Mortgage Brokers and the Effectiveness of Regulatory Oversights

Sumit Agarwal (), Swee Hoon Ang (), Yongheng Deng () and Yonglin Wang ()
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Sumit Agarwal: Department of Finance, NUS Business School, National University of Singapore, Singapore 119245
Swee Hoon Ang: Department of Marketing, NUS Business School, National University of Singapore, Singapore 119245
Yongheng Deng: Department of Real Estate and Urban Land Economics, Wisconsin School of Business, University of Wisconsin-Madison, Madison, Wisconsin 53706
Yonglin Wang: Department of Economics, Lingnan University, Tuen Mun, Hong Kong

Management Science, 2021, vol. 67, issue 8, 5278-5300

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 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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