Politicizing Consumer Credit

Akey, Pat; Heimer, Rawley Z.; Lewellen, Stefan

doi:10.1016/j.jfineco.2020.07.017

Journal of Financial Economics 139 (2): 627–655

Politicizing Consumer Credit

Pat Akey, Rawley Z. Heimer, and Stefan Lewellen

Abstract. Powerful politicians can interfere with the enforcement of regulations. As such, expected political interference can affect constituents’ behavior. Using rotations of Senate committee chairs to identify variation in political power and expected regulatory relief, we study powerful politicians’ effect on consumer lending to communities protected by fair-lending regulations. We find a 7.5% reduction in credit access to minority neighborhoods in states with new committee chairs. Larger reductions occur in Community Reinvestment Act-eligible neighborhoods and when Senators serve on committees that oversee the enforcement of fair-lending laws. Banks headquartered in powerful Senators’ states are responsible for the reduction in credit access.

Keywords: fair lending, Community Reinvestment Act, political economy, Senate committee chairs, regulatory enforcement, minority neighborhoods, credit access, mortgage lending.

JEL codes: G21, G38, G51, P16.

In brief

Political power can weaken the enforcement of fair-lending rules, and lenders respond.

When a state’s senator becomes chair of a Senate committee, credit access to minority neighborhoods in that state falls by 7.5%. The declines are larger in neighborhoods eligible under the Community Reinvestment Act and when the senator’s committee oversees fair-lending enforcement, and they are driven by banks headquartered in the senator’s home state. Expected regulatory relief, not only formal changes to the rules, shapes who gets credit.

**Table 1.** Study at a glance
Panel A. Design
Question	Does expected political interference with regulation change who gets credit?
Setting	Rotations of U.S. Senate committee chairs
Data	Lending to communities protected by fair-lending regulations
Method	New committee chairs as variation in political power and expected regulatory relief
Panel B. Reported effects
Credit access in minority neighborhoods	−7.5% in states with new committee chairs
Larger declines	Community Reinvestment Act-eligible neighborhoods; senators on committees overseeing fair-lending enforcement
Source of the decline	Banks headquartered in the senator’s state

Summarized from the paper. See the paper for exact estimates and specifications.

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Published version, Journal of Financial Economics
Working paper version, SSRN
DOI: 10.1016/j.jfineco.2020.07.017

Akey, Pat, Rawley Z. Heimer, and Stefan Lewellen. 2021. “Politicizing Consumer Credit.” Journal of Financial Economics 139 (2): 627–655. https://doi.org/10.1016/j.jfineco.2020.07.017.

@article{heimer2021politicizing,
  author  = {Akey, Pat and Heimer, Rawley Z. and Lewellen, Stefan},
  title   = {Politicizing Consumer Credit},
  journal = {Journal of Financial Economics},
  volume  = {139},
  number  = {2},
  pages   = {627--655},
  year    = {2021},
  doi     = {10.1016/j.jfineco.2020.07.017},
  url     = {https://www.sciencedirect.com/science/article/pii/S0304405X20302270}
}

Topics: Consumer protection and financial regulation; Consumer credit and debt; Mortgage lending and housing
Related papers: Biased by Choice: How Financial Constraints Can Reduce Financial Mistakes; Should Retail Investors’ Leverage Be Limited?; Temporal Focal Points and Economic Outcomes: Evidence from U.S. Mortgage Lending; Fallible Firms: The Economics of Consumer Redress

In brief

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