attention and appears to be a major concern for borrowers. 1 While all agree that mortgages 

with abusive terms are costly to borrowers and to taxpayers, the extent of the phenomenon is 

hard to quantify and is politically charged (e.g., Agarwal and Evanoff, 2013; Engel and McCoy, 

2007). Several journalistic accounts and industry reports take the position that predatory lending 

had a central role in creating and feeding the housing bubble, particularly through subprime loan 

originations (e.g., the Financial Crisis Inquiry Commission, 2010; Hudson, 2010; Center for 

Responsible Lending, 2009). To our knowledge, there is no systematic evidence to date 

measuring the effect of predatory lending on mortgage performance. Our paper attempts to fill 

this gap. 

In academic literature, predatory lending is modeled as cases in which lenders possess 

private information about borrowers’ future ability to repay loans and encourage mortgages with 

terms that borrowers cannot afford (Bond, Musto, and Yilmaz, 2009). This model clearly 

portrays the empirical challenge in measuring predatory lending: because it is difficult to observe 

lenders’ informational advantage over borrowers, it is hard to measure the size of the 

phenomenon and assess its role in precipitating the subprime mortgage crisis. 

In this paper, we attempt to overcome this challenge by analyzing the effects of a pilot 

anti-predatory legislative program implemented in Chicago near the peak of the real-estate 

boom. The pilot required “low-credit-quality” applicants and applicants for “risky” mortgages to 

submit their loan offers from state-licensed lenders for third-party review by HUD-certified 

financial counselors. As described in greater detail below, the fact that the pilot applied only in 

certain areas during a specific time period, only to certain borrower and mortgage contract 

1 Guiso, Sapienza, and Zingales (2013) find that about half of surveyed borrowers would be willing to strategically 

default on their mortgage should they discover that their lender was involved in predatory lending. 

2

combinations, and only to a specific set of lenders allows us to parse out its effect on the 

availability of mortgage credit with predatory characteristics and to evaluate ex post mortgage 

performance. The study draws on detailed loan-level data from public and proprietary sources, as 

well as data provided by one of the largest counseling agencies involved in the pilot. 

Our empirical strategy is based on classic difference-in-differences analysis that contrasts 

changes in mortgage market composition and loan performance in the treated sample with those 

in a control sample. Unlike bacteria in a petri dish, lenders and borrowers could respond to the 

mandated treatment either by leaving the pilot area or by adapting to the new rules. Hence, we 

pay particular attention to endogenous selection of lenders and borrowers out of treatment. If 

predatory lending resulted in significantly higher default rates and thus precipitated the crisis, we 

should observe a significant reduction in default rates in the targeted market as predatory lending 

declined. 

We find that following passage of the legislative pilot, the number of active lenders 

declined disproportionately in the target geographic area. The decline was particularly 

pronounced among state-licensed lenders that specialized in the origination of subprime loans, 

many of which included contract features deemed objectionable by the legislation. Nearly half of 

the state-licensed lenders exited the pilot zip codes, more than double the exit rate in the control 

areas. The remaining lenders made fewer risky loans and originated credit to borrowers with 

higher credit quality. Specifically, we show that the volumes of loan applications and 

originations by state-licensed lenders in the pilot area declined by 51% and 61%, respectively. 

The average FICO score of borrowers who were able to obtain credit during the pilot period was 

8 points higher (15% of one standard deviation). 

The resulting mortgages issued in the pilot area were less likely to feature “risky” 

characteristics (as defined by legislators) that would subject them to counselor review. For 

instance, there were fewer loans with negative amortization or prepayment penalties, as well as 

fewer low-documentation and low down-payment loans. This set of findings suggests, therefore, 

3

that the legislation had a deep impact on market activity and likely drove much of the predatory 

lending activity from the market. 

Yet, although the pilot dramatically affected market activity, it had a relatively moderate 

effect on borrower default rates. When we restrict our analysis to the subset of market 

participants directly targeted by the pilot—subprime borrowers and state-licensed lenders—we 

find improvements in 18-month default rates of 6 to 7 percentage points, relative to the 

unconditional default rate of 27%. Moreover, all of the statistically measurable improvement in 

loan performance came from changes in the composition of lenders, many of whom were driven 

out by the legislation. These estimates suggest that while predatory lending contributed to high 

default rates, it may have not been as instrumental in precipitating the financial crisis as 

popularly believed. 

In practice, it may be difficult to distinguish predatory lending practices from merely 

“aggressive” ones. To make headway in separating the two, we exploit another feature of the 

anti-predatory program. The heart of the HB4050 pilot was the imposition of a mortgage review 

requirement for risky borrowers and for those who chose risky loans. During the review, 

counselors identified loans that were suspected of having predatory characteristics, e.g., loans 

with above-market rates, loans appearing to be unaffordable based on borrower characteristics, 

and loans with indications of fraud. We analyze a sample of 121 loans for which we have 

detailed counselor assessment data. 2 We conjecture that loans that were flagged as predatory and 

yet were pursued by borrowers (i.e., borrowers ignored the counselors’ advice) were more likely 

to default relative to non-flagged loans. Indeed, we find that these predatory loans had 18-month 

delinquency rates that were 6.5 percentage points higher than nonflagged loans. The difference 

in delinquency rates was even higher for loans with fraud indicia, which had a 12.3 percentage 

point differential. 

2 For an in-depth analysis of the role of mortgage counseling, see Agarwal, Amromin, Ben-David, Chomsisengphet, 

and Evanoff (2010, 2012). 

4

Our findings have important implications for policymakers. First, the pilot program was a 

blunt policy tool that swept up a wide swath of borrowers, lenders, and products and caused 

substantial market disruption. Second, despite the measureable improvements in mortgage 

performance in the subpopulation most affected by the pilot, default rates remained alarmingly 

high, suggesting that predatory lending practices may have played a relatively limited role in 

triggering the crisis. In fact, because some of the loans eliminated by the pilot may have been 

aggressive rather than predatory, we are likely to be overstating the effect of predatory lending 

practices. Third, evaluation of welfare gains or losses stemming from such policy programs is 

fraught with difficulties, many of which are exacerbated by the distortions that exist in housing 

markets. Our paper does not attempt to gauge the welfare consequences of the pilot, and 

policymakers should be aware that such consequences are difficult to measure. Finally, the 

HB4050 pilot demonstrates the political difficulty of implementing policies that “lean” against 

asset bubbles. 3 

Specifically, interest groups (real-estate professionals as well as community 

activists) protested against the legislation. Both groups viewed the preceding run-up in realestate 

prices as an opportunity for their constituents to achieve their goals (profits or housing 

access), and they therefore perceived the legislation as harmful. 

Our paper relates to two strands of the literature. The first explores the role of 

intermediaries in precipitating the financial crisis. Keys et al. (2010) show that securitization 

leads to lax screening by mortgage lenders. Ben-David (2011, 2012) finds that intermediaries 

expanded the mortgage market by enabling otherwise ineligible borrowers to misrepresent asset 

valuations to obtain larger loans, and by pushing buyers to overpay for properties. Rajan, Seru, 

and Vig (2013) show that soft information about borrowers is lost as the chain of intermediaries 

in the origination process becomes longer, leading to a decline in the quality of originated 

mortgages. Finally, see Agarwal and Ben-David (2013) who study the role of loan officer 

compensation leading up to the financial crisis. 

3 As discussed in detail in Section 2.2, the program was terminated early, providing further evidence of the high cost 

of identifying predatory lending—the regulators could not withstand the political pressure associated with 

implementing the program. 

5

The second strand of the literature studies predatory lending in personal finance. In 

particular, researchers have focused on the debate about whether payday lending helps or 

exploits borrowers. Morse (2011) shows that borrowers in areas with payday lending are more 

resilient to natural disasters. In contrast, Melzer (2011) uses cross-border variation and finds no 

evidence that payday lending alleviates hardship. Bertrand and Morse (2011) find that providing 

additional information about loans to payday borrowers reduces loan take-up. Agarwal, Skiba, 

and Tobacman (2009) show that payday borrowers preserve access to formal credit through their 

credit cards while paying very high interest rates on their payday loans. 

2. Illinois Predatory Lending Database Pilot Program (HB4050) 

2.1. Description of the Pilot Program 

In 2005, the Illinois legislature passed a bill intended to curtail predatory lending. 

Although the state had a number of anti-predatory provisions in place, like prevailing practices 

elsewhere in the country, they were based on loan characteristics. Some political leaders in 

Illinois became concerned about the ease with which lenders could avoid the trigger criteria of 

anti-predatory programs by creatively packaging their loans. For instance, balloon mortgages 

targeted by regulations were replaced with adjustable rate mortgages (ARMs) with short fixedrate 

periods and steep rate reset slopes (the so-called 2/28 and 3/27 hybrid ARMs). 4 

Consequently, the new bill included a new enforcement mechanism and tougher penalties for 

noncompliance. It also sought to educate borrowers prior to closing on their new mortgage loans. 

To that effect, the legislation sponsored by Illinois House Speaker Michael Madigan 

mandated review of mortgage offers for “high-risk borrowers” by HUD-certified housing 

counselors. High-risk borrowers were defined as applicants with sufficiently low credit scores or 

sufficiently risky product choices. The legislation set the FICO score threshold for mandatory 

counseling at 620, with an additional provision that borrowers with FICO scores in the 621–650 

4 For a detailed analysis of the impact of the state anti-predatory lending laws on the type of mortgage products used 

in the market, see Bostic et al. (2012). 

6

ange receive counseling if they chose what the regulation defined as high-risk mortgage 

products. Such mortgages included interest-only loans, loans with interest rate adjustments 

within three years, loans underwritten on the basis of stated income (low-documentation loans), 

and repeated refinancings within the past 12 months (Category I loans). Borrowers were subject 

to counseling regardless of their FICO score if they took out loans that allowed negative 

amortization, had prepayment penalties, or had closing costs in excess of 5% (Category II loans). 

The proposal was modeled on a Federal Housing Administration (FHA) program from the 

1970s, 5 and it generated a lot of excitement among Illinois lawmakers, who passed House Bill 

4050 (HB4050) on the last day of the 2005 legislative session. HB4050 applied only to loans 

offered by state-licensed mortgage lenders, as the state lacks legal authority to regulate federally 

chartered institutions and generally exempts them from mortgage licensing requirements. 

Furthermore, HB4050 applied only to select neighborhoods, namely, ten zip codes on the City of 

Chicago’s South Side. 

The need for a high-risk borrower counseling session was determined on the day of the 

application, and the borrower had ten days to contact the agency to schedule it. The lender was 

required to cover the $300 cost of the session. The goal of these sessions, lasting one to two 

hours, was to discuss the terms of the specific offer for a home purchase or refinancing loan and 

to explain their meaning and consequences to the prospective borrower. The counselors were not 

supposed to advise borrowers about their optimal mortgage choice in the sense of Campbell and 

Cocco (2003); rather, they were to warn them against common pitfalls. The counselors were also 

expected to verify the loan application information about the borrower (e.g., income and 

expenses). None of the recommendations was binding—borrowers could always choose to 

proceed with the loan offer at hand. 

At the end of the session, the counselor recorded a number of findings in a stateadministered 

database. These included whether the lender charged excessive fees, whether the 

5 See “Illinois Tries New Tack Against Predatory Loans” by Amy Merrick, Wall Street Journal Online, 21 August 

2007, http://online.wsj.com/article/SB118765937527803664.html. 

7

loan interest rate was in excess of the market rate, whether the borrower understood the 

transaction and/or could afford the loan, and so forth. Even though HB4050 established the 

database for pilot evaluation purposes, lenders feared that the state’s collection of this 

information could lead to potential regulatory (e.g., license revocation) or legal (e.g., class-action 

lawsuits) actions. 

As another direct penalty for noncompliance, lenders lost the right to foreclose on a 

delinquent property. Under HB4050, title companies did not receive a “safe harbor” provision 

for “good faith compliance with the law.” As a result, clerical errors at any point in the loan 

application process could potentially invalidate the title, making the lender unable to pursue 

foreclosure. 6,7 Finally, lenders reportedly feared losing some of their ability to steer borrowers 

toward high margin products. 

The new regulation imposed costs on borrowers as well. Even though session fees had to 

be borne by the lender, anecdotal evidence suggests brokers attempted to pass them on to 

borrowers in the form of higher closing costs and administrative charges (Bates and Van Zandt, 

2007, and personal communication with mortgage counselors). HB4050 also imposed time costs 

on borrowers. By lengthening the expected time until closing, the new law could force borrowers 

to pay for longer credit lock periods, further raising loan costs. 

Both the counseling session and the independent collection of borrower data allowed 

counselors to form their own assessment of the borrower’s creditworthiness. Effectively, the 

counselors were able to elicit private information that may or may not have been used by lenders 

6 According to the Cook County Recorder of Deeds, even federally regulated lenders had to procure a certificate of 

exemption from HB4050 to obtain a clean title. Consequently, all lenders were affected to at least some degree by 

the legislation. 

7 This feature of HB4050 caused some investors to warn about their willingness to purchase loans originated in pilot 

zip codes. Most of these warnings stipulated that to be eligible for purchase, a loan had to receive a certificate of 

counseling or of exemption from counseling. However, the presence of one of these certificates was a requirement 

for loan closing and recording, which itself is a prerequisite for sale or securitization under standard purchase 

criteria. It is thus unclear whether would-be investors had any additional reasons to worry about recorded loans 

under HB4050. In any event, the share of securitized loans in the treated zip codes declined from 83% to 70% 

during the pilot period. However, this decline was not appreciably different from that in the control zip codes. It thus 

appears that the pilot did not have a sizable impact on secondary market activity counter to the historical experience 

in Georgia and New Jersey discussed in Keys et al. (2010). 

8

to make approval and/or pricing decisions and then give that information to state regulators. This 

external verification process, together with strict penalties for noncompliance, likely provided 

strong incentives for lenders to better screen out marginal applications prior to referring 

approved applications to counseling. One extreme form of screening was to cease lending in 

HB4050 areas altogether. 

A report by the nonprofit Housing Action Illinois (2007) summarized the counselors’ 

assessments of HB4050 covered loans. Over the course of the pilot, about 1,200 borrowers had 

their loan offers reviewed by 41 HUD-certified counselors from 11 agencies. Housing Action 

Illinois (2007) reports that 9% of the mortgages were deemed to have indications of fraud. About 

half of the borrowers were advised that they could not afford the loan or were close to not being 

able to do so. For 22% of the borrowers, loan rates were determined to be more than 300 basis 

points above the market rate. For 9% of the borrowers, the counselors found a discrepancy 

between the loan documentation and the verbal description of the mortgage. Perhaps most 

alarmingly, an overwhelming majority of borrowers who were receiving adjustable rate loans did 

not understand that their mortgage payment was not fixed over the life of the loan. 

2.2. Early Termination of the Pilot Program 

The program was meant to run as a four-year pilot in select Chicago neighborhoods. 

Afterwards, its coverage was expected to be expanded to the entire metropolitan area. In spite of 

vocal opposition from community-based groups and affected lenders, Illinois politicians 

clamored to have their districts included in the pilot. This effort by politicians looks particularly 

ironic in retrospect, given the eventual response of the population in the pilot area. 

As mentioned earlier, only loans offered by state-licensed mortgage lenders were subject 

to HB4050. In disadvantaged Chicago neighborhoods, much of the lending had been done 

through state-licensed mortgage bankers, which presented themselves as a local and nimble 

alternative to the more traditional bank lenders. 8 Consequently, the legislation was likely to 

8 Using the Home Mortgage Disclosure Act (HMDA) data described in detail in Section 3, we estimate that statelicensed 

mortgage bankers accounted for 64% of mortgage loans originations in the HB4050 zip codes during 2005. 

9

increase the regulatory burden on the very entities providing credit in the selected pilot area. The 

possibility that this could result in credit rationing prompted many observers to voice concern 

about the potential effect of HB4050 on housing values in the selected zip codes. 

The geographic focus of the legislation differed substantially from typical regulatory 

approaches that require counseling for certain loan types (Bates and Van Zandt, 2007). This 

feature of the legislation generated considerable opposition from community activists and 

residents and prompted several lawsuits. Because the selected pilot area was overwhelmingly 

populated by Hispanic and African American residents (81%, see Table 1, Panel A), the 

selection also prompted heated accusations of discriminatory intent on the part of lawmakers. 

Specifically, community activists formed an organization named the Coalition to Rescind 

HB4050, led by John Paul (president of the Greater Englewood Family Taskforce) and Julie 

Santos (an immigrants’ rights activist). In the media and through vocal protests at the grassroots 

level, the organization put legal and political pressure on politicians to revoke the legislation. 9 

The other group to oppose HB4050 comprised mortgage lenders and real-estate brokers, 

who claimed that the bill imposed onerous costs on real-estate professionals and that it reduced 

market activity. This group also applied considerable pressure to abolish HB4050, ranging from 

highly publicized refusals to lend in the pilot zip codes to joining legal actions against the 

legislation. 10 

As mortgage lenders threatened to withdraw from the pilot zip codes en masse, and as the 

tide of concerns about credit access began to rise, opposition to HB4050 reached fever pitch. 11 

The pilot program was suspended indefinitely on January 17, 2007 after only 20 weeks of 

9 The Chicago Tribune reported on November 2, 2006 that a group of residents and members of the real-estate 

community submitted a lawsuit against the state, claiming discrimination. 

10 The unusual confluence of interests between community activists and real-estate professionals in opposing the 

same regulatory action is reminiscent of Yandle’s (1983, 1999) “Bootleggers and Baptists” theory. The classic 

example of this theory is the banning of Sunday sales of alcohol—a regulation supported by both bootleggers and 

Baptists. The former endorsed the legislation because it allowed them to maintain the business of illegally selling 

liquor without competition. The latter approved of the regulation because it directly supported their objective of 

discouraging consumption of alcoholic beverages. 

11 The record of a public hearing held on November 27, 2006 provides a good illustration of the acrimony 

surrounding HB4050 (see http://www.idfpr.com/newsrls/032107HB4050PublicMeeting112706.pdf). 

10

operation. To provide some of the flavor of the public debate, we summarize the main news 

items about the HB4050 legislation in the national and local media in the Appendix. 

2.3. How Was the Pilot Program Area Selected? 

HB4050 instructed the state regulatory body (Department of Financial and Professional 

Regulation, or IDFPR) to designate a pilot area on the basis of “the high rate of foreclosure on 

residential home mortgages that is primarily the result of predatory lending practices.” The pilot 

area announced by IDFPR in February 2006 encompassed ten contiguous zip codes on the 

southwest side of Chicago (the solid shaded areas in Figure 1). 12 Four of these zip codes were 

located in Illinois House Speaker Madigan’s district. 

Table 1 summarizes some of the key demographic and mortgage characteristics for the 

pilot area and the rest of the City of Chicago. 13 The mortgage data come from the First American 

CoreLogic LoanPerformance data set on securitized, subprime and Alt-A mortgages (henceforth, 

the LP data). Panel A shows that IDFPR’s decision at the time was based on the fact that these 

zip codes had substantially higher default rates (Column (1)) compared to the rest of the city 

(Column (3)), even though they experienced stronger growth in house prices. 14,15 The pilot zip 

codes were also predominantly minority-populated and had much higher rates of unemployment 

and poverty (Panel A) relative to the rest of Chicago. A simple comparison of population counts 

and the total number of loan originations in the nonprime-LP data strongly suggests that the 

HB4050 area had a disproportional share of subprime and Alt-A mortgages. 

12 The HB4050 zip codes are: 60620, 60621, 60623, 60628, 60629, 60632, 60636, 60638, 60643, and 60652. 

13 Panel A also provides this information for the set of 12 zip codes that comprise one of our control samples—zip 

codes similar to those affected by HB4050 but not chosen for the pilot. Their selection is discussed in detail in 

Section 3. The comparisons here are made between the ten HB4050 zip codes and the 31 Chicago zip codes that 

exclude both the HB4050 and the 12 control zip codes. 

14 In this table, we use mortgage characteristics and performance for 2005 because this was the information set 

available to legislators at the beginning of 2006, when the legislation was voted on. 

15 Default is defined as a 90+ day delinquency, foreclosure, or real-estate owned within 18 months of origination. 

11

3. Data and Selection of Control Groups and Empirical Test Design 

3.1. Data Sources 

Our study relies on several complementary sources of data that cover the calendar years 

2005–2007. First, we use data collected under the Home Mortgage Disclosure Act (HMDA) to 

assess elements of supply and demand for credit. In the absence of loan application and 

counseling data collected under the statutory authority of HB4050, we turn to HMDA as the next 

best source of information on loan application volume, rejection rates, and so forth. Using 

information from HUD and hand-collected data, we distinguish between lenders who specialize 

in prime and subprime loans, as well as between lenders that are licensed by Illinois and those 

exempt from licensing. Because the effect of the legislation was likely to be felt most acutely by 

state-licensed subprime lenders, we use this list to refine our analysis. Furthermore, the HMDA 

data allow us to examine how HB4050 affected credit supply along the extensive margin, i.e., to 

identify lenders that left the market altogether. Overall, the HMDA data include 92,658 loans 

that were originated in the HB4050 zip codes during the 2005–2007 period. 

We also use the First American CoreLogic LoanPerformance (LP) database to assess the 

effect of HB4050 on contract type and performance of mortgages originated in the treated zip 

codes during 2005–2007. The LP data set includes detailed borrower and loan information such 

as FICO scores and debt service-to-income (DTI) and loan-to-value (LTV) ratios as well as 

mortgage terms, including maturity, product type (e.g., fixed or adjustable rate mortgage), 

interest rate, and interest rate spread. It also contains information on whether a given loan has a 

prepayment penalty, allows negative amortization, or required full documentation in 

underwriting. These and other characteristics of the LP data are summarized in Table 1, Panels B 

and C. FICO scores allow us to determine which borrowers in the HB4050 zip codes were 

automatically or conditionally subject to loan counseling. The LP data set includes 37,564 

mortgage loans originated in Chicago zip codes in 2005–2007. 

Because the LP data do not include information about the identity of the mortgage 

originator for loans, we need to match observations in the HMDA and LP data sets to examine 

12

the effects of the legislation. We match on the basis of the zip code, loan amount, and date of 

origination. Our matched data set yields 18,724 observations in the HB4050 zip codes. 

In the later part of our analysis, we use information from one of the counseling agencies. 

These data are part of the database constructed under the HB4050 legislation, which includes 

information on original mortgage offers reviewed during 191 counseling sessions. We match 

these data to the Cook County Recorder of Deeds and LP data sets to obtain loan characteristics 

on the counseled loans. The resulting data set includes 121 loans (other loans may not have been 

securitized and, therefore, not included in the LP data set). We use this data set to gauge the 

extent to which counseling had a direct effect on mortgage choice. 

Finally, we use Census and IRS data to control for zip code–level characteristics of 

income and population composition. 

3.2. Constructing a Zip Code–Based Control Group 

To evaluate the effect of the HB4050 legislation, we develop control samples that are 

similar to the pilot area but are unaffected by the legislation. As discussed in Section 2.3, the 

selection of treated zip codes was driven by their demographic and mortgage characteristics, as 

well as by political considerations. In fact, HB4050 zip codes exhibit characteristics that are far 

from unique in the Chicago area. We use this information to construct a control group that is 

meant to resemble the pilot area in terms of its pretreatment socioeconomic characteristics and 

housing market conditions. Without the intervention, we plausibly expect the HB4050 zip codes 

would have experienced the same changes in outcome variables as our control group zip codes. 

To develop the control group, we move beyond the univariate metric of foreclosure rates to a set 

of measures identifying economically disadvantaged inner-city neighborhoods. 

In particular, we use 2005 IRS zip code–level income statistics, as well as the 2000 

Census shares of minority population and of those living below the poverty level, and the 

unemployment rate to identify zip codes within the City of Chicago limits that have similar 

characteristics and the smallest geographic distance from the HB4050 zip codes. The resulting 

13

12–zip code area has about as many residents as the treatment area and experienced a similar 

path of house price changes, as summarized in Column (2), Panel A of Table 1. The statistics in 

Panel B of Table 1 corroborate our conclusion that the control zip codes are similar to the treated 

area in terms of their high default and delinquency rates, low borrower FICO scores, and 

disproportionate reliance on riskier mortgage products. 16 Judging by the spirit and the letter of 

stated legislative guidelines, these zip codes (shown by the striped area in Figure 1) could have 

plausibly been selected for HB4050 treatment. 17 

The HMDA database contains 80,876 loans originated in the 12–zip code control sample 

during the 2005–2007 period. The control sample contains 34,451 loan originations in the LP 

data set, 17,759 of which can be matched with HMDA data. 

3.3. Constructing a Synthetic Zip Code Control Sample 

To further establish the empirical robustness of our analysis, we construct a synthetic 

HB4050-like area in the spirit of Abadie and Gardeazabal (2003). 18 Instead of identifying a 

similar but untreated set of zip codes, we build up a comparison sample loan by loan, by 

matching on the basis of observable loan characteristics. Specifically, for each of the loans issued 

in the ten–zip code HB4050 area, we look for a loan most similar to it that was issued elsewhere 

within the City of Chicago in the same month. The metric for similarity is the geometric distance 

in terms of standardized values of the borrower’s FICO score, the loan’s DTI and LTV ratios, the 

log of home value, and the loan’s intended purpose (purchase or refinancing). Once a loan is 

matched to an HB4050-area loan, it is removed from the set of potential matches and the process 

16 In an earlier version of the paper, we used the reverse sequence to construct the control sample. That is, we built 

up the set of control zip codes by minimizing the distance in observed mortgage characteristics in the pre-HB4050 

LP data. Afterward we checked for similarities in socioeconomic characteristics between the treatment and control 

areas. All of the results reported below are robust to the definition of the control area and are available upon request. 

17 The control area comprises the following zip codes: 60609, 60617, 60619, 60624, 60633, 60637, 60639, 60644, 

60649, 60651, 60655, and 60827. 

18 It would be ideal to look at transactions that lie on either side of the border between the HB4050 and the control 

zip codes to tease out the effect of the counseling mandate. Unfortunately, the LP data do not contain street 

addresses. 

14

is repeated for the next HB4050-area loan. The resulting synthetic HB4050-like area is made up 

of observations from all 43 of the non-HB4050 Chicago zip codes. Not surprisingly, 65% of the 

observations in this synthetic area come from the 12 comparable zip codes identified in the 

preceding section on the basis of their socioeconomic characteristics. 

In Table 1, Panel B, we compare the characteristics of borrowers and mortgages in the 

treated zip codes sample to those in the synthetic control sample. The panel shows that for each 

loan characteristic the samples have very similar properties. Because we are not constrained by 

geographic proximity, the synthetic sample more closely matches the loans in the HB4050 

treatment area than does the control sample. However, all three samples display remarkably 

similar characteristics. 

3.4. Design of Tests: HB4050 Legislation as an Exogenous Shock to Predatory Lending 

To recap our data summary, the majority of lending in the HB4050 area was done by 

state-licensed lenders specializing in subprime loans. Many of these loans had short reset periods 

(hybrid ARMs) and prepayment penalties, and did not require full documentation of income—all 

characteristics that are commonly associated with “predatory lending.” These loans also had 

been defaulting at very high rates (more than 20% of subprime loans originated in HB4050 zip 

codes in the year prior to the pilot defaulted within their first 18 months). Thus, to the extent that 

HB4050 made it more difficult for this subset of lenders to originate such loans with high ex post 

default rates, we regard the pilot as an exogenous shock to lending practices with potentially 

predatory characteristics. 

Our empirical analysis is based on the idea that HB4050 did not have a material effect in 

untreated but similar areas. If predatory lending leads to higher default rates, we would expect 

the negative exogenous shock to such lending practices to have a sizable effect on loan 

performance. 

Another way to think about the proposed empirical design is as a two-stage analysis. In 

the first stage, we verify that the legislation had a material effect on mortgage origination 

15

practices in the treated area. For example, we show that in the treated area the fraction of “highrisk” 

mortgages declined significantly, as did the overall volume of originations and the number 

of active lenders. 

The second stage of the analysis measures the effect of the shock to the lending market 

on mortgage performance. This stage is based on cross-sectional and temporal variation in a 

difference-in-differences framework. Specifically, our tests measure the difference in the 

response of various variables (e.g., default status, contract choice, etc.) as a function of whether 

the loan was originated in a zip code subject to HB4050. Our regressions include both time 

controls and cross-sectional controls, as in classic difference-in-differences analysis. 

Our basic regression specifications have the following form: 

Response ijt = α + β Treatment jt + γ Time dummies t + δ Zip dummies j + θ Controls ijt + ε ijt , (1) 

where Response ijt is the loan-level response variable, such as default status of loan i originated at 

time t in zip j; Treatment jt is a dummy variable that receives a value of one if zip code j is subject 

to mandatory counseling in month t and the loan is originated by a state-licensed lender, and 0 

otherwise; and Time and Zip dummies capture fixed time and location effects, respectively. In all 

regressions, we cluster errors at the zip code level. 19 For each loan, the response is evaluated at 

only one point in time (e.g., interest rate at origination or default status 18 months thereafter). 

Consequently, our data set is made up of a series of monthly cross-sections. The set of controls 

varies with the underlying data source, but it includes variables such as LTV at origination, 

borrower FICO score, loan interest rate, and so forth. 

3.5. Discussion of the Exclusion Restriction and the Context of the Estimates 

Our empirical tests provide estimates of the effect of the anti-predatory program on the 

performance of loans. Here we discuss whether our estimates of improved mortgage 

19 Clustering allows for an arbitrary covariance structure of error terms over time within each zip code and, thus, 

adjusts standard error estimates for serial correlation, potentially correcting a serious inference problem (Bertrand, 

Duflo, and Mullainathan, 2004). Depending on the sample, there are 22 or 53 zip codes in our regressions. 

16

performance can be attributed to the reduction in predatory lending and whether the result can be 

generalized to the entire national market. We identify the effect of predatory lending on borrower 

default based on the assumption that HB4050 affected default rates only through its impact on 

predatory lending (the exclusion restriction). This assumption may not hold for two main 

reasons: (1) the legislation is likely to have altered additional aspects of borrower decision 

making, and (2) the legislation is likely to have induced spillovers of borrowers and lenders from 

the treated zip codes into neighboring zip codes. Below, we analyze the potential effects of 

violating the exclusion restriction assumption. 

The anti-predatory program affected the performance of loans through two main 

channels: oversight and education. First, the program imposed oversight on lenders by subjecting 

their loan offers to external review, thus causing predatory lenders to be more cautious. Second, 

the program provided a detailed review to borrowers, which could have improved their decision 

making. During the 20 weeks in which the pilot program took place, over 1,200 borrowers 

received information about mortgages. In our sample of 191 loans, about 19% did not pursue 

their loan application following the counseling and another 40% modified some of the mortgage 

characteristics. Although it is difficult to clearly distinguish between the channels, our 

measurement of the effect of predatory lending relies on the direct effect of the program through 

oversight. It is plausible, however, that the indirect channel of education violates the exclusion 

restriction and that some of the effect of the anti-predatory program on default rates came 

through this indirect channel. 

Moreover, spillovers of loans from the treatment sample to the control sample violate the 

exclusion restriction because they may have adversely affected the quality of loans originated in 

the control sample. Such spillovers could have happened along three dimensions: spatial, crosssectional, 

and temporal. First, potential purchasers could have moved from the treated area to 

surrounding areas (most likely to the control zip codes, as they have similar characteristics). 

Figure 2a presents the volume of applications in the treated zip codes and the control sample zip 

codes, per state-licensed lenders (treated) and non-state-licensed lenders (not treated). Figure 2b 

17

presents similar analysis for originated mortgages. The figures show no apparent spillover in 

volume. Second, borrowers could have shifted to lenders in the treated area that were not subject 

to the legislation, i.e., non-state-chartered lenders. However, again Figures 2a and 2b do not 

show evidence of such a move. One possible explanation for the lack of spillover is that the 

market was segmented and state-licensed lenders and non-state-licensed lenders serviced 

different populations (subprime and prime borrowers, respectively). Third, there is the possibility 

of a run-up in mortgage applications in the treated area before the starting date of the program 

(which was known in advance). Figures 2a and 2b do suggest some buildup in applications and 

approvals before the onset of HB4050. They also show a minor tick-up immediately after the 

termination of the program, in March 2007. Potentially this is a spillover effect, and these loans 

could have been originated during the legislation period. 

We argue that both violations of the exclusion restriction assumption cause our estimates 

of the effect of predatory lending on borrower default rates to be overstated. If the program 

affected default rates through the education channel, then we cannot ascribe the entire measured 

effect to the elimination of predatory lending. Further, if there were spillovers, then the credit 

quality of the control group is worse than it would be otherwise, creating a greater spread in 

default rates between the treated and control groups. 

In a similar vein, it is likely that the legislation had an effect not only on predatory 

lending, but also on merely “aggressive” lending practices that pushed the boundaries of legally 

permissible behavior without violating them. In this case, the effect that we attribute to predatory 

lending should be ascribed to both predatory and aggressive lending practices. With the 

exception of our analysis in Section 6, distinguishing between the two types of practices is 

difficult. Nevertheless, this limitation also bounds our results from above. Even if we overstate 

the number of predatory loans eliminated by the pilot, our results show that the effect on default 

rates is relatively small. 

A second issue is whether the effects of predatory lending measured in the context of the 

HB4050 legislation can be extrapolated to the national level. There are several reasons to be 

18

skeptical of this. The treatment area was characterized by high delinquency rates due, 

supposedly, to predatory lending. This lending was done by a particular subset of financial 

intermediaries who were readily identifiable and subject to state regulation. The penalties for 

noncompliance were fairly harsh, partially because of lack of clarity regarding enforcement. All 

of these factors are unlikely to hold for the country as a whole, limiting the effect of such 

regulatory intervention. Furthermore, the limited geographic scope of HB4050 made it relatively 

easy for lenders to exit, whether because of high compliance costs or for the strategic goal of 

highlighting the contractionary effects of the pilot on credit availability. This amplified the effect 

of the pilot but would not be applicable at the national level. For all of these reasons, it is likely 

that our estimates are an upper bound for the effect of predatory lending. 

4. The Effects of HB4050 on Predatory Lending 

As described above, the legislation disrupted mortgage markets by changing the loan 

origination process for certain borrowers and products. This section empirically evaluates its 

effect on loan volumes, borrower and mortgage characteristics, and lender participation. 

4.1. Impact of the Legislation on Application and Mortgage Volumes 

We measure mortgage market activity by the volume of loan applications and loan 

originations captured in the HMDA database. 20 Figure 2a depicts the total number of loan 

applications in the treated zip codes (the solid line) and in the control zip codes (the dashed line). 

This information is reported in two panels that further subdivide applications reported by statelicensed 

lenders (who are subject to the legislation) and all other lenders (labeled exempt). 

There is a precipitous decline in loan applications among state-licensed mortgage lenders 

in HB4050 zip codes around the time the regulation became effective (September 1, 2006). For 

these lenders, the application volume dropped from 5,276 in August 2006 to 3,584 in September 

20 We count all relevant HMDA records that have one of the following action codes: originated, denied, approved 

but not taken, withdrawn, or incomplete. 

19

(32% decline), and to 2,275 in October. We observe some run-up in applications in the treated 

areas prior to the legislation period, though it is much smaller than the subsequent drop. In 

contrast, application levels in control zip codes hold steady through December 2006. Following 

the repeal of HB4050, activity levels in both control and treatment areas converged nearly 

instantaneously; then they plummeted jointly to about half that of the market heyday. For nonstate-licensed 

lenders (chart on the right), we observe no differential effect in the HB4050 and 

control zip codes throughout the period examined. 

We observe similarly striking evidence when examining mortgage originations. In Figure 

2b, the left chart shows mortgage originations for state-licensed lenders. Originations in HB4050 

zip codes collapsed from 2,046 in August 2006 to 785 in September 2006 (a 62% decline) and 

remained at this depressed level until the end of 2006. Their levels completely converged with 

originations in the control zip codes following the termination of the program in February 2007, 

by which time subprime lending activity was grinding to a halt nationwide. Again, we do not 

observe any effects of the legislation for non-state-licensed lenders in either the HB4050 or the 

control zip codes. 

Table 2 presents the triple difference (diff-in-diff-in-diff) analysis of the drop in activity, 

as captured by the HMDA data. We calculate the difference between the number of applications 

before and during the legislation period in HB4050 and control zip codes among state-licensed 

lenders. We then repeat the same calculation for non-state-licensed lenders and calculate the 

difference in the results between the two lender subsets. Panel A focuses on changes in the 

monthly rate of applications. It shows a substantial decline in the treated zip codes relative to the 

controls among state-licensed lenders: 51% versus 14%. In contrast, there is no measurable 

difference in the number of applications to non-state-licensed lenders, which increased 

marginally during the pilot period in both the treated and the control areas. Consequently, the 

difference between changes in treatment and control applications for state-licensed and nonstate-licensed 

lenders is striking at nearly 29%. This leads us to conclude that HB4050 

20

significantly lowered borrower applications for mortgage credit and that its impact was, in fact, 

concentrated among state-licensed lenders. 

Next, we use the same method to estimate relative changes in origination activity. As 

shown in Table 2, Panel B, we find a decrease of 61% in the total number of mortgage 

originations by state-licensed lenders in HB4050 zip codes, with a 68% decline in purchase 

mortgages and a 54% decline in mortgage refinance transactions. As with applications, the drop 

in originations by state-licensed lenders in control zip codes is much smaller. Although there is a 

marginal rise in originations by non-state-licensed lenders, the increase is far too small to 

compensate for losses in credit origination by state-licensed lenders. Overall, the difference in 

the relative decline in total originations by state-licensed lenders in the treatment area and time 

period amounted to 39%. This further underscores our contention that the two sets of lenders 

served different segments of the market. 

In preparation for the default analysis that follows, we also perform a robustness check of 

these results based on the matched sample between the LP data set (which contains default 

information) and the HMDA data. The results are reported in Panel C, and they follow exactly 

the same pattern. The magnitude of the declines, both relative and absolute, is even stronger in 

the matched sample, which is heavily tilted towards state-licensed lenders that originated 

subprime loans. For example, the panel shows a 67% drop in originations among such lenders in 

treated zip codes, relative to a 14% runoff in the control area. 

We also note that the effect of the legislation is more pronounced for refinancing 

transactions relative to purchase mortgages. This result is consistent with Choi (2011), who 

examines the effect of anti-predatory legislation on origination volumes and finds a small effect 

for purchase mortgages and a larger effect for refinancing mortgages. There are two potential 

explanations for this result. First, refinancing activity is often discretionary. In particular, 

borrowers who refinance a loan can often wait or find alternative sources of financing. For 

purchases, however, if a buyer wants to complete the transaction, she usually has to take out a 

mortgage in a timely manner. Second, the HB4050 legislation specified frequent refinancing 

21

transactions as one of the triggers for identifying risky mortgages that would require counseling. 

Therefore, one would expect a greater decline in refinancing transactions. 

In sum, the results show that the legislation had far-reaching effects on the volumes of 

mortgage applications and originated loans. Moreover, these effects were most pronounced in the 

targeted population—state-licensed lenders originating loans for low-FICO-score borrowers. 

4.2. Differential Impact of the Legislation by Borrower and Mortgage Characteristics 

Given that the legislation had a significant effect on mortgage originations, we examine 

whether there was a change in the composition of borrower and mortgage types during the 

treatment period. After all, the pilot effectively increased the cost of originating mortgages to 

low-credit-quality borrowers as well as the cost of originating what were considered risky loans. 

To explore this issue, we use a sample including all mortgages in the LP-HMDA data set 

that were originated in the treatment and control zip codes between 2005 and 2007. The 

dependent variables are borrower and mortgage characteristics. The independent variable of 

interest is the interaction between the HB4050 dummy and the state-licensed lender dummy, 

which takes a value of one if the loan was originated subject to the HB4050 legislation. The 

regressions include month fixed effects interacted with a state-licensed dummy and zip code 

fixed effects interacted with the state-licensed dummy. This specification assures that there are 

fixed effects for each dimension that is differenced out (time, zip code, and type of lender). 

Standard errors are clustered by zip code to account for correlation within geographical areas. 

The regression results in Table 3, Panel A show that the composition of borrowers and 

mortgage types changed significantly following the legislation. Column (1) indicates the average 

FICO score of loans originated in the treated zip codes during the HB4050 period was 7.8 points 

higher. This result is material as it reflects a shift of 0.13 standard deviations in the distribution 

of borrowers (see Table 1, Panel B). Column (2) shows further evidence that the credit quality of 

borrowers increased: the average interest spread declined by 0.43 percentage points—or 0.43 

22

standard deviations. Overall, this evidence suggests that during the treatment period, the 

population of borrowers was of appreciably better credit quality. 

We also observe that the originated mortgages are less likely to fall into risky categories 

as defined by HB4050. In Columns (3) to (8), we examine the change in a variety of mortgage 

characteristics: whether loans are adjustable rate mortgages, have low documentation, are 

classified as risky mortgages by the HB4050 regulation (Category I or Category II), or are 100% 

loan-to-value (LTV), and whether loans are considered “excessively risky” (i.e., mortgages that 

are ARM, no- or low-documentation, interest only, and ≥95% LTV). 

The regressions show that mortgages originated in the treated areas would be considered 

less risky by the legislation on most dimensions. Following implementation of HB4050, ARM 

originations declined by 5.2% (t = 2.60; where the base rate in the control sample is 76%), 

Category I loans declined by 2.6% (t = 1.53; the base rate is 83%), Category II loans declined by 

3.9% (t = 2.78; the base rate is 20%), 100% LTV loans declined by 2.5% (t = 1.39; the base rate 

is 16%), and excessive loans declined by 2.2% (t = 2.00; the base rate is 10%). We do not detect 

a decline in no- and low-documentation loans. 

In Panel B we perform a robustness test for the above results. Here we restrict the sample 

to lenders who did not exit from the HB4050 zip codes during the legislation period. As 

described in greater detail below, we define the “exit group” as lenders who reduced their 

average monthly lending rate by more than 90% relative to the prepilot period. The results show 

that the change in the composition of borrowers and products was independent of lender exit, 

i.e., the quality of borrowers and loans also increased for the remaining lenders. 

Overall, these findings show that new borrowers in the treated group were of better credit 

quality and the originated loans were materially less risky, as defined by the legislation, than 

those in the control group. 

23

4.3. Impact of the Legislation on Lender Exit 

Part of the dramatic drop in loan applications can be traced to a number of muchpublicized 

lender withdrawals from the market. We tackle the question of market exit by 

counting the number of unique lenders filing HMDA reports before, during, and after the 

treatment period in both the treated and control zip codes. To be counted as an active lender in a 

given geographic area, a HMDA-reporting institution must originate at least 10% of its prepilot 

average per month during the pilot period, with at least one origination in every month. 21 Panel A 

of Table 4 summarizes the results of this exercise. Of the 89 active state-licensed lenders in the 

treated zip codes in the prelegislative period (January 2005–August 2006), only 46 continued to 

lend during the treatment period. In a reprise of mortgage origination results, the decline in the 

number of lenders is much greater in the treatment areas, and exit is concentrated among statelicensed 

lenders. 

As noted before, the legislation created some legal uncertainty about the enforceability of 

mortgage contracts in the treated zip codes. This ambiguity by itself may have accounted for the 

strong lender response along the extensive margin. It is also conceivable that exit from HB4050 

areas was a strategic response by lenders determined to emphasize the disruptive nature of this 

high-profile regulation. 

We explore the characteristics of exiting lenders in Panel B of Table 4. Because we want 

to focus on mortgage contract features and performance, we need to work with the LP-HMDA 

data set, which contains fewer lenders. The sample includes 55 lenders that were active in the 

HB4050 zip codes during the prepilot period (January 2005–August 2006). The majority of these 

lenders (43) were state-licensed. We focus on loans originated during calendar year 2005, when 

HB4050 discussions were not prevalent. 

We note that exiting lenders were smaller. They originated mortgages to borrowers with 

somewhat lower credit scores but charged a slightly lower credit spread. A higher share of those 

21 None of the patterns depend on the choice of the threshold level or geographic area. The “every month” condition 

is intended to eliminate lenders that withdrew from HB4050 zip codes during the fall of 2006 after working off their 

backlog of earlier applications. 

24

mortgages had adjustable-rate contracts. They originated a higher share of Category I and II 

loans, but a lower fraction of their loans had no equity (100% LTV). Yet, on net, the 18-month 

default rate on mortgages originated in 2005 is measurably higher for state-licensed lenders that 

ended up exiting HB4050 areas—11.6% versus 10.4% for lenders that continued operating. We 

also note that non-state-licensed lenders in the LP-HMDA sample appear to have had very low 

lending volumes and to have been serving a much higher credit quality population. 

Overall, our results show state-licensed lenders were more likely to exit the HB4050 zip 

codes during the legislation period. These lenders appear to have served a population with lower 

credit quality and to have provided loans that were categorized by regulators as risky. 

5. The Effect of the Anti-Predatory Program on Default Rates 

The previous sections established that the legislation reduced market activity in general, 

and in particular, improved the average credit quality of borrowers, improved the risk profile of 

mortgages, and affected lenders that originated risky loans. From the point of view of the 

legislators, these effects are in line with their objective—to reduce what was perceived to be 

predatory lending activity. 

Given these changes in the market, we now examine the effects of the legislation on 

mortgage performance. The hypothesis that we test is whether lower predatory lending activity 

had a material effect on mortgage default. We measure loan performance by flagging borrowers 

who defaulted on their loans within 18 months of origination. 22 We then estimate a series of 

ordinary least squares (OLS) regressions, as defined in equation (1), in which the set of controls 

includes measures of borrower credit quality (FICO score), contract terms (LTV ratio, interest 

spread, and logged property valuation), and contract type (no- or low-documentation, and 

indicators for Categories I and II). In addition, we include three sets of fixed effects: month 

dummies interacted with a state-licensed lender indicator, zip code dummies interacted with a 

22 A loan is considered defaulted if it is 90+ days past due, in bankruptcy, or in foreclosure or is real-estate owned by 

the lender. 

25

state-licensed lender indicator, and zip code interacted with calendar month. These fixed effects 

control for variation in all three dimensions that define the treatment: zip code, month, and 

lender type. 

We present two sets of base regressions in Table 5, Panels A and B. Panel A uses a 

sample based on all mortgages between 2005 and 2007 originated in the pilot zip codes in 

addition to mortgages in the 12–zip code control group. Panel B uses the same treatment group 

but uses the synthetic control sample of matched loans (as defined in Section 3.3). The 

dependent variable in all regressions is an indicator of loan default within 18 months. In all 

regressions, the variable of interest is an indicator of whether the loan is part of the treatment 

group (i.e., originated by a state-licensed lender during the pilot period in the pilot zip codes). 

In each panel, there are six regression specifications. In Column (1) in each panel, we 

include no controls other than the fixed effects described above. In Column (2), we add controls 

for FICO score and logged loan amount. In Column (3), we add the no/low documentation 

indicator, indicators of whether the loans fall under Category I or Category II, and the LTV 

variable. Columns (4) to (6) repeat the specifications of Columns (1) to (3) but add lender fixed 

effects. 

The results in Table 5, Panels A and B show that when we consider the entire treated 

group, the effects of the legislation on default rates are virtually nonexistent. In Panel A, there is 

no discernible effect. In Panel B, the effect on the treatment loans is negative, but it is 

economically small and statistically insignificant. The magnitude of legislation-related declines 

in default rates is about 1 percentage point (no lender fixed effects) or about 2.5 percentage 

points (with lender fixed effects). The unconditional likelihood of default in the loan-matched 

control sample during the pilot time is 23.8%; hence, the legislation caused a decline in default 

of up to 11% for the treated group. 

In Panels C and D, we present additional specifications of the baseline regressions to 

hone down on drivers of default in different subsamples, focusing on subgroups that are likely to 

exhibit stronger results. Panel C uses a control sample that is based on the 12 control zip codes, 

26

while Panel D is based on the matched synthetic sample. In the first specification, the sample 

includes only subprime borrowers (FICO ≤ 620). In the second specification, the sample is 

restricted to loans originated by state-licensed lenders. The third specification includes only 

loans made to subprime borrowers by state-licensed lenders. The fourth specification is restricted 

even further to state lenders who did not exit from the sample. 

Comparing the results in the different specifications sheds light on the source of the 

decline in default rates. Specifically, the decline in the default rate is steepest in the matched 

synthetic sample that is restricted to the subprime population and state-licensed lenders. It is also 

the only sample in which the improvement in default rates is statistically significant. For this 

population, the decline in default is about 6 to 7 percentage points, out of a base rate of about 

27.2% (third specification in Panel D). This means that the improvement in mortgage 

performance is concentrated in the subprime population. 

To answer the question of whether the decline in default is due to the exit of predatory 

lenders, we compare the third and fourth specifications. The samples used in these specifications 

are the same except that the latter is limited to lenders that continued lending in the treatment zip 

codes during the pilot period. The regressions show that the decline in default dissipates once 

this restriction is imposed. Put differently, we observe no improvement in the performance of 

subprime loans originated by lenders that continued to operate in HB4050 zip codes during the 

pilot period. The juxtaposition of these results leads us to conclude that the decline in default was 

driven by lender exit. 

In Panel E, we provide additional specifications for robustness purposes. The dependent 

variable in these regressions is an indicator of whether the loan defaulted within 36 months (as 

opposed to 18 months earlier). The motivation for this is to verify that our results are not driven 

by a difference in the sensitivity of the explored populations to the financial crisis; a period of 36 

months extends well into the crisis period. Then, we rerun the third and fourth specifications 

from Panels C and D. The results show that that the decline in default mirrors the panels above. 

27

To summarize, our results show that the overall effect of the legislation on mortgage 

default rates in treated areas was relatively minor: a decline of 1 to 2.5 percentage points, for a 

base rate default of 24 to 27 percent. We find, however, that the pilot had a stronger effect on the 

subprime population, for whom the improvement in default rates was statistically and 

economically significant: between 5 and 7 percentage points, for a base rate of default of 27% 

(18% to 26% relative decline). Furthermore, our evidence shows that the decline in defaults was 

driven by lender exit. Hence, these findings suggest the withdrawal from the market of some 

lenders resulted in a measurable improvement in loan performance for those subprime borrowers 

who were able to access the credit market. 

6. Estimating the Default Rate of Predatory Loans 

With estimates obtained in the preceding sections, we can calculate the default rate of 

“predatory” loans, after making some assumptions about loan distribution across markets. In this 

exercise, “predatory loans” are defined as loans that were not originated during the HB4050 pilot 

period, presumably because of the effect of the treatment. Our goal here is to approximate the 

hypothetical default rate of predatory loans. 

We estimate that the default rate on subprime loans that were not originated due to 

HB4050 would have been about 32 percent. We performed this algebraic calculation in the 

following manner: from Table 1, Panel B, we see the default rates in the treated and control 

samples were very similar both before and after the treatment period. It was only during the 

treatment period that they diverged. Thus, assuming they would have been similar without the 

treatment, we can back out the hypothetical default rate for the precluded predatory loans. In the 

synthetic control sample of state-licensed subprime loans, all originated loans during the 

treatment period had a default rate of 26.4 percent (Table 1, Panel B, Column (6)). In the treated 

group, loan activity declined by 53.7% (Table 2, Panel C, state-licensed lenders), and the default 

rate declined by about 7.0 percentage points (Table 5, Panel D, third specification, Columns (4)- 

(6)). Therefore, the “precluded” predatory loans would have required a default rate of 32.4% in 

28

order to reach an average default rate of 26.4%. 23 With this calculation, predatory loans appear to 

have a default rate 6.0 percentage points (32.4% – 26.4%) higher than loans that are not 

predatory. 

It is important to note that the pilot also disrupted mortgage activity outside of the 

narrowly defined subprime segment of the market. Those segments did not realize any gains 

from improved mortgage performance (e.g., Table 5, Panels A and B) but did experience the 

costs of the disruption. 

Because of the assumptions required for the above calculation, we utilize alternative data 

to test for robustness of this estimate using a different methodology. Specifically, we calculate 

the default rate of predatory loans using data provided by one of the HUD counseling agencies 

that collected loan and borrower information as part of the HB4050 mandate. Our sample 

includes 121 loans that we could match to loans in the LP data set. 

During the counseling process, the counselors flagged some loans as potentially being 

predatory. They used three main criteria in making this determination: the loan was priced above 

the market rates, the borrower was thought not to be able to afford the loan, and the loan was 

thought to have fraud indicia (Housing Action Illinois, 2007). We use these flags to measure the 

effect of predatory lending in two empirical settings. 

Our first test compares the performance of loans with predatory flags to those not 

identified as predatory. Table 6, Panel A shows the results. A loan flagged as predatory yet still 

originated had a 6.5 percentage points higher default rate (90+ days delinquent) within 18 

months (Column (1)). This magnitude is very similar to the above calculation of a 6.0 percentage 

point differential in default rates (although it is not statistically different from zero given our 

limited sample size). We also measure the probability of default of the subsample of loans that 

were flagged as having indicia of fraud (as opposed to using the three criteria discussed above). 

We find the default rate differential for these loans to be even higher at 12.3 percentage points 

(Column (3)). 

23 (26.4% - 7.0%) * (100% - 53.7%) + X * 53.7% = 26.4%; X = 32.4%. 

29

An additional question is whether counselors flagged loans as problematic based on 

readily observable information or whether they also relied on soft information collected during 

the counseling sessions. This question is relevant for policy design because if only observable 

information was used in making the predatory designation, the same outcome could have been 

achieved with a specific underwriting protocol and without counselor review. 

To tackle this question, we construct a sample of loans in the control zip codes that are 

matched to the 121 counseled loans for which we have contract and performance data. 

Specifically, we match each counseled loan with up to ten other loans in the control zip codes 

that were originated during the same time period, were originated for the same purpose 

(purchase/refinance), and had similar house prices, adjustable/fixed rate types, leverage, 

documentation levels, interest rates, and FICO scores. 24 Overall, our matched sample includes 

1,048 loans (summary statistics are provided in Table 1, Panel E). If a counseled loan is flagged, 

we give it a “red flag” indicator and similarly tag each of its matched control loans. Assuming 

that the predatory designation was given based on observables only, we would expect to continue 

to see higher default probabilities on all “red flag” loans but not to see any differential impact 

among the “red flag” loans that were actually counseled. 

Table 6, Panel B presents the regression results. Consistent with the previous evidence, 

the regression shows that the “red flag” loans have about a 6 percentage point higher default rate 

than nonflagged loans. The interaction with the counseling indicator suggests that the loans that 

were actually counseled are not materially different from those that were matched to them, which 

is consistent with the idea that loans were flagged based solely on observables. 

We repeat the same exercise with “red flag” defined as only cases of suspected fraud. The 

coefficient on the fraud red flag and its interaction with the counseling indicator (Columns (3)- 

(4)) are positive but very imprecisely estimated. This finding suggests that our loan-matching 

procedure did not match well on the fraud dimension—most likely because indicia of fraud are 

24 More precisely, we include loans that were originated within 31 days of one another and that had house prices 

within $8,000, leverage within 10%, interest rates within 1%, and FICO scores within 20 points. 

30

ased on soft information collected by counselors that is unobservable in the raw mortgage 

servicer data. The results in Panel B indicate that some dimensions of predatory lending, such as 

loan affordability and excessive interest rates, are readily captured with observable data, while 

others such as fraud indicia are not. 

To summarize, this section used multiple methods to measure the default rates of 

predatory loans. The different methods generated strikingly similar estimates: predatory loans 

originated in this period had an 18-month default rate that was about 6 percentage points higher 

than similar loans that were not predatory. 

7. Conclusion 

Whether predatory lending was an important factor in precipitating the subprime crisis is 

one of the key questions in the academic and policy debate about the sources of the crisis and its 

aftermath. The main empirical challenge in answering this question is that it is difficult to 

distinguish predatory loans from nonpredatory loans on an ex ante basis. In general, predatory 

lenders exploit borrowers by having an informational advantage over them. This informational 

advantage is not easily discernible when examining the observable characteristics alone. 

In this study we use an anti-predatory legislative pilot (HB4050) enacted in 2006 in 

Chicago as an instrument for identifying predatory lending. The legislation required certain 

borrowers in ten zip codes in Chicago to seek counseling when they took out a mortgage from 

state-licensed lenders. Following implementation of the pilot, market activity dropped by about 

40%, largely through the exit of lenders specializing in risky loans and through a decline in the 

share of subprime borrowers. Default rates in the subpopulation targeted by the pilot—subprime 

borrowers served by state-licensed lenders—improved by 6 to 7 percentage points, relative to the 

unconditional default rate of 26 percent. We use these estimates to impute a hypothetical default 

rate of about 32 percent on the presumably predatory loans that were not originated due to 

HB4050. We obtain similar estimates using other techniques based on subsamples of loans that 

were counseled and flagged as being predatory. 

31

In interpreting our results, the first thing to note is that the pilot represented a very blunt 

policy tool. Its bluntness reflects the severe informational problems that exist in identifying 

predatory lending. Predatory lending is about unobservable information: lenders engage in 

predatory lending when they exploit borrowers by having superior information about their ability 

to repay the loan (Bond, Musto, and Yilmaz, 2009). Given the ambiguity and subjectivity in 

identifying which loans are predatory and which are not, regulators must resort to rough proxies 

(Litan, 2001). In the case of HB4050, predatory loans were proxied as loans made in the poorer 

parts of the city to borrowers with low credit scores and with a certain risk profile. Of course, 

these proxies are imperfect and therefore may impose costs on lenders who do not make 

predatory loans and on borrowers who are not being exploited. 

The bluntness of HB4050 resulted in severe market disruptions, as it drove about half of 

the state-licensed lenders out of the market, lowered the number of originated mortgages by 

about a third, and imposed high counseling costs on the remaining borrowers and lenders. The 

wide and fairly indiscriminate reach of the pilot also triggered intense public opposition from all 

of the affected parties—communities and lenders alike—ultimately leading to its early 

termination. This response highlights the political difficulties involved in policy interventions in 

an environment with inherently complex incentive structures and asymmetric information held 

by lenders, borrowers, and regulators. 

The pilot did appear to lower default rates among its primary target population— 

subprime borrowers served by state-licensed lenders. Although these improvements in mortgage 

performance were measurable, the default rates among the treated subset of borrowers remained 

alarmingly high. This suggests that potentially predatory lending practices by themselves cannot 

account for the meltdown in the subprime mortgage market. 

Our finding that eliminating bad lenders had a greater impact on mortgage defaults than 

eliminating bad loans also suggests that reckless, rather than predatory, lending practices deserve 

greater scrutiny. Although answering this question is beyond the scope of this paper, these results 

are consistent with recent research that highlights the role of long intermediation chains in 

32

mortgage origination leading up to the crisis. In particular, the majority of lenders subject to 

HB4050 were mortgage banks and brokers that securitized the lion’s share of their loans. Such 

lending practices have been found to be associated with aggressive misrepresentation of 

information throughout the mortgage origination and funding process and with subsequently 

higher defaults (Keys et al., 2010; Jiang, Nelson, and Vytlacil, 2012; Piskorski, Seru, and Witkin, 

2013). In a similar vein, our finding that borrowers often chose to pursue bad loans in spite of 

(justified) warnings from counselors brings up questions of the role played by the borrowers 

themselves. These results join the body of literature showing that reckless lending and 

borrowing, combined with distorted incentives of intermediaries, were at the heart of the 

subprime crisis (e.g., Ben-David, 2011; Agarwal and Ben-David, 2013). 

It may be tempting to conduct a back-of-the-envelope welfare analysis by linking the 

estimates of reductions in defaults with the costs of such defaults and of the counseling itself. 25 

However, doing so fails to take into account a number of important effects—losses in utility 

incurred by excluded borrowers, positive spillovers on neighborhood property values from lower 

defaults, losses from inefficient contract choices that resulted from trying to avoid counseling 

sessions, and so forth. Moreover, evaluating the overall welfare effect of this intervention 

requires weighing the relative costs and benefits accruing to different market participants. 26 It is 

further complicated by various distortions that already exist in the housing market due to unique 

tax treatment, zoning restrictions, and so forth, as well as potential externalities produced by 

individual housing decisions. 

25 For instance, we could have taken the average house value in HB4050 zip codes of $190,000 and assumed a 

deadweight loss from foreclosure of about 30% (Campbell, Giglio, and Pathak, 2011). Based on the estimate of a 

6% higher default rate resulting from predatory lending, the expected benefit from curbing predatory lending would 

be $3,420 (0.06*$190,000*30%) per borrower. Therefore, the pre-borrower net direct benefit (net of counseling fee 

and approximately $100 for the cost of time) would be of approximately $2,000. 

26 Some recent attempts to theoretically model the welfare effects of policy choices in household financial markets 

include Carlin and Gervais (2009); Bolton, Freixas, and Shapiro (2007); and Carlin (2009). 

33

Mandated financial counseling and increased oversight of lenders are important policy 

tools being considered in the wake of the housing market crisis. 27 

Both policies impose 

restrictions on free contracting between borrowers and lenders. As such, they can be expected to 

shrink credit markets, particularly for the financially disadvantaged segments of the population. 

In addition to providing an estimate of the quantitative impact of anti-predatory-lending 

programs, our paper sounds a cautionary note about the difficulties of implementing effective 

policy in an informationally opaque setting with complex and conflicting incentives. 

27 In 2010 Congress passed the Dodd-Frank Act, which created a new Consumer Financial Protection Bureau 

(CFPB) to safeguard consumers from unfair, deceptive, and abusive practices in the financial sector. Among other 

approaches, CFPB is likely to consider increasing access to financial counseling. 

34

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37

Appendix. Media News around the Treatment Period 

The following list of articles reflects the public information and sentiment regarding the HB4050 

program. This list provides brief summaries of the articles. 

July 2005: 

- Governor Blagojevich signs House Bill 4050, which is designed to protects homebuyers from 

predatory lending in Cook County’s at-risk communities and reduce the incidence of 

foreclosures; the project is scheduled to begin January 1, 2006 (U.S. Fed News, July 21, 2005). 

- Mortgage brokers are concerned about the impact of the new legislation on origination business 

January 2006: 

(Origination News, July 1, 2005). 

- HB4050 is postponed due to technical and logistic issues (National Mortgage News, January 9, 

2006). 

March 2006: 

- Mortgage lenders object to HB4050 and argue that its compliance costs may prompt firms to 

August 2006: 

withdraw from the market (Chicago Tribune, March 19, 2006). 

- HB4050 goes into effect on September 1, 2006 (Chicago Tribune, August 20, 2006). 

September 2006: 

- “Mortgage pros fear new state regulations will hurt business” (Chicago Sun-Times, September 

11, 2006) 

- “Critics say counseling requirement amounts to redlining” (Chicago Tribune, September 18, 

2006) 

October 2006: 

- “State mortgage law backfires on most vulnerable homeowners” (Chicago Sun-Times, October 5, 

2006) 

- Governor Blagojevich advertises the “[HB4050] pilot program [as] providing borrowers with 

critical information on home loans and help[ing] state regulators and law enforcement track and 

crack down on dishonest lenders” (October 31, 2006). 

38

November 2006: 

- A group of residents and members of the real-estate community submit a lawsuit against the state 

claiming discrimination. (Chicago Tribune, November 2, 2006) 

- “Governor Blagojevich announces results of increased crackdown on unlicensed mortgage loan 

originators” (US Fed News, November 3, 2006) 

- The Coalition to Rescind HB4050 delivers petitions demanding amendments to HB4050 

(November 6). The Coalition is led by John Paul (president of the Greater Englewood Family 

Taskforce) and Julie Santos (an immigrants’ rights activist). They work towards the final veto 

session before the deadline of December 1, 2006. 

John Paul says, “We are calling our State officials to ‘Get on Board’ and ‘Get on FIRE’ working 

to rescind this discriminatory law and head-off declining property value.” 

Chicago mayoral candidate Dorothy Brown (supports the Coalition) says, “At issue is whether 

HR 4050, the state's pilot program designed to fight predatory lending practices, is meeting its 

objective or whether it is hurting the very people it is supposed to help... [HB4050] makes it 

harder for potential homeowners to get credit in those designated areas.” (South Street Journal, 

November 23, 2006) 

- “Neighborhood Housing Services (NHS) of Chicago, a nonprofit housing organization, and its 

lender partners are providing affordable financing to meet the needs of homebuyers and 

homeowners throughout Chicago and in the House Bill 4050 Pilot Program Area” (U.S. 

Newswire, November 6, 2006) 

- Critics say the counseling requirement is racist. Julie Santos (Coalition to Rescind HB4050) says 

that the law has made undocumented Hispanic immigrants afraid to buy homes because they 

hesitate to include their legal status in the state program's database. (Chicago Tribune, November 

14, 2006) 

- “Mortgage counseling law draws 2 nd suit.” The suit was filed by three consumers who say they 

have had difficulties buying, selling, or refinancing because of the law and one real-estate agent 

who reports a significant decline in business because of it, according to the federal complaint. 

(Chicago Tribune, November 16, 2006) 

- Mortgage brokers, realtors, home builders, and community groups agree about HB4050: 

“[HB4050] targets and stigmatizes primarily African American neighborhoods” (Chicago Sun- 

Times, November 17, 2006) 

- Under the direction of Governor Blagojevich, Secretary of Financial and Professional Regulation 

(IDFPR) Dean Martinez announces that he will hold a meeting with community leaders, 

legislators, homeowners, and real-estate professionals to discuss ways to improve the pilot 

39

program created by HB4050. (U.S. Fed News, November 20, 2006; Chicago Tribune, November 

28, 2006) 

December 2006: 

- Groups call the mortgage counseling law unfair and unnecessary. Jesse Jackson says the law 

imposes unnecessary burdens for those trying to buy and sell homes in those neighborhoods. 

(Chicago Sun-Times, December 24, 2006) 

January 2007: 

- “Governor Blagojevich shelves predatory-loan program.” Blagojevich releases the following 

statement: “Even though this law was designed to fight predatory loans, it is clear that the 

program may be negatively affecting the communities it is designed to protect.” (Chicago 

Tribune, January 20, 2007) 

- A study by the University of Illinois (Bates and Van Zandt, 2007) reports that home sales 

declined by 30% in the targeted areas relative to comparable areas. (Chicago Tribune, January 21, 

2007) 

March 2007: 

- The State of Illinois revises HB4050 so that it can be implemented throughout Cook County. The 

new program is targeted at first-time homebuyers. (Chicago Tribune, March 23, 2007) 

April 2007: 

- “Community groups argue that they are not sufficiently staffed for the new anti-predatory law” 

(Chicago Tribune, April 5, 2007) 

June 2007: 

- “Mortgage brokers oppose new anti-predatory lending program” (Home Equity Wire, June 15, 

2007) 

November 2007: 

- Governor Blagojevich signs the new anti-predatory bill protecting homebuyers from predatory 

lending. The project is scheduled to begin July 1, 2008. (Chicago Tribune, November 3, 2007) 

40

Table 1. Summary Statistics 

The table presents summary statistics for the data used in the study. Panel A compares demographics (from the 2005 

IRS Statistics of Income ZIP code data and 2000 Census) of the treated zip codes, the control zip codes, and the rest 

of Chicago. Panel B focuses on mortgages originated by state-licensed lenders; it compares means and standard 

deviations of the main variables used in the analysis across the treated zip codes, the control zip codes, and the 

matched loan (synthetic) sample, and across periods of time (pretreatment, during treatment, and post-treatment). 

Panel C presents similar statistics for non-state-licensed lenders. Panel D shows summary statistics (means and 

standard deviations) for non-state-licensed lenders. Panel E presents summary statistics for the variables in the data 

set received from a counseling agency, and for the matched sample for these loans. 

Panel A: Construction of a Control Sample on the Basis of Pretreatment Socioeconomic 

Characteristics (2005 IRS Statistics of Income ZIP code data and 2000 Census data) 

HB4050 zip codes Control zip codes Other Chicago zip codes 

(10 zip codes) (12 zip codes) (31 zip codes) 

Total population 729,980 713,155 1,467,491 

Total number of 2005 tax returns 259,884 244,326 642,281 

Share of minority households* 0.813 0.863 0.416 

Share of blacks 0.534 0.645 0.156 

Share of hispanics 0.282 0.222 0.263 

Share of households below poverty level* 0.200 0.245 0.163 

Average taxable income in 2005 # $31,579 $30,844 $66,004 

Share of households with income < $50,000 in 2005 0.843 0.850 0.714 

Unemployment rate (2000 Census)* 0.136 0.147 0.072 

Yearly change in house price index (HPI) (LP data)° 

2005 10.14% 8.92% 7.59% 

2006 2.36% 1.75% 3.73% 

2007 -7.47% -7.59% -4.57% 

For state-licensed loans originated in 1-12/2005: 

18-month default rate 0.151 0.150 0.089 

36-month default rate 0.276 0.251 0.170 

* population-weighted averages 

# 

weighted by number of 2005 IRS tax returns 

° weighted by number of households 

41

Panel B: State-Licensed Lenders 

Panel C: Non-State-Licensed Lenders 

Table 1. Summary Statistics (Cont.) 

Pre-treatment (1/2005-8/2006) Treatment Period (9/2006-1/2007) Post-treatment (2/2007-12/2007) 

HB 4050 Control Synthetic HB 4050 Control Synthetic HB 4050 Control Synthetic 

Zip codes: 10 12 43 10 12 43 10 12 43 

N 13,321 11,433 13,321 1,089 2,469 1,089 1,016 920 1,016 

FICO 621.75 622.47 623.07 630.11 624.67 629.42 614.68 620.77 618.96 

[60.95] [62.02] [60.05] [59.30] [60.46] [58.11] [56.37] [59.26] [54.85] 

FICO ≤ 620 (0/1) 0.49 0.49 0.47 0.42 0.47 0.42 0.55 0.49 0.50 

[0.50] [0.50] [0.50] [0.49] [0.50] [0.49] [0.50] [0.50] [0.50] 

Interest spread (%) 5.13 5.16 5.09 4.87 5.22 5.04 5.05 5.08 5.09 

[1.08] [1.11] [1.14] [0.84] [0.96] [1.09] [0.76] [0.85] [0.87] 

ARM (0/1) 0.86 0.86 0.87 0.74 0.77 0.80 0.64 0.61 0.63 

[0.35] [0.35] [0.33] [0.44] [0.42] [0.40] [0.48] [0.49] [0.48] 

No/low doc (0/1) 0.43 0.45 0.46 0.41 0.44 0.48 0.35 0.34 0.37 

[0.50] [0.50] [0.50] [0.49] [0.50] [0.50] [0.48] [0.48] [0.48] 

Category I (0/1) 0.89 0.90 0.91 0.82 0.84 0.88 0.72 0.70 0.74 

[0.31] [0.31] [0.29] [0.39] [0.37] [0.33] [0.45] [0.46] [0.44] 

Category II (0/1) 0.16 0.16 0.15 0.13 0.18 0.16 0.11 0.16 0.16 

[0.37] [0.37] [0.36] [0.34] [0.38] [0.36] [0.32] [0.37] [0.37] 

100% LTV (0/1) 0.16 0.15 0.15 0.14 0.15 0.14 0.06 0.05 0.05 

[0.37] [0.35] [0.36] [0.35] [0.36] [0.34] [0.24] [0.22] [0.21] 

LTV (%) 84.70 83.43 84.05 83.92 83.25 83.87 80.60 79.10 79.72 

[12.03] [12.83] [12.35] [12.09] [12.95] [11.81] [12.32] [13.50] [12.47] 

Excessive (0/1) 0.12 0.11 0.12 0.09 0.10 0.10 0.03 0.03 0.03 

[0.33] [0.32] [0.33] [0.28] [0.31] [0.30] [0.17] [0.18] [0.17] 

Defaulted within 18 months (0/1) 0.184 0.187 0.162 0.247 0.285 0.264 0.297 0.291 0.274 

[0.39] [0.39] [0.37] [0.43] [0.45] [0.44] [0.46] [0.45] [0.45] 


[0.47] [0.47] [0.45] [0.50] [0.50] [0.50] [0.50] [0.50] [0.50] 

Pre-treatment (1/2005-8/2006) Treatment Period (9/2006-1/2007) Post-treatment (2/2007-12/2007) 

HB 4050 Control Synthetic HB 4050 Control Synthetic HB 4050 Control Synthetic 

Zip codes: 10 12 43 10 12 43 10 12 43 

N 2,276 1,994 2,276 811 758 811 211 185 211 

FICO 642.78 639.90 645.64 641.77 635.57 643.57 649.71 647.41 651.28 

[61.76] [61.12] [60.56] [61.24] [57.44] [59.49] [63.68] [65.83] [63.32] 

FICO ≤ 620 (0/1) 0.37 0.38 0.35 0.34 0.38 0.33 0.34 0.36 0.32 

[0.48] [0.49] [0.48] [0.47] [0.49] [0.47] [0.47] [0.48] [0.47] 

Interest spread (%) 4.99 5.05 4.72 4.98 5.03 4.80 4.56 4.82 4.28 

[1.39] [1.32] [1.47] [1.22] [1.10] [1.21] [1.30] [1.21] [1.40] 

ARM (0/1) 0.68 0.70 0.72 0.65 0.67 0.70 0.48 0.54 0.55 

[0.47] [0.46] [0.45] [0.48] [0.47] [0.46] [0.50] [0.50] [0.50] 

No/low doc (0/1) 0.46 0.46 0.48 0.47 0.50 0.52 0.48 0.52 0.57 

[0.50] [0.50] [0.50] [0.50] [0.50] [0.50] [0.50] [0.50] [0.50] 

Category I (0/1) 0.86 0.86 0.86 0.77 0.81 0.84 0.74 0.78 0.80 

[0.35] [0.35] [0.34] [0.42] [0.39] [0.37] [0.44] [0.42] [0.40] 

Category II (0/1) 0.39 0.40 0.35 0.19 0.20 0.18 0.36 0.29 0.26 

[0.49] [0.49] [0.48] [0.39] [0.40] [0.39] [0.48] [0.46] [0.44] 

100% LTV (0/1) 0.15 0.14 0.13 0.13 0.13 0.12 0.01 0.04 0.01 

[0.36] [0.35] [0.33] [0.34] [0.34] [0.32] [0.12] [0.20] [0.12] 

LTV (%) 82.94 81.87 82.02 82.95 82.61 82.35 77.59 77.05 77.23 

[13.72] [14.40] [13.47] [13.39] [13.91] [13.37] [13.24] [13.96] [12.09] 

Excessive (0/1) 0.09 0.08 0.09 0.09 0.10 0.09 0.00 0.04 0.03 

[0.29] [0.28] [0.28] [0.28] [0.30] [0.29] [0.07] [0.19] [0.18] 


[0.36] [0.34] [0.32] [0.41] [0.43] [0.40] [0.35] [0.44] [0.39] 


[0.46] [0.45] [0.43] [0.50] [0.50] [0.50] [0.49] [0.50] [0.49] 

42

Table 1. Summary Statistics (Cont.) 

Panel D: Mean and Standard Deviations of Lender-Level Characteristics for State- 

Licensed Lenders in the HB4050 Zip Codes in 6–8/2006 

N 49 

Lender exited during HB4050 (0/1) (>90% decline) 0.51 

[0.51] 

Share of category I loans 0.88 

[0.19] 

Share of category II loans 0.19 

[0.28] 

Share of excessive loans 0.15 

[0.22] 

log(Avg monthly # transactions) -0.16 

[2.07] 

Panel E: Means and Standard Deviations of Counseling Agency Data and Matched Loans 

HB 4050 loans Matched loans 

N 121 1,048 

Counselled 1.00 0.00 

0.00 0.00 

90 days delinquent (18 months) 0.13 0.13 

[0.34] [0.34] 

90 days delinquent (36 months) 0.41 0.28 

[0.49] [0.45] 

Foreclosure (18 months) 0.07 0.10 

[0.26] [0.30] 

Foreclosure (36 months) 0.20 0.21 

[0.40] [0.40] 

Red flag 0.38 

[0.49] 

Red flag (fraud) 0.12 

[0.32] 

Category I 0.84 0.82 

[0.36] [0.38] 

Category II 0.15 0.12 

[0.36] [0.33] 

LTV (%) 78.22 77.38 

[12.80] [13.68] 

Excessive 0.38 0.38 

[0.49] [0.49] 

log(Loan amount) 12.08 12.14 

[0.35] [0.38] 

43

Table 2. Effects of HB4050 on Market Activity: Application and Mortgage Volumes 

The table presents mortgage application and origination statistics for the pre-HB4050, HB4050, and post- 

HB4050 periods. The sample is stratified by lender type (all lenders, state-licensed lenders, and nonstate-licensed 

lenders) and by transaction type (all, purchases, and refinances). Note that the “Purchases” 

and “Refinances” categories do not necessarily add up to the “All” category because some mortgages 

have other purposes, e.g., home improvement. Panel A and Panel B present an analysis of mortgage 

applications using HMDA data. Panel C presents an analysis of mortgage originations using the matched 

LP-HMDA data. Panel D limits the sample to loans to borrowers with FICO scores lower than 620. 

Panel A: The Effect of HB4050 on the Number of Mortgage Applications (HMDA Sample) 

# Applications per Month for State-Licensed Lenders 

All HB4050 zip codes 

All Control zip codes 

All Purchases Refinances All Purchases Refinances 

1/2005-8/2006 4,813 2,201 2,507 4,218 1,949 2,175 

9/2006-1/2007 (HB4050 period) 2,371 1,086 1,238 3,642 1,631 1,937 

2/2007-12/2007 2,136 619 1,453 1,882 593 1,240 

Diff (9/06-1/07 vs. 1/05-8/06) -50.7% -50.7% -50.6% -13.7% -16.3% -11.0% 

Diff-in-diff -37.1% -34.3% -39.7% 

# Applications per Month for Non-State-Licensed Lenders 




1/2005-8/2006 1,676 561 984 1,362 479 780 

9/2006-1/2007 (HB4050 period) 1,808 644 1,000 1,585 615 851 

2/2007-12/2007 1,885 623 1,091 1,585 561 884 

Diff (9/06-1/07 vs. 1/05-8/06) 7.9% 14.7% 1.6% 16.4% 28.6% 9.1% 

Diff-in-diff -8.5% -13.9% -7.5% 

Diff-in-diff-in-diff -28.6% -20.5% -32.2% 

44

Table 2. Effects of HB4050 on Market Activity: Application and Mortgage Volumes (Cont.) 

Panel B: The Effect of HB4050 on the Number of Originated Mortgages (HMDA Sample) 

# Mortgages per Month for State-Licensed Lenders 




1/2005-8/2006 1,803 912 854 1,507 760 716 

9/2006-1/2007 (HB4050 period) 703 294 394 1,245 529 693 

2/2007-12/2007 582 154 406 508 153 339 

Diff (9/06-1/07 vs. 1/05-8/06) -61.0% -67.7% -53.9% -17.4% -30.4% -3.2% 

Diff-in-diff -43.6% -37.3% -50.7% 

# Mortgages per Month for Non-State-Licensed Lenders 




1/2005-8/2006 711 252 409 552 199 315 

9/2006-1/2007 (HB4050 period) 772 261 440 627 222 355 

2/2007-12/2007 722 240 418 586 209 326 

Diff (9/06-1/07 vs. 1/05-8/06) 8.5% 3.4% 7.5% 13.6% 11.9% 12.7% 

Diff-in-diff -5.0% -8.5% -5.1% 


Panel C: The Effect of HB4050 on the Number of Originated Mortgages for Borrowers 

with FICO ≤ 620 (LP-HMDA Sample) 

# Mortgages per Month for State-Licensed Lenders 




1/2005-8/2006 666 278 388 572 237 335 

9/2006-1/2007 (HB4050 period) 218 71 147 494 163 331 

2/2007-12/2007 92 16 76 84 16 68 

Diff (9/06-1/07 vs. 1/05-8/06) -67.3% -74.5% -62.2% -13.6% -31.2% -1.2% 

Diff-in-diff -53.7% -43.3% -61.0% 

# Mortgages per Month for Non-State-Licensed Lenders 




1/2005-8/2006 114 45 68 100 36 64 

9/2006-1/2007 (HB4050 period) 162 57 105 152 51 100 

2/2007-12/2007 19 3 16 17 4 13 

Diff (9/06-1/07 vs. 1/05-8/06) 42.5% 25.1% 54.1% 52.1% 42.2% 57.7% 

Diff-in-diff -9.5% -17.1% -3.6% 


45

Table 3. Effects of HB4050 on Mortgage Characteristics 

The table presents regressions of borrower and mortgage characteristics on the HB4050 indicator. The 

sample used in Panel A includes all lenders. The sample used in Panel B includes only lenders who stayed 

in the market during the treatment period in the HB4050 zip codes. HB4050 is an indicator of whether the 

loan was originated in the treated HB4050 zip codes during the treatment period. FICO is the FICO credit 

score of the borrower. Interest spread measures the interest spread over the same-maturity treasury rate 

(for fixed rate mortgages) or the quoted interest spread (for adjustable rate mortgages). ARM is an 

indicator of whether a mortgage is an adjustable rate mortgage. No/low doc is an indicator of whether the 

loan required no or low documentation. Category I is an indicator of interest-only loans, loans with 

interest rate adjustments within three years, or loans underwritten on the basis of stated income (no/lowdoc 

loans). Category II includes loans with negative amortization or prepayment penalties. 100% LTV is 

an indicator of whether the loan has a 100% loan-to-value ratio. Excessive mortgages are defined by 

HB4050 as mortgages that are ARM, low documentation, interest-only, and ≥95% LTV. Standard errors, 

presented in parentheses, are clustered at the zip code level. *, **, and *** denote statistical significance 

at the 10%, 5%, and 1% level, respectively. 

Panel A: All Lenders 

Interest No/low Category I Category II 100% LTV Excessive 

Dependent variable: FICO spread (%) ARM (0/1) doc (0/1) (0/1) (0/1) (0/1) (0/1) 

(1) (2) (3) (4) (5) (6) (7) (8) 

HB4050 Zip Code 7.842*** -0.429*** -0.052** 0.007 -0.026 -0.039** -0.025 -0.022** 

× State licensed lender (1.933) (0.036) (0.020) (0.017) (0.019) (0.014) (0.018) (0.011) 

Month × State licensed FE Yes Yes Yes Yes Yes Yes Yes Yes 

Zip × State licensed FE Yes Yes Yes Yes Yes Yes Yes Yes 

Observations 36,483 29,367 36,483 36,483 36,483 36,483 36,483 36,483 

Adj. R 2 0.035 0.042 0.057 0.067 0.044 0.041 0.016 0.025 

Panel B: Lenders Who Stayed in HB4050 Zip Codes during the Treatment Period 

Interest No/low Category I Category II 100% LTV Excessive 

Dependent variable: FICO spread (%) ARM (0/1) doc (0/1) (0/1) (0/1) (0/1) (0/1) 

(1) (2) (3) (4) (5) (6) (7) (8) 

HB4050 Zip Code 7.770*** -0.295*** -0.022 0.019 -0.011 -0.043** -0.035* -0.021 

× State licensed lender (1.888) (0.037) (0.023) (0.021) (0.021) (0.016) (0.018) (0.013) 

Month × State licensed FE Yes Yes Yes Yes Yes Yes Yes Yes 

Zip × State licensed FE Yes Yes Yes Yes Yes Yes Yes Yes 

Observations 22,311 17,385 22,311 22,311 22,311 22,311 22,311 22,311 

Adj. R 2 0.042 0.067 0.071 0.072 0.050 0.082 0.022 0.023 

46

Table 4. Exit of Lenders Due to HB4050 

The table presents analysis of lender exit during the HB4050 pilot. Panel A presents statistics about the 

number of lenders in the treatment and control areas during different time periods. Panel B shows 

summary statistics of lenders by whether they stayed or exited the HB4050 zip codes during the antipredatory 

pilot. The statistics presented are based on 55 lenders identified in the matched sample HMDA- 

LP and are based on pre-announcement statistics from January to December 2005. 

Panel A: Number of Lenders Operating in the Treatment and Controls Areas 

# State-licensed lenders # Non-state-licensed lenders 

HB4050 Control Synthetic HB4050 Control Synthetic 

Pre HB4050 (1/2005 - 8/2006) 89 79 87 33 33 35 

HB4050 (9/2006 - 1/2007) 46 63 61 23 27 24 

Post HB4050 (2/2007 - 12/2007) 28 29 30 15 14 18 

Diff (9/06-1/07 vs. 1/05-8/06) -48.3% -20.3% -29.9% -30.3% -18.2% -31.4% 

Diff-in-Diff (Control) -18.4% 1.1% 

Diff-in-Diff (Synthetic) -28.1% -12.1% 

Diff-in-Diff-in-Diff (Control) -19.6% 

Diff-in-Diff-in-Diff (Synthetic) -15.9% 

Panel B: Characteristics of Lenders Who Exited the HB4050 Zip Codes (Based on 2005 

Originations) 

State-licensed lenders Non-state-licensed lenders 

Statistics in Jan-Dec/2005 Stayed Exited Stayed Exited 

# Mortgages (per month) 17.7 11.6 4.8 0.7 

Avg FICO 645.8 639.6 675.5 710.5 

Avg interest spread (%) 4.84 4.73 4.10 3.30 

% Arm (0/1) 74.0% 83.8% 59.2% 50.0% 

% Low doc 45.0% 52.6% 61.3% 100.0% 

% Category I 86.6% 93.0% 81.3% 100.0% 

% Category II 26.8% 29.0% 35.7% 0.0% 

% Default within 18 months 10.4% 11.6% 9.2% 12.5% 

% 100% LTV 22.7% 14.6% 8.9% 0.0% 

% Excessive 11.2% 14.0% 6.6% 0.0% 

# Lenders 21 22 11 1 

47

Table 5. The Effect of HB4050 on Borrower Default 

The table presents regressions of borrower defaults. Panels A and B present baseline regressions. Panels A and C 

use the treatment sample and a control sample based on zip codes with similar demographics. Panels B and D use 

the treatment sample and a control sample based on one-to-one loan matching (the synthetic control sample). Panel 

E uses both control samples. In each panel, there are six regression specifications. In all regressions, we regress the 

default indicator on the treatment dummy with the following: zip code interacted with calendar month, zip code 

interacted with a state-licensed lender indicator, and calendar month interacted with a state-licensed lender indicator. 

These three sets of fixed effects control for variations in all three dimensions that define the treatment: treatment zip 

code, treatment month, and treatment lender group. In Column (1) in each panel, we include no other controls. In 

Column (2), we include controls for FICO score and logged loan amount. In Column (3), we include a no/low 

documentation indicator, indicators of whether the loan is Category I or Category II, and an LTV variable. Columns 

(4) to (6) repeat the specifications of Columns (1) to (3) but add lender fixed effects. The dependent variable is an 

indicator of borrower default (within 18 or 36 months). Default is defined as a 90-day delinquency. HB4050 is an 

indicator of whether the loan was originated in the treated HB4050 zip codes during the treatment period. FICO/100 

is the FICO credit score of the borrower (divided by 100). No/low doc is an indicator of whether the loan required no 

or low documentation. Category I is an indicator for interest-only loans, loans with interest rate adjustments within 

three years, or loans underwritten on the basis of stated income (no/low-doc loans). Category II includes loans with 

negative amortization or prepayment penalties. The tables also show statistics about the default rate in the control 

group. Standard errors, presented in parentheses, are clustered at the zip code level. *, **, and *** denote statistical 

significance at the 10%, 5%, and 1% level, respectively. 

Panel A: All LP-HMDA Loans; HB4050 Loans and Control Sample 

Sample: 

Dependent variable: 

Default rate for the control group during pilot: 

All mortgages, 2005-2007; Control is based on 12 zip codes 

Default within 18 months (0/1) 

0.274 

(1) (2) (3) (4) (5) (6) 

HB4050 Zip × Month × Lender 0.010 0.009 0.008 0.001 0.000 0.002 

(0.025) (0.024) (0.023) (0.028) (0.027) (0.026) 

FICO/100 -0.045*** -0.071*** -0.044*** -0.068*** 

(0.006) (0.005) (0.006) (0.005) 

log(Loan amount) 0.167*** 0.098*** 0.152*** 0.094*** 

(0.015) (0.016) (0.014) (0.015) 

No/low doc 0.048*** 0.047*** 

(0.007) (0.007) 

Category I 0.059*** 0.060*** 

(0.007) (0.007) 

Category II -0.016** -0.021** 

(0.005) (0.007) 

LTV 0.003*** 0.003*** 

(0.000) (0.000) 

Zip code FE x Month FE Yes Yes Yes Yes Yes Yes 

Zip code FE x State-licensed FE Yes Yes Yes Yes Yes Yes 

Month FE x State-licensed FE Yes Yes Yes Yes Yes Yes 

Lender FE No No No Yes Yes Yes 

Observations 36,483 36,483 36,483 36,483 36,483 36,483 

Adj. R 2 0.043 0.064 0.082 0.059 0.077 0.092 

48

Table 5. The Effect of HB4050 on Borrower Default (Cont.) 

Panel B: All LP-HMDA Loans; HB4050 Loans and Loan-Matched Sample 

Sample: 

Dependent variable: 

Default rate for the control group during pilot: 

All mortgages, 2005-2007; Control is based on loan matching 

Default within 18 months (0/1) 

0.238 

(1) (2) (3) (4) (5) (6) 

HB4050 Zip × Month × Lender -0.009 -0.013 -0.011 -0.026 -0.029 -0.022 

(0.025) (0.025) (0.025) (0.030) (0.030) (0.029) 

FICO/100 -0.050*** -0.077*** -0.049*** -0.073*** 

(0.006) (0.005) (0.006) (0.005) 

log(Loan amount) 0.153*** 0.087*** 0.139*** 0.085*** 

(0.016) (0.016) (0.015) (0.015) 

No/low doc 0.047*** 0.046*** 

(0.006) (0.006) 

Category I 0.058*** 0.060*** 

(0.006) (0.007) 

Category II -0.011* -0.015* 

(0.005) (0.006) 

LTV 0.003*** 0.003*** 

(0.000) (0.000) 

Zip code FE x Month FE Yes Yes Yes Yes Yes Yes 

Zip code FE x State-licensed FE Yes Yes Yes Yes Yes Yes 

Month FE x State-licensed FE Yes Yes Yes Yes Yes Yes 

Lender FE No No No Yes Yes Yes 

Observations 37,448 37,448 37,448 37,448 37,448 37,448 

Adj. R 2 0.039 0.058 0.075 0.054 0.070 0.084 

49


Panel C: Default Regression with Sample Limited to Low FICO Score; Control Zip Codes 

(1) (2) (3) (4) (5) (6) N Default rate for control 

FICO≤ 620 loans by state-licensed & non-state-licensed lenders 

Treatment -0.008 -0.006 -0.012 -0.038 -0.034 -0.033 16,967 0.257 

(0.043) (0.043) (0.041) (0.041) (0.040) (0.039) 

Adj. R 2 0.028 0.043 0.058 0.039 0.051 0.065 

All loans by state-licensed lenders 

Treatment -0.034 -0.035 -0.028 -0.036 -0.038 -0.029 30,248 0.285 

(0.020) (0.021) (0.019) (0.023) (0.023) (0.022) 

Adj. R 2 0.038 0.058 0.076 0.049 0.066 0.082 

All FICO≤ 620 loans by state-licensed lenders 

Treatment -0.045 -0.048* -0.039 -0.048 -0.051* -0.041 14,668 0.264 

(0.026) (0.026) (0.025) (0.028) (0.028) (0.027) 

Adj. R 2 0.027 0.040 0.056 0.034 0.045 0.060 

All FICO≤ 620 loans by state-licensed lenders that did not exit 

Treatment -0.027 -0.031 -0.020 -0.033 -0.036 -0.027 8,583 0.204 

(0.028) (0.027) (0.026) (0.028) (0.027) (0.026) 

Adj. R 2 (0.026) 0.043 0.061 0.031 0.047 0.064 

Panel D: Default Regression with Sample Limited to Low FICO Score; Synthetic Control 


FICO≤ 620 loans by state-licensed & non-state-licensed lenders 

Treatment -0.040 -0.039 -0.042 -0.069 -0.065 -0.064 17,080 0.248 

(0.046) (0.047) (0.045) (0.047) (0.047) (0.045) 

Adj. R 2 0.028 0.041 0.055 0.039 0.049 0.062 

All loans by state-licensed lenders 

Treatment -0.038 -0.044* -0.034 -0.043 -0.049* -0.037 30,852 0.264 

(0.023) (0.024) (0.023) (0.025) (0.025) (0.025) 

Adj. R 2 0.040 0.057 0.074 0.050 0.065 0.080 

All FICO≤ 620 loans by state-licensed lenders 

Treatment -0.064* -0.071** -0.059* -0.070** -0.075** -0.064* 14,776 0.272 

(0.032) (0.032) (0.031) (0.034) (0.034) (0.033) 

Adj. R 2 0.028 0.039 0.055 0.036 0.045 0.060 

All FICO≤ 620 loans by state-licensed lenders that did not exit 

Treatment -0.036 -0.042 -0.026 -0.042 -0.047 -0.033 8,529 0.193 

(0.037) (0.036) (0.035) (0.035) (0.034) (0.034) 

Adj. R 2 0.054 0.070 0.093 0.067 0.079 0.099 

50


Panel E: 36-Month Default Regressions 


Control is based on 12 zip codes; All loans by state-licensed & non-state-licensed lenders 

Treatment -0.006 -0.008 -0.009 -0.017 -0.019 -0.017 36,483 0.522 

(0.035) (0.033) (0.032) (0.037) (0.035) (0.034) 

Adj. R 2 0.076 0.106 0.133 0.094 0.118 0.141 

Control is based on 12 zip codes; All FICO≤ 620 loans by state-licensed lenders 

Treatment -0.045 -0.050 -0.036 -0.050 -0.053 -0.039 14,668 0.515 

(0.031) (0.032) (0.030) (0.032) (0.032) (0.031) 

Adj. R 2 0.057 0.077 0.102 0.070 0.086 0.108 

Control is based on loan matching; All loans by state-licensed & Non-state-licensed lenders 

Treatment -0.026 -0.031 -0.028 -0.036 -0.039 -0.031 37,448 0.479 

(0.040) (0.039) (0.038) (0.041) (0.040) (0.039) 

Adj. R 2 0.076 0.099 0.125 0.092 0.111 0.133 

Control is based on loan matching; All FICO≤ 620 loans by state-licensed lenders 

Treatment -0.054 -0.063* -0.045 -0.057 -0.065* -0.048 14,776 0.500 

(0.037) (0.037) (0.035) (0.036) (0.036) (0.034) 

Adj. R 2 0.054 0.070 0.093 0.067 0.079 0.099 

51

Table 6. Measuring the Default Rate of Predatory Loans Using the HB4050 Data Set 

The table presents analysis of a sample of counseled loans (121 loans) and a control sample of loans 

matched from other Chicago zip codes (every counseled loan is matched with up to ten similar loans from 

Chicago). Panel A presents the sample of 121 counseled loans. Panel B presents the sample of 121 

together with the 1,048 matched loans. The dependent variable is an indicator of borrower default within 

18 months. Default is defined as a 90-day delinquency. Red flag is an indicator of whether the counseled 

loan was identified as unaffordable or fraudulent by the HUD-certified counselors. Red flag (fraud) is an 

indicator of whether the counseled loan was identified as having fraud indicia. No/low doc is an indicator 

of whether the loan required no or low documentation. Category I is an indicator for interest-only loans, 

loans with interest rate adjustments within three years, or loans underwritten on the basis of stated income 

(no/low-doc loans). Category II includes loans with negative amortization or prepayment penalties. 

Excessive mortgages are mortgages that are ARM, no/low documentation, interest-only, or ≥95% LTV. 

Standard errors, presented in parentheses, are clustered at the zip code level. *, **, and *** denote 

statistical significance at the 10%, 5%, and 1% level, respectively. 

Panel A: Predatory Loans in the Counseled Sample 

Dependent variable: Defaulted within 18 months (0/1) 

(1) (2) (3) (4) 

Red flag 0.065 0.036 

(0.068) (0.072) 

Red flag (fraud) 0.123 0.111 

(0.106) (0.111) 

No/low doc -0.081 -0.085 

(0.079) (0.079) 

Category I 0.210* 0.224** 

(0.112) (0.111) 

Category II 0.024 0.036 

(0.103) (0.102) 

LTV 0.001 0.002 

(0.003) (0.003) 

Excessive 0.100 0.066 

(0.207) (0.210) 

log(Loan amount) 0.161 0.144 

(0.124) (0.124) 

Month FE Yes Yes Yes Yes 

Observations 121 115 121 115 

Adj. R 2 -0.046 -0.018 -0.042 -0.010 

52

Table 6. Measuring the Default Rate of Predatory Loans Using the HB4050 Data Set 

(Cont.) 

Panel B: Comparing the Counseled Sample to a Comparable Sample in the Control Zip 

Codes (18-Month Default Rate) 

Dependent variable: Defaulted within 18 months (0/1) 

(1) (2) (3) (4) 

Red flag 0.061* 0.063* 

(0.036) (0.037) 

Counseled × Red flag -0.011 

(0.065) 

Red flag (fraud) 0.061 0.055 

(0.075) (0.075) 

Counseled × Red flag (fraud) 0.051 

(0.102) 

Counseled -0.000 0.004 -0.001 -0.007 

(0.032) (0.041) (0.032) (0.034) 

Month FE Yes Yes Yes Yes 

Observations 1,159 1,159 1,159 1,159 

Adj. R 2 0.012 0.011 0.008 0.007 

53

Figure 1. HB4050 Treatment and Control Zip Codes 

This figure presents a map of the HB4050 treatment area (the shaded area) and the control zip codes (the 

striped area). As described in Section 3.3, the 12–zip code control area is constructed to resemble the 

treatment area in terms of pretreatment socioeconomic characteristics and housing market conditions. The 

socioeconomic variables used for selection include 2005 Internal Revenue Service (IRS) zip code–level 

income statistics, the 2000 Census shares of minority population and of those living below the poverty 

level, and the unemployment rate. Housing market metrics include default rates on mortgages originated 

in 2005 as well as zip code–level means of FICO scores, LTV and DTI ratios, and housing values. All of 

the control zip codes lie within the City of Chicago limits. The 12–zip code control area has about as 

many residents as the treatment area. 

54

Figure 2. HMDA Loan Application Filings 

This figure presents a time series of loan application filings. Figure 2a depicts filings in both the treatment 

and control areas, separating lenders subject to HB4050 and those exempt from it. Figure 2b focuses only 

on the treatment areas, differentiating between lenders that remained active during the mandate period 

and those that exited HB4050 zip codes. The solid vertical lines denote the time during which HB4050 

was in force. 

Figure 2a. Number of Mortgage Applications in HB4050 Zip Codes and in Control Zip 

Codes, per State-Licensed and Non-State-Licensed Lenders 

6,000 

State-Licensed Lenders (subject to HB4050) 

6,000 

Non-State-Licensed Lenders (Exempt from HB4050) 

5,000 

5,000 

Number of Applications 

4,000 

3,000 

2,000 

1,000 

HB4050 zip codes 

Control zip codes 

Number of Applications 

4,000 

3,000 

2,000 

1,000 



0 

0 

Jan-05 

Mar-05 

May-05 

Jul-05 

Sep-05 

Nov-05 

Jan-06 

Mar-06 

May-06 

Jul-06 

Sep-06 

Nov-06 

Jan-07 

Mar-07 

May-07 

Jul-07 

Sep-07 

Nov-07 

Jan-05 

Mar-05 

May-05 

Jul-05 

Sep-05 

Nov-05 

Jan-06 

Mar-06 

May-06 

Jul-06 

Sep-06 

Nov-06 

Jan-07 

Mar-07 

May-07 

Jul-07 

Sep-07 

Nov-07 

Figure 2b. Number of Mortgage Originations in HB4050 Zip Codes and in Control Zip 

Codes, per State-Licensed and Non-State-Licensed Lenders 

2,500 

State-Licensed Lenders (subject to HB4050) 

2,500 

Non-State-Licensed Lenders (Exempt from HB4050) 

2,000 

2,000 

Number of Originations 

1,500 

1,000 

500 



Number of Originations 

1,500 

1,000 

500 


0 

0 

Jan-05 

Mar-05 

May-05 

Jul-05 

Sep-05 

Nov-05 

Jan-06 

Mar-06 

May-06 

Jul-06 

Sep-06 

Nov-06 

Jan-07 

Mar-07 

May-07 

Jul-07 

Sep-07 

Nov-07 

Jan-05 

Mar-05 

May-05 

Jul-05 

Sep-05 

Nov-05 

Jan-06 

Mar-06 

May-06 

Jul-06 

Sep-06 

Nov-06 

Jan-07 

Mar-07 

May-07 

Jul-07 

Sep-07 

Nov-07 


55

Page 154 of 181

Attachment C 

Subprime and Predatory Lending 

In Rural America 

Page 155 of 181

CARSEY 

POLICY BRIEF NO. 4 

C A R S E Y I N S T I T U T E 1 

FALL 2006 

I N S T I T U T E 

Subprime and Predatory Lending in Rural America: 

Mortgage lending practices that can trap low-income rural people 

Predatory lending, which encompasses a range of 

financial practices that are often targeted at lowincome 

individuals and threaten their income and 

assets, is becoming increasingly prevalent in rural 

communities. While predatory lending practices can include 

check-cashing outlets for payday loans, car title loans, refund 

anticipation loans and rent-a-center loans, among others, 1 

this report focuses on predatory practices in the housing 

market. A home is usually a person’s largest investment, 

making home mortgages a prime target for predatory lending. 

Using targeted marketing and promises of “easy credit” 

and “quick cash,” predatory lenders can trap borrowers in a 

cycle of high interest payments, abusive fees and terms that 

can lead to home foreclosures, and ultimately devastate borrowers’ 

financial futures. 

Individuals and communities that have few lending 

options are vulnerable to predatory products. 2 The use of 

these products appears to be growing in rural areas, where 

there are fewer commercial financial banking firms serving 

rural borrowers than in urban counties. 3 Lacking access 

to financial alternatives, rural residents are susceptible to a 

range of predatory financial institutions and products that 

charge excessive fees and diminish their ability to save and 

build wealth. 

This brief examines predatory mortgage loans, which have 

emerged in the expanding subprime mortgage market, looking 

at who is most at risk of being abused by such lending 

practices and where these practices occur. One key finding 

is that rural minorities are more likely than whites to take 

out High APR Loans or “HALs.” The report also details the 

widespread use of HALs to purchase manufactured housing, 

a key component of the rural housing market. A Maine case 

study illustrates the persistence of predatory lending in rural 

communities. The report concludes with recommendations 

to address predatory lending practices at the federal and 

state levels. 

Predatory Mortgage Lending Hurts 

Families 

Children have a better chance for success when they are 

raised in families who own their own home and have stable 

financial assets. When parents or caregivers have little savings 

to fall back on, they may seek assistance from predatory 

lenders, as the story below illustrates. 

Ms. Leah Pyy grew up in Falmouth, Maine in a clam shop 

with no running water, and she always dreamed of owning 

a home. In 1995, she and her husband bought a home for 

themselves and their grandson, who had been living with 

them since 1993. 

“The house means the world to me, especially since it’s a 

safe place for my grandchild to live and play,” Ms. Pyy said. 

She had been in a serious car accident years before that 

left her disabled, and it was not easy for the family to make 

ends meet. After buying the house, the Pyys went into debt 

and fell behind on their house payments. 

“I heard that you could get out of debt by using your 

home equity to pay credit card bills,” Ms. Pyy said, who 

soon found herself ensnared in a predatory mortgage loan. 

“There were a lot of loan papers, a lot of fine print that didn’t 

mean anything to me. We were desperate, and the bank 

seemed to be offering us a way out.” 

They obtained a second mortgage for $31,500 at an interest 

rate of 13.75 percent that cost $4,787 in closing costs. 

As a result of this expensive mortgage loan, the Pyys fell 

deeper and deeper in debt. 

Although she now understands how to avoid predatory 

lending traps, Ms. Pyy continues to receive calls every week 

from mortgage companies that want to lend her more 

money. 

“These days, I know better – but I’m sure they’re reaching 

a lot of others who are desperate, as I was,” Ms. Pyy added. 

Adapted from “Statement of Ms. Leah Pyy, Victim of Predatory 

Mortgage Lending,” presented at Coastal Enterprises, Inc. 

press conference, February 13, 2006.

2 C A R S E Y I N S T I T U T E 

The Subprime Mortgage Market and 


Identifying a Predatory Mortgage Loan 

Predatory mortgage lending includes a range of abusive 

terms and activities, including the following: 

• Excessive points and fees—Points and fees in excess 

of five percent of the total loan amount are considered 

excessive. 

• Prepayment penalties—Penalty fees imposed on 

borrowers who repay all or the majority of a loan before 

a set time period. 

• Loan flipping—Refinancing a mortgage loan without 

conveying a net benefit to the borrower, usually in order 

to extract additional fees and charges. 

• Steering—A borrower is “steered” to take out a higher 

cost loan than they could have qualified for. 

• Financed credit insurance—Financing mortgage 

insurance through a lump-sum payment folded into the 

mortgage loan. 

Adapted from: 

Dickstein, Carla et al., 2006. Predatory Mortgages in Maine: 

Recent Trends and the Persistence of Abusive Lending 

Practices in the Subprime Mortgage Market. Coastal 

Enterprises, Inc., and Center for Responsible Lending. 

Subprime mortgages carry higher costs than prime loans, ostensibly 

to compensate lenders for the added risks imposed 

by borrowers who may be at greater risk to fail to repay their 

loans. In recent years, the subprime mortgage market has increased 

significantly. In 1996, subprime lenders reported $90 

billion in lending. By 2004, the subprime mortgage market 

had grown to $401 billion. 4 

Within the subprime market, loans with interest rates at 

least three percentage points higher than that of U.S. Treasury 

securities of comparable maturity are considered High 

APR Loans (HALs). 5 Examining the prevalence of HALs has 

been difficult, given the lack of consistent data. However, the 

most recent Home Mortgage Disclosure Act (HMDA) 6 data 

provide some important insights into this market. 

Even more costly are what the federal Home Ownership 

Equal Protection Act (HOEPA) defines as “high-cost loans.” 

These loans charge points and fees that are 8 percent or more 

of the mortgage amount (10 percent for second mortgages) 

and interest rates of 8 percent above the U.S. Treasury yield. 

A “high-cost” loan triggers certain consumer protections 

under federal law and under some state laws, such as those 

discussed in the Maine case study included in this brief. 

Subprime lenders avoid making high-cost loans so the actual 

number of loans of this type is negligible. 

Predatory mortgage loans have been defined as those 

loans that (1) charge more in interest and fees than needed 

to cover the associated risk; (2) contain abusive terms and 

conditions (see box); and/or (3) do not take into account the 

borrower’s ability to repay. They often target women, minorities, 

and communities of color. 7 Predatory loans can add a 

great deal to the cost of mortgages, costs most low-income 

borrowers cannot afford. It is important to recognize, however, 

that although predatory loans are concentrated in the 

subprime market, not all subprime loans or even HALs are 

predatory. As subprime lending activity has increased, concern 

over wealth-stripping predatory lending has increased 

as well. 

Predatory loans often contain a consumer-unfriendly prepayment 

penalty, which is assessed if a borrower pays off the 

loan before a specified time has elapsed. Prepayment penalties 

can trap consumers in subprime loans—even if they 

qualify for a lower-cost loan—because they cannot afford the 

prepayment penalty. These penalties drain equity from the 

borrowers when they refinance or sell their homes and create 

an incentive for borrowers to continue paying on loans with 

higher costs than they might otherwise qualify for. 

A B O U T T H E D A T A 

Since 1975, the Home Mortgage Disclosure Act (HMDA) has required that all depository financial institutions that meet a specific asset 

level and are headquartered in a metropolitan area are required to report information on mortgage applications. This geographically 

based dataset provides demographic information on the applicant, the loan disposition, and other characteristics that can be used to 

track lending rates and trends. 

This information brief presents Housing Assistance Council (HAC) tabulations of 2004 Home Mortgage Disclosure Act (HMDA) data. 

For the first time in 2004, HMDA data include interest rate information for approved mortgage loans, providing important insight into 

the subprime lending market. 

While HMDA data are a critical resource to understanding lending trends, the limitations of these data in rural America must be acknowledged. 

Only those depository institutions with assets of $33 million (adjusted to $35 million in 2005) that were headquartered in 

a metropolitan area were required to report HMDA data in 2004. Consequently, an untold number of rural lending data are unavailable, 

as many small, rural financial institutions were not required to report HMDA data. Despite these limitations, HMDA provides the best 

available information on rural lending and high cost mortgage loans.


Some researchers who have analyzed predatory lending 

have characterized it as “redlining in reverse.” 8 The same 

poor and minority communities that were often denied access 

to credit are now being flooded with loan products that 

often strip equity and diminish wealth. Research has shown 

that African American and Hispanic borrowers are more 

likely to receive HALs than similarly qualified white borrowers, 

regardless of income. 9 Steering borrowers to loans with 

higher fees and interest rates than they could qualify for is a 

major component of predatory lending. It has been estimated 

that as many as half of all subprime loan borrowers could 

in fact qualify for conventional rate mortgages. 10 

Rural High APR Lending 

As shown in the HMDA data, among the 555,941 rural 

mortgage loan originations reported in the 2004 HMDA 

data, 17.4 percent, or nearly 97,000, were classified as HALs. 

This was slightly higher than the national and metro rates. 

Further analysis of these data also shows that HALs are 

concentrated in rural areas with chronic poverty, and, often, 

a high proportion of minorities. Figure 1 illustrates the 

location of HALs in rural America as identified in the 2004 

HMDA data. 

As shown in Figure 1, HALs can be found in rural 

counties throughout the U.S., but there are some regional 

differences. Throughout the northeast and the far west, most 

rural counties have high APR lending rates of less than 20 

percent. Rates of high APR lending increase considerably in 

the central and southern regions of the country, particularly 

in rural areas that have historically high rates of poverty and 

racial and ethnic minorities. In almost 500 rural counties, 

nearly all of them in central and southern regions, one-third 

or more of the total mortgage originations were for HALs. 

These higher rates of high APR loans occur overwhelmingly 

in Persistent Poverty Counties. Figure 2 shows the location 

of Persistent Poverty Counties—those counties that have 

had poverty rates of 20 percent or more for the last three 

decades. 

Connected to these issues of location are issues of race 

and ethnicity. As the map shows, concentrations of HALs 

can be found across the Mississippi Delta region, in counties 

with Native American reservations and poor Hispanic- 

American communities, and in some Appalachian communities. 

Half of the counties with significant rates of higher 

cost loans –30 percent or more – are counties with minority 

populations of 33 percent or more. 

Rural America tends to be more racially and ethnically 

homogenous than the rest of the nation. Less than one-fifth 

of rural residents are minorities and 11 percent of all rural 

homeowners are minorities. As in urban areas, minorities 

in rural America receive a disproportionate share of HALs. 

Although, rural minorities account for less than 9 percent 

Table 1. 2004 High APR Mortgage Loan Originations, 

HMDA 

Total Loans 

High APR Mortgages 

# % 

Urban 5,243,959 810,934 15.5% 

Rural 555,941 96,897 17.4% 

National 5,799,900 907,831 15.6% 

Source: HAC tabulations of 2004 HMDA data. 

Figure 1: Map of High APR Lending 

Source: HAC tabulation of 2004 HMDA data. 

Figure 2: Map of Persistent Poverty Counties 

Source: Map prepared by ERS from U.S. Census Bureau data.


Figure 3. HALs by Race and Ethnicity 

Source: HAC tabulations of 2004 HMDA data 

of all rural HALs, minorities were much more likely to 

receive HALs than Whites. The proportion of HALs for rural 

minorities far exceeds that for rural non-Hispanic Whites. 

As shown in Figure 3, slightly less than one-third of all rural 

Latino and Native American borrowers received HALs in 

2004. Almost half (46.5 percent) of all rural African-American 

borrowers received a HAL. In comparison, less than 17 

percent of rural non-Hispanic White borrowers received 

high APR mortgage loans as reported by HMDA. 

Manufactured Housing 

Figure 4. Percent of rural property type with high cost loan 

One housing sector in rural America that is particularly tied 

to high APR lending is manufactured housing, which represents 

15 percent of the rural housing stock. 

The vast majority of manufactured housing continues to 

be financed using personal property loans, which do not 

have the same consumer protections as mortgage loans. Personal 

property loans allow borrowers to purchase a manufactured 

home with little or no down payment; however, the 

rates and terms are often significantly higher than conventional 

mortgages. 

Lenders that do make mortgage loans for manufactured 

homes impose stricter underwriting standards than do 

personal property lenders. Many mortgage lenders require 

manufactured homes to be placed on permanent foundations 

and on land that is privately owned. These requirements 

may be beneficial to the borrower in the long run but 

often increase the initial cost of the home. 

For those rural residents who took out a real estate loan, 

as reported in HMDA data, to purchase their manufactured 

homes in 2004, 50.7 percent received HALs (See Figure 4). 

The Effects of Predatory Lending in 

Rural Communities 

The Center for Responsible Lending (2001) estimates that 

predatory mortgage lending practices cost borrowers at 

minimum $9.1 billion annually. a It has been demonstrated 

that certain loan term characteristics (e.g. balloon payments 

and prepayment penalties) substantially increase the likelihood 

of foreclosure, and can jeopardize homeownership 

for those homeowners. b While there has been little research 

on the impact of predatory lending in rural communities, 

several studies have demonstrated the financial and physical 

impact predatory mortgage loans have on central city residents 

and neighborhoods. In addition to stripping the equity 

of individual homeowners and charging the most in terms of 

interest and fees to those who can least afford it, predatory 

mortgages can have significant community impacts as they 

can lead to increased foreclosures and vacant housing units 

(ACORN 2000). 

Research has shown that rural borrowers are more likely 

than those in urban areas to be subjected to prepayment 

penalties. 12 One study showed that in 2002, rural subprime 

borrowers were six percent more likely than urban borrowers 

to have a loan that included a prepayment penalty with 

a term of at least two years (CRL 2004). More tellingly, rural 

subprime borrowers were 20 percent more likely in 2002 to 

take out a mortgage with a prepayment penalty carrying a 

term of five or more years than urban borrowers. 

Overall, 63 percent of rural subprime mortgage loans 

imposed a prepayment penalty on borrowers with a twoyear 

penalty period. And 39 percent of all rural subprime 

mortgages studied had pre-payment penalties carrying terms 

of three years or longer (CRL 2004). 

Source: HAC tabulations of 2004 HMDA data 

a 

Eric Stein. 2001. Quantifying the Economic Cost of Predatory Lending. 

Center for Responsible Lending, Durham, NC. 

b 

Quercia, Stegman, and Davis. 2005. The Impact of Predatory Loan Terms 

on Subprime Foreclosures: The Special Case of Prepayment Penalties and


Conclusion and Recommendations 

A home is the most valuable asset for most low-income 

rural residents, as it is for most Americans. Predatory loans 

diminish the value of homeownership because they strip 

equity and undermine families’ ability to build assets. As 

discussed, although rural residents receive HALs at only 

slightly higher percentages than urban homebuyers, in rural 

areas, minorities are significantly more likely than whites to 

receive these loans. 

To protect the benefits of homeownership, national and 

state officials should adopt and enforce policies that better 

regulate supprime lending terms, monitor lending and 

real estate practices in this growing sector, and educate and 

protect borrowers. 

Needed Federal Action 

The Homeownership and Equity Protection Act (HOEPA), 

which passed in 1994, applies to all lenders in all states, 

while preserving the authority of individual states to enact 

laws that provide more rigorous consumer protections. 13 

Recent attempts to pass new anti-predatory legislation at 

the federal level are conflicted over preserving state control 

versus creating uniform federal standards that preempt state 

law. 

The mortgage industry has pushed strongly for uniform 

standards and federal preemption of state laws – focusing 

on H.R. 1295, sponsored by U.S. Reps. Bob Ney and Paul 

Kanjorski. Although the industry argues that complying with 

a myriad of state laws is costly, research by the Center for 

Responsible Lending has shown the cost of such compliance 

to be approximately $1 per mortgage transaction. 14 

Many advocates for low and moderate income families 

support a strong federal law that does not preempt stronger 

state laws; one example cited is H.R. 1182, sponsored by U.S. 

Reps. Brad Miller, Melvin Watt and Barney Frank. These 

groups argue that states need the ability to change their laws 

quickly to respond to changing markets and stamp out abusive 

practices that may differ from state to state. 

The Center for Responsible Lending has made recommendations 

to address unfair lending to racial and ethnic 

minorities in both rural and urban areas. Those recommendations 

call for stricter oversight of yield spread premiums, 

which encourage mortgage brokers to steer borrowers into 

subprime loans; requiring lenders and brokers to offer only 

loans that are suitable and reasonably advantageous for 

a given borrower; giving regulators wider authority and 

adequate resources to fully enforce fair lending laws; and 

creating incentives and new policies to ensure that minority 

borrowers are fairly served. 15 

Policymakers should also consider the following recommendations: 

• In addition to anti-predatory lending laws, Congress 

should consider strengthening the Community Reinvestment 

Act. CRA has been a critical tool used by local communities 

to encourage and increase access to affordable 

lending products. More effective use of the CRA process 

in rural communities and a strengthening of the law 

could result in more affordable lending products targeted 

to rural borrowers and less reliance on subprime products. 

• Government agencies, including the U.S. Department of 

Housing and Urban Development, private lenders, and 

other stakeholders should collaborate to fund, design, 

and implement effective, independent housing counseling 

programs and materials for low-income borrowers 

considering subprime loans. Federal regulators could 

stimulate banks to help fund these activities through the 

Community Reinvestment Act (CRA) examinations or 

through incentives. 16 

• The federal government should require small banks and 

those headquartered in non-metropolitan areas, which 

are now exempt from many reporting requirements 

under HMDA, to comply with proposed new reporting 

requirements in order to provide a full picture of lending 

practices in rural areas. Rural communities would then 

have a better understanding of lending trends and activity 

and would be better prepared to address lending abuses. 

Needed State Actions 

While federal policy can be an important tool to help protect 

borrowers from predatory mortgage lending, it should not 

preempt state policy. In passing anti-predatory legislation, 

some states 17 have closed loopholes in HOEPA and placed 

limits on abusive loans and practices. In general, the state 

laws attempt to: 

• Reduce excessive points and fees that strip equity from 

borrowers. This is usually done by reducing the percentage 

of points and fees (from 8 to 5 percent) that define a 

high-cost loan and trigger additional consumer protections. 

Also, additional fees that are presently not counted 

are included in the total percentage. 

• Provide consumers with additional protections for highcost 

loans, such as requiring mandatory credit counseling, 

prohibiting pre-payment penalties, or prohibiting the 

financing of fees. 

• Require interest rates to reflect the risk of the loan rather 

than upfront points and fees that strip equity from borrowers. 

Interest rates are more transparent to consumers.


• Protect consumers in disputes with lenders. Some states 

prohibit mandatory arbitration, which tends to favor 

lenders; some give borrowers legal protections even if 

their mortgage is sold in the secondary market. 

• Require a net tangible benefit to the borrower in any refinance 

loan. This is designed to prevent loan flipping and 

equity drain through excessive fees. 

Other states should follow the lead of “best practice” states 

such as North Carolina and Massachusetts, and adopt similar 

policies to protect vulnerable homebuyers both in rural 

and non-rural communities in their states. 

References 

Association of Community Organizations for Reform Now 

(ACORN). 2000. “Separate and Unequal: Predatory Lending in 

America.” ACORN: Washington, DC. 

Berenbaum, David. The National Community Reinvestment 

Coalition. 2002. The Myths of Subprime Lending. Rural Voices, 

Spring 2002, p.7. 

Bocian, Debbie Gruenstein, Keith S. Ernst and Wen Li. 2006. 

“Unfair Lending: The Effect of Race and Ethnicity on the Price 

of Subprime Mortgages.” Center for Responsible Lending: 

Durham, NC. 

Bradford, Calvin. 2002. “Risk or Race? Racial Disparities and the 

Subprime Refinance Market.” Center for Community Change: 

Washington, DC. 

Center for Responsible Lending. 2005. “Predatory Payday Lending 

Traps Borrowers.” Center for Responsible Lending: Durham, NC. 

Center for Responsible Lending. 2004. “Rural Borrowers More 

Likely to be Penalized for Refinancing Subprime Home Loans.” 

Center for Responsible Lending: Durham, NC. 

Cedillos, Romano. 2004. “Payday loans: easy, convenient—and 

pricey.” Tucson Citizen. 

Goldstein, Deborah. 1999. “Understanding Predatory Lending: 

Moving Towards a Common Definition and Workable Solutions.” 

Joint Center for Housing Studies of Harvard University: 

Cambridge, MA. 

Housing Assistance Council. 2005. Moving Home. Housing 

Assistance Council: Washington, DC. 

Quercia, Roberto G, Michael Stegman, and Walter Davis. 2005. 

“The Impact of Predatory Loan Terms on Subprime Foreclosures: 

The Special Case of Prepayment Penalties and Balloon Payments.” 

Center for Community Capitalism: Chapel Hill. 

Squires, Gregory D. 2005. “Predatory Lending: Redlining in 

Reverse.” [online]. Available from www.nhi.org/online/issues/139/ 

redlining.html. 

Temkin, Kenneth, Jennifer E. H. Johnson, and Diane Levy. 2002. 

“Subprime Markets, the Role of GSEs, and Risk-Based Pricing.” 

The Urban Institute: Washington, DC. 

U.S. Department of Agriculture. Economic Research Service 

(USDA ERS). 1997. “Credit in Rural America.” Agricultural 

Economic Report No. 749. USDA ERS: Washington, DC. 

Endnotes 

1 

Center for Responsible Lending. 2004. Rural Borrowers More 

Likely to be Penalized for Refinancing Subprime Home Loans. 

Center for Responsible Lending. Durham, NC. 

2 

Goldstein, Deborah. 1999. Understanding Predatory Lending: 

Moving Towards a Common Definition and Workable Solutions. 

Joint Center for Housing Studies of Harvard University: 

Cambridge, MA. 

3 

The Federal Deposit Insurance Corporation reports that while 56 

percent of the nation’s banks are headquartered in nonmetro areas, 

rural counties have an average of 4.33 banking firms compared to 

10.90 for urban counties. See, http://www.ers.usda.gov/publications/RCAT/ract93i.pdf, 

for more information. 

4 

Quercia, Roberto G, Michael Stegman, and Walter Davis. 2005. 

The Impact of Predatory Loan Terms on Subprime Foreclosures: 

The Special Case of Prepayment Penalties and Balloon Payments. 

Center for Community Capitalism: Chapel Hill. 

5 

These data are reported through HMDA using the “rate spread” 

variable. 

6 

The Home Mortgage Disclosure Act (HMDA), enacted by Congress 

in 1975 and implemented by the Federal Reserve Board’s Regilation 

C, requires lending institutions to report public loan data. 

7 

Berenbaum, David. 2002. The National Community Reinvestment 

Coalition. The Myths of Subprime Lending. Rural Voices, Spring 

2002, p.7. 

8 

Squires, Gregory D. 2005. “Predatory Lending: Redlining in 

Reverse.” [online]. Available from www.nhi.org/online/issues/139/ 

redlining.html. 

9 

For the most comprehensive analysis of predatory lending 

targeted to racial and ethnic populations, see Gruenstein, Debbie, 

et al. 2006. Unfair Lending: The effect of Race and Ethnicity on the 

Price of Subprime Mortgages. Durham, NC: Center for Responsible 

Lending. Also see, Association of Community Organizations for 

Reform Now (ACORN). 2000. “Separate and Unequal: Predatory 

Lending in America.” ACORN: Washington, D.C. 

10 

Fannie Mae and Freddie Mac. 2004. Separate and Unequal: 

Predatory Lending in America. ACORN: Washington, DC. 

11 

The data reflect HAC’s analysis of 2004 HMDA data and “rural 

counties” are nonmetro counties. Nonmetro counties refer to places 

defined by the Office of Management and Budget (OMB) as nonmetropolitan 

in 2003. Nonmetropolitan areas are those counties 

that lie outside core based statistical areas.


12 

Center for Responsible Lending. 2004. Rural Borrowers More 

Likely to be Penalized for Refinancing Subprime Home Loans. 

http://www.responsiblelending.org/pdfs/kf-Rural_Borrowers-0904. 

pdf 

13 

These best practice states include North Carolina, New Mexico, 

and Massachusetts. 

14 

Center for Responsible Lending. July 2005. Strong Compliance 

Systems Support Profitable Lending While Reducing Predatory 

Practices. Issue Paper No. 10. Center for Responsible Lending. 

15 

For more information, see the Center for Responsible Lending 

2006 report “Unfair Lending: the Effect of Race and Ethnicity on 

the Price of Subprime Mortgages.” This report can be found on the 

Center’s website at: http://www.responsiblelending.org/pdfs/rr011- 

Unfair_Lending-0506.pdf 

16 

The FHLB subsidizes the interest rates for advances (loans) and 

provides direct subsidies to FHLBank System members engaged 

in lending for affordable housing. The 12 FHLBanks reserve 10 

percent of their collective net income or $100 million, whichever is 

greater, for use in the Affordable Housing Program. 

17 

These states include North Carolina, New Mexico, Massachusetts. 

Acknowledgements 

We thank Josh Silver and Jim Campen for their helpful external 

review of this policy brief and Amy Seif of the Carsey Institute, 

Priscilla Salant, and the Hatcher Group for editorial assistance. 

The Carsey Institute appreciates early review by the National 

Community Reinvestment Coalition (NCRC); however, NCRC is 

not responsible for the findings of this research. 

Authors 

Theresa Singleton, Director of Research and Information, Housing 

Assistance Council. Theresa@ruralhome.org 

Lance George, Research Associate, Housing Assistance Council. 

Lance@ruralhome.org 

Carla Dickstein, Senior Vice-President for Research and 

Policy Development, Coastal Enterprises, Inc. cbd@ceimaine.org 

Hannah Thomas, Research Associate, Coastal Enterprises, Inc. 

Hlt@ceimaine.org 

The Housing Assistance Council (HAC), founded in 1971, is a 

nonprofit corporation that supports the development of 

rural low-income housing nationwide. HAC provides technical 

housing services, loans from a revolving fund, housing program 

and policy assistance, research and demonstration projects, and 

training and information services. Coastal Enterprises, Inc. (CEI) is 

a community development finance institution that supports small 

businesses and affordable housing development primarily in Maine 

through financing, technical assistance, and workforce development. 

The Carsey Institute partners with HAC and CEI to provide 

information on predatory lending to policymakers, practitioners 

and the general public.


BUILDING KNOWLEDGE FOR FAMILIES AND COMMUNITIES 

IN THE 21st CENTURY. 

The Carsey Institute at the University of New Hampshire 

conducts independent, interdisciplinary research and 

communicates its findings to policymakers, practitioners 

and the general public. 

Huddleston Hall 

73 Main Street 

Durham, NH 03824 

(603) 862-2821 

www.carseyinstitute.unh.edu 

The Carsey Institute Reports on Rural America are supported 

by the Annie E. Casey Foundation’s initiative to strengthen 

rural families, the Ford Foundation, and the W.K. Kellogg 

Foundation.

The Persistence of Predatory Lending: 


A Case Study from Maine 

Introduction 

In 2005, Coastal Enterprises, Inc. (CEI) and the Center for Responsible 

Lending (CRL) 1 , conducted the first systematic investigation 

of the nature and extent of predatory lending in Maine. 2 The 

impetus for the study was a concern that Maine citizens were not 

receiving the same protections against predatory lending practices 

that are available in other states such as Massachusetts, New Mexico 

and North Carolina. 

The research examined trends in Maine’s subprime mortgage 

market and the characteristics of loans made in Maine from 2000 

through 2005 to determine if they had predatory characteristics. 

A number of data sources were used, including available empirical 

data on the subprime market 3 ; publicly available foreclosure 

records and lien histories; and interviews with various stakeholders 

and borrowers. In addition, the researchers reviewed the relevant 

laws and regulations in Maine’s Consumer Credit Code to answer 

a basic question: Do current laws in Maine provide an appropriate 

framework to regulate subprime mortgage lending, given the lending 

practices revealed by the research? 

Key Findings of Maine’s Subprime Mortgage Market 

Like other parts of the country, Maine’s subprime mortgage market 

has grown dramatically. Between 2000 and 2004, its subprime 

market grew 436 percent by dollar volume. In 2004, it topped 

$1 billion with about 8000 loans. In 2003 subprime loans (excluding 

subprime loans for manufactured housing) were almost 10 

percent of the total Maine mortgage market. Over 30 percent of 

all subprime loans made in Maine by lenders on HUD’s Subprime 

Lender List in 2003 4 were from two out-of-state non-bank lenders, 

Option One Mortgage Corporation and Ameriquest. 

Mainers obtain a higher percentage of their subprime loans in 

the form of cash-out refinances than do borrowers in any other 

state. Between January 2004 and May 2005, 65 percent of the state’s 

subprime mortgage market represented cash-out refinances, 5 which 

is where most abuses in the subprime mortgage market typically 

occur. During the same period, only 28 percent of subprime 

mortgage loans in Maine were used for home purchases, the lowest 

in the nation. This trend is consistent with Maine’s high home 

ownership rate, rising property values in many parts of the state, 

rising consumer debt, pockets of economic distress, and aging 

population—conditions that make it vulnerable to predatory lending 

practices. 

Predatory lending is evident in Maine’s subprime loans. An 

examination of subprime mortgage loans shows the following 

predatory characteristics: 

• Steering. A conservative analysis of data suggests that at least 

15 percent of the subprime mortgages in Maine between 2003 

and 2005 went to families who could have qualified for a less 

expensive loan. 

• Prepayment Penalties with terms greater than 24 months have 

increased, albeit only marginally, since the passage of Maine’s 

2003 anti-predatory lending law from 12 percent of subprime 

originations to 15 percent. 

• Abusive lending terms in subprime foreclosure records. Subprime 

records in four district courts showed loan terms strongly 

associated with predatory lending, including: mandatory 

arbitration (17 percent of records); prepayment penalties (11 

percent); points and fees over five percent; and evidence of flipping. 

In total, at least 26 percent of the records contained one or 

more of the following terms: mandatory arbitration, points and 

fees over five percent, or prepayment penalties. Most records 

did not document loan characteristics, so our findings very 

likely substantially under-report the extent of predatory lending 

characteristics. 

Stakeholders also described extensive debt consolidation driving 

a market for subprime loans with abusive loan terms, aggressive 

sales tactics and equity stripping. Interviewees included mortgage 

brokers, bank and credit union lenders, bankruptcy trustees, 

bankruptcy attorneys, housing counselors and borrowers. Those 

interviewed also noted general concerns about inflated appraisals; 

“bottom feeders 6 “ targeting borrowers in bankruptcy; steering and 

flipping. One of the borrowers interviewed lost about $100,000 in 

equity to predatory practices, and five of the nine borrowers interviewed 

were either in, or had gone through, the foreclosure process. 

Characteristics of Subprime Mortgage Market in Rural 

Maine 

Between January 2004 and May 2005, 52 percent of the Maine 

subprime originations were in rural parts of the state, while only 42 

percent of Maine’s population is rural. Maine ranked fourth in the 

nation for the concentration of subprime mortgage loans in rural 

areas. Maine’s rural counties that are further away from more urban 

areas of southern Maine had higher concentrations of subprime 

mortgage loans as a percentage of total mortgage loans. The highest 

concentrations of subprime loans were in some of the poorest 

rural “rim counties” – Somerset, Washington and Piscataquis. This 

is consistent with the findings that rural communities have fewer 

lending options and are more susceptible to subprime lenders. 

However, the research could not determine whether the high concentration 

of subprime loans in rural areas reflected a higher risk 

for these loans. 

Most of the data that indicate predatory lending characteristics 

of subprime loans are not available by rural areas. What data are 

Table 1: Summary of Multiple Refinances seen in Portland, 

South Paris, Newport and Lincoln County District Courts 

Registries of Deeds Sample 

District Number of Refinances Multiple Total Percentage 

Court lien histories where interest refinances by possible of possible 

reviewed for rate increased subprime flips flips for 

subprime between lender sample 

foreclosures subprime loans 

Portland 30 3 7 10 33 

Lincoln 11 3 1 4 36 

South Paris 20 0 5 5 20 

Newport 15 0 2 2 13

available come from 357 foreclosure and lien records determined 

10 to be Csubprime A R S E Y loans I N 7 Sin Tthree I T Urural T E county courthouses in Lincoln 

County, South Paris, and Newport. Predatory lending characteristics 

evident in these records included excessive points and fees, 

mandatory arbitration clauses, prepayment penalties over two 

years, and multiple refinances that suggest possible flipping 8 of 

loans with no net tangible benefit to the borrower as shown below. 

Conclusion and Recommendations 

Predatory mortgage lending in Maine leads to lost wealth for families 

and, too often, lost homes. A 2001 study estimated that Maine 

lost $23.4 million in 2000 through equity stripping practices. 9 This 

figure does not include foreclosure losses. One out of five subprime 

mortgages originated in 1999 entered foreclosure by 2005, giving 

Maine the highest cumulative rate in New England for that period. 10 

It is not clear how much of that figure is a result of predatory 

mortgage lending, but as cited above, national research has shown 

a higher risk of foreclosure from some predatory mortgage lending 

practices. 

The study found that Maine’s current legal framework fails to 

protect its families from the abusive lending practices identified in 

the research. A so-called anti-predatory lending law passed in 2003 

(PL49) has not provided adequate protections, and in fact legalized 

some of the abusive practices identified in the national Household 

and Beneficial Finance Corporations lawsuit settled by the Maine 

Attorney General in 2003. Additionally, many of the practices 

alleged in the lawsuit such as excessive points and fees, prepayment 

penalties, abusive use of open-ended credit, and flipping are 

largely legal in today’s Maine market. 

Protections against predatory lending could be substantially 

strengthened through state legislative action. Maine regulates 

eighty-nine percent of recognized subprime lenders identified in 

the HUD Subprime Lender List. In addition, Maine regulates all 

mortgage brokers. As such, Maine can draw on the experience of a 

number of best practice states with strong anti-predatory laws, such 

as North Carolina, New Mexico and Massachusetts, to improve its 

legislation and ensure that more Maine families hold on to their 

homes and their hard-earned wealth acquired through home equity. 

A recent study by the Center for Responsible Lending of 28 state 

reforms found that strong state laws are working well to prevent 

predatory lending. Furthermore, borrowers have ready access to 

subprime credit in these states., and borrowers pay about the same 

or lower interest rates for subprime mortgages. 11 Recommended 

changes in Maine’s Consumer Credit Code are as follows. 

Redefine what is meant by “high-cost” loans and provide more 

protections for these loans 

The percentage of points and fees that trigger a “high-cost” loan 

should be reduced, more types of fees must be counted, and open 

ended loans, such as a line of credit, must be subject to the definition. 

Extra protections for “high–cost” loans include mandatory 

credit counseling, prohibiting pre-payment penalties, and prohibiting 

the financing of fees. 

Ensure appropriate recourse for consumers if they have problems 

with their loans 

Mandatory arbitration should be prohibited, thus ensuring that 

borrowers can pursue a dispute with the lender through the court 

system. Assignee liability provisions should be adopted that allow 

borrowers to pursue justice from secondary market lenders who 

buy their loans. 

Require that loans that are refinanced have a net tangible benefit 

to the consumer. 

This provision will prevent loan flipping and stripping of equity 

from borrowers through excessive points and fees. 

These recommendations provide more transparency of the true 

costs of loans to consumers and more protections. None of the 

recommendations prevent a lender from charging whatever points 

or fees or interest rates it considers necessary. If the threshold of a 

high-cost loan is lowered, the lender can still make a loan that exceeds 

the threshold but would trigger additional consumer protections. 

While strong legislation is essential, solving the problem of 

predatory mortgage lending requires complementary efforts such 

as consumer/financial education and better outreach by responsible 

lenders to borrowers who might otherwise fall into the hands of 

predatory lenders. However, such actions will have little impact 

unless they are supported by effective policies to help ensure that 

responsible lenders can compete in Maine. 

Endnotes 

By Carla Dickstein and Hannah Thomas, 

adapted from Dickstein et al (2006). 

1 

CEI, based in Wiscasset, Maine, is a community development corporation 

(CDC) and community development finance institution 

(CDFI). CRL is a subsidiary of Self-Help Community Credit Union 

headquartered n Durahm, North Carolina, which is also a CDFI. 

2 

See Carla Dickstein, Hannah Thomas and Uriah King. 2006. 

Predatory Mortgages in Maine: Recent Trenads and the Persistence 

of Abusive Lending in the Subprime Mortgage Market. Coastal 

Enterprises, Inc., Wiscasset, ME. This study was supported by the 

Annie E. Casey Foundation, Maine’s Attorney General and AARP. 

3 

These included data collected under the Home Mortgage 

Disclosure Act (HMDA), from the Mortgage Bankers’ Association 

and most important, from an industry database that compiles 

self-reported data from the mortgage industry on the characteristics 

of loans, described in Dickstein et al (2006). 

4 

Data is from the HUD 2003 list of subprime lenders. 

5 

A cash-out refinance gives the mortgagor cash back after paying 

off the mortgage , any junior mortgage and settlement costs. The 

cash paid out comes out of the equity in the house and is often used 

to pay off credit card debt. 

6 

These individuals offer to get people out of Chapter 13 bankruptcy 

by refinancing the loan at outrageous terms that homeowners 

cannot afford. In almost every case, the loan leads eventually to 

foreclosure, and the excessive fees charged in this last-ditch refinancing 

strip away any equity the homeowner may have had left in 

the house. 

7 

Subprime loans were determined by the lenders’ inclusion in the 

HUD Subprime Lender List, and in the top 25 list from Inside B 

&C Lending, an industry publication. 

8 

In order to fully assess flipping, we would have to review every 

borrower’s loan documents and loan history. Hence we refer to 

“possible flips.” 

9 

See Eric Stein. 2001. Quantifying the Economic Cost of Predatory 

Lending. Center for Responsible Lending, Durham, NC. 

10 

This finding is from the industry database analysis. Details of this 

database are described in Farris and Richardson, “The Geography 

of Supbrime Mortgage Prepayment Penalty Patterns.” Housing 

Policy Debate 15 (3) 687-714. 

11 

See Wei Li and Keith Ernst. 2006. The Best Value in the Subprime 

Market: State Predatory Lending Reforms. Durham, NC: Center 

for Responsible Lending. This peer-reviewed study used statistical 

analysis to compare states with anti-predatory lending laws to 

states without these laws.

Page 156 of 181


Page 157 of 181


The e-Advocate Quarterly 

Page 158 of 181

Issue Title Quarterly 

Vol. I 2015 The Fundamentals 

I 

The ComeUnity ReEngineering 

Project Initiative 

Q-1 2015 

II The Adolescent Law Group Q-2 2015 

III 

Landmark Cases in US 

Juvenile Justice (PA) 

Q-3 2015 

IV The First Amendment Project Q-4 2015 

Vol. II 2016 Strategic Development 

V The Fourth Amendment Project Q-1 2016 

VI 


Juvenile Justice (NJ) 

Q-2 2016 

VII Youth Court Q-3 2016 

VIII 

The Economic Consequences of Legal 

Decision-Making 

Q-4 2016 

Vol. III 2017 Sustainability 

IX The Sixth Amendment Project Q-1 2017 

X 

The Theological Foundations of 

US Law & Government 

Q-2 2017 

XI The Eighth Amendment Project Q-3 2017 

XII 

The EB-5 Investor 

Immigration Project* 

Q-4 2017 

Vol. IV 2018 Collaboration 

XIII Strategic Planning Q-1 2018 

XIV 

The Juvenile Justice 

Legislative Reform Initiative 

Q-2 2018 

XV The Advocacy Foundation Coalition Q-3 2018 

Page 159 of 181

XVI 

for Drug-Free Communities 


Juvenile Justice (GA) 

Q-4 2018 

Page 160 of 181


Vol. V 2019 Organizational Development 

XVII The Board of Directors Q-1 2019 

XVIII The Inner Circle Q-2 2019 

XIX Staff & Management Q-3 2019 

XX Succession Planning Q-4 2019 

XXI The Budget* Bonus #1 

XXII Data-Driven Resource Allocation* Bonus #2 

Vol. VI 2020 Missions 

XXIII Critical Thinking Q-1 2020 

XXIV 

The Advocacy Foundation 

Endowments Initiative Project 

Q-2 2020 

XXV International Labor Relations Q-3 2020 

XXVI Immigration Q-4 2020 

Vol. VII 2021 Community Engagement 

XXVII 

The 21 st Century Charter Schools 

Initiative 

Q-1 2021 

XXVIII The All-Sports Ministry @ ... Q-2 2021 

XXIX Lobbying for Nonprofits Q-3 2021 

XXX 

XXXI 

Advocacy Foundation Missions - 

Domestic 

Advocacy Foundation Missions - 

International 

Q-4 2021 

Bonus 

Page 161 of 181

Vol. VIII 

2022 ComeUnity ReEngineering 

XXXII 

The Creative & Fine Arts Ministry 

@ The Foundation 

Q-1 2022 

XXXIII The Advisory Council & Committees Q-2 2022 

XXXIV 

The Theological Origins 

of Contemporary Judicial Process 

Q-3 2022 

XXXV The Second Chance Ministry @ ... Q-4 2022 

Vol. IX 2023 Legal Reformation 

XXXVI The Fifth Amendment Project Q-1 2023 

XXXVII The Judicial Re-Engineering Initiative Q-2 2023 

XXXVIII 

The Inner-Cities Strategic 

Revitalization Initiative 

Q-3 2023 

XXXVIX Habeas Corpus Q-4 2023 

Vol. X 2024 ComeUnity Development 

XXXVX 

The Inner-City Strategic 

Revitalization Plan 

Q-1 2024 

XXXVXI The Mentoring Initiative Q-2 2024 

XXXVXII The Violence Prevention Framework Q-3 2024 

XXXVXIII The Fatherhood Initiative Q-4 2024 

Vol. XI 2025 Public Interest 

XXXVXIV Public Interest Law Q-1 2025 

L (50) Spiritual Resource Development Q-2 2025 

Page 162 of 181

LI 

Nonprofit Confidentiality 

In The Age of Big Data 

Q-3 2025 

LII Interpreting The Facts Q-4 2025 

Vol. XII 2026 Poverty In America 

LIII 

American Poverty 

In The New Millennium 

Q-1 2026 

LIV Outcome-Based Thinking Q-2 2026 

LV Transformational Social Leadership Q-3 2026 

LVI The Cycle of Poverty Q-4 2026 

Vol. XIII 2027 Raising Awareness 

LVII ReEngineering Juvenile Justice Q-1 2027 

LVIII Corporations Q-2 2027 

LVIX The Prison Industrial Complex Q-3 2027 

LX Restoration of Rights Q-4 2027 

Vol. XIV 2028 Culturally Relevant Programming 

LXI Community Culture Q-1 2028 

LXII Corporate Culture Q-2 2028 

LXIII Strategic Cultural Planning Q-3 2028 

LXIV 

The Cross-Sector/ Coordinated 

Service Approach to Delinquency 

Prevention 

Q-4 2028 

Page 163 of 181

Vol. XV 2029 Inner-Cities Revitalization 

LXIV 

LXV 

LXVI 

Part I – Strategic Housing 

Revitalization 

(The Twenty Percent Profit Margin) 

Part II – Jobs Training, Educational 

Redevelopment 

and Economic Empowerment 

Part III - Financial Literacy 

and Sustainability 

Q-1 2029 

Q-2 2029 

Q-3 2029 

LXVII Part IV – Solutions for Homelessness Q-4 2029 

LXVIII 

The Strategic Home Mortgage 

Initiative 

Bonus 

Vol. XVI 2030 Sustainability 

LXVIII Social Program Sustainability Q-1 2030 

LXIX 

The Advocacy Foundation 

Endowments Initiative 

Q-2 2030 

LXX Capital Gains Q-3 2030 

LXXI Sustainability Investments Q-4 2030 

Vol. XVII 2031 The Justice Series 

LXXII Distributive Justice Q-1 2031 

LXXIII Retributive Justice Q-2 2031 

LXXIV Procedural Justice Q-3 2031 

LXXV (75) Restorative Justice Q-4 2031 

LXXVI Unjust Legal Reasoning Bonus 

Page 164 of 181

Vol. XVIII 2032 Public Policy 

LXXVII Public Interest Law Q-1 2032 

LXXVIII Reforming Public Policy Q-2 2032 

LXXVIX ... Q-3 2032 

LXXVX ... Q-4 2032 

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The e-Advocate Monthly Review 

2018 

Transformational Problem Solving January 2018 

The Advocacy Foundation February 2018 

Opioid Initiative 

Native-American Youth March 2018 

In the Juvenile Justice System 

Barriers to Reducing Confinement April 2018 

Latino and Hispanic Youth May 2018 


Social Entrepreneurship June 2018 

The Economic Consequences of 

Homelessness in America S.Ed – June 2018 

African-American Youth July 2018 


Gang Deconstruction August 2018 

Social Impact Investing September 2018 

Opportunity Youth: October 2018 

Disenfranchised Young People 

The Economic Impact of Social November 2018 

of Social Programs Development 

Gun Control December 2018 

2019 

The U.S. Stock Market January 2019 

Prison-Based Gerrymandering February 2019 

Literacy-Based Prison Construction March 2019 

Children of Incarcerated Parents April 2019 

Page 166 of 181

African-American Youth in The May 2019 

Juvenile Justice System 

Racial Profiling June 2019 

Mass Collaboration July 2019 

Concentrated Poverty August 2019 

De-Industrialization September 2019 

Overcoming Dyslexia October 2019 

Overcoming Attention Deficit November 2019 

The Gift of Adversity December 2019 

2020 

The Gift of Hypersensitivity January 2020 

The Gift of Introspection February 2020 

The Gift of Introversion March 2020 

The Gift of Spirituality April 2020 

The Gift of Transformation May 2020 

Property Acquisition for 

Organizational Sustainability June 2020 

Investing for Organizational 

Sustainability July 2020 

Biblical Law & Justice TLFA August 2020 

Gentrification AF September 2020 

Environmental Racism NpA October 2020 

Law for The Poor AF November 2020 

… 

Page 167 of 181

2021 

Biblically Responsible Investing TLFA – January 2021 

International Criminal Procedure LMI – February 2021 

Spiritual Rights TLFA – March 2021 

The Theology of Missions TLFA – April 2021 

Legal Evangelism, Intelligence, 

Reconnaissance & Missions LMI – May 2021 

The Law of War LMI – June 2021 

Generational Progression AF – July 2021 

Predatory Lending AF – August 2021 

… 

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The e-Advocate Quarterly 

Special Editions 

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Social Media for Nonprofits October 2017 

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The Opioid Crisis in America: January 2018 

Issues in Pain Management 

The Opioid Crisis in America: February 2018 

The Drug Culture in the U.S. 

The Opioid Crisis in America: March 2018 

Drug Abuse Among Veterans 

The Opioid Crisis in America: April 2018 

Drug Abuse Among America’s 

Teens 

The Opioid Crisis in America: May 2018 

Alcoholism 

The Economic Consequences of June 2018 

Homelessness in The US 

The Economic Consequences of July 2018 

Opioid Addiction in America 

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The e-Advocate Journal 

of Theological Jurisprudence 

Vol. I - 2017 

The Theological Origins of Contemporary Judicial Process 

Scriptural Application to The Model Criminal Code 

Scriptural Application for Tort Reform 

Scriptural Application to Juvenile Justice Reformation 

Vol. II - 2018 

Scriptural Application for The Canons of Ethics 

Scriptural Application to Contracts Reform 

& The Uniform Commercial Code 

Scriptural Application to The Law of Property 

Scriptural Application to The Law of Evidence 

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Legal Missions International 

Page 171 of 181


Vol. I 2015 

I 

II 

God’s Will and The 21 st Century 

Democratic Process 

The Community 

Engagement Strategy 

Q-1 2015 

Q-2 2015 

III Foreign Policy Q-3 2015 

IV 

Public Interest Law 

in The New Millennium 

Q-4 2015 

Vol. II 2016 

V Ethiopia Q-1 2016 

VI Zimbabwe Q-2 2016 

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Vol. V 2019 

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The e-Advocate Juvenile Justice Report 

______ 

Vol. I – Juvenile Delinquency in The US 

Vol. II. – The Prison Industrial Complex 

Vol. III – Restorative/ Transformative Justice 

Vol. IV – The Sixth Amendment Right to The Effective Assistance of Counsel 

Vol. V – The Theological Foundations of Juvenile Justice 

Vol. VI – Collaborating to Eradicate Juvenile Delinquency 

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The e-Advocate Newsletter 

Genesis of The Problem 

Family Structure 

Societal Influences 

Evidence-Based Programming 

Strengthening Assets v. Eliminating Deficits 

2012 - Juvenile Delinquency in The US 

Introduction/Ideology/Key Values 

Philosophy/Application & Practice 

Expungement & Pardons 

Pardons & Clemency 

Examples/Best Practices 

2013 - Restorative Justice in The US 

2014 - The Prison Industrial Complex 

25% of the World's Inmates Are In the US 

The Economics of Prison Enterprise 

The Federal Bureau of Prisons 

The After-Effects of Incarceration/Individual/Societal 

The Fourth Amendment Project 

The Sixth Amendment Project 

The Eighth Amendment Project 

The Adolescent Law Group 

2015 - US Constitutional Issues In The New Millennium 

Page 175 of 181

2018 - The Theological Law Firm Academy 

The Theological Foundations of US Law & Government 

The Economic Consequences of Legal Decision-Making 

The Juvenile Justice Legislative Reform Initiative 

The EB-5 International Investors Initiative 

2017 - Organizational Development 

The Board of Directors 

The Inner Circle 

Staff & Management 

Succession Planning 

Bonus #1 The Budget 

Bonus #2 Data-Driven Resource Allocation 

2018 - Sustainability 

The Data-Driven Resource Allocation Process 

The Quality Assurance Initiative 

The Advocacy Foundation Endowments Initiative 

The Community Engagement Strategy 

2019 - Collaboration 

Critical Thinking for Transformative Justice 

International Labor Relations 

Immigration 

God's Will & The 21st Century Democratic Process 

The Community Engagement Strategy 

The 21st Century Charter Schools Initiative 

2020 - Community Engagement 

Page 176 of 181

Extras 

The Nonprofit Advisors Group Newsletters 

The 501(c)(3) Acquisition Process 

The Board of Directors 

The Gladiator Mentality 

Strategic Planning 

Fundraising 

501(c)(3) Reinstatements 

The Collaborative US/ International Newsletters 

How You Think Is Everything 

The Reciprocal Nature of Business Relationships 

Accelerate Your Professional Development 

The Competitive Nature of Grant Writing 

Assessing The Risks 

Page 177 of 181

Page 178 of 181

About The Author 

John C (Jack) Johnson III 

Founder & CEO 

Jack was educated at Temple University, in Philadelphia, Pennsylvania and Rutgers 

Law School, in Camden, New Jersey. In 1999, he moved to Atlanta, Georgia to pursue 

greater opportunities to provide Advocacy and Preventive Programmatic services for atrisk/ 

at-promise young persons, their families, and Justice Professionals embedded in the 

Juvenile Justice process in order to help facilitate its transcendence into the 21 st Century. 

There, along with a small group of community and faith-based professionals, “The Advocacy Foundation, Inc." was conceived 

and developed over roughly a thirteen year period, originally chartered as a Juvenile Delinquency Prevention and Educational 

Support Services organization consisting of Mentoring, Tutoring, Counseling, Character Development, Community Change 

Management, Practitioner Re-Education & Training, and a host of related components. 

The Foundation’s Overarching Mission is “To help Individuals, Organizations, & Communities Achieve Their Full Potential”, by 

implementing a wide array of evidence-based proactive multi-disciplinary "Restorative & Transformative Justice" programs & 

projects currently throughout the northeast, southeast, and western international-waters regions, providing prevention and support 

services to at-risk/ at-promise youth, to young adults, to their families, and to Social Service, Justice and Mental 

Health professionals” everywhere. The Foundation has since relocated its headquarters to Philadelphia, Pennsylvania, and been 

expanded to include a three-tier mission. 

In addition to his work with the Foundation, Jack also served as an Adjunct Professor of Law & Business at National-Louis 

University of Atlanta (where he taught Political Science, Business & Legal Ethics, Labor & Employment Relations, and Critical 

Thinking courses to undergraduate and graduate level students). Jack has also served as Board President for a host of wellestablished 

and up & coming nonprofit organizations throughout the region, including “Visions Unlimited Community 

Development Systems, Inc.”, a multi-million dollar, award-winning, Violence Prevention and Gang Intervention Social Service 

organization in Atlanta, as well as Vice-Chair of the Georgia/ Metropolitan Atlanta Violence Prevention Partnership, a state-wide 

300 organizational member, violence prevention group led by the Morehouse School of Medicine, Emory University and The 

Original, Atlanta-Based, Martin Luther King Center. 

Attorney Johnson’s prior accomplishments include a wide-array of Professional Legal practice areas, including Private Firm, 

Corporate and Government postings, just about all of which yielded significant professional awards & accolades, the history and 

chronology of which are available for review online. Throughout his career, Jack has served a wide variety of for-profit 

corporations, law firms, and nonprofit organizations as Board Chairman, Secretary, Associate, and General Counsel since 1990. 

www.TheAdvocacyFoundation.org 

Clayton County Youth Services Partnership, Inc. – Chair; Georgia Violence Prevention Partnership, Inc – Vice Chair; Fayette 

County NAACP - Legal Redress Committee Chairman; Clayton County Fatherhood Initiative Partnership – Principal 

Investigator; Morehouse School of Medicine School of Community Health Feasibility Study - Steering Committee; Atlanta 

Violence Prevention Capacity Building Project – Project Partner; Clayton County Minister’s Conference, President 2006-2007; 

Liberty In Life Ministries, Inc. – Board Secretary; Young Adults Talk, Inc. – Board of Directors; ROYAL, Inc - Board of 

Directors; Temple University Alumni Association; Rutgers Law School Alumni Association; Sertoma International; Our 

Common Welfare Board of Directors – President)2003-2005; River’s Edge Elementary School PTA (Co-President); Summerhill 

Community Ministries; Outstanding Young Men of America; Employee of the Year; Academic All-American - Basketball; 

Church Trustee. 

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www.TheAdvocacyFoundation.org 

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Predatory Lending

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