Behavioral Exploitation Antitrust in Consumer Subprime Mortgage Lending

Abstract

We analyze whether antitrust might provide an alternative and perhaps superior approach to regulating consumer subprime mortgage lending. Behavioral exploitation antitrust targets commercial conduct of the sort that was observed in consumer subprime mortgage lending in the years leading up to 2007. The welfare effects of that conduct are easily established. Antitrust-based regulation can mitigate those welfare effects. Regulation that does exist, which operates at the level of the individual transaction, may be easily avoided, may be short-sighted, may suffer from enforcement problems that public choice theory explains, and/or may overreach by removing consumer choice. We show that antitrust enforcement under a rule of reason approach avoids those pitfalls. However, none of the three primary approaches to antitrust enforcement – prohibitions of anticompetitive conduct by a dominant firm, prohibitions of anticompetitive agreements, and prohibitions of mergers with incipient anticompetitive effects – in their current form permit resort to antitrust remedies in the consumer subprime mortgage market. We argue that liberalized standards for antitrust enforcement under both Clayton Act section 7 (regulating mergers) and Sherman Act section 1 (regulating concerted conduct), perhaps restricted narrowly to this and closely analogous markets, would be appropriate to gain the benefits of regulation through behavioral exploitation antitrust.