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Predatory Lending and the Subprime Crisis

  • Sumit Agarwal
  • Gene Amromin
  • Itzhak Ben-David
  • Souphala Chomsisengphet
  • Douglas D. Evanoff

We measure the effect of an anti-predatory pilot program (Chicago, 2006) on mortgage default rates to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, risky borrowers and/or risky mortgage contracts triggered review sessions by housing counselors who shared their findings with the state regulator. The pilot cut market activity in half, largely through the exit of lenders specializing in risky loans and through decline in the share of subprime borrowers. Our results suggest that predatory lending practices contributed to high mortgage default rates among subprime borrowers, raising them by about a third.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19550.

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Date of creation: Oct 2013
Date of revision:
Publication status: published as Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2014. "Predatory lending and the subprime crisis," Journal of Financial Economics, Elsevier, vol. 113(1), pages 29-52.
Handle: RePEc:nbr:nberwo:19550
Note: LE
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  1. Campbell, John & Cocco, Joao, 2003. "Household Risk Management and Optimal Mortgage Choice," Scholarly Articles 3157876, Harvard University Department of Economics.
  2. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, vol. 91(3), pages 278-287, March.
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  4. Ben-David, Itzhak & Agarwal, Sumit, 2012. "Do Loan Officers' Incentives Lead to Lax Lending Standards?," Working Paper Series 2012-07, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
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  7. Raphael Bostic & Souphala Chomsisengphet & Kathleen Engel & Patricia McCoy & Anthony Pennington-Cross & Susan Wachter, 2012. "Mortgage Product Substitution and State Anti-predatory Lending Laws: Better Loans and Better Borrowers?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 40(3), pages 273-294, September.
  8. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 517-555.
  9. Marianne Bertrand & Adair Morse, 2009. "Information Disclosure, Cognitive Biases and Payday Borrowing," Working Papers 2009-007, Becker Friedman Institute for Research In Economics.
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  11. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Douglas D. Evanoff, 2010. "Learning to Cope: Voluntary Financial Education and Loan Performance during a Housing Crisis," American Economic Review, American Economic Association, vol. 100(2), pages 495-500, May.
  12. Sumit Agarwal & Paige M. Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," NBER Working Papers 14659, National Bureau of Economic Research, Inc.
  13. repec:reg:rpubli:396 is not listed on IDEAS
  14. Itzhak Ben-David, 2011. "Financial Constraints and Inflated Home Prices during the Real Estate Boom," American Economic Journal: Applied Economics, American Economic Association, vol. 3(3), pages 55-87, July.
  15. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  16. Bond, Philip & Musto, David K. & Yilmaz, Bilge, 2009. "Predatory mortgage lending," Journal of Financial Economics, Elsevier, vol. 94(3), pages 412-427, December.
  17. Morse, Adair, 2011. "Payday lenders: Heroes or villains?," Journal of Financial Economics, Elsevier, vol. 102(1), pages 28-44, October.
  18. Wei Jiang & Ashlyn Aiko Nelson & Edward Vytlacil, 2014. "Liar's Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency," The Review of Economics and Statistics, MIT Press, vol. 96(1), pages 1-18, March.
  19. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
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