HF-016 Are Rejected Households Credit-Constrained Or Simply Less Creditworthy?, July 2002.

This paper re-examines consumer participation in credit markets looking specifically at issues related to the market treatment of borrowers of different credit risk. The traditional credit-rationing literature describes some borrowers as being "credit-constrained" as a result of creditors not being able to determine their future income prospects. However, this paper presents evidence that most rejected borrowers have experienced delinquency problems in the past year and/or filed for bankruptcy; therefore, rejected borrowers are often of lower credit quality. Furthermore, a substantial amount of credit has been made available over the past few years, and the lending industry has developed credit and mortgage scoring techniques that allow it to price the credit risk of individual borrowers. As a result, credit has been made to risky borrowers although they must pay higher prices for it. The analysis also shows that creditworthy minorities are not more likely to pay unusually high loan rates. Finally, borrowers that are considered to be creditworthy yet still pay high interest rates are also the ones who report they do little shopping for a loan. In addition to mortgage credit, automobile and revolving credit markets are also analyzed in this study.

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