Financial Education versus Costly Counseling: How to Dissuade Borrowers from Choosing Risky Mortgages?

American Economic Journal: Economic Policy, Forthcoming

Fisher College of Business Working Paper No. 2008-03-020

Charles A. Dice Center Working Paper No. 2008-20

Paolo Baffi Centre Research Paper No. 2009-51

Networks Financial Institute Working Paper 2011-WP-12

FRB of Chicago Working Paper No. 2009-7

FDIC Center for Financial Research Working Paper No. 2009-04

57 Pages Posted: 20 Oct 2008 Last revised: 19 Apr 2019

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Gene Amromin

Federal Reserve Bank of Chicago

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Douglas D. Evanoff

Federal Reserve Bank of Chicago

Date Written: January 1, 2014

Abstract

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.

Keywords: Financial counseling, subprime crisis, predatory lending, household finance

JEL Classification: D14, D18, L85, R21

Suggested Citation

Agarwal, Sumit and Amromin, Gene and Ben-David, Itzhak and Chomsisengphet, Souphala and Evanoff, Douglas D., Financial Education versus Costly Counseling: How to Dissuade Borrowers from Choosing Risky Mortgages? (January 1, 2014). American Economic Journal: Economic Policy, Forthcoming; Fisher College of Business Working Paper No. 2008-03-020; Charles A. Dice Center Working Paper No. 2008-20; Paolo Baffi Centre Research Paper No. 2009-51; Networks Financial Institute Working Paper 2011-WP-12; FRB of Chicago Working Paper No. 2009-7; FDIC Center for Financial Research Working Paper No. 2009-04. Available at SSRN: https://ssrn.com/abstract=1285603 or http://dx.doi.org/10.2139/ssrn.1285603

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Gene Amromin

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Douglas D. Evanoff

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5814 (Phone)

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