Improving Mortgage Default Collection Efforts by Employing the Decoy Effect

We test the ability of the Decoy Effect to enhance debt collection efforts and find that by disclosing the Annual Percentage Rate (APR) in settlement offers, participants are less influenced by the decoy and more apt to select the repayment option that is in their best interest. At the same time, by...

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Bibliographic Details
Published in:The journal of real estate finance and economics 2023-05, Vol.66 (4), p.840-860
Main Authors: Harrison, David M., Luchtenberg, Kimberly F., Seiler, Michael J.
Format: Article
Language:English
Subjects:
Economics
Economics and Finance
Financial Services
Regional/Spatial Science
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Summary:We test the ability of the Decoy Effect to enhance debt collection efforts and find that by disclosing the Annual Percentage Rate (APR) in settlement offers, participants are less influenced by the decoy and more apt to select the repayment option that is in their best interest. At the same time, by reporting the APR, borrowers are more willing to make repayments on the modified loan, resulting in a net gain to debt collection efforts. Because disclosing the APR is Consumer Financial Protection Bureau (CFPB) compliant, this simple disclosure has the ability to increase debt collection returns while helping borrowers make better decisions when selecting debt modification repayment plans. Our results suggest an applicability to all types of defaulted debt including mortgages, sub-prime auto loans, credit cards, student loans, and payday loans.
ISSN:0895-5638
1573-045X
DOI:10.1007/s11146-021-09876-8