The Impact of Reversing Regulatory Arbitrage on Loan Originations: Evidence from Bank Holding Companies

Mortgage banking subsidiaries of bank holding companies (BHCs) became increasingly active players in the mortgage origination market during the last decade. At the time, the Federal Reserve Board (FRB) had supervisory power over BHCs, and under the Bank Holding Company Act was authorized to monitor...

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Bibliographic Details
Published in:The journal of real estate finance and economics 2015-04, Vol.50 (3), p.307-338
Main Authors: Downs, David H., Shi, Lan
Format: Article
Language:English
Subjects:
Arbitrage
Bank examinations
Bank examiners
Bank holding companies
Banking industry
Banking system
Commercial banks
Compliance
Comptrollers
Consumer protection
Deposit insurance
Economics
Economics and Finance
Financial Services
Government agencies
Housing
Housing market
Hypotheses
Lending institutions
Loan originations
Loans
Loopholes
Mortgage banks
Mortgage companies
Mortgages
Predatory lending
Regional/Spatial Science
Regulation of financial institutions
Regulatory agencies
Statistical analysis
Subprime lending
Subsidiaries
Subsidiary
Supervision
Wall Street Reform & Consumer Protection Act 2010-US
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Summary:Mortgage banking subsidiaries of bank holding companies (BHCs) became increasingly active players in the mortgage origination market during the last decade. At the time, the Federal Reserve Board (FRB) had supervisory power over BHCs, and under the Bank Holding Company Act was authorized to monitor and examine the subsidiaries of BHCs under certain circumstances. However, this authority did not clearly extend to routine examinations of nonbank subsidiaries of BHCs. This changed between 2007 and 2009 due to FRB policy on consumer compliance supervision for nonbank subsidiaries of BHCs. Our empirical analysis tests for the impact of the new policy on the quantity and quality of loan originations by mortgage banking subsidiaries of BHCs. We use a difference-in-differences estimator with the control group being other types of lenders. We show that loan production moved from mortgage banking subsidiaries to their affiliated depository institutions after the policy change. The quality of loans originated by mortgage banking subsidiaries of BHCs increased after the policy change: The denial rates for mortgage applications increased, loan-to-income ratios decreased, and the proportion of owner occupied houses increased in mortgage banking subsidiaries more than they did in other types of lenders.
ISSN:0895-5638
1573-045X
DOI:10.1007/s11146-014-9468-x