Mortgage companies and regulatory arbitrage

Yuliya Demyanyk and Elena Loutskina

Journal of Financial Economics, 2016, vol. 122, issue 2, 328-351

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: Regulation; Banks; Mortgage companies; Mortgages; Financial crisis (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Working Paper: Mortgage companies and regulatory arbitrage (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:122:y:2016:i:2:p:328-351

DOI: 10.1016/j.jfineco.2016.07.003

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