The Effectiveness of Mandatory Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky Mortgages?

37 Pages Posted: 24 Feb 2014 Last revised: 26 Feb 2014

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: February 2014

Abstract

We explore the effects of mandatory third-party review of mortgage contracts on consumer choice--including the terms and demand for mortgage credit. Our study is based on a legislative pilot carried out by the State of Illinois in a selected set of zip codes in 2006. Mortgage applicants with low FICO scores were required to attend loan reviews by financial counselors. Applicants with high FICO scores had to attend counseling only if they chose "risky mortgages." We find that low-FICO applicants for whom counselor review was mandatory did not materially change their contract choice. Conversely, applicants who could avoid counseling by choosing less risky mortgages did so. Ironically, the ultimate goals of the legislation (e.g., better loan terms for borrowers) were only achieved among the population that was not counseled. We also find significant adjustments in lender behavior as a result of the counseling program.

Suggested Citation

Agarwal, Sumit and Amromin, Gene and Ben-David, Itzhak and Chomsisengphet, Souphala and Evanoff, Douglas D., The Effectiveness of Mandatory Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky Mortgages? (February 2014). NBER Working Paper No. w19920. Available at SSRN: https://ssrn.com/abstract=2400265

Sumit Agarwal (Contact Author)

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

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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