Playing Hide and Seek: How Lenders Respond to Consumer Protection
33 Pages Posted: 3 Oct 2019
Date Written: September 24, 2019
Abstract
This paper uses the universe of mortgage contracts along with a quasi-experimental design to estimate the response of high-interest lenders to borrower protection regulations aimed at simplifying and making loan terms more transparent. We find that lenders substantially reduce interest rates, by an average of 10%, in order to avoid being subject to consumer protection, without reducing amounts lent nor the number of loans originated. This finding implies that high interest lenders prefer the ability to issue obfuscatory mortgage contracts to mortgages with higher interest rates and is consistent with the model of Gabaix & Laibson (2006), which shows that firms may not educate consumers if sufficiently many consumers are inattentive.
Keywords: consumer protection, high-interest mortgages, behavioral economics
JEL Classification: D91, G18, G21, H10
Suggested Citation: Suggested Citation