Legal Restrictions in Personal Loan Markets

Brent Ambrose and Anthony B. Sanders

ABSTRACT

This study examines the pricing of personal loans in the form of second mortgages to determine whether state-specific default laws have an impact on the availability and cost of that debt. We examine whether lenders rationally price loans to higher risk borrowers and whether borrowers in states that limit lender ability to seek default remedies pay higher credit costs. Our results indicate that lenders rationally price loans to higher risk borrowers for the most part; however, when we focus on smaller and smaller FICO scores buckets, the results indicate that the mean actual loan rates are higher than those predicted by our model. The results also indicate that state-specific default laws do have an impact on the price of credit. The results also show that there is a greater degree of error in the pricing of second mortgage loans to low FICO borrowers than to high FICO borrowers.

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