Fuzzy Math, Disclosure Regulation and Credit Market Outcomes: Evidence from Truth in Lending Reform

40 Pages Posted: 4 Feb 2008 Last revised: 4 Oct 2012

See all articles by Victor Stango

Victor Stango

UC Davis Graduate School of Management

Jonathan Zinman

Dartmouth College; Innovations for Poverty Action; Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

Date Written: April 20, 2009


Consumer installment lenders prefer to market “low monthly payments” and shroud interest rates. Why not voluntarily disclose rates? We show that when an interest rate is not disclosed, most consumers substantially underestimate it using information on the monthly payment, loan principal and maturity. This “fuzzy math” or “payment/interest bias” helps explain why lenders shroud rates and thereby violate the Truth-in-Lending Act (TILA) even under the threat of fines and litigation. So does TILA have any teeth? We identify within-household interactions between policy-induced variation in the strength of TILA enforcement across lenders and time, payment/interest bias, and interest rates on actual loans. More biased households pay roughly 400 basis points more than less-biased households, but only on loans from lenders facing relatively weak TILA enforcement. The results link a cognitive bias to firm strategy and market outcomes, show that mandated disclosure can attenuate those links, and highlight the importance of enforcement costs.

Keywords: truth in lending, payment/interest bias, disclosure regulation, consumer lending

JEL Classification: D1, G2, L5

Suggested Citation

Stango, Victor and Zinman, Jonathan, Fuzzy Math, Disclosure Regulation and Credit Market Outcomes: Evidence from Truth in Lending Reform (April 20, 2009). Available at SSRN: https://ssrn.com/abstract=1081635 or http://dx.doi.org/10.2139/ssrn.1081635

Victor Stango (Contact Author)

UC Davis Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Jonathan Zinman

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-0075 (Phone)

HOME PAGE: http://https://sites.dartmouth.edu/jzinman/

Innovations for Poverty Action

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New Haven, CT 20009
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Jameel Poverty Action Lab

77 Massachusetts Avenue
Cambridge, MA 02139
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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