With the House Financial Services Committee moving forward with a bill to increase the regulation of our consumer credit markets, particularly our mortgage market, it is worth asking the question: what’s the best protection for consumers, regulation or competition?


Let’s take the example of mortgage brokers. They’ve often been targeted as one of the causes of the crisis. The story goes that they just made the loans and passed it along to the lenders and/​or Wall Street and so, didn’t care about the quality of the loan.


The response of government, first at the state then the federal level, has been to subject mortgage brokers to increased oversight and licensing, with the intent to keep the “bad actors” out of the marketplace. How well did this all work out?


According to Professor Morris Kleiner and Minn Fed Economist Richard Todd, not exactly the way you’d want. What the economists found was that tighter regulation on who can become a mortgage broker is actually associated “with higher broker earnings, fewer brokers, fewer subprime mortgages, higher foreclosure rates, and a greater percentage of high‐​interest‐​rate mortgages.”


It seems the barrier to entry created by these licensing requirements reduced competition in a manner that caused far more harm to consumer than any protections provided by increasing the “quality” of mortgage brokers.