Mortgage Companies and Regulatory Arbitrage

47 Pages Posted: 5 May 2012 Last revised: 3 Oct 2015

Yuliya S. Demyanyk

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Elena Loutskina

University of Virginia - Darden School of Business

Date Written: October 2, 2015

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.

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

JEL Classification: G21, G28, D12

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

Yuliya S. Demyanyk (Contact Author)

Federal Reserve Banks - 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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