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

47 Pages Posted: 22 Mar 2018 Last revised: 16 May 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: May 14, 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, 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

Begley, Taylor A. and Gurun, Umit and Purnanandam, Amiyatosh K. and Weagley, Daniel, Disaster Lending: 'Fair' Prices, but 'Unfair' Access (May 14, 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

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