Charles A. Dice Center Working Paper No. 2012-7
50 Pages Posted: 26 Apr 2012 Last revised: 29 Apr 2016
Date Written: April 28, 2016
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.
Keywords: loan officers, loan prospecting, information production, credit default model
JEL Classification: G01, G21
Suggested Citation: Suggested Citation
Agarwal, Sumit and Ben-David, Itzhak, Loan Prospecting and the Loss of Soft Information (April 28, 2016). Fisher College of Business Working Paper No. 2012-03-07; Charles A. Dice Center Working Paper No. 2012-7. Available at SSRN: https://ssrn.com/abstract=2046696 or http://dx.doi.org/10.2139/ssrn.2046696