Mortgage Brokers and the Effectiveness of Regulatory Oversights

Management Science, forthcoming

58 Pages Posted: 29 Apr 2019 Last revised: 27 Apr 2020

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Swee Hoon Ang

National University of Singapore (NUS) - Department of Marketing

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Yonglin Wang

Lingnan University

Date Written: March 20, 2020

Abstract

This paper studies the responses among different types of mortgage brokers to occupational licensing regulations. By explicitly accounting for heterogeneities between sole and corporate brokers, we find evidence that sole brokers respond to financial regulatory oversight by applying a more stringent screening process in conducting brokerage activities, hence achieving better loan performances. Specifically, loans originated through sole brokers exhibit higher quality on an array of credit-relevant characteristics, including those reported and unreported to future investors. By contrast, we find no such regulatory effect on corporate brokers who tend to rely extensively on reported characteristics that are critical to the subsequent loan securitization at the expense of unreported information despite the latter indicating potential risks. Hence, the agency problem among sole brokers can be mitigated by the consolidated financial requirement for occupational licensing. However, such provision is ineffective in governing corporate brokers. Additionally, welfare gains associated with the occupational licensing regulation are achieved at the expense of prospective borrowers paying a higher loan price and having reduced credit access. Stricter licensing regulations may induce welfare loss related to credit rationing as reasonable loan applications are not funded, including those with potentially lower default risk.

Keywords: mortgage brokers, occupational licensing regulations, reported and unreported information, loan performance

JEL Classification: G21, G24, J44

Suggested Citation

Agarwal, Sumit and Ang, Swee Hoon and Deng, Yongheng and Wang, Yonglin, Mortgage Brokers and the Effectiveness of Regulatory Oversights (March 20, 2020). Management Science, forthcoming, Available at SSRN: https://ssrn.com/abstract=3368063 or http://dx.doi.org/10.2139/ssrn.3368063

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Swee Hoon Ang

National University of Singapore (NUS) - Department of Marketing ( email )

Kent Ridge Crescent
Singapore 119260
Singapore

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://bus.wisc.edu/faculty/yongheng-deng

Yonglin Wang (Contact Author)

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
43
Abstract Views
467
PlumX Metrics