Loan Prospecting and the Loss of Soft Information
NBER Working Paper No. 19945
We study a controlled experiment in a large U.S. commercial bank in which loan officers engaged in loan prospecting. Consequently, loan size, loan volume, and loan default increased. We show that while the bank’s credit standards did not change, it put greater weight on hard information in the approval process and thus approved many applications that previously would have been rejected. Furthermore, loan officers did not source new applications but rather convinced existing applicants to borrow larger amounts. Both factors contributed to a higher default rate and to the loss of the predictive power of the bank’s credit model.
This paper was revised on May 4, 2016
Document Object Identifier (DOI): 10.3386/w19945
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