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Where credit is due: Stanford economist Jonathan Levin a began investigating subprime lending in 2004. His findings and insights may help the financial sector avoid mistakes in the coming years.

Article Excerpt
When Stanford economist Jonathan Levin started studying subprime lending in 2004, he had no idea how hot the topic would become. His interest in the subject was piqued by a research proposal from an undergraduate student who had worked at a national auto retailer that issued car loans to low-income buyers. The company kept a massive database on its customers and their payment histories, and it was willing to share the data in a way that many lenders have since become reluctant to do.

Speaking about it today, Levin's voice still reflects the excitement he felt in seeing the numbers for the first time. "They provided a window into the behavior of a whole population of low-income Americans," he says. Levin points out that as a general rule "the data visibility is not great on people with low incomes and bad credit histories." His sample promised to illuminate a whole range of questions: "What does the demand for loans look like in this market? How do you explain the behavior of customers? And what steps can companies take to manage risk and stay profitable?"

These questions fed directly into one of Levin's broad research interests, which he describes as...

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