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In this paper, we investigate some implications of recent results about salience on loan decisions. Using the framework of focus-weighted utility we show that consumers might take out loans even when that yield them negative utility due to the focusing bias. We suggest, however, that this can be counterbalanced and consumers might be more prudent in their decisions and less likely to take out such loans when the usual fixed-installments plan is coupled with an equivalent decreasing-installments option. Moreover, we show that this is true even for loans with prepayment options or when borrowers take default into consideration. We argue that harmful loan consumption could be decreased if a policy would prescribe presentation of loan repayment schedules in a way that employs this effect.

This study analyzes the benefits of rapid student loan repayment, defined here as borrowers who repaid their cumulative undergraduate loan debt in half the time of the expected repayment cycle (10 years). Drawing from data on borrowers in two nationally representative samples, I first explain the analytic framework employed to identify rapid loan repayers, then examine whether rapid loan repayment is associated with financial benefits in terms of salary, homeownership, and non–poverty level, identifying how rapid loan repayers differ from their non–rapid loan repayer and nonborrower counterparts. Results show salary benefits associated with rapid loan repayment and indicate that among rapid loan repayers, cumulative loan debt generally did not surpass $15,000. These findings suggest that policy-makers may consider the adoption of shorter repayment plans with clear eligibility cutoff amounts as an alternative to the more common 10-year fixed plan.

In this study, we seek to understand whether soft information conveyed by contracting language found in private loan agreements is informative regarding borrower risk. We proxy for credit-risk-relevant soft information using Loughran and McDonald’s uncertainty measure. We first examine initial contract terms and find that, incremental to traditional summary measures of credit risk, increased contractual uncertainty is associated with higher initial loan spreads and a greater likelihood of using dynamic and performance-pricing covenants. We then turn to examine realized credit risk over the life of the loan and find that increased uncertainty is associated with a higher likelihood of future loan downgrades and loan amendments. We corroborate our results on the risk relevance of soft information by showing that the bid-ask spreads of loans trading on the secondary loan market are increasing in uncertainty. Overall, the evidence we provide is consistent with embedded linguistic cues in loan agreements publicly revealing the credit risk assessments of privately informed lenders.

Past empirical studies appear to support the idea that banks and finance companies do not differ in their ability to resolve adverse selection problems associated with issuing new debt. In this article, we find there is a difference. More specifically, using an event study we find larger abnormal returns for secured loan disclosures to lower quality borrowers when the lender is a finance company versus a bank. This suggests the market views finance companies as more effective than banks in evaluating/monitoring lower quality borrowers obtaining secured loans. We posit this is due to finance companies’ greater expertise in this type of lending, resulting from specialization. Our findings extend the literature on how lender identity can influence signals about firm value from loan disclosures. Our results also support recent findings that positive abnormal returns to borrowing firms may not be a general feature across the loan population, but may be restricted to smaller, lower quality borrowers. Fi...

Purpose The purpose of this paper is to identify determinants of feasible outcome events (expired with no loss, settled for loss, still performing) and time to event of Farm Service Agency (FSA) operating and farm ownership (FO) loan guarantees. Design/methodology/approach Data on 19,126 FSA guaranteed loans, which were made by various lenders to farmers who have limited ability to obtain loans from normal sources without the Federal guarantee, were collected. Cox proportional hazards models for operating loans (OLs) and FO loans are estimated to identify borrower characteristics, loan characteristics, lender types, and farm and macroeconomic environment factors that influence guarantee outcomes. Findings Loans with different characteristics (loan amount, loan term, lender type, region originated) and assistance programs (Beginning Farmer, Interest Assistance) have differing guarantee outcomes. Contemporaneous variables, in particular delinquency status, have a significant impact on guarantee outcomes. Research limitations/implications All loans were originated in calendar years 2004 and 2005. Since FO loans may have as long as 40 year terms, results are not as robust for FO loans as for OLs. Practical implications Different loan characteristics and macroeconomic conditions significantly influence the occurrence of possible guarantee outcomes and time to the outcomes. Originality/value Guaranteed loans are the primary method of government credit assistance to US farm operators. Data on individual borrowers have been difficult to obtain for much of the life of the guaranteed program because loan applications are held privately. This study provides insight on how various factors drive guarantee performance which is useful to policy makers trying to increase guaranteed loan program efficiency.

SYNOPSIS In this study, we examine whether and how borrowing firms' financial statement comparability affects the contracting features of syndicated loans. Using a sample of loans issued by U.S. public firms in the syndicated loan market over the period 1992–2008, we find strong and robust evidence that financial statement comparability is negatively associated with loan spread and the likelihood of pledging collateral, and positively associated with loan maturity and the likelihood of including performance pricing provisions in loan contracts. We also find that borrowing firms with greater financial statement comparability are able to complete the loan syndication process more swiftly, form loan syndicates enabling the lead lenders to retain smaller percentages of loan shares, and attract a greater number of lenders and, particularly, a greater number of uninformed participating lenders. Altogether, these findings are consistent with the view that financial statement comparability plays an important role in alleviating information asymmetry in the syndicated loan market. JEL Classifications: G12; G14; M41

Loan guarantee schemes have existed since 1953 (in the US) and are widely used throughout the world to provide financial support to smaller firms by guaranteeing loans from commercial banks. The UK government has been an active supporter of loan guarantees since 1981, and has a long track record of modifying its scheme to reflect changing market conditions and the financing needs of its SME sector. Arguably the two most significant changes occurred in 2008 when the 5-Year Rule on eligibility was removed and in 2009 when the long-standing Small Firms Loan Guarantee Scheme was replaced by the Enterprise Finance Guarantee Scheme. We treat the removal of the 5-Year Rule as a natural policy experiment and empirically question whether, on economic grounds, this was a sensible policy. Our findings suggest that the 5-Year Rule was a better policy choice with regard to employment but had no impact on sales growth.

We construct a synthesized model to study credit rationing by loan size. In our model, the borrower faces a trade-off between raising debt and exerting costly effort to undertake an investment project. In the absence of agency costs, increasing the loan size at the equilibrium interest rate raises the default risk and hence reduces the average cost of the loan for the borrower, so the borrower always demands a larger loan than what the lender can offer. Furthermore, agency cost raises this excess demand for a given interest rate. If the agency cost is sufficiently high, the borrower is unable to obtain the loan that she needs at any interest rate, requiring the use of non-price instruments in the loan contract. This is the common logic underlying the agency models of non-price credit rationing, as we show in the cases of costly state verification, money diversion, risk-shifting and hidden shirking.

Despite the prominent role that information plays in the economic theory of credit markets, no direct evidence exists on the causal relationship between the availability of information about loan applicants and loan performance. This paper provides such evidence by exploiting an unanticipated change in the amount of information visible in an online market for loans to measure the impact of lender information on loan outcomes. Conditional on data available in both periods, allowing lenders to access more borrower credit information substantially reduced default rates among high-risk borrowers by 17 percentage points on average but had almost no effect on low-risk borrowers. Immediate lender returns increased by about 12 percentage points and took 5 weeks to decay. Among high-risk loans, returns converged within credit grade bins. Using panel information on lenders, I find that the information improved loan performance in two ways: first, it significantly improved the screening performed by lenders already active on the website. Second, it attracted new lenders who were better at screening loan applicants and earned higher returns. I test whether the reform resulted in selection among loan applicants using data that is unobserved by lenders in both periods. I find that there was no change in unobserved credit quality among loan applicants, but that the information improved lenders’ ability to select the (unobservably) higher quality borrowers from the pool of applicants. I also find suggestive evidence that lenders’ beliefs about loan applicants, as measured by the minimum interest rate at which they were willing to lend, converged.

A common situation is where a borrower is offered the choice of two types of loans—a fixed interest rate loan for a fixed period or a variable interest (floating interest) rate loan. Usual wisdom and advice is that the borrower opts for the fixed rate loan if interest rates are anticipated to rise in the future or opts for the variable rate loan if interest rates are anticipated to fall. However, depending on the magnitude of the rates offered, and the rate uncertainty in the market, such wisdom may not always be well founded. This note demonstrates why this might be. It derives a readily usable, low-mathematical-background expression showing, for borrowers, when fixed and variable rate loans are equivalent and when one rate type is better/worse than the other.

The authors describe the structural solution of the loan rate as a function of default and response risk that maximizes expected return on equity for a lender's portfolio of risky loans. Under the assumptions of our model, the non-linear differential equation for the optimizing price is found to be separable in transformed financial, response and risk variables. With an end-point condition where default-free borrowers are willing to borrow at loan rates higher than the lender's cost of funds, general solutions are obtained for cases where default probabilities may depend explicitly on the offered loan rate and where adverse selection may or may not be present. For the general solution, we suggest a numerical algorithm that involves the sequential solutions of two separate transcendental equations each one of which depends on parameters of the risk and response scores. For the special case where the borrower's default probability is conditionally independent of loan rate, it is shown that the optimal solution is independent of Basel regulations on equity capital. © 2014 Operational Research Society Ltd. All rights reserved.

The aim of this article is to test the relationship among organizational architecture, joint liabilities contracts, and loan conditions. Based on a sample of 135 MFIs rated between 2003 and 2008, the study shows that solidarity lending and a decentralized credit decision have no significant influence on loan conditions. Being a village bank lender is significantly associated with higher interest rates charged, higher outreach, lower depth of outreach, and higher transaction costs. Results seem to highlight the existence of a trade-off between outreach and the average loan size per borrower when MFIs decentralize credit decisions or establish joint liability contracts.

I analyze optimal loan modification schemes in a stochastic home price and stochastic interest-rate environment. Lenders maximize loan values by managing the borrower’s option to default on the loan and prepayment option. Given negative equity, controlling for the borrower’s ability to pay, rate reductions and maturity extensions result in a higher probability of redefault by homeowners even after modification of their loans. In contrast, loan write-downs (the Principal Principle), not a favored recipe, are value maximizing for the lender. A shared-appreciation mortgage enhances the ability to pay, mitigates adverse selection, and reduces the present value of expected deadweight foreclosure costs.

This paper studies loan conditions when firms switch banks. Recent theoretical work on bank–firm relationships motivates our matching models. The dynamic cycle of the loan rate that we uncover is as follows: a loan granted by a new (outside) bank carries a loan rate that is significantly lower than the rates on comparable new loans from the firm's current (inside) banks. The new bank initially decreases the loan rate further but eventually ratchets it up sharply. Other loan conditions follow a similar economically relevant pattern. This bank strategy is consistent with the existence of hold-up costs in bank–firm relationships.

The article analyzes effects of borrower interest rates and student lender subsidies on federally guaranteed student loan volumes from 1988 to 1994 and from 1996 to 2006. Some have argued that lender subsidy cuts would reduce loan supply or cause lenders to exit the student loan market. If lenders get economic rents due to overly generous subsidies, a simple model of the student loan market suggests that small changes in subsidy levels should not affect loan supply. Empirical results based on a variety of generalized method of moments panel estimators suggest that evidence of links between higher special allowance payment margins and higher loan volumes is weak or inconclusive for both the 1988–94 and 1996–2006 periods. Subsidy reductions, according to this analysis, had no discernable effect on student loan volumes. Results also suggest that higher real borrower interest rates reduce student loan volumes for public colleges and universities. Changes in the federal student loan program in the wake of the credit crunch that began in August 2007 are briefly discussed, along with current proposals to shift all new loans to a direct lending program. © 2010 American Education Finance Association

In a roll-up mortgage, the borrower receives a loan in the form of a lump sum. The loan is rolled up with interest until the borrower dies, sells the house, or moves into long-term care permanently. The house is sold at that time, and the proceeds are used to repay the loan and interest. Most roll-up mortgages are sold with a no-negative-equity guarantee (NNEG), which caps the redemption amount at the lesser of the face amount of the loan and the sale proceeds. The core of this study is to develop a framework for pricing and managing the risks of the NNEG.

Notwithstanding his exhaustive treatment of alternative loan subsidy valuation methods, Jennergren entertains only one type of loan structure in his paper, to wit, bond-type arrangements that entail only interest payments during the life of the debt and the repayment of the entire principal at maturity. The effects of this loan structure specificity are illustrated in the context of Jennergren's dual interpretations of his first loan subsidy valuation method. It is shown that, absent a restriction that the loan must satisfy, the two interpretations result in different valuations. This cautionary note argues that future research must develop loan subsidy valuation methods that are loan structure robust by addressing the more fundamental issue that remains unresolved, namely, how to calculate the amount of the unsubsidized loan that is replaced by the subsidized loan.

This paper examines the secondary market for loan sales and, in particular, loan contract design as a mechanism to resolve informational issues in loan sales and associated costs and benefits. Using loan-level data, we find that sold loans contain additional covenants and more restrictive net worth covenants, particularly when agency and informational problems are more severe. Why do borrowers agree to incur the additional costs associated with loan sales? Our evidence suggests that these borrowers benefit through increased private debt availability. Further, loan sales go hand in hand with more durable lending relationships, suggesting that risk management aids continued relationship lending. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

Personal loans can be obtained by borrowers from very different types of lending institution. The most common are a traditional loan institutions, payday lenders, or a Peer to Peer (P2P) lending brokers. P2P lending companies do not loan the money directly. They link the borrower to a lender and provide the lender with the borrower’s income which is not usually verified. The P2P lenders collects fees based on the transaction and financially benefits from a higher number of introductions of borrowers and lenders. P2P lending is becoming more popular among borrowers because the pay highest interest rates are much lower than payday lenders and loans require less verification of income and assets than traditional loan institutions. A higher reported income with P2P lenders can result in a larger loan for the borrower and thus more profit and fees generated for the P2P lender. If the loan defaults due to an overstated or fraudulently reported income by the borrow, the P2P lender does not suffer, it is the lender that was matched to the borrower by the P2P lender that will incur the financial loss. This paper focuses on proposing a data science approach to detecting loan applicants that provide fraudulent income data to P2P lenders. The data obtained for this study contained 887,379 observations and 74 variables of loan applicants from the P2P loan company, Lending Club. The initial observations of this data showed that unverified loans make up 23% of the defaulted loans while verified and source verified loans made up about 77%. Described within this paper is how the data set for analysis was obtained and prepared for analysis, the initial findings, the proposed data science approach to fully analyzing this data, and the significance of the lending industry, both traditional and P2P, with a method of detecting fraudulent income reported on loan applications. Models generated from this analysis could be incorporated by lenders into their applications along with research in this area should improve the P2P lending industry by increasing the detection of fraudulent income reported on loan applications.

This study designs optimal loan quality models for a two-period loan market. Specifically, this work explores whether enterprise and individual provide the guarantees for loan credit and whether financial institution repackages the rights of the loan creditor to issue financial asset securitization products to assess the upper (maximum net loan profit) and lower (specific net loan profit) bounds of optimal loan quality. This proposed model can facilitate optimal decision making regarding loan qualities based on financial institution operating performance.

When a loan is sold, it goes to a lower-cost financing source than its originator. Yet, lending markets are less than perfectly competitive. Despite the lower funding cost, therefore, the loan price is not necessarily more favorable to the borrower. However, corporate borrowers are averse to the participation of their loans to other lenders because of the complexity of dealing with multiple banks and the potential information costs of the sale announcement. Consequently, I conjecture that the borrower extracts a price concession in exchange for allowing the bank to sell participations in the loan. Using a hand-matched dataset of loans, borrowers, and lenders, I find that the average yield spread on loans originated by active loan sellers is about 20 basis points lower than the average spread on loans originated by moderate loan sellers. Copyright 2006, Oxford University Press.

This paper studies the bank's lending decision, based on three observed phenomena: banks earn substantial profits from off-balance sheet activities and services, which they take into account in their lending decisions. Secondly, the critical point in the customer relation is the loan decision: the probability of the customer staying with the bank is a function of the loan extended each time one is applied for. Third, what is at stake in the loan decision is the expected value of the entire customer relation, which is the probability times the present value of expected future profits. The bank is a maximizer of this expected present value, while making decisions on individual loan applications. It is shown that the bank is in a corner solution with respect to its good customers, and other customers often have an incentive to get to a corner. Therefore, corner solutions may be the rule rather than the exception in the bank's customer relations, and there is no mechanism making the bank indifferent, at the margin, between lending to different customers. It can be optimal to extend loans to (present and expected future) good customers at an interest rate loss. A rationed customer with a concave enough probability function can receive a larger loan by asking for less. Loyalty increases the customer's value to the bank but improves its loan terms only if the customer makes it conditional on the loan extended.

Investments in productive assets by broad-based black economic empowerment (BEE) enterprises in South Africa (SA) during the 1990s have been constrained, in part, by a lack of access to capital. Even if capital can be sourced, BEE businesses often face a liquidity problem, as conventional, equally amortized loan repayment plans do not take into account the size and timing of investment returns, or there are lags in the adjustment of management to such new investments. This paper describes five alternative loan products to the conventional equally amortized loan: the single payment non-amortized loan; the decreasing payment loan; the partial payment loan; the graduated payment loan; and the deferred payment loan. Recent SA experience with the graduated payment loan and the deferred payment loan suggests that there is scope to alleviate the liquidity problem if a wholesaler of funds can offer such terms to private banks and venture capital investors who then on-lend to finance BEE asset investments that are otherwise considered relatively high credit risks. This would shift the liquidity problem away from the client to the wholesaler of the funds, but requires access to capital at favourable interest rates. Such capital could be sourced from empowerment funds earmarked by the private sector, donors and government.

This paper analyses corporate loan guarantees among the Korean chaebol affiliates. Loan guarantees are found to be efficiency‐neutral under a set of ideal conditions characterized by perfect and sy...

Online peer-to-peer lending companies set the rules for transactions on their platforms and could decide to limit the general visibility of borrowers’ personal information in loan requests, if this proved to profitably influence lenders’ investment behavior. In my experiment, I asked participants to allocate an amount of € 1,000 between real peer-to-peer loan requests and a bank account. Participants were shown projects on one of four levels of information availability, ranging from only the most basic information set to the full profile including borrowers’ pictures. Against the initial theory-based expectation, I find that the amount allocated to loan projects versus the bank decreases with ascending levels of information availability. A premature conclusion that “less is more” when it comes to personal information in peer-to-peer loans, has to be revised based on the finding that investors ignore projects from the worst — but most common — rating category X, unless personal information is available to allow the mitigation of information asymmetries. In addition, I find that investors are attracted by high monthly liquidity of borrowers, penalize loan applicants seeking funding for non-existential purposes and support those who state self-employment or personal education as loan purpose.

Small-dollar credit is a form of unsecured consumer credit primarily characterized by the low dollar amounts of loans. There has been increasing debate about the benefit and harm to consumers from small-dollar loans, along with recent discussion of greater regulation. Determining the need for and appropriate form of regulation requires an understanding of the current state of the small-dollar credit industry based on actual industry data. One significant change is the shift from single-payment payday loans to multiple-payment loans or installment loans. This paper is the first systematic study of small-dollar installment loans.Our main findings are as follows. A typical installment loan is for $900 and is scheduled to be repaid in 12 biweekly installments over six months. Less than a quarter of borrowers take another loan within 14 days of ending a previous loan. Most borrowers do not keep their loan until maturity. Even repeat borrowers generally either pay off the loan or have it charged off before the maturity date of their original loan. Those who borrow repeatedly are more likely to repay their loans on average and are offered lower interest rates, indicating that at least some of these repeat borrowers are utilizing the opportunity to borrow again based on their past track record of payments. Payment-to-income ratio alone is a poor metric for predicting whether the loan will be paid off or not. Regulation imposing an upper limit on payment-to-income ratio is likely to result in reduced access to credit for a large majority of current borrowers, without a large improvement in loan payoff rates. A payment-to-income limit of 5% would reduce the volume of credit between 55.1% and 92.6%. It would only increase the loan payoff rate by 0.7% (from 72.9% to 73.6%). A payment-to-income limit of 10% will result in reduction of credit between 26.5% and 67.8% without any increase in loan payoff rate.A regulation that prohibits lending based on simple affordability criteria risks substantial reductions in credit availability to a population that often has few available alternatives. A cost-benefit analysis of the proposed regulation requires weighing the cost of reduced access to a financially underserved segment of the population against the benefit of a higher loan payoff rate and lower incidence of indebtedness. Limiting the payment-to-income ratio to 5% would benefit fewer than 1% of borrowers by reducing the incidence of loans that are not paid off, but it would impose costs on 86% of current borrowers, who could not be offered the same credit on the same terms that they now obtain. Raising the permitted ratio can reduce these costs, but it also reduces the benefits, because payment-to-income ratio alone is poor predictor of the likelihood of repayment.

In this paper, we derive a stochastic loan repayment model, that will be used to quantify or ascertain the maximum borrowing capacity for a firm. Initially, we derived the revenue and then the stochastic loan repayment model. The derived stochastic loan repayment model is a function of the generated revenue. We also show that the model is consistent with our expectations, that is [Formula: see text], the proportion of revenue that goes toward loan repayment is a very important parameter as far as ascertaining default is concerned. Under stochastic loan repayment model, a firm will be highly likely to default the moment [Formula: see text] which approaches one. Technically, this means that all the revenue is used in loan repayment. Finally, we show that when financial institutions lend using the fixed repayment regime, fixed periodic installments must be less than or equal to stochastic repayment amount, otherwise there will be a default. From this analysis, we ended up with a very crucial boundary relationship between the loan amount, [Formula: see text] and the stochastic loan repayment amount. The derived stochastic loan repayment model works well in a less volatile environment. When volatility exceeds 100%, we may need more frequent revenue values to achieve the desired results.

While monitoring borrowers, a bank obtains private information about its customers, giving the bank an informational advantage in the production of subsequent services. Competing theories exist on the way banks use this advantage in the pricing of subsequent services to the customer. If moral hazard limits the transfer of private information, the borrowing relationship transforms into an informational monopoly and can be characterized as a “wasting asset.” Alternately, if the banks' competitive environment necessitates that cost economies are shared, the relationship has “value.” Ordering pairs of successive loans made to a particular borrower as prior loans and subsequent loans, and controlling for environmental, borrower, and loan characteristics, we show that the subsequent loan is priced significantly lower than the prior loan.

West keeps score of the continuing and growing inadequacies of the British student loan scheme to 1998 and shows how an income-contingent loan could better satisfy its aims. He explores a common objection to any form of student loan scheme, that students pay for their university education through progressive income taxes. West shows how this argument falls short, and hence that some form of income contingent loan is required if equity and efficiency are to be satisfied.

The most common type of debt used to finance real property is a mortgage. A mortgage is a loan that is secured by a specific property as collateral for the repayment of the debt. The lender looks to the property’s cash flow or, in some cases, the owner’s financial resources to cover the periodic interest due and to repay some or all of the principal balance over the life of the loan. At the maturity of the loan, the borrower can sell or refinance the asset to pay off any remaining principal balance. In the event that the loan is not repaid as per its terms, the lender has the right to liquidate the property and apply the proceeds towards repayment of the loan.

Shows that loan loss expectation plays an important role in determining credit rationing. Shows that the optimal loan size depends on the marginal loan loss, and not on the initial portfolio position of the bank. While an increase in loan administrative costs leads to a larger optimal loan size, restricting the loan size is used to minimize default risks. Also shows that under conditions of uncertainty when default risk is present, and if absolute risk aversion is increasing in wealth, a rise in wealth of the bank will lower the amount of asset to be allocated in risky loans even if credit can be properly priced.

The current economic and financial crisis situation, in general, and the real-estate crisis, in particular, have favoured the introduction of new banking products, especially loans, which, on the one hand, try to make the investment in housing attractive through novel mortgage loans and, on the other hand, to adapt to the possible financial difficulties of the borrower. In effect, lot of families need to have a house, but the banks are afraid that the borrower punctually could not face the corresponding payments. In this case, some financial entities give the borrower the possibility of deferring some payments until the end of the loan term, under the conditions which will be detailed hereinafter. In this paper, we present a mathematical expression of the average duration of the loan and the value of the payment that would amortize the loan in the initially stipulated period.

Prior research investigating the commitment to a failing course of action (escalation) has identified several influences that can exacerbate or mitigate these decision biases (Brockner, 1992). Commercial lending provides an example of a situation in which the competing influences of personal identification with a project and blame for failure exist. Fifty commercial loan officers were assigned to one of two conditions: sole responsibility for granting a loan or responsibility to recommend to a loan committee (diffused responsibility). After making an initial loan decision or recommendation, loan officers were given a follow-up request for an additional loan. The request constituted an escalation decision, because the borrower's financial condition had seriously deteriorated since the loan was made initially. The results are consistent with the prediction that escalation is most likely where personal identification with the initial project decision is high and the likelihood of blame for project failure is low because of the diffusion of responsibility.

JULIAN, ULPIAN AND THE ATYPICAL LOAN: ON ANALOGY AS APPLIED IN LEGAL REASONINGSummary The paper concerns the legal controversy as to the possibility of transforming a debt that is due under a contract of mandate or any other consensual contract into a loan by means of a bare agreement (pactum). Under such an agreement the creditor would entitle his debtor to keep the equivalent of the debt – which already existed between them – as a loan. The discussion took place between Julian, the eminent jurist of the midsecond-century A.D, and Ulpian, the jurist of the first half of the third century A.D. Julian argued against the possibility of classifying the contract in question as a loan. His arguments were based on analogy, distinction, and reductio ad absurdum (D.17,1,34 pr.). Ulpian, on the other hand, defended the possibility that was ruled out by his predecessor. Interestingly enough, the latter relies on analogy as his main argument as well. His conclusion is drawn, however, from analogy with the very same situation which Julian considered distinct from the case in question (D. 12,1,15). In the article, it is argued that this diversity of opinions can be explained by the different interpretations of the characteristic of the loan as a real contract. From Julian’s standpoint, this characteristic required the loan to be the title of acquisition by the borrower of ownership of money or things that are thereby considered the object of the loan: if the money or things were acquired on any other grounds, no loan could be construed (not to mention the case where the debtor does not – materially – acquire any money at all). Ulpian, on the other hand, was concerned not as much with the material substrate of the loan as with the economical calculus: in this perspective, indeed, the agreement – which tended to replace the hitherto debt by the loan-debt of the same amount – turned out to be a perfect substitution of a double payment, which would lead to the same effect. It is important to note one of the consequences to which Ulpian’s reasoning could lead: the possibility that someone who has never obtained any money from anyone or indeed never had them, nevertheless could be considered to have borrowed them (e.g. someone obliged to pay damages is entitled by the creditor to keep the amounts due as a loan of money that he never materially obtained). In order to accept this consequence, some serious redefinition of the concept of the loan as a real contract seems necessary, to say the least. The paper argues that – when ruling out the transformation – Julian strove to avoid accepting this very consequence.

This paper addresses the loan environment in which (a) the asset funded by the loan serves as collateral for the loan, (b) the funded asset decreases in value over the period of the loan at a known constant rate, and (c) the loan is repaid in a finite number of equal end-of-period payments. Of particular concern are the conditions under which the value of the collateral may be less than the unpaid principal during the loan period, thereby creating an unwelcome situation for the lender. The loan interest rate is determined such that the unpaid loan principal is at all times equal to or smaller than the current market value of the collateral.

In 2002 and 2003, many Chinese banks implemented reforms that delegated authority to individual loan officers. The change followed China’s entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information. We find that the bank’s internal risk rating becomes a stronger predictor of loan interest rates and ex post outcomes after reform. When the loan officer and the branch president who approves the loan work together longer, the rating also becomes more strongly related to loan prices and outcomes. Our results highlight how incentives and communication costs affect information use and production.

How do the distance constraints faced by lenders in acquiring borrower information affect the design of bank loan contracts? Theoretical studies posit that greater information asymmetry leads to the allocation of stronger ex ante decision rights to the lender (the uninformed party). Consistent with this hypothesis, we find that, upon inception, contracts tend to be more restrictive when firms seek loans from remote lenders. This finding is robust to potential endogeneity bias and simultaneity of various loan terms. Overall, we establish a strong informational link between distance and loan contract design.

International audience; Using a stylized real options model, we show that discretion over the timing of charging off a non-performing loan could be economically justified when collateral values are uncertain and there is a chance of loan recovery. The implied hypothesis of an "uncertainty dependence" aspect in loan charge-offs is empirically tested and validated using a panel of European banks. A welfare-maximizing regulator might want to let banks pursue such discretionary loan charge-off behavior, with the problem of distinguishing it from alternative capital management and income smoothing objectives, while transparency-seeking accounting standards setters would presumably not. © 2011 Elsevier B.V.

We study how a bank’s willingness to lend to a previously exclusive firm changes once the firm obtains a loan from another bank (“outside loan”) and breaks an exclusive relationship. Using a difference-in-difference analysis and a setting where outside loans are observable, we document that an outside loan triggers a decrease in the initial bank’s willingness to lend to the firm i.e., outside loans are strategic substitutes. Consistent with concerns about co-ordination problems and higher indebtedness, we find that this reaction is more pronounced the larger the outside loan and it is muted if the initial bank’s existing and future loans retain seniority and are protected with valuable collateral. Our results give a benevolent role to transparency enabling banks to mitigate adverse effects from outside loans. The resulting substitute behavior may also act as a stabilizing force in credit markets limiting positive co-movements between lenders, decreasing the possibility of credit freezes and financial crises.

Lenders will often restructure a loan rather than foreclose on a property because it is less value-destroying. A loan modification primarily entails a change in the loan rate, principal balance and/or remaining time to maturity. We analyze optimal loan modification schemes in a stochastic home price and stochastic interest-rate environment. Lenders maximize their loan values by managing the value of the borrower's option to default on the loan and prepayment option. We argue that, controlling for the borrower's ability to pay, loan modifications via rate reductions and maturity extensions are ineffective, leading to dissipation in loan value to the lender, and resulting in a high probability of re-default by homeowners even after modification of their loans. In contrast, loan write-downs (the Principal Principle), not a favored recipe, and sometimes prohibited by covenants, are value-maximizing for the lender. A useful structuring device, the shared appreciation mortgage, enhances the ability to pay, mitigates adverse selection, and reduces the present value of expected deadweight foreclosure costs.

Loan modifications offer one strategy to prevent mortgage foreclosures by lowering interest rates, extending loan terms and/or reducing principal balance owed. Yet modifications are largely at the discretion of loan servicers and not as systematically transparent as loan application approvals and denials. Who is offered a modification and what form of modification they receive could result in disparate impacts for low-income and minority communities. This paper uses data on 105,769 non-agency securitized subprime loans made in 2005 to examine the incidence of defaults and modifications among loans managed by one large trustee of securitized loans covering 94 loan servicers in California, Oregon and Washington. Data from Home Mortgage Disclosure Act (HMDA) data is used to assess borrower characteristics. The results suggest although loan modifications remain a rarely used option among the servicers in these data, there is no evidence that minority borrowers are less likely to receive a modification or less aggressive modification. These borrowers are more likely to be delinquent, but controlling for delinquencies we find no evidence of disparate impact. We also find that preliminary performance of loans post-modification is positive, particularly for minority borrowers. Generally modifications involve modest interest rate reductions and increasing loan balances.

I Introduction MONEYLENDING in the rural areas of South Asia takes various forms. One type of informal loan agreement commonly found in many areas is the usufructuary land mortgage, hereinafter abbreviated to ULM. Under this type of contract, the borrower transfers to the lender a parcel of his land, to be held by the latter as collateral until the exact monetary amount of the loan is repaid in full. In all cases, after the loan is made, the lender is in possession of the collateral with the authority to cultivate or lease out the land. In this type of loan, the lender, the mortgagee, charges no explicit interest on the loan. However, because the mortgagee is free to utilize the land for his own cultivation, income from the land is, in effect, an implicit form of interest.(1) The repayment period for the principal is not specified when the loan is contracted--the landowner is free to reclaim his land as soon as he has the means to pay back the loan. In practice, the land is held for a few years. Field research shows that at least four to five years usually elapse before a loan is repaid, and the average repayment period is much longer than that (Bertocci, 1972; Rashid, 1983). Under some arrangements, the title of the mortgaged land is also transferred to the lender with a verbal stipulation that when the loan is repaid, the land title would revert to the borrower. In such cases, the lender becomes the owner of the land in legal terms and acquires all usufruct rights, including the right to sell. However, social sanctions deter sale of collateral unless the borrower is in default. While there is no stated term for the loan, default and foreclosure are relevant and meaningful concepts in the context of ULM. However, these concepts cannot be interpreted in purely legalistic terms. Foreclosure can occur for a variety of reasons. For example, if a borrower expresses his inability or unwillingness to repay the loan, he forfeits the collateral. On the other hand, a lender can foreclose if a borrower is deemed to be in default. A not too uncommon foreclosure scenario involves a majlish (gathering) or shalish (arbitration) of village elders. If the elders make a determination that the borrower has no chance of redemption owing to his worsening financial conditions, or other reasons, the land belongs to the lender, de jure as well as de facto. One interesting thing to note is that if, as in some cases, the borrower is given the title to the land when the loan is made, foreclosure proceedings take place only for social validation of the transfer of ownership. The literature on rural credit has largely focused on the determinants of the high rate of interest on loans (Bhaduri, 1973; Long, 1968; Wai, 1958). Many have noted, in passing, that collaterals, including land, are often undervalued by the lender in loan contracts (Wai, 1958; Bottomley, 1963b; Bhaduri, 1977). Since providing an explanation for the high rate of interest has been the prime concern, the collaterals and their valuation have not always been integrated in the analyses. In this paper, the informal credit market and usufructuary land mortgage is examined from two points of view: to seek the rationale for the undervaluation of collateral, and to explore the implications of the undervaluation for the determination of interest rates for secured loans. Contrary to the literature which sees undervaluation of collaterals, and thus the high interest rates, as attributable to risk and monopoly power (see Section II below), this paper provides a model that shows the proper relationship between undervaluation of collaterals and the high implicit rates of interest on ULMs. This relationship only can be understood by comparing the opportunity cost of funds and return from money-lending: The opportunity cost of funds tied up in loans is equal to the net income foregone, including capital gains, from comparable pieces of land, whereas return from moneylending is given by net income from the land collateral, after factoring in default. …

Governments and universities have trouble reconciling the goal of keeping higher education widely accessible with the need to retrieve some of its costs from students. Student loans offer a plausible solution to the problem. But loan programs turn out in practice to have been a disappointing instrument of cost recovery: analysis of twenty-three programs found that students repay only a small portion of the value of the original loan. Subsidies, high default rates, and high administrative costs have eroded the value of repayments. Sometimes loan programs have proved as expensive as outright grants. This article argues that most loan programs could be reformed to improve financial effectiveness - through targeting, charging positive real interest rates, designing repayment plans to take account of the likely pattern of graduate earnings, and ensuring that the oversight institutions can and will collect. Or governments could explore alternative devices for cost recovery, such as a graduate tax. This approach levies a higher income tax rate on beneficiaries of government-subsidized higher education and thus preserves the idea, implicit in loan programs, of paying for education with future earnings. As part of an effective tax system, a graduate tax could bring in significantly more revenue than traditional loan programs.

We consider the recently proposed “income-contingent loan” (ICL), in which Congress would establish a national trust fund from which students could borrow money to finance the cost of attending college; students would repay these loans by contributing a fixed proportion of their subsequent income for a specified number of years. One key issue is whether proposed income-contingent loan plans will be self-financing; that is, will the value of loan repayments cover the initial cost of providing the loan? What about adverse selection? And how should income be defined for purposes of an income-contingent loan plan? In essence the typical income-contingent loan proposal involves three parameters: the amount of the loan; the period over which income is “taxed”; and the rate at which income is taxed. At what level must the tax rate be set for an ICL plan to be self-financing? We present several illustrative calculations that might be useful to those who wish to evaluate various proposals and present some conclusions.

This paper uses 2973 loan profile records of 2810 poor households who have taken these loans from different quasi-formal sources of which about 50 percent of the loan taken is supplied by the Ultra-poor oriented program designed by PKSF. The objective of this program was to create some income source for these Ultra-poor through credit support. But diversion of loan use from the proposed IGA to other non-productive sector, especially to consumption hinders the objects and at the same time causes a threat to the MFIs as some of them become default. We observe that among these Ultra-poor households who have taken loan, about 68 percent of the loan was diverted from the proposed IGA to other activity with different degree of diversion and of these diverted loan, 40 percent was fully diverted. We find that among the non-savers, wage employers, inhabitants of char have higher likelihood of diverting their received loan from the proposed IGA to others and more than 28 percent of each loan on average was used for consumption.

After making a loan, a bank finds out if the loan needs contract enforcement ("monitoring"); it also decides whether to lay off credit risk in order to release costly capital. A bank can lay off credit risk by either selling the loan or by buying insurance through a credit default swap (CDS). With a CDS, the originating bank retains the loan's control rights but no longer has an incentive to monitor; with loan sales, control rights pass to the buyer of the loan, who can then monitor, albeit in a less-informed manner. In a single-period setting, for high levels of base credit risk, only loan sales are used in equilibrium; risk transfer is efficient, but monitoring is excessive. For low levels of credit risk, equilibrium depends on the cost of capital shortfalls. When capital costs are low, only poor quality loans are sold or hedged; risk transfer is inefficient, and monitoring may also be too low. When capital costs are high, CDS and loan sales can coexist, in which case risk transfer is efficient but monitoring is too low. In both cases, if gains to monitoring are sufficiently high, the borrowing firm may choose to borrow more than is needed to finance itself so as to induce monitoring. Restrictions on the bank's ability to sell the loan expand the range where CDS are used and monitoring does not occur.In a repeated setting, reputation concerns may support efficient outcomes where CDS are used and the bank still monitors. Because loan defaults trigger a return to inefficient outcomes in the future, total efficiency cannot be sustained indefinitely. Reputational equilibria are most likely for firms that have high base credit quality or for firms where monitoring has a high impact on default probabilities.

Until students understand the need for financial accounting standards (FAS), those standards are merely rules that must be learned. Events in the savings and loan (S&L) industry provide examples to which students can relate and which demonstrate the need for accounting standards. Such a need arises because producers of financial information often have different objectives than external users of the information. Loan origination fees illustrate such a difference. Savings and loan managers argued that loan origination fees were revenue, while others argued that origination fees should be treated as adjustments to the yields of mortgages. Prior to FAS No. 65, loan origination fees were reported as revenue at the time mortgages were created, a treatment with which most S&L managers agreed. As problems arose in the savings and loan industry, the needs of external financial statement users became evident, and the FASB issued Statement No. 65 in an effort to address the controversy surrounding the reporting of loan origination fees. Subsequently, FAS No. 91 reconsidered the issue and further refined the reporting standards. The SLO Town Savings and Loan case illustrates the significance of the issues related to origination fees, the impact of accounting standards on management preferences for particular financial transactions, and the evolution of a financial reporting standard.

This paper demonstrates how the design of standards, pricing and finance must be integrated if affordable housing is to be achieved in a sustainable and replicable way. The paper does this by identifying basic principles in achieving affordability and applying these principles through a simple, computer-based integrated-design model to a ‘model’ housing project in Pakistan. In most instances, where there is not a development grant or forgivable loan, affordability must be combined with cost-recovery if projects are to be sustainable and replicable. Keys to such projects are the use of market prices, incremental construction using sweat equity, efficient and affordable standards, differential pricing, and financing using market interest rates but with affordable down payments and repayment rates. The paper demonstrates that the ‘model’ project in Pakistan, as designed, is not affordable. Through examining several alternative designs using different land-use standards, pricing and financing systems, the paper shows what needs to be done to make such projects affordable. In doing so, it illustrates how affordability, standards, pricing, finance, and cost-recovery can be integrated in the design process. While applied to Pakistan, the relevance to Canada of this integrated-interactive design process is explored.

The paper analyzes effects of borrower interest rates and student lender subsidies on federally guaranteed student loan volumes from 1988 to 1994 and from 1996 to 2006. In present and past policy debates, some have contended that lender subsidy cuts would cause some lenders to reduce loan supply or to leave the student loan market. A simple model of the student loan market suggests that if lenders receive economic rents due to overly generous subsidies, small changes in subsidy levels should not affect loan supply. The empirical results based on a variety of GMM panel estimators find evidence of a link between higher SAP margins and higher loan volumes is weak or inconclusive for both the 1988-1994 and 1996-2006 periods. This suggests that subsidy reductions had no discernable effect on student loan volumes. Results also suggest that higher real borrower interest rates reduce student loan volumes for public colleges and universities.

This paper provides some principles of bad loan management, explanation of identifying, reasons, treatments of bad loan. Addressing some reasons of bad loans in Palestine. this paper provides some theoretical frame of bad loan management.