VOL 99 NO. I ADAMS ETAL.: SUBPRIME LENDING Applications 38品NE Sales Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Calendar week FIGURE 2A. SEASONALITY IN APPLICATIONS AND SALES Notes: Figure based on data from all applications. Both number of applications and sales are normalized by the aver- over the rest of the year. These seasonal patterns cannot be attributed to sales or other changes in the firms offers. In fact, required down payments are almost $150 higher in February, averaging across applicants in our data, than in the other months of the year. Indeed we initially thought these patterns indicated a data problem, until the company pointed out that prospective buyers receive their tax rebates at precisely this time of year. But can tax rebates be large enough to explain such a dramatic spike in demand? All loan pplicants must hold a job to be eligible for a loan, and most are relatively low earners, making them eligible for the earned income tax credit(EltC). The associated rebate, which varies with income and the number of dependents, can be as high as $4, 500. To assess whether purchasing patterns might reflect EITC rebates, we classified applicants into 12 groups depending on their monthly household income and their number of dependents. For each group, we calculated the earned income tax credit for the average household in the group, and also the percent increase in applications, close rate, and sales in February relative to the other months. Figure 2B plots the relationship between the calculated ElTC rebate and the seasonal spike in demand for each group. There is a sharp correlation. For households with monthly incomes below $1, 500 and at least two dependents, for whom the EITC rebate could be around $4, 000, the number of applications doubles in February and the number of purchases more than triples. In contrast, for households with monthly incomes above $3, 500 and no dependents, for whom the EITC rebate is likely zero, the number of applications and purchases exhibits virtually no increase in tax rebate season Because minimum down payment requirements are raised during tax season, it is interesting to isolate the seasonal effect in demand, holding all else constant. Our demand estimates in the next section. which control for the relevant offer terms as well as individual characteristics such as credit score and household income, indicate that the demand of applicants who arrive on the 13The details of the EITC schedule did not change much over our observation period (2001-2005). The particular numbers we report are based on the 2003 schedule.VOL. 99 NO. 1 Adams Et al.: Subprime Lending 57 over the rest of the year. These seasonal patterns cannot be attributed to sales or other changes in the firm’s offers. In fact, required down payments are almost $150 higher in February, averaging across applicants in our data, than in the other months of the year. Indeed we initially thought these patterns indicated a data problem, until the company pointed out that prospective buyers receive their tax rebates at precisely this time of year. But can tax rebates be large enough to explain such a dramatic spike in demand? All loan applicants must hold a job to be eligible for a loan, and most are relatively low earners, making them eligible for the earned income tax credit (EITC). The associated rebate, which varies with income and the number of dependents, can be as high as $4,500. To assess whether purchasing patterns might reflect EITC rebates, we classified applicants into 12 groups depending on their monthly household income and their number of dependents. For each group, we calculated the earned income tax credit for the average household in the group,13 and also the percent increase in applications, close rate, and sales in February relative to the other months. Figure 2B plots the relationship between the calculated EITC rebate and the seasonal spike in demand for each group. There is a sharp correlation. For households with monthly incomes below $1,500 and at least two dependents, for whom the EITC rebate could be around $4,000, the number of applications doubles in February and the number of purchases more than triples. In contrast, for households with monthly incomes above $3,500 and no dependents, for whom the EITC rebate is likely zero, the number of applications and purchases exhibits virtually no increase in tax rebate season. Because minimum down payment requirements are raised during tax season, it is interesting to isolate the seasonal effect in demand, holding all else constant. Our demand estimates in the next section, which control for the relevant offer terms as well as individual characteristics such as credit score and household income, indicate that the demand of applicants who arrive on the 13 The details of the EITC schedule did not change much over our observation period (2001–2005). The particular numbers we report are based on the 2003 schedule. 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 Sales Applications Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Calendar week Normalized count per week Figure 2A. Seasonality in Applications and Sales Notes: Figure based on data from all applications. Both number of applications and sales are normalized by the aver￾age number of applications per week