Disaster Lending: 'Fair' Prices, but 'Unfair' Access
52 Pages Posted: 22 Mar 2018 Last revised: 2 Oct 2019
Date Written: October 1, 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. 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: Suggested Citation