Loan Prospecting and the Loss of Soft Information
Georgetown University - Department of Finance
Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)
April 28, 2016
Fisher College of Business Working Paper No. 2012-03-07
Charles A. Dice Center Working Paper No. 2012-7
We study a controlled experiment in which bank’s loan officers were incentivized to prospect for new applications. The dollar volume of approved loans increased; however, we find that loan officers did not source new applications and that the expected default rate did not change. Instead, the bank relied on favorable hard information when approving loans and ignored unfavorable soft information. Furthermore, loan officers convinced approved applicants to borrow larger amounts. Both factors contributed to an ex post higher default rate and to the loss of the predictive power of the bank’s credit default model.
Number of Pages in PDF File: 50
Keywords: loan officers, loan prospecting, information production, credit default model
JEL Classification: G01, G21
Date posted: April 26, 2012 ; Last revised: April 29, 2016
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