A Cognitive and Social Psychological Analysis of Disclosure Laws and Call for Mortgage Counseling to Prevent Predatory Lending

Abstract

The federal government’s primary method of protecting consumers from “predatory lending” has been to enact disclosure laws that were supposed to enable consumers to make informed decisions. This article contends that notwithstanding these disclosure laws, unscrupulous mortgage brokers and lenders have been able to take advantage of certain described cognitive and social psychological phenomena to induce borrowers to enter into predatory loans, and argues that disclosures alone - even the recently revised disclosure forms - are inadequate. To better empower consumers to make informed decisions on their home loans, this article proposes and details a mortgage counseling intervention that contains both “in-person” and interactive computer training as a necessary supplement to disclosure laws. Designed properly, such an intervention would more effectively address the cognitive and social psychological barriers to rational decision-making than disclosure alone. The article also examines the likely costs and benefits of the proposed mortgage counseling intervention in light of Illinois experience with mortgage counseling and urges policymakers to consider not only the costs of implementing mortgage counseling, but also the costs of not providing for this counseling.