Predatory Lending and Hidden Risks

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 sub prime borrowers, raising them by about a third.

Agarwal, Sumit and Ben-David, Itzhak and Amromin, Gene and Chomsisengphet, Souphala and Evanoff, Douglas D., Predatory Lending and the Subprime Crisis (October 3, 2013). Journal of Financial Economics (JFE), Forthcoming, Fisher College of Business Working Paper No. 2012-03-008 , Charles A. Dice Center Working Paper No. 2012-8, Available at SSRN: https://ssrn.com/abstract=2055889