The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market |
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| Authors: | SUMIT AGARWAL BRENT W. AMBROSE SOUPHALA CHOMSISENGPHET CHUNLIN LIU |
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| Affiliation: | 1. Sumit Agarwal is from the Federal Reserve Bank of Chicago (E‐mail: ushakri@yahoo.com).;2. Brent W. Ambrose is at Pennsylvania State University (E‐mail: bwa10@psu.edu).;3. Souphala Chomsisengphet is at the Office of the Comptroller of the Currency (E‐mail: souphala.chomsisengphet@occ.treas.gov).;4. Chunlin Liu is at the University of Nevada, Reno (E‐mail: cliu1235@yahoo.com). |
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| Abstract: | Credit underwriting is a dynamic process involving multiple interactions between borrower and lender. During this process, lenders have the opportunity to obtain hard and soft information from the borrower. We analyze more than 108,000 home equity loans and lines‐of‐credit applications to study the role of soft and hard information during underwriting. Our data set allows us to distinguish lender actions that are based strictly on hard information from decisions that involve the collection of soft information. Our analysis confirms the importance of soft information and suggests that its use can be effective in reducing overall portfolio credit losses ex post. |
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| Keywords: | D1 D8 G21 information contract frictions screening banking home equity lending |
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