Mortgage Lending Regulatory Arbitrage: A Cross-Sectional Analysis of Nonbank Lenders
40 Pages Posted: 27 May 2016 Last revised: 17 Apr 2017
Date Written: April 5, 2017
Abstract
This study provides new insights about less regulated nonbank lenders, major originators of risky subprime mortgages prior to 2008. We document significant cross-sectional variations in lending practices and show that nonbank lenders who entered the industry via less-regulated states are associated with riskier loan originations. We also show that states with lower entry barriers have not significantly increased homeownership rates nor reduced poverty rates. Overall our findings, consistent with the traditional banking literature, suggest that while low industry entry barrier encourages more risk taking by new financial institutions it does not necessarily translate into long term economic benefits.
Keywords: Mortgage licensing regulations; Nonbank lenders; Regulatory arbitrage; Residential mortgage lending
JEL Classification: G21; G28
Suggested Citation: Suggested Citation