Abstract

http://ssrn.com/abstract=748286
 
 

Citations (11)



 
 

Footnotes (136)



 


 



Decisionmaking & the Limits of Disclosure: The Problem of Predatory Lending


Lauren E. Willis


Loyola Law School Los Angeles

June 2005

Loyola-LA Legal Studies Research Paper No. 2005-14

Abstract:     
Despite the importance of the transaction, many Americans are not making optimal home loan decisions, in two important respects. First, many borrowers are not obtaining home loans at optimal price terms, prices that a competitive market of borrowers engaged in effective price-shopping would produce. Second, the home loan decisions of many borrowers are not optimal choices with regard to risk of loss of the home, both in that the benefits of the loan are outweighed by the risk of loss of the home imposed by the loan, and in that borrowers are failing to take advantage of alternatives that are preferable, in cost-benefit terms, to shouldering that risk of loss. The households paying these high prices and facing this high risk of foreclosure are disproportionately African-American, Latino, and low to moderate income, households that already have fewer financial resources and significantly lower homeownership rates. The sale of these overpriced and overly risky home loans constitutes what has come to be known as predatory lending.

From a legal and policy perspective, what is puzzling about this problem is that borrowers are agreeing to these loans against their own self-interest and despite federally-mandated disclosures regarding loan price, and, for some loans, risk of foreclosure. This paper argues that the problem is not so puzzling when the structure of the home loan market and consumer decisionmaking within that market are carefully analyzed. Federal law regarding home lending is based on a rational actor model of borrower decisionmaking, with some allowances for bounded rationality. But borrowers frequently depart from the law's model due to widespread cognitive limitations, heuristics, biases, and emotional coping mechanisms. This paper explains how sellers are able to take advantage of these impediments to optimal decisionmaking and the structure of the market to convince significant numbers of borrowers to take loans that are overpriced and overly risky. The paper also makes a number of suggestions for reform.

Number of Pages in PDF File: 48

JEL Classification: D1, D4, D8, G2, K23

working papers series


Download This Paper

Date posted: June 23, 2005  

Suggested Citation

Willis, Lauren E., Decisionmaking & the Limits of Disclosure: The Problem of Predatory Lending (June 2005). Loyola-LA Legal Studies Research Paper No. 2005-14. Available at SSRN: http://ssrn.com/abstract=748286 or http://dx.doi.org/10.2139/ssrn.748286

Contact Information

Lauren E. Willis (Contact Author)
Loyola Law School Los Angeles ( email )
919 Albany Street
Los Angeles, CA 90015-1211
United States
213-736-1086 (Phone)
213-380-3769 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 3,299
Downloads: 352
Download Rank: 46,524
Citations:  11
Footnotes:  136

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 1.000 seconds