Loan Product Steering in Mortgage Markets

Sumit Agarwal, Gene Amromin, Itzhak Ben-David and Douglas Evanoff
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Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We present evidence of a particular type of loan steering in which lenders lead borrowers to take out high margin mortgage products. We identify this activity by comparing borrowers who were rejected by lenders but were subsequently approved by their affiliates (steered borrowers) to other initially rejected borrowers who obtained loans elsewhere. Although steered borrowers default less, they pay significantly higher interest rates and are more likely to borrow through contracts with unconventional features, such as negative amortization or prepayment penalties. Female borrowers, single borrowers with no co-signers, and borrowers in low-income locations are more likely to be steered.

Date: 2016
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Working Paper: Loan Product Steering in Mortgage Markets (2016)
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