When Regulatory Oversight Tightens, Do Mortgages Become Scarcer for Riskier Borrowers?

Among the governmental actions pursued in the wake of the Great Recession, the Dodd–Frank Wall Street Reform and Consumer Protection Act stands out for including measures to protect consumers of financial services. At the time of the act's introduction, a range of disparate federal agencies oversaw consumer financial products, with no single agency having absolute jurisdiction. The Dodd–Frank Act alleviated this lack of centralization by creating a regulatory body dedicated to overseeing consumer financial protection: the Consumer Financial Protection Bureau.

The bureau commenced operations in July 2011, with authority to make rules, examine financial services firms, and enforce actions against firms that violate consumer protection laws. It took its first public action by the following year and has remained active since then; between 2012 and 2019, for instance, its actions led to more than $12 billion in relief payments to consumers.

Not long after the bureau's creation, analysts began debating its benefits and potential drawbacks. Supporters lauded the agency's focused approach to discouraging financial firms from predatory and deceptive practices, while critics feared it would ultimately diminish the supply of consumer credit. In their research paper, "Does CFPB Oversight Crimp Credit?" Andreas Fuster, Matthew Plosser, and James Vickery study both sides of the argument, finding that indeed a trade-off exists between protecting borrowers and reducing the willingness of financial firms to issue loans. They reveal, for instance, that a particularly significant effect of the act — reduced availability of mortgages for riskier applicants — is accompanied by evidence that underperforming loans issued by CFPB-supervised banks (that is, loans that slip into early-stage delinquency) tend to avoid serious delinquency more often than troubled loans issued by nonsupervised banks. It seems plausible, the analysis shows, that banks subject to oversight may have been more likely to help delinquent borrowers avoid foreclosure.¹

As part of their research design, the authors compare loans issued by banks that are subject to oversight (banks with total assets above $10 billion, according to the act) with loans issued by banks that are exempt from oversight (banks with assets below $10 billion). To focus on banks in the neighborhood of the $10 billion threshold, the sample consists of banks with total assets of between $1 billion and $25 billion. 

At the start of CFPB oversight in 2011, the sample includes 48 banks subject to the bureau's oversight and 532 nonsupervised banks. After the 2016 federal election, the sample includes 40 banks subject to oversight and 581 exempt banks.² All told, the data set contains millions of loans issued to borrowers throughout the entire U.S.

Fuster, Plosser, and Vickery find that beginning around the formation of the CFPB, aggregate lending by CFPB-supervised banks did not appear to drop relative to the control group. However, issuance of FHA loans,³ which primarily serve borrowers on the riskier end of the credit spectrum, declined significantly. More specifically, the FHA market share of banks subject to CFPB oversight decreased by somewhere between 4.5 and 5.5 percentage points, or between 11 and 13 percent of their average market share. This trajectory, the researchers say, supports the argument that CFPB oversight was causally related to the drop in FHA lending. (In addition, large banking conglomerates — those that control CFPB-supervised banks as well as nonsupervised financial institutions — sometimes reduced the amount of loans issued by their supervised banks while simultaneously increasing the number of loans issued by their nonsupervised entities. This practice, referred to as regulatory arbitrage, is identified as an additional consequence of regulatory supervision.)

Having described changes in mortgage issuance soon after the CFPB's formation, the paper explores mortgage lending after the 2016 federal election, a period of less active oversight during which, among other developments, enforcement actions declined and the CFPB's staffing levels were reduced. In this environment of less active CFPB scrutiny, the authors ask, did lending activity pick up at supervised firms? To answer this question, they again track lending trends between CFPB-supervised banks and nonsupervised banks, finding that supervised banks made substantially more loans during the postelection period than before the election. This change in lending volume suggests that less-strict CFPB oversight led to increased FHA lending, and further supports the conclusion that lending activity was influenced by the regulatory environment in a meaningful way.

Taken together, the pre-election and postelection results reveal a significant link between CFPB oversight and FHA lending. The analysis also shows evidence of the advantages as well as the costs of oversight: Regulatory oversight helped deter deceptive and abusive lending practices, but it also stemmed the supply of credit.

As the largest component of household debt (and as an active source of consumer complaints about financial institutions), the mortgage market makes a natural laboratory in which to study the trade-off between protecting borrowers and maintaining their access to loans. The costs and benefits of regulatory oversight deserve a robust debate, and the findings in "Does CFPB Oversight Crimp Credit?" contribute to the conversation. By showing evidence of a causal link between CFPB oversight and the supply of mortgage loans, the paper fosters a better understanding of how regulation can affect the availability of credit.