Is Discretionary Pricing Discretionary? The Case of Overages in Mortgage Lending

17 Pages Posted: 5 Aug 2005

See all articles by Harold A. Black

Harold A. Black

University of Tennessee, Knoxville - Department of Finance

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

Thomas P. Boehm

University of Tennessee, Knoxville - Department of Finance

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Date Written: August 2005

Abstract

Research on moral hazard and adverse selection indicates that restricting the ability of lenders to price loans could result in less credit being extended to those in the riskiest credit tier. Given that blacks have worse credit than similarly situated whites, then they would be worse off if overages were banned. Second, borrowers who are unfamiliar with the financial system, such as first-time customers, may require more effort by the loan officer to guide the applicant through the process. Unless lenders can recover the cost of this service, the number of loans to such borrowers will probably decrease. Third, research indicates that blacks do not bargain or comparison shop as much as whites. This implies that, ceteris paribus, markup differences will persist even after accounting for risk, service and demographic variables. Finally, these differences may vary across local markets throughout the country.

Future research efforts should analyze loan payment performance after controlling for market forces within the relevant local market. If unexplained pricing differentials exist between minorities and whites, yet loan payments performance is the same, then clearly there exists an arbitrary component to pricing that is probably discriminatory. Alternatively, if unexplained differentials correspond to payment performance, then these differentials are not arbitrary and discriminatory but market driven. Thus, policy makers and regulators should not strive to eliminate differential pricing but should concern themselves with those differences that are unrelated to market forces.

Keywords: overage, mortgage, discrimination

JEL Classification: G18, G21

Suggested Citation

Black, Harold A. and DeGennaro, Ramon P. and Boehm, Thomas P., Is Discretionary Pricing Discretionary? The Case of Overages in Mortgage Lending (August 2005). Available at SSRN: https://ssrn.com/abstract=766164 or http://dx.doi.org/10.2139/ssrn.766164

Harold A. Black (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States
423-974-1721 (Phone)
423-974-1716 (Fax)

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

Thomas P. Boehm

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States
615-974-3216 (Phone)
615-974-1716 (Fax)

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