Simplifying Complex Disclosures: Evidence from Disclosure Regulation in the Mortgage Markets

Abstract

Complex disclosures have long been a major source of borrowers’ poor understanding of mortgages. We examine the effect of simplifying mortgage disclosures in a difference-in-differences design around a significant disclosure rule mandated by the CFPB in 2015. We find that inexperienced borrowers pay significantly lower interest rates after the disclosure regulation relative to experienced borrowers, suggesting that simplifying these disclosures reduces interest costs. Additional tests show that the reduction in interest costs is not accompanied with more upfront non-interest costs paid by borrowers. Our cross-sectional analyses reveal two mechanisms by which simplifying disclosures lowers interest costs: curbing predatory lending and facilitating borrower shopping. We further find that disadvantaged borrowers benefit more from simplified disclosures. Last, we do not find that simplifying disclosures affects loan performance.

Keywords: disclosure processing costs, disclosure regulation, mortgage, TRID, simplification

JEL Classification: G21, G5, G18, M4