Cross-ideological coordination by private interests: Evidence from mortgage market regulation under Dodd-Frank

Abstract

Rulemaking pursuant to the 2010 Dodd-Frank Act provides a useful setting to assess theories of interest group influence. In the wake of the financial crisis, Congress delegated new rulemaking authority to federal agencies to regulate mortgage markets. A critical aspect of this new regulatory regime engendered significant controversy from affected interests: “credit risk retention” would require sponsors of asset-backed securities to retain a stake in the risk of securitized assets. Contrary to unrefined industry capture-based accounts stressing the disproportionate role of larger, well-established regulated entities in setting policy, we find little evidence of sustained effort by large lenders to dilute regulatory standards via political investments. Rather, a diverse coalition of housing sector, community, and civil rights groups, backed by an ideologically diverse swath of legislators, forced substantial regulatory retrenchment. Our analysis suggests a more nuanced view of private influence, in which coordination plays a more substantial role than political investments alone.

Mortgage Market Credit Conditions and U.S. Presidential Elections

“…3 GSE mortgage-backed securities were also exempted from the Volcker Rule's prohibition on proprietary trading. Finally, although the Dodd-Frank Act of 2010 called for strict new standards for "qualifying mortgages," rather than create two standards (strict and less strict), regulators opted to only create a single, less strict standard, after considerable lobbying pressure and pressure from members of Congress pushed the regulatory agencies to weaken previously proposed standards (Gordon and Rosenthal 2016).…”

Measuring the Cost of Regulation: A Text-Based Approach

“…Important theoretical contributions includeOlson (1965),Stigler (1971Stigler ( , 1988,Krueger (1974), andPeltzman (1976). For discussions of the advantaged role of large firms in the regulatory process in finance, seeCalomiris and Haber (2014),Chapters 7-8, Kirilenko et al (2014),Gordon and Rosenthal (2016), andLibgoer (2020).…”