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Predatory Lending and the Subprime Crisis

Author

Listed:
  • Agarwal, Sumit

    (National University of Singapore and Federal Reserve Bank of Chicago)

  • Ben-David, Itzhak

    (OH State University)

  • Amromin, Gene

    (Federal Reserve Bank of Chicago)

  • Chomsisengphet, Souphala

    (US Office of the Comptroller of the Currency)

  • Evanoff, Douglas D.

    (Federal Reserve Bank of Chicago)

Abstract

It is typically argued that predatory lending generated significant social costs and played a central role in creating the subprime crisis. However, there are few estimates of its true effect. We estimate the effect of predatory lending on the residential mortgage default rate using an anti-predatory program implemented in Chicago in 2006. Under the legislation, risky borrowers and risky mortgages triggered mandatory counseling. Following the legislation, market activity decreased by about 35%, where risky borrowers, risky products, and lenders who typically made riskier loans were most affected. Despite the sharp decline in market activity, 18- and 36-month default rates in the treated group exhibited a relative improvement of 12% and 7%, respectively. We estimate that predatory loans have a 6-7% higher default rate than nonpredatory loans. Our results suggest that predatory lending may have not been instrumental in precipitating the financial crisis as often believed.

Suggested Citation

  • Agarwal, Sumit & Ben-David, Itzhak & Amromin, Gene & Chomsisengphet, Souphala & Evanoff, Douglas D., 2012. "Predatory Lending and the Subprime Crisis," Working Paper Series 2012-08, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2012-08
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection

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