Predatory lending: What does Wall Street have to do with it?

Abstract

Abstract In this article, we examine the contention that the secondary market will exert sufficient market discipline to drive predatory home loan lenders from the subprime marketplace. Using a so‐called lemons model, we identify the potential risks that investors encounter if they buy securities backed by predatory home loans. We then explain how structured finance, deal provisions, pricing mechanisms, and legal protections shield investors from much of the risk that those loans entail. While the secondary market does impose some discipline on the subprime home loan market, it is not enough to bring predatory lending to a halt. We provide rationales for imposing liability on the assignees of predatory loans and describe the parameters of our proposed assignee liability legislation.