Partial Deregulation and Competition: Effects on Risky Mortgage Origination

Marco Di Maggio (), Amir Kermani () and Sanket Korgaonkar ()
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Marco Di Maggio: Department of Finance, Harvard Business School, Boston, Massachusetts 02163; National Bureau of Economic Research, Cambridge, Massachusetts 02138
Amir Kermani: National Bureau of Economic Research, Cambridge, Massachusetts 02138; University of California, Berkeley, Berkeley, California 94720
Sanket Korgaonkar: Pennsylvania State University, State College, Pennsylvania 16802

Management Science, 2019, vol. 65, issue 10, 4676-4711

Abstract: We exploit the preemption of national banks from state laws against predatory lending by the Office of the Comptroller of the Currency (OCC) 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 relative to national banks in states without anti-predatory-lending laws. We highlight a competition channel: in counties where OCC-regulated lenders had larger market shares, non-OCC-regulated lenders responded by increasing their supply of contracts with riskier features, such as deferred amortization, which were not restricted by the state anti-predatory-lending law. Non-OCC lenders were able to lure borrowers into these higher-margin contracts by increasing their appeal with teaser rates.

Keywords: complex mortgages; credit supply; preemption rule (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (12)

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