Abstract

http://ssrn.com/abstract=2051001
 
 

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Mortgage Companies and Regulatory Arbitrage


Yuliya S. Demyanyk


Federal Reserve Bank of Cleveland

Elena Loutskina


University of Virginia - Darden School of Business

April 21, 2014

FRB of Cleveland Working Paper No. WP 12-20R
Darden Business School Working Paper No. 2051001

Abstract:     
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: 45

Keywords: Banking Regulation, Regulatory Arbitrage, Shadow Banking, Lending Standards, Mortgage, Foreclosure, Bank, Crisis

JEL Classification: G21, G28, D12

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Date posted: May 5, 2012 ; Last revised: April 22, 2014

Suggested Citation

Demyanyk, Yuliya S. and Loutskina, Elena, Mortgage Companies and Regulatory Arbitrage (April 21, 2014). FRB of Cleveland Working Paper No. WP 12-20R; Darden Business School Working Paper No. 2051001. Available at SSRN: http://ssrn.com/abstract=2051001 or http://dx.doi.org/10.2139/ssrn.2051001

Contact Information

Yuliya Demyanyk (Contact Author)
Federal Reserve Bank of Cleveland ( email )
Research Department
East 6th & Superior
Cleveland, OH 44101-1387
United States
HOME PAGE: http://www.clevelandfed.org/Research/Economists/Demyanyk
Elena Loutskina
University of Virginia - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)
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