Partial Deregulation and Competition: Effects on Risky Mortgage Origination
55 Pages Posted: 8 Apr 2015 Last revised: 3 Mar 2017
Date Written: November 17, 2016
We exploit the OCC's preemption of national banks from state laws against predatory lending as a quasi-experiment to study the effect of deregulation and its interaction with competition on the supply of complex mortgages. Following the preemption ruling, national banks significantly increased their origination of loans with prepayment penalties by comparison with national banks in states without predatory-lending laws. We highlight a competition channel: in counties where OCC-regulated lenders had larger market shares, non-OCC lenders responded by increasing their use of riskier contract features, such as deferred amortization, adjustable rates and interest-only payments, which were not restricted by the state predatory-lending laws.
Keywords: Great Recession, subprime, complex mortgages, credit supply, competition, household debt, preemption rule
JEL Classification: E20, E30, E51, G28
Suggested Citation: Suggested Citation