Playing hide and seek : how lenders respond to borrower protection

Author / Creator

Benzarti, Youssef, author

Available as

Online

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. ...

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.

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