A previous version of this original working paper was published in 2004.

In their model, scores are used in a standardized fashion, which reflects the prevalence of automated underwriting in industry practice. The authors show that their model has implications for the debate on the effect of personal bankruptcy exemptions on secured lending.

Recent literature has developed conflicting theories — and found conflicting results — seeking to explain how exemptions affect the mortgage market. By contrast, in their model exemptions are actually irrelevant to the mortgage underwriting decision. Instead, their model suggests that since exemptions are correlated with credit scores, some of the previous works findings of significant effects for exemptions may rather reflect a failure to fully control for creditworthiness. Merging data from a major credit bureau with the Home Mortgage Disclosure Act (HMDA) data set, the authors confirm these predictions of their model.