Predatory Lending and the Subprime Crisis

56 Pages Posted: 10 May 2012 Last revised: 11 Feb 2014

Sumit Agarwal

Georgetown University - Department of Finance

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Gene Amromin

Federal Reserve Bank of Chicago

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Douglas D. Evanoff

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: October 3, 2013

Abstract

We measure the effect of an anti-predatory pilot program (Chicago, 2006) on mortgage default rates to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, risky borrowers and/or risky mortgage contracts triggered review sessions by housing counselors who shared their findings with the state regulator. The pilot cut market activity in half, largely through the exit of lenders specializing in risky loans and through decline in the share of subprime borrowers. Our results suggest that predatory lending practices contributed to high mortgage default rates among sub prime borrowers, raising them by about a third.

Keywords: Predatory lending, subprime crisis, household finance, default

JEL Classification: D14, D18

Suggested Citation

Agarwal, Sumit and Ben-David, Itzhak and Amromin, Gene and Chomsisengphet, Souphala and Evanoff, Douglas D., Predatory Lending and the Subprime Crisis (October 3, 2013). Journal of Financial Economics (JFE), Forthcoming; Fisher College of Business Working Paper No. 2012-03-008 ; Charles A. Dice Center Working Paper No. 2012-8. Available at SSRN: https://ssrn.com/abstract=2055889

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

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

Itzhak Ben-David (Contact Author)

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Gene Amromin

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Douglas D. Evanoff

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5814 (Phone)

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