Ditching the Middle Class with Consumer Protection Regulation
58 Pages Posted: 1 Oct 2016
Date Written: September 29, 2016
Abstract
We analyze the effects of a recent piece of consumer-protection regulation – Dodd-Frank – on mortgage originations. Dodd-Frank aimed at reducing mortgage fees and abuses against vulnerable borrowers, but increased the costs of originating mortgages. We find it triggered a substantial redistribution of credit from middle-class households to wealthy households. Lenders reduced credit to middle-class households by 15%, and increased credit to wealthy households by 21%, after controlling for drivers of the demand for housing, local house prices, and foreclosures. Large lenders found reacting to Dodd-Frank to be less costly. We thus instrument households’ exposure to Dodd-Frank with the pre-crisis share of mortgages originated by large lenders in each county. The redistribution of credit from the middle class to the wealthy was higher in counties more exposed to large lenders, which are similar to other counties. Results hold at the individual-loan level and zip-code level, at the intensive margin (amount lent) and extensive margin (number of loans originated), and for accepted and rejected loans. Changes in the distribution of refinancing loans do not explain the results.
Keywords: Mortgage Market, Financial Crisis, Dodd-Frank, Household Finance, Banking
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