47 Pages Posted: 5 May 2012 Last revised: 3 Oct 2015
Date Written: October 2, 2015
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.
Keywords: Banking Regulation, Regulatory Arbitrage, Shadow Banking, Lending Standards, Mortgage, Foreclosure, Bank, Crisis
JEL Classification: G21, G28, D12
Suggested Citation: Suggested Citation
Demyanyk, Yuliya S. and Loutskina, Elena, Mortgage Companies and Regulatory Arbitrage (October 2, 2015). FRB of Cleveland Working Paper No. WP 12-20R; Darden Business School Working Paper No. 2051001. Available at SSRN: https://ssrn.com/abstract=2051001 or http://dx.doi.org/10.2139/ssrn.2051001