Do Loan Officers' Incentives Lead to Lax Lending Standards?
National University of Singapore
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
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
Date posted: April 26, 2012 ; Last revised: January 31, 2014
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