Predatory Lending
نویسنده
چکیده
This paper studies the equilibrium predatory practices that may arise when the borrowers have behavioral weaknesses. Rational lenders offer short term contracts that can be renewed at the cost of paying a penalty fee. We show how the optimal contracts depend on the degree of näıveté of the time inconsistent customers. Penalty fees have a dual role : they increase market share by providing a useful commitment device to time-inconsistent but otherwise rational borrowers ; they are also a source of revenue from the semi-näıve borrowers who understand the need for commitment but fail to forecast their future time discount factor. We also show that perfect competition does not eliminate predatory practices, since the equilibrium contract entails a subsidized (below marginal cost) short-term loan that can only be profitable if a fraction of the borrowers end up paying the penalty fee. JEL : D03, D18, D49, D86
منابع مشابه
Working Paper No. 06-2 Predatory Lending in a Rational World
Regulators express growing concern over “predatory lending,” which we take to mean lending that reduces the expected utility of borrowers. We present a rational model of consumer credit in which such lending is possible, and we identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans, and ...
متن کاملPredatory Lending in a Rational World
Regulators express growing concern over “predatory lending,” which we take to mean lending that reduces the expected utility of borrowers. We present a rational model of consumer credit in which such lending is possible and we identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans and po...
متن کاملReducing Home Mortgage Foreclosures in a Predatory Lending Environment: a Case Study of Mid-sized City in Central New York
This article discusses the growing problem of predatory lending, particularly in low-income, inner city neighborhoods, with a case study of communities in Syracuse, New York. The author documents mortgage lending activities and foreclosure patterns in central New York and argues for continued education throughout the home-buying process. A program that reduced foreclosures in low-income urban n...
متن کاملDefining and Detecting Predatory Lending
We define predatory lending as a welfare-reducing provision of credit. Using a textbook model, we show that lenders profit if they can tempt households into “debt traps,” that is, overborrowing and delinquency. We then test whether payday lending fits our definition of predatory. We find that in states with higher payday loan limits, less educated households and households with uncertain income...
متن کاملTh E Law a N D Ec O N O M I C S O F Re M E D I E S F O R Pr E D at O Ry Le N D I N G
Over the past decade, there has been a significant increase in the phenomenon known as ”predatory lending.” In a forthcoming paper, we argue that predatory lending emerged when market incentives that historically led lenders to engage in credit rationing gave way to a market where lenders could easily exploit unsophisticated borrowers. Our specific focus is on the home loan market, i.e., closed...
متن کامل