Does Relationship Lending Still Matter in the Consumer Banking Sector? Evidence from Two Financial Service Organizations in Vermont

Jessica Holmes (), Jonathan Isham (), Ryan Petersen and Paul Sommers ()

Middlebury College Working Paper Series from Middlebury College, Department of Economics

Abstract: We use actual loan applications submitted to a community development credit union (CDCU) and a traditional community bank to examine the role of relationship lending in the automobile loan market. We first show that the community bank relies upon credit scoring, not relationship lending; low-income households with poor credit histories are very unlikely to receive car loans from this traditional bank. We then show that relationship lending is a critical factor in the loan decision at the CDCU; low-income households with strong ties to the institution are likely to receive loans, despite poor credit histories. We conclude that as consolidation, deregulation and technology move mainstream financial institutions away from relationship lending and toward credit scoring, CDCUs will occupy an increasingly critical niche for low-income households.

Pages: 27 pages
Date: 2005-07
New Economics Papers: this item is included in nep-fmk
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