Sumit Agarwal
of the National University of Singapore and the Federal Reserve Bank of Chicago,
Itzhak Ben-David
of Ohio State's Fisher College of Business,
Gene Amromin
of the Chicago Fed,
Souphala Chomsisengphet
of the Office of the Comptroller of the Currency (OCC
Douglas D. Evanoff
of the Chicago Fed have written Predatory Lending and the Subprime Crisis. Here's the 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.
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