Playing Hide and Seek: How Lenders Respond to Borrower Protection

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, I find that lenders substantially reduce interest rates—by an averag...

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Bibliographic Details
Published in:The review of economics and statistics 2024-03, Vol.106 (2), p.384-393
Main Author: Benzarti, Youssef
Format: Article
Language:English
Subjects:
Hide and seek
Interest rates
Loans
Mortgages
Quasi-experimental methods
Regulation
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Summary: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, I find that lenders substantially reduce interest rates—by an average of 10%—in order to avoid being subject to borrower protection, without reducing amounts loaned or the number of loans approved. This finding is consistent with high-interest lenders preferring to issue obfuscatory mortgage contracts with lower interest rates rather than more transparent and regulated mortgages with higher interest rates.
ISSN:0034-6535
1530-9142
DOI:10.1162/rest_a_01167