Minimizing predatory lending: Designing a long-term compensation structure to minimize the actions of opportunistic mortgage brokers
Keywords:Mortgage Brokers, Compensation, Agency theory, Information asymmetry, Predatory lending, Banking
AbstractThis paper addresses the inadequacies in the current compensation structure for mortgage brokers, and asserts that the resulting opportunistic behavior by brokers played a major role in the 2008 collapse of the mortgage market. We utilize agency theory as an underpinning to suggest that increased regulation will have only a limited impact on self-serving behavior due to the complex information asymmetries possessed by brokers. We posit that a restructured long-term compensation package would be effective in aligning the interests of borrowers and brokers, ultimately reducing the level of mortgage defaults and foreclosures.
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