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http://ssrn.com/abstract=2046696
 
 

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Do Loan Officers' Incentives Lead to Lax Lending Standards?


Sumit Agarwal


National University of Singapore

Itzhak Ben-David


Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

December 31, 2013

Fisher College of Business Working Paper No. 2012-03-007
Charles A. Dice Center Working Paper No. 2012-7

Abstract:     
We study a controlled corporate experiment in which loan officers’ compensation structure was altered from fixed salary to volume-based pay. The incentives increased aggressiveness of origination: higher origination rates ( 31%), larger loan sizes ( 15%), and higher default rates ( 28%). Under the incentive system, loan officers have greater influence on loan approval decisions; however, their recommendations do not convey more information. Poor loan performance is caused by lax approval and aggressive loan terms, and is more likely to occur among end-of-month originations, male loan officers, and tenured loan officers. About 10% of the loans under the incentive system are likely to have negative net present value.

Number of Pages in PDF File: 58

Keywords: loan officers, default, housing bubble, financial crisis

JEL Classification: G01, G21

working papers series





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Date posted: April 26, 2012 ; Last revised: January 31, 2014

Suggested Citation

Agarwal, Sumit and Ben-David, Itzhak, Do Loan Officers' Incentives Lead to Lax Lending Standards? (December 31, 2013). Fisher College of Business Working Paper No. 2012-03-007; Charles A. Dice Center Working Paper No. 2012-7. Available at SSRN: http://ssrn.com/abstract=2046696 or http://dx.doi.org/10.2139/ssrn.2046696

Contact Information

Sumit Agarwal
National University of Singapore ( email )
15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)
HOME PAGE: http://www.ushakrisna.com
Itzhak Ben-David (Contact Author)
Ohio State University - Fisher College of Business, Finance Department ( email )
2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/
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