Predatory lending and the subprime crisis
Predatory Lending and the Subprime Crisis
Sumit Agarwala
Gene Amrominb
Itzhak Ben-Davidc
Souphala Chomsisengphetd
Douglas D. Evanoffb
September 2012
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 program, risky borrowers and risky ‘type’ mortgages triggered mandatory counseling. Following the legislation, market activity decreased by about 50%, where risky borrowers, risky products, and lenders who typically made riskier loans were most affected. Despite the sharp decline in market activity, for most of our analysis we find little evidence that predatory lending contributed to significantly higher mortgage default rates. However, when we hone in on a subsample of borrowers thought to be most susceptible to predatory lending, we find evidence consistent with higher mortgage default rates by about a third.
Keywords: Predatory lending, subprime crisis, household finance, default
JEL Classification: D14, D18
We thank Caitlin Kearns for outstanding research assistance. We thank Amit Seru for helpful comments, and an anonymous referee for important and insightful comments. The views in this paper are those of the authors and may not reflect those of the Federal Reserve System, the Federal Reserve Bank of Chicago, or of the Office of the Comptroller of the Currency.
Contact author: Douglas Evanoff, Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, IL 60604-1413 douglas.evanoff@chi.frb.org a National University of Singapore
b Federal Reserve Bank of Chicago
c Fisher College of Business, The Ohio State University
d Office of the Comptroller of the Currency