Playing Hide and Seek: How Lenders Respond to Borrower Protection

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, I find that lenders substantially reduce interest rates—by an average of 10%—in order to avoid being subject to borrower protection, without reducing amounts loaned or the number of loans approved. This finding is consistent with high-interest lenders preferring to issue obfuscatory mortgage contracts with lower interest rates rather than more transparent and regulated mortgages with higher interest rates.