Findings from a study on the impact of a predatory-lending law in North Carolina are seen as damaging to the case for tighter regulation of subprime lending, but it is sparking controversy.

The July 24 report by Georgetown University Business School professors Michael E. Staten and Gregory Elliehausen said low-income groups had less access to credit in the nine months that followed the July 1999 enactment of the North Carolina law. It was cited in a Senate Banking Committee hearing two days after the report came out, and the controversy provoked by that testimony from Charles Calomiris was reignited by his op-ed piece in Monday's New York Times.

Mr. Calomiris, a professor of finance and economics at Columbia University Business School, co-authored the article - "Homeownership That's Too Important to Risk" - with Robert E. Litan, a director of economic studies at the Brookings Institution.

The Staten-Elliehausen report, which was commissioned by the American Financial Services Association, said lending by finance companies to people earning less than $50,000 a year waned considerably in North Carolina when compared with levels in South Carolina and Virginia. Originations of first mortgages by nine subprime lenders to North Carolina borrowers earning less than $25,000 dropped almost 50% between the third quarter of 1999 and the second quarter of 2000 - almost five times the percentage drop in South Carolina and over eight times the drop in Virginia.

Mr. Calomiris' testimony at the July 26 Senate hearing on predatory lending was challenged at the hearing by Martin Eakes of the Self Help Credit Union, of Durham, N.C. The activist argued that any lending drop-off could have been caused by North Carolina's worst flood ever, which hit in September of 1999.

The North Carolina law caps interest rates on high-cost loans. Mr. Calomiris calls it a "stealth usury" law designed to circumvent a 1982 federal preemption against states and cities' setting usury ceilings. He said the measure has slowed business in the subprime sector to the detriment of consumers by making it unprofitable for lenders to do business there.

But Mr. Eakes' colleague at the Self Help Credit Union, David Beck, said "there is no way the law had that kind of chilling effect right off the bat." The law, which bans a number of loan characteristics and terms on high-cost loans, did not take effect in full until July of 2000, Mr. Beck said.

From September 1999 to June of 2000 - the period the academics referenced in their report - the only part of the law in effect was a ban on prepayment penalties and on loans over $150,000, Mr. Beck said.

Mr. Staten said his report is not definitive given its timing, but he added that it is reasonable to expect that the law "would impact lender decisions in advance of full implementation." For instance, lenders could have pulled pack on their mail campaigns.

The report relied on an enormous data set, with information on nearly 2.4 million mortgage loans originated or purchased by the subprime units of nine anonymous lenders between July 1, 1995, and June 30, 2000. Together, the lenders make up 35% to 60% of the national subprime market, said Mr. Staten. PricewaterhouseCoopers compiled the data.

Advocates say the data set is another of the report's flaws. Mr. Beck said the information was questionable because it was culled by the trade group and because the lenders were all anonymous. "I assume they handpicked who they wanted to include in that," he said.

Mr. Staten said the lenders represented a substantial part of the subprime market and that PricewaterhouseCoopers did not cherry-pick the loans to produce certain results.

In fact, Randy Lively, president of the American Financial Services Association, a Washington trade group, said the AFSA plans to use the data for several studies on the market.

Nonetheless, Mr. Beck said Home Mortgage Disclosure Act data, which break down lending by borrower characteristics, including race and geographic area, are more reliable. He added that 2000 HMDA data were just recently released.

Mr. Lively said that while HMDA data include loans with specific characteristics, the loans made by the AFSA's members would not hit the triggers for HMDA counting, so it is pointless to compare the two data sets. And he said the consumer activists should come up with better data themselves before criticizing his group.

Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, said he was not bothered by the decline in lending.

"We anticipated some drop-off because we thought some of the lending was unethical," he said. "Perhaps that drop-off is a net benefit to consumers in North Carolina, because you only have clean loans being made and no predatory loans."

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