Disaster Lending: 'Fair' Prices, but 'Unfair' Access

52 Pages Posted: 22 Mar 2018 Last revised: 2 Oct 2019

See all articles by Taylor A. Begley

Taylor A. Begley

Washington University in St. Louis - John M. Olin Business School

Umit Gurun

University of Texas at Dallas

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business

Daniel Weagley

Georgia Institute of Technology - Scheller College of Business

Date Written: October 1, 2019

Abstract

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. This program screens applicants on credit quality, but cannot price loans according to credit risk. 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.

Keywords: credit access, discrimination, income inequality, government lending, unintended consequences

JEL Classification: G21, G28, H81, H84

Suggested Citation

Begley, Taylor A. and Gurun, Umit and Purnanandam, Amiyatosh K. and Weagley, Daniel, Disaster Lending: 'Fair' Prices, but 'Unfair' Access (October 1, 2019). Georgia Tech Scheller College of Business Research Paper No. 18-6; Finance Down Under 2019 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=3145298 or http://dx.doi.org/10.2139/ssrn.3145298

Taylor A. Begley (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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

Umit Gurun

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Daniel Weagley

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 385-3015 (Phone)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
161
Abstract Views
1,278
rank
188,518
PlumX Metrics