Bank Technology Adoption and Loan Production in the U.S Mortgage Market

Abstract

Information technology plays a key role in the consumer credit market, by shaping the way lenders underwrite borrowers. We study how the adoption of information technology by lenders affects approval decisions, pricing, and repayment in the U.S mortgage market. We assemble a loan-level dataset that covers the trajectory of mortgages from application to repayment and combine it with detailed information about information technology investment by lenders. We empirically identify that higher investment in information technology leads lenders to increase approval rates for loan applications, introduce greater granularity in their pricing, and create portfolios with better ex-post performance. A simple model of investment, underwriting and pricing is developed to explain our empirical findings.