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Fuzzy Math, Disclosure Regulation, and Market Outcomes: Evidence from Truth-in-Lending Reform

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  • Victor Stango
  • Jonathan Zinman

Abstract

We posit that consumer lenders shroud interest rates and market "low monthly payments" to price discriminate on "fuzzy math" or "payment/interest bias": consumers' pervasive tendency to underestimate borrowing costs when an interest rate is not disclosed. We test whether mandated disclosure changes lenders' ability to price discriminate using within-household interactions between payment/interest bias and policy-induced variation in the strength of Truth-in-Lending Act (TILA) enforcement across lenders and time. Weak TILA enforcement substantially widens the gap between rates paid by more-biased and less-biased borrowers. TILA compliance costs appear to increase interest rates overall, making the net effect on interest rates ambiguous. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhq089
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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 24 ()
Issue (Month): 2 ()
Pages: 506-534

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Handle: RePEc:oup:rfinst:v:24:y::i:2:p:506-534

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Cited by:
  1. Jonathan Zinman, 2008. "Restricting consumer credit access: household survey evidence on effects around the Oregon rate cap," Working Papers 08-32, Federal Reserve Bank of Philadelphia.
  2. Richard Disney & John Gathergood, . "Financial Literacy ad Indebtedness: New Evidence for UK Consumers," Discussion Papers 11/05, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  3. J. Collins, 2011. "Mortgage Mistakes? Demographic Factors Associated with Problematic Loan Application Behaviors," Journal of Family and Economic Issues, Springer, vol. 32(4), pages 586-599, December.
  4. Gu, Yiquan & Wenzel, Tobias, 2012. "Strategic obfuscation and consumer protection policy in financial markets: Theory and experimental evidence," DICE Discussion Papers 76, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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