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Spillover effects of financial deregulation: The unintended consequences of the OCC preemption rule on mortgage lending practices

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  • Wu, Di
  • Sam, Abdoul G.
  • Wang, Xiangrui

Abstract

In 2004, the Office of the Comptroller of the Currency (OCC) adopted a preemption rule that clarified and codified the preemption standards applicable to national banks. This study investigates the impact of the federal preemption of state anti-predatory lending (APL) laws on the lending practices of national banks in the home mortgage market and the overstatement of buyer income on mortgages originated by other lending institutions before the 2008 crisis. Utilizing a triple-difference approach, we find that the rule led to OCC-regulated lenders decreasing income requirements by 2.5% and increasing mortgage supply by 6.7% in states with APL laws. Furthermore, our results indicate that the expansion of OCC lenders following the preemption rule exacerbated the issue of income overstatement on mortgages originated by nonbanks and subprime lenders through the channel of competition. Our research highlights the potential unintended consequences of financial deregulation, emphasizing the need for careful consideration of regulatory changes on market dynamics and financial stability.

Suggested Citation

  • Wu, Di & Sam, Abdoul G. & Wang, Xiangrui, 2024. "Spillover effects of financial deregulation: The unintended consequences of the OCC preemption rule on mortgage lending practices," International Review of Financial Analysis, Elsevier, vol. 95(PC).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pc:s1057521924003946
    DOI: 10.1016/j.irfa.2024.103462
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    More about this item

    Keywords

    OCC preemption; Income overstatement; Anti-predatory lending laws;
    All these keywords.

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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