You Could Lose Your Home: The Effects of State Policies Mandating Subprime Mortgage Risk Disclosures on Consumer Evaluations of Loan Offers

Abstract

This paper presents an empirical study of consumer responses to mandated information disclosures as measured by loan applicants rejecting approved high-cost mortgage loan offers in states with disclosure laws. Using 2005 Home Mortgage Disclosure Act data, this analysis suggests that state laws requiring signed consumer disclosures of the risk of “losing your home” result in more loan applicants rejecting an approved high-cost refinance loan offer from a lender. In general, a loan application covered by a state signed risk disclosure law, controlling for applicant, lender and market factors, results in a 4 to 10 point increase in the rate of applicants rejecting high-cost loan offers, compared to a mean rate of 16 percent overall. While states with any mortgage risk disclosures for high cost loans exhibit elevated probabilities that loan applicants will reject high-cost loan offers based on sequential logit models, modeling only the loan applicant’s accept-reject decision and focusing on loans estimated to be covered by state laws, it appears the effects of disclosure laws are strongest among provisions that require a signature by the loan applicant. These results suggest signed disclosures may be incorporated into consumer decision making when evaluating potential high cost mortgage refinance loans and are a strategy policymakers and regulators concerned about consumer decision making may want to consider.