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Partial Deregulation and Competition: Effects on Risky Mortgage Origination

Author

Listed:
  • 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)

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.

Suggested Citation

  • Marco Di Maggio & Amir Kermani & Sanket Korgaonkar, 2019. "Partial Deregulation and Competition: Effects on Risky Mortgage Origination," Management Science, INFORMS, vol. 65(10), pages 4676-4711, October.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:10:p:4676-4711
    DOI: 10.1287/mnsc.2018.3060
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    References listed on IDEAS

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    3. Thiago Sousa Barros & Julián Cárdenas & Wesley Mendes-Da-Silva, 2021. "The effect of interlocking directorates on mergers and acquisitions in Brazil," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(3), pages 811-839, September.
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    7. Begley, Taylor A. & Purnanandam, Amiyatosh, 2021. "Color and credit: Race, regulation, and the quality of financial services," Journal of Financial Economics, Elsevier, vol. 141(1), pages 48-65.
    8. James Conklin & Moussa Diop & Mingming Qiu, 2022. "Religion and Mortgage Misrepresentation," Journal of Business Ethics, Springer, vol. 179(1), pages 273-295, August.

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