Working Paper: NBER ID: w26382
Authors: Youssef Benzarti
Abstract: 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.
Keywords: borrower protection; mortgage contracts; interest rates; lender behavior
JEL Codes: D91; G18; G21; H10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| HOEPA regulations (G28) | lenders reduce interest rates (G21) |
| lenders reduce interest rates (G21) | number of mortgages above regulatory thresholds declines (G21) |
| lenders reduce interest rates (G21) | number of mortgages just below regulatory thresholds increases (G21) |
| HOEPA regulations (G28) | total supply of credit remains unaffected (E51) |