2013 Conference

Financial Services

Housing

Consumer financial protection has come to public attention during the current financial crisis because of massive home foreclosures associated with unfair, deceptive, and fraudulent home mortgage lending. This paper investigates the impact of repealing a consumer financial protection law, using a natural experiment in Cleveland, OH, where mortgage lending restrictions imposed on home-purchase loans with high interest rates were removed due to a court ruling. Empirical evidence shows that lenders made more high-interest loans after all the lending restrictions were removed: the marginal interest rate increased by 0.31 percentage points. Although observable borrower characteristics didn't change, the foreclosure probability increased by five percent. Loans made by local lenders had a 15 percent higher foreclosure rate than those made by nonlocal lenders, suggesting local information about the repeal induced more aggressive reactions. There is evidence that borrowers were aware of the higher exposure to lending terms that used to be prohibited by law, and therefore declined loan offers from lenders more often than before the repeal.