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Household Finance

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Regency Ballroom C2
Hosted By: American Finance Association
  • Chair: Gregor Matvos, University of Chicago

High-cost Debt and Borrower Reputation: Evidence From the United Kingdom

Andres Liberman
,
New York University
Daniel Paravisini
,
London School of Economics
Vikram Pathania
,
University of Sussex

Abstract

When taking up high-cost debt signals poor credit risk to lenders, consumers trade off
alleviating financing constraints today with exacerbating them in the future. Using data
from a high-cost lender in the U.K., we document this trade-off by exploiting random
application assignment to loan officers, which measures the effect of loan take-up for
the average applicant, and a regression discontinuity design, which measures the effect
of take-up for the marginal applicant. For the average applicant, taking up a high-cost
loan causes an immediate and permanent decline on the credit score, and leads to more
default and credit rationing by standard lenders in the future. In contrast, the marginal
applicant—whose credit score is not affected—is not more likely to default and does not
experience further credit rationing after take-up. Thus, high cost credit has a negative
impact on future financial health when it affects borrower reputation, but not otherwise.
The evidence suggests that high-cost borrowing may leave a self-reinforcing stigma of
poor credit risk.

The Housing Crisis and the Rise in Student Loans

Gene Amromin
,
Federal Reserve Bank of Chicago
Janice Eberly
,
Northwestern University
John Mondragon
,
Northwestern University

Abstract

The flow of new student loans increased by 50% between 2007 and 2010, and the amount borrowed per student also rose by about a third. This shift occurred during the Financial Crisis, while credit markets were disrupted, and home prices fell by about a third nationwide. In this paper, we explore whether these two phenomena are linked, and in particular, whether the decline in home equity caused households to shift the responsibility for education financing to students in the form of loans. Student loans were one of the few forms of credit that remained accessible throughout the crisis. We estimate that for every dollar of home equity lost, households increase student loan debt by forty to sixty cents. This substitution appears to be driven primarily by households with low levels of liquid assets. We extend our analysis using credit bureau data to trace longer-run effects of this leverage on students. Our results show that constrained households generally continued to enroll in college, but switched to student loan financing. Our quantitative estimates suggest that the 30% average decline in house prices resulted in $1300 in additional student borrowing on average, per student, though the estimated effects are larger for liquidity-constrained and less-educated households. This channel explains 38% of the change in student loan debt within our sample.

Politicizing Consumer Credit

Pat Akey
,
University of Toronto
Rawley Heimer
,
Federal Reserve Bank of Cleveland
Stefan Lewellen
,
London Business School

Abstract

Using proprietary credit bureau data, we find that consumers' access to credit decreases by 4.5% - 8% when the borrower's home-state U.S. Senator becomes the chair of a powerful Senate committee. The reduction in credit access is concentrated among historically credit-constrained consumers (low income, non-white, and borrowers with poor credit scores), and is stronger in areas with less politically-engaged constituents and more politically-connected lenders. Our evidence is consistent with a "political protection" hypothesis in which politically-connected banks reduce their compliance with regulatory fair-lending guidelines after their political connections become more powerful. Our results highlight the distinction between political power and legislative outcomes and contrast with recent findings that governments expand credit access to firms and consumers.

Monthly Payment Targeting and the Demand for Maturity

Bronson Argyle
,
Brigham Young University
Taylor Nadauld
,
Brigham Young University
Christopher Palmer
,
Massachusetts Institute of Technology

Abstract

In recent years, auto debt has been growing faster than any other category of debt in the consumer credit complex, and there is now more auto debt outstanding in the U.S. than credit card debt. In this paper, we argue that increases in credit supply have been an important contributor in the recent rise in household debt. In particular, median auto loan maturities have increased 10% over the past few years, and half of auto-loan originations are for loans with a term of over 5.5 years. We exploit data from millions of auto loans issued by hundreds of credit unions to estimate demand elasticities with respect to term and interest rate using discontinuities in lender pricing rules and find demand to be much more sensitive to maturity than to interest rate. While a loan’s interest rate affects its total cost more than its maturity does, changes in maturity affect monthly payments more than equally sized proportional changes in interest rates. Additional evidence suggests that this consumer focus on monthly payments is driven in large part by the phenomenon of monthly payment targeting—budgeting a set amount for monthly car payments. The resulting strong preference for long-maturity loans combined with increases in credit supply explains at least 15% of the growth in household debt since 2012.
Discussant(s)
Adriano Rampini
,
Duke University
Vyacheslav Fos
,
Boston College
Samuel Hanson
,
Harvard Business School
Efraim Benmelech
,
Northwestern University
JEL Classifications
  • G2 - Financial Institutions and Services