Predatory Lending and Hidden Risks

Sumit Agarwal, Gene Amromin, Itzhak Ben-David, and Douglas D. Evanoff

♦ We study a specific practice of predatory lending: borrowers being rejected and approved in rapid succession by the same lender. We show that in such cases borrower and contract characteristics and ex-post performance are consistent with predatory steering. Steered borrowers are associated with groups with lower financial sophistication. They are more likely to enter non-amortizing contracts with high profit margins that are quickly securitized. Steered borrowers default less in boom years when refinancing is easy. However, their performance deteriorates sharply once falling prices trap them in contracts with rising payments, reflecting the long-term costs of predatory lending.

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