Predatory Lending

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
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