Predatory Lending

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