Financial Education versus Costly Counseling: How to Dissuade Borrowers from Choosing Risky Mortgages?
Douglas D. Evanoff
- American Economic Journal: Economic Policy (Forthcoming)
This paper explores the effects of mandatory third-party review of
mortgage contracts on consumer choice. The study is based on a
legislative pilot carried out in Illinois in 2006, under which mortgage
counseling was triggered by applicant credit scores or by their choice of
“risky mortgages.” Low-credit score applicants for whom counselor
review was mandatory did not materially alter their contract choice.
Conversely, higher-credit score applicants who could avoid counseling by
choosing non-risky mortgages did so, decreasing their propensity for
high-risk contracts between 10 and 40 percent. In the event, one of the key
goals of the legislation—curtailment of high-risk mortgage products—was
only achieved among the population that was not counseled.
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