Prepayment Penalties: Efficieny and Predation

Morgan Rose

No 11-133, UMBC Economics Department Working Papers from UMBC Department of Economics

Abstract: This paper presents evidence that reductions in mortgage interest rates associated with prepayment penalties are greater for riskier borrowers, as measured by mortgage type, credit scores, and local incomes and education levels. This is consistent with an efficiency view that, by reducing the reclassification risk faced by lenders, prepayment penalties can be welfare-improving. Additional findings indicate that prepayment penalties are also used as a predatory lending tool, but that the efficiency view dominates the predatory view in most circumstances. State anti-predatory lending laws restricting the duration and amount of prepayment penalties appear to curb the predatory use of prepayment penalties.

Keywords: prepayment penalties; predatory lending; financial regulation; mortgage crisis; reclassification risk (search for similar items in EconPapers)
JEL-codes: D18 G01 G21 G28 L85 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-10-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.umbc.edu/economics/wpapers/wp_11_133.pdf (application/pdf)

Related works:
Journal Article: Prepayment Penalties: Efficiency and Predation (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:umb:econwp:11133

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in UMBC Economics Department Working Papers from UMBC Department of Economics UMBC Department of Economics 1000 Hilltop Circle Baltimore MD 21250, USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christelle Viauroux ().