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How BCFP Impacts Mortgage Lending

UnderwritingThe Bureau of Consumer Financial Protection (BCFP) was formed as part of the Dodd-Frank Act and began operations in July 2011 with the mandate to protect consumer finances and a broad authority over banks and nonbanks.

How has the oversight of the bureau affected banks since it began seven years ago? A new research by the Federal Reserve Bank of New York aimed to measure the effects on banks of BCFP's supervision and enforcement activities to answer this question.

Focusing on BCFP and mortgage lenders, the research revealed that "there is no evidence that being subject to CFPB supervision and enforcement has led to lower mortgage lending for affected banks," the New York Fed said on its Liberty Street Economics blog on Tuesday.

Written by Andreas Fuster, Matthew Plosser, and James Vickery, the blog gave an overview of the research done by the bank on the impact of BCFP's oversight on lenders. Looking at commercial and savings banks with total assets between $1 billion and $25 billion as of June 30, 2011, the research sorted them into two groups: those that became subject to the bureau's oversight when it started operating in mid-2011 and those that did not and plotted the mortgage lending volumes for these two groups using Home Mortgage Disclosure Act data.

It found that while the volume of mortgage lending for both groups fluctuated substantially over time and reflected movements in long-term interest rates and other factors, there were no obvious differential trends with lending volumes moving very closely together for the two groups.

The research also estimated the lending effects of BCFP oversight by using a model that accounted for the location of mortgaged property and other loan characteristics. It found that the estimated effect of BCFP's oversight on mortgage origination volume was economically small and "generally not statistically different from zero."

"We also find that banks subject to CFPB oversight are no more likely to reject mortgage applications than other banks," the blog said. "We find that CFPB oversight reduces affected lenders’ share of mortgage originations by at most 1.6 percentage points, a small decline relative to the overall 38 percent market share of these lenders in our sample."

However, when the research looked at the composition of mortgage lending, it found that BCFP oversight had impacted these. "Most notably, we find a 6 percent drop in the market share of CFPB-supervised banks for mortgages insured by the Federal Housing Administration (FHA). These loans tend to be riskier since they are made to lower-income borrowers and generally involve a small down payment," the research revealed. "There is also some evidence of a drop in lending to borrowers with higher credit risk. Offsetting these declines, CFPB-supervised banks substitute toward large loans in the “jumbo” segment of the mortgage market, where borrowers tend to have higher incomes."

Click here to read the full blog and research findings.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Dallas, Texas. You can contact her at Radhika.Ojha@theMReport.com.

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