Loan Prospecting and the Loss of Soft Information
National University of Singapore
Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)
July 31, 2015
Charles A. Dice Center Working Paper No. 2012-7
Fisher College of Business Working Paper No. 2012-03-007
We study a controlled experiment in a large U.S. commercial bank in which loan officers engaged in loan prospecting. Consequently, loan size, loan volume, and loan default increased. We show that while the bank’s credit standards did not change, it put greater weight on hard information in the approval process and thus approved many applications that previously would have been rejected. Furthermore, loan officers did not source new applications but rather convinced existing applicants to borrow larger amounts. Both factors contributed to a higher default rate and to the loss of the predictive power of the bank’s credit model.
Number of Pages in PDF File: 46
Keywords: loan officers, loan prospecting, information production, credit default model
JEL Classification: G01, G21
Date posted: April 26, 2012 ; Last revised: August 28, 2015
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