Search Results
Working Paper
Credit Score Doctors
We study how the existence of cutoffs in credit scores affects the behavior of homebuyers. Borrowers are more likely to purchase houses after their credit scores cross over a cutoff to qualify them for a higher credit score bin. However, the credit accounts of these individuals (crossover group) are more likely to become delinquent within four years following home purchases than the accounts of those who had stayed in the same bin (non-crossover group). The effect is not only concentrated in subprime bins, but in other bins as well. It is neither limited to pre-crisis period nor curtailed by ...
Working Paper
How Much Does Racial Bias Affect Mortgage Lending? Evidence from Human and Algorithmic Credit Decisions
We assess racial discrimination in mortgage approvals using new data on mortgage applications. Minority applicants tend to have significantly lower credit scores, higher leverage, and are less likely than white applicants to receive algorithmic approval from race-blind government automated underwriting systems (AUS). Observable applicant- risk factors explain most of the racial disparities in lender denials. Further, we exploit the AUS data to show there are risk factors we do not directly observe, and our analysis indicates that these factors explain at least some of the residual 1-2 ...
Report
Unintended Consequences of "Mandatory" Flood Insurance
We document that the quasi-mandatory U.S. flood insurance program reduces mortgage lending along both the extensive and intensive margins. We measure flood insurance mandates using FEMA flood maps, focusing on the discreet updates to these maps that can be made exogenous to true underlying flood risk. Reductions in lending are most pronounced for low-income and low-FICO borrowers, implying that the effects are at least partially driven by the added financial burden of insurance. Our results are also stronger among non-local or more-distant banks, who have a diminished ability to monitor local ...
Working Paper
Social Externalities of Bank Enforcement Actions: The Case of Minority Lending
This paper studies the role banking supervision plays in improving access to credit for minorities by investigating how enforcement decisions and orders (EDOs) affect the bank borrower base. We find that, after an EDO's termination, banks significantly increase residential mortgage lending to minorities, even when the enforcement order is not issued for violations of fair lending laws. Our findings suggest that improvements in banks' internal credit assessment and compliance due to the enforcement process are associated with the expansion in lending to minority borrowers. Our findings ...
Working Paper
Does Differential Treatment Translate to Differential Outcomes for Minority Borrowers? Evidence from Matching a Field Experiment to Loan-Level Data
This paper provides evidence on the relationship between differential treatment of minority borrowers and their mortgage market outcomes. Using data from a field experiment that identifies differential treatment matched to real borrower transactions in the Home Mortgage Disclosure Act (HMDA) data, we estimate difference-in-difference models between African American and white borrowers across lending institutions that display varying degrees of differential treatment. Our results show that African Americans are more likely to be in a high-cost (subprime) loan when borrowing from lenders that ...
Working Paper
Reexamining the 'Role of the Community Reinvestment Act in Mortgage Supply and the U.S. Housing Boom'
Concerns have lingered since the 2007 subprime crisis that government housing policies promote risky mortgage lending. The first peer-reviewed evidence of a causal effect was published by the Review of Financial Studies in a paper (Saadi, 2020) linking the crisis to changes in the Community Reinvestment Act (CRA) in 1995. A review of that paper, however, shows that it misrepresents the policy changes as having taken effect in mid-1998, 2.5 years after they were implemented. When the correct timing is used, a similar analysis yields no evidence of a relationship between CRA and riskier ...
Working Paper
Market Concentration in Fintech
This paper discusses concentration in consumer credit markets with a focus on fintech lenders and residential mortgages. We present evidence that shows that concentration among fintech lenders is significantly higher than that for bank lenders and other nonbank lenders. The data also show that the overall concentration in mortgage lending has declined between 2011 and 2019, driven mostly by a reduction in concentration among bank lenders. We present a simple model to show that changes in lender financial technology (interpreted as improvements in quality of loan services) explain more than ...
Report
Nonconforming Preferences: Jumbo Mortgage Lending and Large Bank Stress Tests
The 2010s saw a profound shift towards jumbo mortgage lending by large banks that are regulated under the Dodd-Frank Act. Using data from the Home Mortgage Disclosure Act, we show that the “jumbo shift” is correlated with being subject to the Comprehensive Capital Analysis and Review (CCAR) stress tests, and that financial regulation caused CCAR-regulated banks to change preference for nonconforming relative to conforming loans of similar size. We discuss potential mechanisms through which regulation could have affected bank incentives.
Working Paper
The Rise of Nonbanks and the Quality of Financial Services: Evidence from Consumer Complaints
We show that as nonbanks' market share increases in a local residential mortgage market, the quality of mortgage services in the market improves. Two instrumental variable analyses exploiting (1) stress tests conducted by the Federal Reserve, and (2) mortgage industry surety bonds required by each state confirm this finding. We find evidence that as nonbanks grow their market share, they develop a specialty in servicing lower-income borrowers and increase investment in technology, leading to improved service quality. This improvement in service quality is more salient in counties with a ...