Do CRA Agreements Influence Lending Patterns?

This article considers the broader impact of Community Reinvestment Act (CRA) agreements—bank pledges to extend a certain volume of lending to targeted groups and communities—by examining whether they are associated with changes in lending to lower–income and minority communities in the markets where they are initiated. We find the number of newly initiated CRA agreements in a county to be associated with significant increases in CRA, minority and overall conventional mortgage lending in a county over a three–year period. The results are consistent with the view that the increases in lending represent new lending, with some evidence suggesting that the increases in lending are relatively short–lived. Overall, the results are consistent with the notion that lenders view CRA agreements as a form of insurance against the potentially large and unknown costs associated with fair lending violations, poor CRA performance ratings and adverse publicity from CRA–related protests of mergers or other applications. The results are also consistent with the view that the effectiveness of CRA agreements in increasing lending activity is ultimately determined by the persistence and sophistication of community groups in monitoring compliance with CRA agreements.     

Self-Selection and Discrimination in Credit Markets

In this article we make two contributions toward a better understanding of the causes and consequences of discrimination in credit markets. First, we develop an explicit theoretical model of loan underwriting in which lenders use a simple Bayesian updating process to evaluate applicant creditworthiness. Using a signal correlated with an applicant's true creditworthiness and their prior beliefs about the distribution of credit risk in the applicant pool, lenders are able to evaluate an applicant's expected or "inferred" creditworthiness to determine which loans to approve and which to deny. Second, we explicitly model the self-selection behavior of individuals. Because these decisions shape lenders' prior beliefs about the distribution of credit risk, they also affect the Bayesian posterior from which lenders compute an applicant's inferred creditworthiness, implying that statistical discrimination can arise endogenously. As an example, we show that in a market in which only some lenders have Beckerian tastes for discrimination there are conditions under which lenders without racial animus will also discriminate. Our model's flexibility makes it ideal for analyzing a wide variety of empirical and policy questions.     

Emergence of subprime lending in minority neighborhoods

Subprime lending is concentrated in minority neighborhoods. However, the literature provides little evidence for what led to this concentration. We use the endorsement of credit scores in mortgage underwriting by the Government Sponsored Enterprises (GSEs) in 1995 to answer this question. We show that prime lenders were substituted by subprime lenders in minority neighborhoods. As a result, the share of subprime lending increased by 5 percentage points in minority neighborhoods, relative to nonminority neighborhoods. Prime lenders with a stronger relationship with the GSEs reduced their lending in minority neighborhoods more, and the level of securitization by the GSEs in minority neighborhoods also decreased.     

Do Deposit Rates Cause Mortgage Loan Rates?: The Evidence from Causality Tests

This paper applies two familiar causality detection techniques to the issue of whether it is costs that determine prices or vice versa in the mortgage loan market. The question is posed in terms of causal priority: Are savings and loan deposit rates causally prior to mortgage loan rates or is it the other way around? For the time period prior to the onset of deposit interest rate deregulation, the evidence that emerges is consistent with the view that lenders raised their loan rates in response to higher deposit rates of interest. However, for the more recent period of deregulation, the evidence is not consistent with this view.     

Renegotiation of Troubled Debt: The Choice between Discounted Payoff and Maturity Extension

Renegotiation of securitized debt contracts is generally a more efficient solution to default than foreclosure when there are significant deadweight costs associated with the enforcement of security rights. Recent literature shows that when renegotiation takes the form of discounted loan payoffs, it eliminates deadweight costs associated with the liquidation or transfer of assets. There is evidence, however, that, in practice, renegotiation of other contract terms such as maturity is a more common form of loan workout. This observation is puzzling because, in general, maturity renegotiation does not eliminate deadweight costs. We provide a partial answer to this puzzle by showing that maturity renegotiation better aligns the incentives of borrowers and lenders than does renegotiation of principal. Specifically, we find that borrowers who expect that lenders will renegotiate maturity in the event of default have less incentive to divert cash flow from the collateral during the term of the loan and less incentive to take on additional risk. If the lender's cost of managing these standard agency problems is positively related to the magnitude of the borrower's incentive, then maturity renegotiation will result in lower monitoring and enforcement costs.     

An Empirical Study of the Relationships among Co-location, Integration, Performance, and Satisfaction

Co-locate or perish. In this era of cross-functional integration, are these the only choices for the departments that participate in the new product development (NPD) process? Bringing together different departments certainly seems like a good idea. After all, breaking down the walls between functions improves the quality of the inputs to NPD and thus increases the likelihood of success. On the other hand, a firm would be ill-advised to implement co-location simply because it seems like a good idea. Such a complex undertaking requires careful consideration of the costs, the benefits, and the effects of co-location. Noting the need for more in-depth knowledge in this area, Kenneth Kahn and Edward McDonough present the results of a study that explores several issues regarding co-location and its relationship to interdepartmental integration, performance, and satisfaction. For example, does co-location relate directly to improved performance and satisfaction in working with personnel from other departments? Or does co-location play a moderating role, fostering improved interdepartmental collaboration and interaction, which in turn increase performance and satisfaction? And finally, do the effects of co-location depend on which departments are involved? For example, do the benefits of co-locating marketing and R&D exceed those of co-locating manufacturing and R&D? The 514 survey respondents work as department managers in member companies of the Electronic Industries Association. The study includes an even distribution of responses from managers of marketing, manufacturing, and R&D departments. Most respondents have firsthand knowledge of the effects of colocation; 68% of the marketing managers report that they are co-located with manufacturing, and 80% of the marketing managers are co-located with R&D. R&D and manufacturing managers fall between those levels, with roughly 75% indicating that they are co-located with the other departments. While generally supporting the premise that co-location is helpful for integrating departments, the survey results indicate that co-location has department-specific effects. For example, the findings indicate that co-location facilities collaboration between R&D and marketing, but not between manufacturing and the other departments. The findings do not point to a direct relationship between co-location and performance. On the other hand, the results suggest direct links between collaboration and both performance and satisfaction.     

Mortgage Shoppers: How Much Do They Save?

Survey evidence suggests that many U.S. and European consumers do not spend a lot of time comparing mortgage products. We show, however, that mortgage shopping is associated with a substantial monetary payoff, using a unique data set from a website where borrowers (not the lenders) can post their complete set of received mortgage rate offers. A borrower who shops for five mortgage offers is able to save 7,078 euros in net present value on average. The potential savings suggest suboptimal mortgage shopping as the opportunity cost of time to renegotiate additional quotes is unlikely to be that high.     

The Geography of Lender Behavior in Peer‐to‐Peer Loan Markets

This paper empirically investigates the role of geography in online peer‐to‐peer loan markets. Using transaction level data, I find strong evidence that lenders are more informed about local projects and have higher demand for better performing local projects. This effect is shown to be driven by informational frictions. Additionally, listings with more early local bidding attract more lenders, leading to a higher probability of funding and a lower final interest rate, if funded. My results are consistent with localness embodying some incidentally obtained initial informational advantage which rationally causes persistent information asymmetries.     

Tradition and diversity jeopardised by food safety regulations? The Serrano Cheese case,Campos de Cima da Serra region,Brazil

Although some authors and policymakers have been considering the valorisation of traditional food as a strategy to revitalise rural areas, the commercialisation of such foods in formal markets demands strict compliance with food safety regulations. This is particularly so in relation to building structures and equipment. However, many of these requirements, based on an expectation of zero microbiological contamination, represent a big challenge to traditional food production and commercialisation; they often put in jeopardy the very characteristics that make these foods unique, diverse and desirable. Taking this context into account, how would it be possible to overcome the challenges that food safety regulations represent to the valorisation and maintenance of the individuality and diversity of traditional and artisanal food? This paper, inspired by the Cultural Theory of risk, considers the case of traditional cheeses, particularly those made from raw milk and using wooden surfaces, moulds and utensils, which are commonly used in many Latin American countries. The aim is to amplify the debate related to traditional food valorisation, particularly regarding artisanal cheeses. To do this, we consider the case of Serrano Cheese, an artisanal cheese made from unpasteurised milk in Campos de Cima da Serra, a region located in the southernmost state of Brazil. A field study inspired by the ethnographic method was carried out in this region. The data collected indicate that besides adapting production and expertise to food safety regulations, the valorisation of traditional food depends firstly on understanding the risk perceptions related to these products and secondly on recognising and legitimating traditional forms of knowledge.     

Uncertainties, resources, and supplier selection in an emerging economy

Focusing on supplier selection, this article addresses two questions: (1) What are the antecedents that lead to the adoption of various types of selection strategies? (2) What impact do these strategies have on supplier performance? We build a research model showing how both the uncertainty-based and resource-based views drive market-focused and relationship-focused supply selection strategies. Further, we argue that market-focused and relationship-focused selection strategies may have different effects on supplier performance. Specifically, market-focused selection has a positive influence, whereas relationship-focused selection has an inverted U-shaped effect on supplier performance. In addition, the interaction between these two strategies exerts a significant positive influence on supplier performance. Survey data collected from 208 Chinese manufacturers are used to test our hypotheses.     

The information value of online social networks: Lessons from peer-to-peer lending

We examine whether social networks facilitate online markets using data from a leading peer-to-peer lending website. We find that borrowers with social ties are consistently more likely to have their loans funded and receive lower interest rates; however, most borrowers with social ties are more likely to pay late or default. We provide evidence that these findings are driven by lenders not fully understanding the relationship between social ties and unobserved borrower quality. Overall, our findings suggest caution for using online social networks as a signal of quality in anonymous transactions.     

The design process — Does it exist?

There are many published models for the process of design or open-ended problem solving. Some of these are represented in diagrammatic form while others are implicit within the text of the publication. Where do these models come from? Upon what evidence are they based and how accurately do they describe the pupil designer? The idea that we should teach pupils a procedure for completing design and make tasks or a strategy for solving problems is an attractive one but is there only one procedure and is this easily transferred to a wide variety of tasks? This article examines the similarities in a variety of published models for the design or problem-solving process including those implicitly described in the development of the National Curriculum for Design and Technology in England and Wales. It finds a surprising consensus of opinion among authors but suggests that there is little research evidence to support their claims.     

Managerial ties, strategic initiatives, and firm performance in Central Asia and the Caucasus

Managerial ties are an area commanding managers’ attention in emerging economies. However, no previous study has drawn on cross-country data to address a crucial question: Are more developed market-supporting institutions associated with less use of managerial ties in emerging economies? Further, to strive for better performance, firms also need to develop market-based strategic initiatives. How do these initiatives impact performance? What role do managerial ties play in the relationship? Addressing these questions, this article extends research on managerial ties in emerging economies to an underexplored region—Central Asia and the Caucasus.     

Adjustable-Rate Mortgages, Economic Fluctuations, and Lender Portfolio Change

In this study we examine the effects of economic fluctuations on the repayment behavior of a portfolio of adjustable-rate mortgages (ARMs). Because the U.S. experience with ARMs is quite recent, we have used data on a form of ARM used in Canada, the rollover mortgage. The results of our analysis suggest that use of ARMs similar to the rollover mortgage may reduce but not eliminate interest-rate risk for lenders, as borrowers, albeit constrained, prepay above-market-rate loans. In addition, we find that the periodic payment change inherent in the rollover mortgage does not lead to higher default rates and, therefore, credit risk.     

Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

We use a regression discontinuity approach and present new institutional evidence to investigate whether affordable housing policies influenced the market for securitized subprime mortgages. We use merged loan‐level data on nonprime mortgages with individual‐ and neighborhood‐level data for California and Florida. We find no evidence that lenders increased subprime originations or altered loan pricing around the discrete eligibility cutoffs for the Government‐Sponsored Enterprises' (GSEs) affordable housing goals or the Community Reinvestment Act. Although we find evidence that the GSEs bought significant quantities of subprime securities, our results indicate that these purchases were not directly related to affordable housing mandates.     

Reverse Mortgages and Borrower Maintenance Risk

This paper develops a theoretical model of the problem of maintenance risk in reverse mortgages (RMs) and home equity conversion instruments generally. By maintenance risk, we refer to the incentive homeowners will have to reduce maintenance expenditures as their equity in the house falls during the term of the RM. The underlying reason for this tendency is the limited liability feature of RMs, given that a borrower's obligation to the lender at. maturity is limited to the value of the house.
The results of the model show that lenders will respond to this problem either by limiting the amount of RM loans to guarantee that maintenance risk is not a threat, or by charging an interest rate premium to cover the expected cost of default. Unfortunately, there do not exist data to test the importance of maintenance risk as a possible limitation on the extent of the RM market.     

Agricultural credit problems and policies during the transition to a market economy in Central and Eastern Europe

This paper assesses the problems of financing Central and Eastern European agriculture during the present transitionary period and the role of government in this process. Initially the paper looks at why credit markets work imperfectly, even in well developed market economies, focusing on problems related to asymmetric information, adverse selection, moral hazard, credit rationing, optimal debt instrument choice and initial wealth. It shows why these and related problems may cause transaction costs to be so high that credit rationing and high interest rates are rational and efficient responses by lenders to the imperfect information problems of the agricultural sector. A series of specific, transition-related issues are then discussed which have worsened these problems within the Central and Eastern European agricultural sector. The potential roles of governments in solving these issues and actual observed interventions by Central and Eastern Europe governments through credit subsidies, loan guarantees and specialised agricultural lending institutions are analysed. Finally, the paper discusses how financial market innovations have solved some of the credit market problems and derives the implications for government policies.     

Employee Mobility and Interfirm Relationship Transfer: Evidence from the Mobility and Client Attachments of United States Federal Lobbyists, 1998–2014

Research summary : Employee mobility can erode competitive advantage by facilitating interfirm knowledge and relationship transfer. This study investigates the latter and identifies factors that influence the likelihood of its occurrence. Using a novel database that tracks the employment and client attachments of U.S. federal lobbyists, I show that repeated exchange with employees (firms) increases (decreases) the likelihood clients follow employees who switch firms. Structurally, multiplexity reduces the likelihood of client transfer and weakens the effect of employee–client repeated exchange, with the multiplexity effect strongest when team members have specialized expertise. By examining the main and interactive effects of repeated exchange, multiplexity, and specialized human capital, this study extends prior work by demonstrating how individual, organizational, and structural relationship characteristics affect client transfer and retention ex‐post employee mobility . Managerial summary : When do clients follow employees who switch firms? What can firms do to guard against it? These questions are important in service‐based industries where clients may become loyal to individual employees within the firm rather than to the firm itself. This study provides evidence that helps practicing managers: (a) identify which clients are most at risk of defecting if employees exit, and (b) structure relationships in ways that mitigate the likelihood that employee exit results in client loss. Findings suggest that a client is more likely to defect when she has extensive history working with the exiting employee, particularly if the employee was the sole link between the client and firm. Managers, however, can reduce the risk of client loss following employee exit by structuring relationships so that clients work with teams of employees rather than exclusively with an individual and by increasing the degree of specialization within these teams . Copyright © 2017 John Wiley & Sons, Ltd.     

Credit Scoring: Statistical Issues and Evidence from Credit-Bureau Files

Although credit scoring offers benefits to lenders and borrowers, its use raises important statistical issues that may affect the ability of scoring systems to accurately quantify an individual's credit risk. The evidence from a national sample of credit-bureau records suggests that concerns about omitted-variable bias may be justified, as local economic factors show significant correlations with credit scores.     

Becoming a pirate: Independence as an alternative to exit in the gig economy

How and why do platform workers ‘quit’? Drawing on original qualitative data from 84 ride-hail drivers, the author finds that platform companies use information asymmetries to downplay the true cost of working a ‘gig’. Once workers realize these costs, some exit, yet others cannot because they have come to rely on their ride-hail income to meet their short-term needs, a phenomenon the author refers to as ‘acquired dependence’. In response, the author finds these workers begin their own ‘pirate’ (illegal) taxi operations to decrease their dependence on platform companies. These findings are then used to develop an original survey instrument that tests if drivers’ ‘acquired dependence’ is associated with ‘pirate’ taxi operations. Using survey data from 330 ride-hail drivers, the author finds evidence that drivers with greater acquired dependence are more likely to develop off-app ‘pirate’ taxi operations. In doing so, this article develops both a new category of conflict and response for marketized employment relationships.