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Predatory lending in rational world

Author

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  • Philip Bond
  • David K. Musto
  • Bilge Yilmaz

Abstract

Regulators express growing concern over “predatory lending,” which we take to mean lending that reduces the expected utility of borrowers. We present a rational model of consumer credit in which such lending is possible, and identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans, and poorly informed borrowers. Under most circumstances competition among lenders eliminates predatory lending.

Suggested Citation

  • Philip Bond & David K. Musto & Bilge Yilmaz, 2006. "Predatory lending in rational world," Working Papers 06-2, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:06-2
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers//2006/wp06-2.pdf
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    References listed on IDEAS

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    Cited by:

    1. Danny Ben-Shahar, 2008. "Default, Credit Scoring, and Loan-to-Value: a Theoretical Analysis under Competitive and Non-Competitive Mortgage Markets," Journal of Real Estate Research, American Real Estate Society, vol. 30(2), pages 161-190.
    2. Elul, Ronel, 2008. "Collateral, credit history, and the financial decelerator," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 63-88, January.

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    Keywords

    Predatory lending;

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