Perspectives on credit scoring and fair mortgage lending: article two

Credit scoring systems ; Mortgages

Sustaining Homeownership Through Education and Counseling

This paper addresses a two-fold problem. First, some families are struggling to sustain their home ownership, yet market responses are inadequate. Second, postpurchase education and counseling, potential tools to assist vulnerable homeowners, are inadequately provided. This paper presents a conceptual framework for the effect of postpurchase education and counseling in assisting homeowners. It then examines information needs and strategies that can drive the provision of postpurchase services. In particular, the analysis assesses the current effectiveness and implementation of postpurchase programs. It also draws implications from prepurchase counseling and private sector loss mitigation. Finally, current stakeholders in home-ownership outcomes are identified. This paper recommends postpurchase education and counseling that are integrated into the lending models of the financial services industry and comprehensive over the timeline of the mortgage. A series of models ranging in scope are suggested, including potential actors and challenges involved

Disentangling the Epistemic Failings of the 2008 Financial Crisis

I argue that epistemic failings are a significant and underappreciated moral hazard in the financial services industry. I argue further that an analysis of these epistemic failings and their means of redress is best developed by identifying policies and procedures that are likely to facilitate good judgment. These policies and procedures are “best epistemic practices.” I explain how best epistemic practices support good reasoning, thereby facilitating accurate judgments about risk and reward. Failures to promote and adhere to best epistemic practices contributed to the 2008 financial crisis. I identify and discuss some of the ways in which best epistemic practices were violated in the events that led to the crisis, with a focus on the role of the credit rating agencies. I go on to discuss some of the ways in which these failings have been redressed. I conclude by observing how proactive regulation for best epistemic practices might help us to anticipate and avoid future crises

Understanding Predatory Lending: Moving Toward a Common Definition and Workable Solutions

To date, various parties have used the term "predatory lending" to describe a wide range of abuses. Regulators, industry and advocates have not agreed on a single definition, but have used the term individually to refer to different practices and loan terms. This paper describes predatory lending as a set of loan terms and practices that falls between appropriate risk-based pricing by subprime lenders and blatant fraud. Thus, all subprime lending is not predatory, but typically relies on risk-based pricing to serve borrowers who cannot obtain credit in the prime market. The higher degree of risk associated with subprime borrowers requires a higher cost for a subprime loan. At the other end of the spectrum, cases of blatant fraud are predatory, but less common and can generally be combated with current criminal statutes. The most difficult cases are those in which loan terms seem out of line with standard prices. In particular, high-cost loans coupled with unscrupulous practices that pressure a borrower into a loan are predatory. The paper sets forth three potential regulatory and legislative solutions that may address the issue of predatory lending

Technological change, financial innovation, and diffusion in banking

This paper discusses the technological change and financial innovation that commercial banking has experienced during the past twenty-five years. The paper first describes the role of the financial system in economies and how technological change and financial innovation can improve social welfare. We then survey the literature relating to several specific financial innovations, which we define as new products or services, production processes, or organizational forms. We find that the past quarter century has been a period of substantial change in terms of banking products, services, and production technologies. Moreover, while much effort has been devoted to understanding the characteristics of users and adopters of financial innovations and the attendant welfare implications, we still know little about how and why financial innovations are initially developed.Technological innovations

Impact of the Financial Crisis on Finance Sector Workers

[Excerpt] The purpose of this paper is to briefly review the background, causes, characteristics and trajectory of the ongoing financial and economic crisis; to define the financial services sector, its occupations and their educational requirements, as well as recent important trends; to provide a preliminary assessment of the impact of the crisis on finance sector jobs; and to give suggestions on possible policy responses to address the effects of the crisis on finance sector workers

Home Value Protection: Final Report

The following report provides an overview of a Home Value Protection (HVP) product to evaluate the practicality of making such a program more widely available and provide background for anyone considering such a plan. The paper is based largely on the Home Value Protection product established in Syracuse New York in 2002, and a number of the authors of this paper participated in the establishment of the Syracuse Home Value Protection program.The paper contains four sections:1: Investor OutreachThis section provides background information about the Syracuse program, the current and potential participants and what roles they might play, a review of a few of the ways such a program could be implemented, and links to various media coverage.2: Index ResearchThe Syracuse program measured changes in house values by a real estate index for the area (rather than individual house sale price), and this section evaluates a number of different index methods using four markets historical data to see how well the different indexes would have performed with a HVP product (had it been available).3: Capital Requirements & PricingThis section provides a model for estimating the pricing requirements and capital required for a program across multiple markets. While not exhaustive, this approach will provide a useful reference and starting point for anyone evaluating investment in such a program.4: Regulatory EnvironmentThis section provides information on some of the regulatory entities across the markets used in the analysis. Due to the variations in the way a HVP product could be implemented, regulations could apply in a variety of ways and this section can only offer a starting point for potential investors or participants