Bank Technology Adoption and Loan Production in the U.S. Mortgage Market *

Abstract

Information technology plays a key role in the consumer credit market, by shaping the way lenders screen and underwrite borrowers. We study how the adoption of information technology by lenders affects approval decisions, pricing, and repayment in the U.S mortgage market. We assemble a novel loan-level dataset that covers the trajectory of mortgages from application to repayment and combine it with detailed information about IT investment by lenders. We empirically identify that higher IT investment leads lenders to increase approval rates for loan applications, introduce greater granularity in their pricing, and create loan portfolios with better ex-post performance. A simple model of screening technology investment, loan underwriting and pricing is developed to explain our empirical findings.

Keywords: Mortgage market, Bank screening, loan decision, loan pricing, loan performance, technology adoption, financial inclusion JEL codes: G21, D22, G20, G51

JEL Classification: G21, D22, G20, G51