Finance and Accounting Research Seminar with Professor Danny McGowan

Title: The Cost of Privacy: Evidence from Mortgage Markets

Abstract: We study how compliance costs of a data privacy law, the California Consumer Protection Act (CCPA), affects mortgage finance. Lenders pass compliance costs to borrowers by raising interest rates, making the average prime mortgage costlier by $4,350. The CCPA imposes compliance costs of $880,000 on the average bank, while nonbanks share the costs with government-sponsored enterprises. Although loan risk increases, competition from nonbanks prevents banks from pricing the risk. Banks respond by reducing credit by 3.4%. The fixed compliance burden creates economies of scale in lending, leading to regressive credit. Privacy law creates comparative advantages based on lenders’ data intensity which ultimately leads to reallocations of market share from banks to nonbanks.