Does Relationship Lending Still Matter in the Consumer Banking Sector? Evidence from the Automobile Loan Market

Authors


  • *Direct correspondence to Jessica Holmes, Department of Economics, Middlebury College, Middlebury, VT 05753 〈jholmes@middlebury.edu〉. The authors gratefully acknowledge the insightful comments of the journal editor and several anonymous SSQ reviewers.

Abstract

Objective. This article examines the role of relationship lending in the automobile loan market at a community development credit union (CDCU) and at a traditional community bank.

Method. Data collected from actual car loan applications are used in a probit analysis to estimate the importance of selected demographic, financial, and loan-specific variables on the probability of loan approval at the two types of financial institutions.

Results. We first show that the community bank relies on credit scoring, not relationship lending. Relationship lending is, however, a critical factor in the loan decision at the CDCU. Low-income households with strong ties to the CDCU are likely to receive loans, despite poor credit histories.

Conclusions. If consolidation, deregulation, and technology move mainstream financial institutions away from relationship lending and toward credit scoring, CDCUs will occupy an increasingly critical niche for low-income households.

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