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Consumer Credit Risk and Pricing


  • I gratefully acknowledge the insights and comments made on an earlier version of this paper (currently an HUD Housing Finance Working Paper No. HF-016 entitled “Are Rejected Households Credit-Constrained or Simply Less Creditworthy?”). Paul Calem and Paul Kupiec were particularly helpful in the direction of this research. In addition, I thank Harold Bunce, Charles A. Capone Jr., Jason Dietrich, Theresa DiVenti, Michael J. Dueker, Christopher Henderson, John Krieg, Nandinee Kutty, Kevin B. Moore, William J. Reeder, Mark Schroeder, Farris G. Shuggi, Martha A. Starr, and the seminar participants at The American University and at a seminar sponsored by the Washington Statistical Society. All views expressed in this paper are my own and do not necessarily reflect the position of any institution. All remaining errors are my own.


Previous academic studies viewed borrower rejection as a sign of market imperfections in the consumer credit markets, but this view was based upon the assumption that differences in the levels of borrower creditworthiness could not be accurately identified. Today, it is possible to differentiate between types of borrowers, and riskier borrowers can participate in credit markets if they are willing to pay relatively higher borrowing costs. Hence, a more critical issue concerning the performance of these markets should be whether loan prices correctly reflect the level of borrower credit risk. This paper reexamines consumer participation in credit markets looking specifically at issues related to the pricing of borrowers of different credit risk.