Working Paper: NBER ID: w22696
Authors: Sumit Agarwal; Gene Amromin; Itzhak Bendavid; Douglas D. Evanoff
Abstract: We present evidence of a particular type of loan steering in which lenders lead borrowers to take out high margin mortgage products. We identify this activity by comparing borrowers who were rejected by lenders but were subsequently approved by their affiliates (steered borrowers) to other initially rejected borrowers who obtained loans elsewhere. Although steered borrowers default less, they pay significantly higher interest rates and are more likely to borrow through contracts with unconventional features, such as negative amortization or prepayment penalties. Female borrowers, single borrowers with no co-signers, and borrowers in low-income locations are more likely to be steered.
Keywords: loan steering; mortgage markets; predatory lending; financial literacy
JEL Codes: D12; D18; G18; G21; K2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| steered borrowers (G51) | higher interest rates (E43) |
| steered borrowers (G51) | complex mortgage products (G21) |
| steered borrowers (G51) | lower default rate (E43) |
| lender behavior (G21) | borrower outcomes (G51) |