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Improving Mortgage Default Collection Efforts By Employing The Decoy Effect

Author

Listed:
  • David M. Harrison
  • Kimberly F. Luchtenberg
  • Michael J. Seiler
  • Raymond A.

Abstract

Using a large sample of borrowers, we test the ability of the Decoy Effect to enhance debt collection efforts. We find that by disclosing the Annual Percentage Rate (APR) during settlement negotiations, participants are less influenced by the decoy and more apt to select the repayment option that is in their best interest. At the same time, by reporting the APR, borrowers are more willing to make repayments on the modified loan, resulting in a net gain to debt collection efforts. Because disclosing the APR is Consumer Financial Protection Bureau (CFPB) compliant, this simple disclosure has the ability to increase debt collection returns while helping borrowers make better decisions when selecting debt modification repayment plans. Our results suggest an applicability to all types of defaulted debt including mortgages, sub-prime auto loans, credit cards, student loans, and payday loans.

Suggested Citation

  • David M. Harrison & Kimberly F. Luchtenberg & Michael J. Seiler & Raymond A., 2017. "Improving Mortgage Default Collection Efforts By Employing The Decoy Effect," AfRES afres2017_114, African Real Estate Society (AfRES).
    • Handle: RePEc:afr:wpaper:afres2017_114
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    More about this item

    Keywords

    Asymmetric Dominance; Behavioral finance; Debt Collection; Decoy Effect; Heuristics; Mortgage Default;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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