Playing Hide and Seek: How Lenders Respond to Borrower Protection

Working Paper No. 26382 This paper uses the universe of mortgage contracts to estimate the response of high-interest lenders to borrower protection regulations aimed at simplifying and making loan terms more transparent. Using a quasi-experimental design, we find that lenders substantially reduce in...

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Bibliographic Details
Published in:NBER Working Paper Series 2019-10, p.26382
Format: Article
Language:English
Subjects:
Consumer protection
Consumers
Economic models
Economic theory
Fines & penalties
Interest rates
Loans
Mortgages
Predatory lending
Regulation
Wall Street Reform & Consumer Protection Act 2010-US
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Summary:Working Paper No. 26382 This paper uses the universe of mortgage contracts to estimate the response of high-interest lenders to borrower protection regulations aimed at simplifying and making loan terms more transparent. Using a quasi-experimental design, we find that lenders substantially reduce interest rates – by an average of 10% – in order to avoid being subject to borrower protection, without reducing amounts lent or the number of loans approved. This finding implies that a substantial number of high-interest lenders prefer to issue obfuscatory mortgage contracts with lower interest rates rather than more transparent and regulated mortgages with higher interest rates.
ISSN:0898-2937
DOI:10.3386/w26382