The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market

34 Pages Posted: 11 Nov 2010

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Brent W. Ambrose

Pennsylvania State University - Department of Insurance & Real Estate

Souphala Chomsisengphet

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Chunlin Liu

University of Nevada, Reno - College of Business

Date Written: November 10, 2010

Abstract

Credit underwriting is a dynamic process involving multiple interactions between borrower and lender. During this process, lenders have the opportunity to obtain hard and soft information from the borrower. We analyze more than 108,000 home equity loans and lines-of-credit applications to study the role of soft and hard information during underwriting. Our dataset allows us to distinguish lender actions that are based strictly on hard information from decisions that involve the collection of soft information. Our analysis confirms the importance of soft information and suggests that its use can be effective in reducing overall portfolio credit losses ex post.

Keywords: Information, Contract Frictions, Screening, Banking, Home Equity Lending

JEL Classification: D1, D8, G21

Suggested Citation

Agarwal, Sumit and Ambrose, Brent W. and Chomsisengphet, Souphala and Liu, Chunlin, The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market (November 10, 2010). Journal of Money, Credit, and Banking, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1706916 or http://dx.doi.org/10.2139/ssrn.1706916

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Brent W. Ambrose

Pennsylvania State University - Department of Insurance & Real Estate ( email )

Smeal College of Business,
Penn State University
University Park, PA US-0-PA 16802
United States
8148670066 (Phone)

HOME PAGE: http://https://sites.psu.edu/brentwambrose/

Souphala Chomsisengphet

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Chunlin Liu

University of Nevada, Reno - College of Business ( email )

University of Nevada, Reno
Reno, NV 89557-0016
United States

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