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Playing Hide and Seek: How Lenders Respond to Borrower Protection

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  • Youssef Benzarti

Abstract

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.

Suggested Citation

  • Youssef Benzarti, 2019. "Playing Hide and Seek: How Lenders Respond to Borrower Protection," NBER Working Papers 26382, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26382
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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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