Disaster Lending: 'Fair' Prices, but 'Unfair' Access
47 Pages Posted: 22 Mar 2018 Last revised: 16 May 2019
Date Written: May 14, 2019
We find that under risk-insensitive loan pricing -- a feature present in many government programs -- marginal credit quality borrowers are less likely to receive credit. By restricting price flexibility, marginal applicants that would likely receive a loan at a higher interest rate are instead denied credit altogether. Our particular setting is the Small Business Administration's disaster-relief home loan program, where risk-based pricing is absent, but screening on credit quality remains. We find that this program denies more loans in areas with larger shares of minorities, subprime borrowers, and higher income inequality, even relative to private market denial rates. Thus, despite ensuring "fair'' prices, risk-insensitive pricing may lead to "unfair'' access to credit. As a consequence, the government's own lending program ends up denying credit to minority and poor borrowers at a higher rate than private markets.
Keywords: credit access, discrimination, income inequality, government lending, unintended consequences
JEL Classification: G21, G28, H81, H84
Suggested Citation: Suggested Citation