Loan Sales and Screening with Two-Dimensional Borrower Types

42 Pages Posted: 25 Aug 2015

See all articles by André Stenzel

André Stenzel

University of Mannheim and MaCCI

Date Written: August 25, 2015


We consider a model of lending with subsequent loan sale opportunities. Market participants observe a public signal about the creditworthiness of each borrower. Lenders additionally have the opportunity to privately screen potential borrowers at a cost. The model rationalizes empirically documented discontinuities in lending and default rates around a FICO credit rating score of 620, while providing a foundation for the endogenous emergence of a cutoff rule-of-thumb. We show that loan sale opportunities have a positive impact on borrowers' access to credit contingent on screening revealing positive information whenever the public information about a borrower's type is relatively bad. At the same time, average borrower quality for intermediate borrower types decreases as gains from trade via loan sales increase the relative profitability of loans to unscreened borrowers compared to loans to screened borrowers which imply significant risk retention. Loan sale opportunities can lead to adverse effects on borrower welfare while strictly increasing lender profitability.

Keywords: screening, loan sales, securitization

JEL Classification: D83, G21, G32

Suggested Citation

Stenzel, André, Loan Sales and Screening with Two-Dimensional Borrower Types (August 25, 2015). Available at SSRN: or

André Stenzel (Contact Author)

University of Mannheim and MaCCI ( email )

Department of Economics, University of Mannheim
L7, 3-5
Mannheim, 68131

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