Hostname: page-component-7b7567c8c-kwt9d Total loading time: 0 Render date: 2026-11-12T09:31:31.989Z Has data issue: false hasContentIssue false
  • English
  • Français

Predatory Lending and Hidden Risks

Published online by Cambridge University Press:  26 June 2025

Sumit Agarwal,
Gene Amromin,
Itzhak Ben-DavidOpen 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:
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

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

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 , Volume 60 , Issue 5 , August 2025, pp. 2526 - 2554
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.

References

Agarwal, S.; Ambrose, B. W.; and Yao, V.. “Lender Steering in Residential Mortgage Markets.” Real Estate Economics, 48 (2020a), 446–475.CrossRefGoogle Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; and Evanoff, D. D.. “Learning to Cope: Voluntary Financial Education and Loan Performance During a Housing Crisis.” American Economic Review: Papers & Proceedings, 100 (2010), 495–500.CrossRefGoogle Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; and Evanoff, D. D.. “Predatory Lending and the Subprime Crisis.” Journal of Financial Economics, 113 (2014), 29–52.CrossRefGoogle Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; and Evanoff, D. D.. “Financial Education Versus Costly Counseling: How to Dissuade Borrowers from Choosing Risky Mortgages?” American Economic Journal: Economic Policy, 12 (2020b), 1–32.Google Scholar
Agarwal, S., and Ben-David, I.. “Loan Prospecting and the Loss of Soft Information.” Journal of Financial Economics, 129 (2018), 608–628.CrossRefGoogle Scholar
Agarwal, S.; Ben-David, I.; and Yao, V.. “Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market.” Management Science, 61 (2015), 2220–2240.CrossRefGoogle Scholar
Agarwal, S.; Ben-David, I.; and Yao, V.. “Systematic Mistakes in the Mortgage Market and Lack of Financial Sophistication.” Journal of Financial Economics, 123 (2017), 42–58.CrossRefGoogle Scholar
Agarwal, S.; Rosen, R. J.; and Yao, V.. “Why Do Borrowers Make Mortgage Refinancing Mistakes?” Management Science, 62 (2016), 3494–3509.CrossRefGoogle Scholar
Amromin, G.; Huang, J.; Sialm, C.; and Zhong, E.. “Complex Mortgages.” Review of Finance, 22 (2018), 1975–2007.CrossRefGoogle Scholar
Avery, R.; Brevoort, K.; and Canner, G.. “Opportunities and Issues in Using HMDA Data.” Journal of Real Estate Research, 29 (2007), 351–380.CrossRefGoogle Scholar
Azmy, B. “Squaring the Predatory Lending Circle.” Florida Law Review, 57 (2005), 295.Google Scholar
Barr, M. S. “Credit Where it Counts: The Community Reinvestment Act and its Critics.” NYU Law Review, 80 (2005), 513.Google Scholar
Ben-David, I. “Financial Constraints and Inflated Home Prices During the Real Estate Boom.” American Economic Journal: Applied Economics, 3 (2011), 55–87.Google Scholar
Berndt, A.; Hollifield, B.; and Sandås, P.. “How Subprime Borrowers and Mortgage Brokers Shared the Pie.” Real Estate Economics, 44 (2016), 87–154.CrossRefGoogle Scholar
Bocian, D. G.; Ernst, K. S.; and Li, W.. “Race, Ethnicity and Subprime Home Loan Pricing.” Journal of Economics and Business, 60 (2008), 110–124.CrossRefGoogle Scholar
Bond, P.; Musto, D. K.; and Yilmaz, B.. “Predatory Mortgage Lending.” Journal of Financial Economics, 94 (2009), 412–427.CrossRefGoogle Scholar
Bord, V., and Santos, J. A.. “The Rise of the Originate-to-Distribute Model and the Role of Banks in Financial Intermediation.” Economic Policy Review, 18 (2012), 21–34.Google Scholar
Bostic, R.; Chomsisengphet, S.; Engel, K. C.; McCoy, P. A.; Pennington-Cross, A.; and Wachter, S.. “Mortgage Product Substitution and State Anti-Predatory Lending Laws: Better Loans and Better Borrowers?” Atlantic Economic Journal, 40 (2012), 273–294.CrossRefGoogle Scholar
Bostic, R. W.; Engel, K. C.; McCoy, P. A.; Pennington-Cross, A.; and Wachter, S. M.. “State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms.” Journal of Economics and Business, 60 (2008), 47–66.CrossRefGoogle Scholar
Bowen, R. M.; Jollineau, S. J.; and Lougee, B. A.. “WaMu’s Option-ARM Strategy.” Issues in Accounting Education, 29 (2014), 9–24.CrossRefGoogle Scholar
Buchak, G., and Jørring, A.. “Do Mortgage Lenders Compete Locally? Implications for Credit Access.” Working Paper, Boston College (2021).Google Scholar
Carr, J. H., and Kolluri, L.. Predatory Lending: An Overview. Fannie Mae Foundation (2001), 1–17.Google Scholar
Demyanyk, Y., and Loutskina, E.. “Mortgage Companies and Regulatory Arbitrage.” Journal of Financial Economics, 122 (2016), 328–351.CrossRefGoogle Scholar
Demyanyk, Y., and Van Hemert, O.. “Understanding the Subprime Mortgage Crisis.” Review of Financial Studies, 24 (2011), 1848–1880.CrossRefGoogle Scholar
Di Maggio, M.; Kermani, A.; and Korgaonkar, S.. “Partial Deregulation and Competition: Effects on Risky Mortgage Origination.” Management Science, 65 (2019), 4676–4711.CrossRefGoogle Scholar
Egan, M. “Brokers Versus Retail Investors: Conflicting Interests and Dominated Products.” Journal of Finance, 74 (2019), 1217–1260.CrossRefGoogle Scholar
Eggert, K. “Held up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine.” Creighton Law Review, 35 (2001), 503.Google Scholar
Elliehausen, G., and Staten, M. E.. “Regulation of Subprime Mortgage products: An analysis of North Carolina’s Predatory Lending Law.” Journal of Real Estate Finance and Economics, 29 (2004), 411–433.CrossRefGoogle Scholar
Engel, K. C., and McCoy, P. A.. “A Tale of Three Markets: The Law and Economics of Predatory Lending.” Texas Law Review, 80 (2001), 1255.Google Scholar
Engel, K. C., and McCoy, P. A.. “Turning a Blind Eye: Wall Street Finance of Predatory Lending.” Fordham Law Review, 75 (2006), 2039.Google Scholar
Ferreira, F., and Gyourko, J.. “Heterogeneity in Neighborhood-Level Price Growth in the United States, 1993–2009.” American Economic Review: Papers & Proceedings, 102 (2012), 134–140.CrossRefGoogle Scholar
Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Government Printing Office (2010).Google Scholar
Freddie Mac. “Automated Underwriting: Making Mortgage Lending Simpler and Fairer for America’s Families.” Industry Report, Freddie Mac (1996).Google Scholar
Garmaise, M. J. “Borrower Misreporting and Loan Performance.” Journal of Finance, 70 (2015), 449–484.CrossRefGoogle Scholar
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Neglected Risks, Financial Innovation, and Financial Fragility.” Journal of Financial Economics, 104 (2012), 452–468.CrossRefGoogle Scholar
Griffin, J. M., and Maturana, G.. “Who Facilitated Misreporting in Securitized Loans?” Review of Financial Studies, 29 (2016), 384–419.CrossRefGoogle Scholar
Gurun, U. G.; Matvos, G.; and Seru, A.. “Advertising Expensive Mortgages.” Journal of Finance, 71 (2016), 2371–2416.CrossRefGoogle Scholar
Harvey, K. D., and Nigro, P. J.. “Do Predatory Lending Laws Influence Mortgage Lending? An Analysis of the North Carolina Predatory Lending Law.” Journal of Real Estate Finance and Economics, 29 (2004), 435–456.CrossRefGoogle Scholar
Ho, G., and Pennington-Cross, A.. “The Impact of Local Predatory Lending Laws on the Flow of Subprime Credit.” Journal of Urban Economics, 60 (2006), 210–228.CrossRefGoogle Scholar
Immergluck, D., and Smith, G.. “Measuring Neighborhood Diversity and Stability in Home-Buying: Examining Patterns by Race and Income in a Robust Housing Market.” Journal of Urban Affairs, 25 (2003), 473–491.CrossRefGoogle Scholar
Jiang, W.; Nelson, A. A.; and Vytlacil, E.. “Securitization and Loan Performance: Ex Ante and Ex Post Relations in the Mortgage Market.” Review of Financial Studies, 27 (2014), 454–483.CrossRefGoogle Scholar
Jørring, A. “Financial Sophistication and Consumer Spending.” Journal of Finance, forthcoming (2025).Google Scholar
Keys, B. J.; Mukherjee, T.; Seru, A.; and Vig, V.. “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans.” Quarterly Journal of Economics, 125 (2010), 307–362.CrossRefGoogle Scholar
Keys, B. J.; Pope, D. G.; and Pope, J. C.. “Failure to Refinance.” Journal of Financial Economics, 122 (2016), 482–499.CrossRefGoogle Scholar
Kolb, R. W. The Financial Crisis of Our Time. Oxford, UK: Oxford University Press (2011).Google Scholar
Lusardi, A., and Mitchell, O. S.. “The Economic Importance of Financial Literacy: Theory and Evidence.” American Economic Journal: Journal of Economic Literature, 52 (2014), 5–44.Google ScholarPubMed
Mayer, C.; Pence, K.; and Sherlund, S.. “The Rise in Mortgage Defaults.” Journal of Economic Perspectives, 23 (2009), 27–50.CrossRefGoogle Scholar
Morton, F. S.; Zettelmeyer, F.; and Silva-Risso, J.. “Consumer Information and Discrimination: Does the Internet Affect the Pricing of New Cars to Women and Minorities?” Quantitative Marketing and Economics, 1 (2003), 65–92.CrossRefGoogle Scholar
Nadauld, T. D., and Sherlund, S. M.. “The Impact of Securitization on the Expansion of Subprime Credit.” Journal of Financial Economics, 107 (2013), 454–476.CrossRefGoogle Scholar
Ondrich, J.; Ross, S.; and Yinger, J.. “Now You See it, Now You Don’t: Why Do Real Estate Agents Withhold Available Houses from Black Customers?” Review of Economics and Statistics, 85 (2003), 854–873.CrossRefGoogle Scholar
Piskorski, T.; Seru, A.; and Witkin, J.. “Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market.” Journal of Finance, 70 (2015), 2635–2678.CrossRefGoogle Scholar
Purnanandam, A. “Originate-to-Distribute Model and the Subprime Mortgage Crisis.” Review of Financial Studies, 24 (2011), 1881–1915.CrossRefGoogle Scholar
Reiss, D. “Subprime Standardization: How Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market.” Florida State University Law Review, 33 (2005), 985.Google Scholar
Renuart, E. “An Overview of the Predatory Mortgage Lending Process.” Housing Policy Debate, 15 (2004), 467–502.CrossRefGoogle Scholar
Shiller, R. J. “Narrative Economics.” American Economic Review, 107 (2017), 967–1004.CrossRefGoogle Scholar
White, A. M. “Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications.” Connecticut Law Review, 41 (2008), 1107.Google Scholar
Zingales, L. “Presidential Address: Does Finance Benefit Society?” Journal of Finance, 70 (2015), 1327–1363.CrossRefGoogle Scholar