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Premature repayment of fixed interest mortgage loans without compensation, a case of misguided consumer protection in the EU

Author

Listed:
  • Hans-Bernd Schäfer

    (Bucerius Law School)

  • Alexander J. Wulf

    (SRH Berlin University of Applied Sciences)

Abstract

Consumer protection shifts risks from consumers to businesses. This raises marginal costs and equilibrium prices. It is justified when markets are not strong enough to allocate contractual risks or accident risks efficiently, especially in cases of severe asymmetric information between suppliers and consumers. Consumer protection can then increase the consumer’s expected welfare from a contract. We test these considerations in a theoretical and empirical study on consumers' right to early repayment of mortgage loans without damage compensation to the creditor in the European Union. We show in a formal model that such a right can lead to an impairment of consumer welfare, compared with the traditional rule of expectation damages for breach of contract. This applies if the consumer is risk averse and repays a loan with a high interest rate in a low interest period to take up a new loan for the same project at lower interests. From a theoretical point of view, this right has no solid economic underpinning, if it is not restricted to cases of personal hardship of the consumer and serves an insurance purpose. We present empirical evidence supporting this argument. In a panel study on monthly mortgage interest rates of 23 EU Member States between 2005 and 2017 we show how interest rate spreads change with the level of consumer protection.

Suggested Citation

  • Hans-Bernd Schäfer & Alexander J. Wulf, 2022. "Premature repayment of fixed interest mortgage loans without compensation, a case of misguided consumer protection in the EU," European Journal of Law and Economics, Springer, vol. 53(2), pages 175-208, April.
    • Handle: RePEc:kap:ejlwec:v:53:y:2022:i:2:d:10.1007_s10657-021-09719-0
    DOI: 10.1007/s10657-021-09719-0
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    References listed on IDEAS

    as
    1. Roland Kirstein & Hans-Bernd Schäfer, "undated". "Erzeugt der Europäische Verbraucherschutz Marktversagen? Eine informationsökonomische und empirische Analyse," German Working Papers in Law and Economics 2007-1-1172, Berkeley Electronic Press.
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    3. Yannis Bakos & Florencia Marotta-Wurgler & David R. Trossen, 2014. "Does Anyone Read the Fine Print? Consumer Attention to Standard-Form Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 43(1), pages 1-35.
    4. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    5. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    6. Alexander Wulf, 2014. "Institutional competition of optional codes in European contract law," European Journal of Law and Economics, Springer, vol. 38(1), pages 139-162, August.
    7. O. Seizov & A. J. Wulf & J. Luzak, 2019. "The Transparent Trap: A Multidisciplinary Perspective on the Design of Transparent Online Disclosures in the EU," Journal of Consumer Policy, Springer, vol. 42(1), pages 149-173, March.
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    More about this item

    Keywords

    Consumer contract law; Consumer protection; Mortgage loans; Financial services; Regulation; EU law;
    All these keywords.

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K25 - Law and Economics - - Regulation and Business Law - - - Real Estate Law
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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