Making sense of soft information: interpretation bias and loan quality

We explore whether cognitive constraints and behavioral biases impede the processing and interpretation of soft information in private lending. Using data from a credit union's internal reporting system, we delineate three constraints and biases likely to affect lending decisions: limited attention, task-specific human capital and common identity. We find that soft information leads to worse loan quality when loan officers are busy or before weekends and around national holidays; when they have prior sales experience; and when both the officers and borrowers are men. We provide evidence of non-agency-related costs in the use of soft information in lending decisions. •We explore whether cognitive constraints and behavioral biases impede the processing and interpretation of soft information in private lending.•We delineate three constraints and biases that affect lending decisions: limited attention, task-specific human capital and common identity.•Soft information leads to worse loan quality when loan officers are busy or before weekends and around national holidays.•Soft information leads to worse loan quality when loan officers have prior sales experience.•Soft information leads to worse loan quality when both the officers and borrowers are men.•We provide evidence of non-agency-related costs in the use of soft information in lending decisions.