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The Effects of Mandated Financial Counseling on Household Mortgage Decisions: Evidence from a Natural Experiment

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Author Info

  • Agarwal, Sumit

    (Federal Reserve Bank of Chicago)

  • Amromin, Gene

    (Federal Reserve Bank of Chicago)

  • Ben-David, Itzhak

    (Ohio State U)

  • Chomsisengphet, Souphala

    (Office of the Comptroller of the Currency)

  • Evanoff, Douglas D.

    (Federal Reserve Bank of Chicago)

Abstract

We explore the effects of mandated financial counseling to borrowers on the terms and availability of mortgage credit. Our study is based on a natural experiment in Cook County, Illinois that took place in 2006. The County issued a legislation that required low credit mortgage borrowers in 10 zip codes in Cook County to take financial counseling before accepting loan proposals from state-licensed lenders. Our results are based on a difference-in-differences analysis. We document that as a consequence of the legislation, both supply and demand of credit declined, with marginal borrowers being pushed out of the market. Due to the change in composition of buyers, market adjusted property prices increased over the period and the remaining treated borrowers borrowed at lower rates (controlling for credit quality). The fraction of full documentation loans increased over the treatment period.

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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2008-20.

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Date of creation: Oct 2008
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Handle: RePEc:ecl:ohidic:2008-20

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  1. Xavier Gabaix & John C. Driscoll & David Laibson & Sumit Agarwal, 2008. "The Age of Reason: Financial Decisions Over the Lifecycle," 2008 Meeting Papers 322, Society for Economic Dynamics.
  2. David Hirshleifer, 2008. "Psychological Bias as a Driver of Financial Regulation," European Financial Management, European Financial Management Association, vol. 14(5), pages 856-874.
  3. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
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