Abstract

Does higher regulatory uncertainty constrain credit? This paper focuses on the recent regulation of \qualied mortgages " (QM) and on the effects of the related rule-making process on bank lending. In 2011, the Federal Reserve proposed a set of criteria that would give lenders the presumption of a borrower's ability-to-repay a mortgage{and, thus, legal protection should a borrower sue. But the debt-to-income (DTI) ratio criterion{the most binding in the nal rule{was not specied in the proposed rule. The absence of such a bright line created high regulatory uncertainty for banks between the proposed and the nal rule. Using public comments submitted by banks in response to the rule proposal, we compute a measure of policy uncertainty at the bank level. We show that more uncertain banks issued fewer loans (and for smaller amounts) after the rule proposal. To control for general economic uncertainty, we instrument our measure by a bank's past legal costs. We conrm that banks that historically were sued more often cut lending more severely during the rule-making process. At a more aggregated level, counties that recorded a large number of mortgage lawsuits also experienced lower house price growth. Gissler, Oldfather, and Ruffino are at the Federal Reserve Board. E-Mails: Ste-