Disaster Lending: The Distributional Consequences of Government Lending Programs

Abstract

We find the Small Business Administration's disaster-relief home loan program denies significantly more loans in areas with larger shares of minorities, subprime borrowers, and higher income inequality. We find that risk-insensitive loan pricing -- a feature present in many regulated and government-run lending programs -- is a primary driver of these disparities in access to credit. The differences in denial rates are disproportionately high compared to private-market lending and government-insured risk-sensitive loan pricing programs. Thus, despite ensuring fair prices, the use of risk-insensitive pricing may lead to unfair access to credit.