Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending

Abstract

We examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA-RESPA Integrated Disclosures (TRID) rule simplifies the mortgage disclosures provided to consumers. As a consequence, TRID-affected mortgages become a less attractive investment opportunity to banks. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We find evidence consistent with both a decrease in consumers' information processing costs and an increase in banks' secondary market frictions, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending, and that fintechs absorb mortgage demand in areas with reduced mortgage lending by banks. Our study documents real actions that firms take in response to disclosure transparency regulation and contributes to the literature on the economic consequences of such regulation.

Online appendix available at https://ssrn.com/abstract=4486367

Keywords: information processing costs, consumer disclosures, real effects, mortgage lending, banks, fintechs, transparency regulation

JEL Classification: D18, D83, G21, G28