The mortgage market’s supply of available credit has seen little impact from increased regulatory scrutiny since the founding of the Consumer Financial Protection Bureau (CFPB), according to a recent study by the Federal Reserve Bank of New York.
The study was conducted to determine whether financial institutions have engaged in less lending activity in response to increased regulatory oversight by the bureau, as is commonly asserted by industry advocates. The Fed also asserted that it found no substantial evidence that increased oversight led to significantly higher loan origination costs across most loan types or decreased asset growth among CFPB-supervised banks.
“We find little evidence that CFPB oversight significantly reduces the overall volume of mortgage lending,” the Fed stated in a report detailing the study’s findings. “However, we find some evidence of changes in the composition of lending — CFPB-supervised banks originated fewer loans to risky borrowers, offset by an increase in large ‘jumbo’ mortgages. We find no clear evidence of substitution in lending between bank and nonbank subsidiaries, or effects on asset growth or bank noninterest expenses.”
Declines in lending market share among CFPB-supervised banks were no more than 1.6 percentage points, according to the study’s findings.
The Fed used loan-level mortgage lending data, collected under the Home Mortgage Disclosure Act (HMDA), and took a difference-in-differences approach, examining outcomes before and after July 2011, when the CFPB begins operations. The Fed also studied bank balance sheet growth and composition, as well as and bank noninterest expenses. The study then examined “treated” commercial banks and savings banks subject to bureau oversight, and examination and enforcement activities to firms with less than $10 billion in total consolidated assets.
Results indicated that the prevalence of risky loans dropped over the examined time. There also has been a reduction of between 5 percentage points and 6 percentage points in the market share of CFPB-supervised banks for mortgages insured by the Federal Housing Administration (FHA), perhaps as a result of banks withdrawing from the FHA market share as such loans have been the subjects of an increasing number of lawsuits in recent years. The report also notes a drop in loans to borrowers applying without a applicant.
“This evidence provides some support for the view that heightened legal risk and regulatory scrutiny related to consumer financial protection has led to some ‘de-risking’ of bank activities, and in particular, affected bank lending to riskier borrowers,” the report states. “Although FHA loans are guaranteed against default by the federal government, mortgage lenders still view them as carrying significant legal risk, and also the risk that the FHA may not indemnify the lender against credit losses if the loan has been found to be incorrectly underwritten. We note more broadly that there has been significant substitution from banks to nonbanks in the FHA market, a trend which has been linked to regulatory factors and which has attracted significant attention among policy makers and in the media.”
The declines have been offset by an uptick in large loans in the jumbo segment of the mortgage market, where borrowers tend to have higher incomes, among supervised banks.
The Fed also stated that, aside from costs associated originating FHA loans, the study did not reveal evidence to support the commonly held notion that increased oversight by the bureau has led to significantly higher compliance costs for mortgage originators, associated with longer processing times and other elements affected by a tightened regulatory environment. With respect to cost increases for FHA loans originated by supervised banks, the report describes them as “marginally significant.”
“With respect to processing times, we do not find a robust relation with CFPB oversight and greater processing times overall, although there is a marginally significant increase for FHA loans originated by CFPB-supervised banks,” the report states. “We find no evidence that CFPB supervision increases noninterest expense or its components; our point estimates are actually negative, although not statistically significant. Our estimates are quite imprecise, however, based on our measured confidence bounds. We also find no evidence that banks subject to CFPB oversight grow more slowly, although again our power is relatively low. We find some weak evidence of a shift from retail loans to other assets in terms of the composition of CFPB-supervised bank balance sheets.”
Based on the results, the Fed concluded that there is no substantial evidence to support concerns that more robust enforcement of consumer protection laws have made supervised banks more likely to deny mortgage applications, or that CFPB oversight has led to lower asset growth or higher expenses. However, the Fed conceded that its statistical ability to gauge such regressions is relatively low.