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Predatory Lending and Hidden Risks

Published online by Cambridge University Press:  26 June 2025

Sumit Agarwal ,
Gene Amromin ,
Itzhak Ben-David Open the ORCID record for Itzhak Ben-David [Opens in a new window]  and
Douglas D. Evanoff
Sumit Agarwal
Affiliation:
National University of Singapore
Gene Amromin
Affiliation:
Federal Reserve Bank of Chicago
Itzhak Ben-David*
Affiliation:
https://ror.org/00rs6vg23 The Ohio State University and NBER
Douglas D. Evanoff
Affiliation:
Federal Reserve Bank of Chicago and the Kaufman Financial Policy Center at Loyola University Chicago
*
ben-david.1@osu.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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We study a specific practice of predatory lending: Borrowers being rejected and approved in rapid succession by the same lender. We show that in such cases borrower and contract characteristics and ex post performance are consistent with predatory steering. Steered borrowers are associated with groups with lower financial sophistication. They are more likely to enter non-amortizing contracts with high profit margins that are quickly securitized. Steered borrowers default less in boom years when refinancing is easy. However, their performance deteriorates sharply once falling prices trap them in contracts with rising payments, reflecting the long-term costs of predatory lending.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 29
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

The views expressed in this paper are those of the authors and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System, or the U.S. Treasury Department. We thank Caitlin Kearns and Mike Mei for their outstanding research assistance and Han Choi for their editorial assistance. We also thank Viral Acharya, Gadi Barlevy, Mike Berry, Michael Greff, Jason Keller, Steve Kuehl, Elizabeth Laderman, Geng Li, Leonard Nakamura, Mitchell Petersen, Amit Seru, Greg Udell, Lena Vanterpool, Alicia Williams, and Marva Williams for constructive input. The comments of seminar participants at the University of Houston, Rice University, the University of Notre Dame, Baruch College, the Real Estate Finance & Investment Symposium at Cambridge, and the Kaufman Financial Policy Center at Loyola University Chicago are well-appreciated. All errors are those of the authors. Email: bizagarw@nus.edu.sg, gene.amromin@chi.frb.org, ben-david.1@osu.edu, douglas.evanoff@comcast.net.

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