Playing Hide and Seek: How Lenders Respond to Consumer Protection

33 Pages Posted: 3 Oct 2019

See all articles by Youssef Benzarti

Youssef Benzarti

University of California, Santa Barbara (UCSB) - Department of Economics

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

Benzarti, Youssef, Playing Hide and Seek: How Lenders Respond to Consumer Protection (September 24, 2019). Available at SSRN: https://ssrn.com/abstract=3459226 or http://dx.doi.org/10.2139/ssrn.3459226

Youssef Benzarti (Contact Author)

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

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