Mortgage Companies and Regulatory Arbitrage
Yuliya S. Demyanyk
Federal Reserve Banks - Federal Reserve Bank of Cleveland
University of Virginia - Darden School of Business
October 2, 2015
FRB of Cleveland Working Paper No. WP 12-20R
Darden Business School Working Paper No. 2051001
Mortgage companies (MCs) do not fall under the strict regulatory regime of depository institutions. We empirically show that this gap resulted in regulatory arbitrage and allowed bank holding companies (BHCs) to circumvent consumer compliance regulations, mitigate capital requirements, and reduce exposure to loan-related losses. Compared to bank subsidiaries, MC subsidiaries of BHCs originated riskier mortgages to borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that precrisis regulations had the capacity to mitigate the deterioration of lending standards if consistently applied and enforced for all types of intermediaries.
Number of Pages in PDF File: 47
Keywords: Banking Regulation, Regulatory Arbitrage, Shadow Banking, Lending Standards, Mortgage, Foreclosure, Bank, Crisis
JEL Classification: G21, G28, D12
Date posted: May 5, 2012 ; Last revised: October 3, 2015
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