Cost Of Lending Research Articles

Predatory Lending and Housing Disinvestment

This paper develops a model of predatory lending within the context of refinance mortgages. The primary objective is to determine analytically the extent to which predatory lenders may decrease home equity in the refinance mortgage market. The model characterizes an individual borrower's decision to refinance or not refinance, and with whom to refinance. There exist two types of refinance applicants - prime and subprime, and three types of lenders - prime, good (i.e. non-predatory) subprime, and predatory subprime. Applicants cannot distinguish with certainty a legitimate lender from a predatory lender; they infer a lender's type via a signal. Predatory lenders are distinguished from legitimate lenders by higher lending costs and their attempts to misrepresent themselves as good subprime lenders. The model is able to address questions concerning the most desirable structure of policies designed to lower the prevalence of predatory lenders and to improve consumer awareness of predatory practices. In particular, it shows that both types of policies can experience diminishing returns, and that effective policies to combat predatory lending will be most effective when they aim to achieve both goals. In addition, policy simulations are conducted that estimate the expected change in borrower equity effected by changes in policy parameters representing the level of intensity in predatory lending and the degree of successful predatory lender deception. Using reasonable parameter values, the simulation estimates a potential annual loss in homeowner equity resulting from predatory lending of more than $9 billion.

Trends in relationship lending and factors affecting relationship lending efficiency

This paper investigates the efficiency of relationship managers at the Canadian Imperial Bank of Commerce (CIBC) one of Canada's largest banks. Data envelopment analysis (DEA) efficiency scores are analyzed using regression. The results demonstrate that managers are less efficient when facing larger numbers of loans or smaller loans. M. Berlin and L.J. Mester (On the profitability and cost of relationship lending, Working paper no. 97-43, The Wharton School, University of Pennsylvania, 1997) show that credit smoothing is generally suboptimal. A more complete explanation is obtained by taking a micro-level focus. Other results indicate that banks may improve profitability by reserving relationship lending for loans of larger size. Tests of relationships between efficiency and nonperforming loans and of the skimping hypothesis are conducted.

On the profitability and cost of relationship lending

We provide evidence on the costs and profitability of relationship lending by banks. We derive bank-specific measures of loan rate smoothing for small business borrowers in response to exogenous shocks to their credit risk and to interest rates, and then estimate cost and profit functions to examine how smoothing affects bank costs and profits. Our results suggests that, in general, loan rate smoothing in response to a credit risk shock is not part of an optimal long-term contract between a bank and its borrower, while loan rate smoothing in response to an interest-rate shock is.

On the Profitability and Cost of Relationship Lending

We provide evidence on the costs and profitability of relationship lending by banks. We derive bank-specific measures of loan rate smoothing for small business borrowers in response to exogenous shocks to their credit risk and to interest rates, and then estimate cost and profit functions to examine how smoothing affects bank costs and profits. Our results suggests that, in general, loan rate smoothing in response to a credit risk shock is not part of an optimal long-term contract between a bank and its borrower, while loan rate smoothing in response to an interest rate shock is.

MICRO‐LENDING INSTITUTIONS: USING SOCIAL NETWORKS TO CREATE PRODUCTIVE CAPABILITIES

Financial service institutions design commercial lending mechanisms for small businesses with specific kinds of business owners in mind, that is, owners who already own or have access to both capital and productive resources. Given the conventional mechanisms devised by traditional lenders, individuals without productive capital appear to be costly, high risk borrowers. Today a new financial service institution called micro‐lending offers credit to just these high risk borrowers by constructing alternative lending mechanisms based on peer networks. These alternative mechanisms reduce the costs of lending to a higher risk population while providing access to business information and human capital skills, creating opportunities to build productive capabilities and other, less tangible resources, such as community networks. Using a case study of a neighborhood‐based inner‐city micro‐loan program in New England, I investigate how micro‐lending operates to reduce the costs of lending, as well as examine the group interaction that emerges among program participants.

Bank-NGO linkages and the transaction costs of lending to the poor through groups

The Foundation for Development Cooperation's 'Banking with the Poor' project stresses the importance of linkages between commercial banks on the one hand, and non-government organizations (NGOs) and self-help groups of the poor (SHGs) on the other, as a mechanism for channelling credit to the poor on a sustainable basis. In addition to offering a number of other advantages, such 'linkages' can reduce the transaction costs of lending and borrowing. This article describes two studies, one in India and one in the Philippines, which set out to quantify the transaction costs of commercial banks and NGOs in lending to the poor, and the transaction costs facing poor borrowers. The Indian study compared the transaction costs incurred by banks when lending to the poor through various channels, and found that transaction costs were much lower where banks used NGOs and SHGs as intermediaries. Transaction costs facing borrowers were also significantly lower. This suggests an important role for NGOs in the intermediation process.The Philippines study looked at the question from the perspective of the NGOs. It found that NGOs could channel credit to the poor with lower transaction costs, as a proportion of loans granted, than most other institutions. Nevertheless, the small loans and short maturities inherent in lending to the poor inevitably led to transaction costs being relatively high compared to the value of loans outstanding at any one point in time. This highlights the need for NGOs to minimize costs as far as possible, and the article includes a number of measures that would help them to achieve financial sustainability.

The Financial Accelerator and the Flight to Quality

Adverse shocks to the economy may be amplified by worsening credit-market conditions-- the financial 'accelerator'. Theoretically, we interpret the financial accelerator as resulting from endogenous changes over the business cycle in the agency costs of lending. An implication of the theory is that, at the onset of a recession, borrowers facing high agency costs should receive a relatively lower share of credit extended (the flight to quality) and hence should account for a proportionally greater part of the decline in economic activity. We review the evidence for these predictions and present new evidence drawn from a panel of large and small manufacturing firms.

Modelling the economics of interlending

Examines issues raised during a project, carried out by Coopers and Lybrand Associates on behalf of the British Library Document Supply Centre, which looked at interlibrary lending (ILL) costs and compiled an economic model of the ILL process. Discusses the calculation of existing costs as well as costs after hypothetical changes in ILL. Presents a data collection methodology and computer based model which should enable librarians to collect and analyse data for their own use whilst adding to the main database.

Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan

Many governments have perceived the rural moneylender as usurious. This article takes a first step toward directly testing the validity of this view. In a study of services, costs, and charges of fourteen informal market moneylenders and their clients in Chambar, Pakistan, the article examines whether the high implicit interest rates charged reflect the actual costs of operating in that market. Estimates of the resource costs incurred by informal lenders for screening, pursuing delinquent loans, overhead, and cost of capital (including unrecoverable loans) suggest that lenders' charges are equal to their average cost of lending but exceed their marginal cost. This finding is consistent with the view that the informal credit market is characterized by excess capacity and monopolistic competition in the presence of imperfect information.

Overcoming Obstacles to Interpersonal Compliance A Principle of Message Construction

Scholars recognize that language can be used to accomplish goals. If so, messages should be constructed so as to overcome obstacles to the achievement of interpersonal objectives. Based upon this perspective, six hypotheses were deduced that predicted the linguistic features of help-seeking messages from obstacles associated with (a) the type of request (borrowing favors) and (b) relational intimacy. The results of a study that tested these hypotheses are reported; support for each was found. Specifically, messages seeking to borrow a resource proposed contractual arrangements aimed at reducing the costs of lending. On the other hand, favor-seeking messages included more inquiries about the costs of compliance to the target and offers of compensation. Relational obligations and resulting facework were also studied. As predicted, when seeking to borrow a resource, intimacy was negatively related to communicated facework; when seeking a favor intimacy was positively related to facework. Finally, when a request to borrow a resource was rejected, intimacy was positively related to counter persuasion cues and negatively related to expressed forgiveness; however, when a favor-seeking message was refused, intimacy was positively related to communicated forgiveness.

Decision support for accounts receivable management: A conceptual framework: V. Srinivasan and Y.H. Kim: College of Business Administration, University of Cincinnati, 1985

For a long period of time, due to the lack of collateral, high risks, and high bank lending costs, China's rural household financing still facing significant constraints, and the innovation of rural household financing models is relatively behind the innovation of other financial products. In order to solve the problem of rural financing difficulties, this paper combines agricultural big data technology and financial technology to construct a rural financing problem analysis system. Moreover, this paper analyzes the problems of information asymmetry between farmers and financial institutions in the current traditional and innovative financing models of farmers and financial institutions, high thresholds, and inability to take account of information asymmetry and lack of collateral for farmers, and proposes corresponding countermeasures. From the research results of this paper, we can see that the method proposed in this paper has a certain effect which are described in detail.

Financial Stress in Agriculture: Implications for Agricultural Lenders

During the 1970s and 1980s forces in the sector and the financial markets have significantly influenced the cost and availability of financial capital for farmers. Farm income has experienced periodic shocks that in the early 1980s created one of the deepest and most widespread recessions in agriculture since the 1930s. In financial markets, the unprecedented high and volatile interest rates and profound regulatory changes for financial institutions lessened the insulation of credit from national and international markets. These conditions have impacted the hardest on the owners of and lenders to larger farms that, while relatively few in number, hold substantial debt and are highly leveraged (USDA). Consistent, current, and valid information about the farm credit crisis of the early 1980s is not available. Moreover, an objective assessment is often obscured by the media's tendency to highlight the most serious cases. Nonetheless, as data to follow will show, credit problems can likely be considered very serious but still manageable. The incidences of delinquencies, loans being liquidated, customers discontinued, foreclosures, bankruptcies, and workouts all appear to have accelerated from past experiences (Shepard and Collins). In turn, these conditions cause higher lending costs, greater lending frustration, and reevaluations of credit standards and loan policies. In this paper, we focus on financial stress for major agricultural lenders, arising from agricultural and financial market forces. We first establish the lenders' risk setting, and then review the credit problems and their impacts on commercial banks, the credit system, government credit programs, and other lenders. Managerial and policy implications are also considered.

Observations on the conditionality of international financial institutions

Conditionality, the terms imposed by international financial institutions on borrowing countries, has been regarded by critics as being too inflexible and focussing too narrowly on demand forces and monetary policy instruments. The major intent of the paper, however, is to shift the discussion of conditionality to its functions in relation to private international lending. Conditionality provides information to lenders and certification of borrowers which, by decreasing uncertainty, may increase the quantities and reduce the costs of private lending. Yet restrictions on total and/or foreign credit may also reduce competition. These are examples of neglected issues of conditionality which deserve more attention.

INTERNAL COSTS OF INTERLIBRARY LENDING IN BRITISH UNIVERSITY LIBRARIES

The question of interlibrary loan costs is of major importance to librarians in higher education establishments. In May 1978 the Library Management Research Unit (now the Centre for Library and Information Management) at Loughborough University carried out a short programme of studies to investigate the internal costs of interlibrary lending and borrowing at five libraries in three British universities. The studies were carried out at University A for five working days at random over four weeks, at University B (Main Library, Science Library, Medical Library) for 15 consecutive working days, and at University C for 19 consecutive working days. The necessary work time data was gathered by self‐completed diary surveys of staff at each library. In spite of some unavoidable differences in study technique at each library it proved possible to calculate some generally comparable unit costs from the work measurement data recorded. The libraries concerned had some reservations about the comparative study and the way in which it should best be carried out, but agreed in the end that it was a useful exercise giving reasonable results. At the same time the libraries produced their own estimates of unit costs based on annual expenditure and transaction data.

INTERLIBRARY LENDING AROUND THE WORLD — A REVIEW OF RECENT PAPERS — VII

Attention is given to some of the arguments for and against the use of computer‐based networks and services in the United States of America, to likely effects of the new US copyright law, and to the costs of interlibrary lending. The ability of the Federal Republic of Germany to satisfy international loan requests is examined, as is the use of the ISBN in union catalogue construction and its role in interlibrary /ending. The possibility of establishing a central loan collection in New Zealand is considered, and statistics of interlibrary lending in France are presented.

Theory and Reality in Bankruptcy: The Spherical Chicken

In his paper entitled Financial Markets, Default, and Bankruptcy: Role of State Dean William H. Meckling used some principles widely accepted by economists as analytical framework within which to clarify issues, identify more precisely role which bankruptcy plays, and assess social consequences of alternative legal structures for bankruptcy.' Meckling asserts that the evidence and theory strongly support proposition that any increase (or decrease) in lending costs brought about by changes in bankruptcy laws will in long run be passed along to borrowers or potential borrowers.2 These propositions are restated in more economic terms: [T]he supply of funds available for any class of credit is virtually perfectly elastic at an interest rate determined by costs of lending in that market....3 are defined to include alternative lending opportunities, as well as risks and various expenses of business operation in consumer lending.4 Costs are, to some extent, result of anticipated and actual risks. risks include default in form of a petition in bankruptcy. price of money is a direct function of these costs to sellers of money. As Meckling puts it, The higher these costs, more it will cost individuals to borrow.5

High Cost of Lending

High Cost of Lending

COMMERCIAL BANK PRICE DISCRIMINATION AGAINST SMALL LOANS: AN EMPIRICAL STUDY*

THE BUSINESS LOAN SURVEYS made by the Federal Reserve Board' reveal consistently that commercial bank loans of smaller sizes carry higher interest rates than do larger loans. Since size of loans and size of firm are highly correlated, this inverse relationship between interest rates and size of loans apparently has led many observers to conclude that banks discriminate against small businesses.2 It is reasoned that small businesses have fewer sources of funds available to them and hence have more inelastic demand curves for loans from a particular bank lender than have large businesses. The banks are thought to take advantage of this situation by charging higher interest rates on small loans than on large loans. An alternative hypothesis is that the observed differential between interest rates charged on large and small loans is due to a differential in the marginal costs of lending and risk between large and small loans. The elasticity of demand for loans faced by a bank is believed to be the same whether it is derived from large or small loans.3 Then, as one can demonstrate with familiar price theory analysis, higher marginal costs of lending and risk on small loans (if they exist) should be reflected in higher rates charged on these loans if the bank does not price discriminate against large loans.4 To demonstrate this alternative hypothesis, it is necessary not only to show that the marginal cost of lending and risk is higher for small than for large loans, but also to show that the difference in marginal costs is sufficient to explain the difference in marginal earnings.5 Thus, estimates of marginal earnings, marginal lending costs, and the marginal cost of risk per $100 change in the size of loans, with the effect of other relevant factors taken into account, are presented in this study. Data for 1959 and 1960 and 1961 (three cross sections) were analyzed by means of multiple regression analysis. The coefficients estimated were consistent among the cross sections.

Federal Credit Agencies and the Structure of Money Markets, Interest Rates and the Availability of Capital

I. Introduction, 421. — II. The influence of federal agencies on the costs of lending, 421. — III. Agency influences on the availability of capital and rate patterns, 428. — IV. Conclusions, 443.

Experience with Reductions in the Small-Loan Rate in Wisconsin

r 9H E maximum rate of charge which the state permits licensed . personal finance companies to charge is often criticized as excessive. Lenders engaged in the business defend these rates on the ground that the high costs of extending small loans necessitate legal rates which are sufficiently high to induce capital to enter into the industry and engage in business under the licensing and regulation of the state. The lenders contend that if the maximum rate of charge is not high enough to permit profitable investment of capital, the business will disappear entirely, thus cutting off these credit facilities from the low-income groups which normally make up the market for personal finance loans,3 or it will be conducted illegally at still higher rates of charge by persons who are willing to risk criminal prosecution for violating the usury statutes.4 Since its inception the industry has been subjected to a great deal of pressure to reduce the maximum rates of charge permitted by the usury statutes or other regulatory legislation. In part, the pressure for rate reduction emanates from well-meaning people who are unfortunately suffering from a cultural lag. Accepting the widespread notion that any charge in excess of 6 per cent per annum is usurious, they consider a rate of 3 per cent per month on unpaid balances or 36 per cent per annum on the average outstanding balance as an immoral exaction. Actually, these companies operate under a statute specifically exempting them from the usury law and maximum rates charged are established by law.A The personal finance companies are credit agencies having relatively high costs of lending, and it is unlikely that they could operate under the ordinary usury statutes. Where small-loan laws do not exist, this type of credit-small loans to low-income borrowers-is either not available or available only from loan sharks.6 Another source of pressure for rate reductions comes from the illegal lenders. Their business is seriously limited by the competition of personal finance companies, and, in order to remove this competition, they exert pressure to lower the maximum rate of charge permitted to personal finance companies to a point where these lenders can no longer continue in business at a profit. Once the personal finance companies are driven I The author is indebted to Dr. Ralph A. Young, director, Financial Research Project, National Bureau of Economic Research, for his painstaking criticism of and contributions to the content of this article. However, all opinions expressed are solely those of the author.