After the Storm: Asymmetrical Information, Game Theory, and an Examination of the 'Minnesota Model' for National Regulation of Mortgage Brokers and Tomorrow's Predatory Lenders
Second Judicial District-State of Minnesota
December 19, 2009
William Mitchell Law Review, Vol. 36, No. 1, 2009
There is a general consensus that the root cause of the most recent turmoil in the domestic and global markets is due to a failure in our regulatory system. Yet, Congress has not supported comprehensive regulation related to the day-to-day activities of mortgage brokers and their relationship with consumers. This article identifies the three regulatory and legislative failures related to mortgage lending, and then examines these failures through the economic concepts of asymmetrical information and game theory. Specifically, how the regulatory failures resulted in mortgage brokers and lenders that were not acting in the best interest of homeowners or the future purchasers of securitized loans. Finally, this Article recommends adopting the “Minnesota Model” as a national framework for regulating mortgage lending. The Minnesota Model was an anti-predatory lending law passed in Minnesota in 2007.
Keywords: predatory lending, subprime lending, mortgage, mortgage brokers, asymmetrical information, gamet theory, securitization, regulation
JEL Classification: A11, A13, C70, C71, C78, D80, D82, G21, G28, K00, K20, K42
Date posted: August 11, 2011 ; Last revised: March 25, 2012