Abstract
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.
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Notes
Depository institutions can also set up non-depository MBSs to engage in the lending business, and they are supervised by their respective federal agencies as well.
Countrywide Bank later became a thrift, and thus its regulator changed from the OCC to OTS.
It should be noted that in the years running up to the 2007 subprime crisis, some states toughened their mortgage broker and bank licensing requirements and enacted laws, which were more stringent than the federal laws, to battle predatory lending.
In September 2009, the FRB formally issued an important policy relating to the FRB’s supervision of nonbank subsidiaries of bank holding companies (BHCs) and foreign banking organizations (FBOs).
Ding et al. (2010), in a series of papers, examine the impact of federal preemption on national banks’ lending practices.
A relatively larger literature examines regulatory capital arbitrage; for example, see Calem and Follain (2007).
The OTS became part of the OCC in July 2011.
As for state-level laws and regulations, OTS-chartered thrifts and their MBSs have been exempt from state consumer protection laws and regulations since as early as in 1990s. OCC-chartered banks were exempt starting in 2004 (see the notice by the OCC in 2004). State-chartered banks and their mortgage banking subsidiaries are subject to state consumer protection laws and regulations, as are state-licensed independent mortgage companies. MBSs of BHCs must obey state consumer protection laws and regulations as well.
The new regulation also applied to foreign banking organizations (FBOs).
A potential weakness of using HMDA data is that the lender does not know the final disposition for many of its loans—it only knows the investor at the end of the calendar year of the origination year. Other data sets have information on the final investor. Demyanyk and Loutskina (2013) report that the portion that is private-label securitized is close to 10 percentage points lower for MBSs of BHCs than for independent mortgage companies, and the portion that is securitized through GSEs is close to 20 percentage points higher for MBSs of BHCs than for independent mortgage companies. Overall, these numbers are consistent with our findings here.
The pilot program also involves two associations of state regulators, the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. The states will conduct coordinated examinations of independent state-licensed subprime lenders and their associated mortgage brokers. Since independent mortgage company experience heightened examination, using independent mortgage companies as a control group would further underestimate the true effect of the policy change on BHC.
The omitted lender group (i.e., the reference group) contains the depository institutions unaffiliated with BHCs (unaffiliated depositories).
In untabulated robustness checks, we use 2008 and 2009 as alternative definitions of the policy change year and obtain similar results.
Appendix, Table A.1 provides information on the type of depositories under BHCs from 2006 to 2009. In 2006, for example, 207 depositories were under BHCs. In terms of both the number of lenders and the number of loan originations, the majority were OCC-chartered national banks and their subsidiaries. During 2007–2008, OTS-chartered national thrifts began to have a significant market share. Overall, the majority of the depositories under BHCs were nationally chartered banks or thrifts.
Note that exp (−1.99)-1 = −0.86. The same computation applies to other coefficients.
Ashcraft (2008) shows that depositories under BHCs are less likely to fail than independent mortgage companies, as they can draw on the resources of their parent BHCs.
We also conducted this analysis for the sample excluding subprime loans and found, in untabulated results the same trend: Loan volume for MBSs of BHCs decreased, while that for affiliated BHC depositories shot up following the 2007 FRB policy change.
The sample size of the HMDA data is large. For instance, in 2007, there are 26.6 million observations.
We adopt OLS for computational expediency and find that the results are very similar.
The mean value of \( \left(\frac{ HP{I}_t}{ HP{I}_{t-1}}\right) \) is 1.029.
We notice that the trend in denial rate for MBSs of BHCs differs from that for others. To address its impact on the estimates, we include lender-type specific trend variables in the regression. In untabulated results, the magnitude of the coefficient β 1 decreases and becomes statistically insignificant. We interpret this finding with two caveats. First, the denial rate for the MBSs of BHCs did not exhibit significant changes (yet other aspects improved, as shown in later sections). Second, we believe that our major finding in this paper concerns the change of locus of loan origination from MBSs of BHCs to affiliated depositories under BHCs. Given the very limited size of loans in MBSs of BHCs, results on their quality carry less weight than results on quantity.
We use median instead of mean because the distribution of the variable is skewed.
In all regressions, the coefficients on the loan characteristics variables are reasonably estimated.
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Acknowledgements
We gratefully acknowledge the comments and suggestions of Joseph Nichols (our discussant), and other participants at the 2013 AREUEA National Conference in Washington, D.C. We extend our appreciation to Glenn Canner, Bob Avery and Marsha Courchane for assistance in accessing data. Downs acknowledges the support of The Kornblau Institute at Virginia Commonwealth University. The views expressed in this paper are solely the authors’ and do not represent those of the Office of the Comptroller of the Currency or the U.S. Department of Treasury. All errors remain our own.
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Downs, D.H., Shi, L. The Impact of Reversing Regulatory Arbitrage on Loan Originations: Evidence from Bank Holding Companies. J Real Estate Finan Econ 50, 307–338 (2015). https://doi.org/10.1007/s11146-014-9468-x
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DOI: https://doi.org/10.1007/s11146-014-9468-x