Working Papers

Consumer Protection Laws and the Mortgage Market: Evidence from Ohio

Abstract: Despite regulatory reform after the 2008 crisis, American households are exposed to significant financial risks. Consumer protection laws are intended to protect households from exploitative firm behavior. This project studies the effect of two common types of consumer protection laws: standards of care, which are enforced only when consumers have bad outcomes that they claim are connected to firm misbehavior, and mandated disclosures, which require sellers to provide all consumers with information ex ante to help them make better decisions. Using a natural experiment in Ohio, which introduced the Homebuyer’s Protection Act in 2007, I study the impact of both standards of care and mandated disclosures on mortgage loans originated between 2000 and 2013. I find that imposing standards of care on lenders decreases their propensity to foreclose on consumers and lowers consumer bankruptcy rates. Lenders subject to the standards of care do not offer different interest rates or change other loan characteristics. Instead, they originate fewer risky loans overall, and are more lenient towards borrowers. In contrast, mandated disclosures decrease loan sizes and encourage more responsible borrower repayment behavior. These contrasting effects shed light on the classic debate between ex ante rules vs. ex post standards, suggesting that ex post standards improve firms’ long term incentives and result in positive consumer outcomes. Overall, both standards of care and mandated disclosure have some significant positive impacts on consumers, while the costs of standards of care need more investigation.

The Exercise of Contract Rights

Abstract: Parties to a contract can choose to invoke their rights stringently or leniently. In the context of consumer contracts, such as mortgages, the decision to be lenient towards a borrower can have a huge effect on the borrower’s welfare. Yet, there is little empirical evidence about how firms exercise their contract rights. This Article uses both theoretical and empirical methods to explore the mechanisms that drive and discipline the exercise of contract rights. First, it lays out a theory how parties choose to exercise contract rights, and shows how private information can drive inefficiencies in contract exercise. Second, it analyzes loan-level mortgage data to show empirically that firms’ private information predicts their exercise of foreclosure rights. Firms’ exercise of contract rights matters as much as formal contract terms. Market forces, such as competition across lenders or consumer bargaining, are not strong enough to discipline this inefficient behavior. Third, the Article proposes that consumer protection law is necessary to limit inefficient foreclosure, and the inefficient exercise of contract rights in general. To do this, the Article proposes changes to contract law doctrine that provides consumers with rights to recover when firms engage in rent-seeking behavior.  Successful consumer protection laws can do more than remove incentives for wrongdoing – it can build trust between firms and consumers that maximizes the contract’s value to both parties when changes occur during the contract term.

Fiduciary Duty and the Market for Financial Advice (with Vivek Bhattacharya and Gaston Illanes) [Media: Bloomberg]

Abstract: Recent regulatory debate in the financial advice industry has focused on expanding fiduciary duties to broker-dealers. Proponents of this reform argue that it would improve the advice given to clients and limit losses from agency problems, while detractors counter that such regulation would increase compliance costs without directly improving consumer outcomes. This paper evaluates these claims empirically, using a transactions-level dataset for annuity sales from a major financial services provider and exploiting state-level variation in common law fiduciary duty. We find that imposing fiduciary duty on broker-dealers shifts the set of products they sell to consumers, away from variable annuities and towards fixed indexed annuities. Within variable annuities, fiduciary duty induces a shift towards lower-fee, higher-return annuities with a wider array of investment options. We develop a model that leverages the distributional changes in products sold to test the mechanism by which fiduciary duty operates. We find evidence that fiduciary duty does not solely increase the cost of doing business but that it has the intended effect of directly improving financial advice.

Retirement Policy and Annuity Market Equilibria: Evidence from Chile (with Gaston Illanes)

Abstract: Retirement policy has indirect effects on its beneficiaries, through the “crowd-out” or “crowd-in” of insurance markets. We study how retirement policy in Chile, which limits the drawdown of retirement assets but otherwise does not provide or require fixed income in retirement, results in more than 60% of eligible retirees purchasing private annuities at low prices. We estimate a demand model to show that replacing this voluntary policy with partial mandatory annuitization and removing limits on drawdowns causes the private annuity market to partially unravel. Under our model, this reform leads to a welfare increase equivalent to$4,000 dollars of additional pension savings on average, but welfare effects are heterogenous and many retirees would be harmed due to the higher prices of private annuities. Our results highlight the importance of considering the impact of policy reforms on the equilibria of related markets.

Polarized Politics, Stable Markets: The Case of State Attorneys General & Mortgage Lender (with Brian Feinstein and Chen Meng)

Abstract: Partisan polarization may subject market  participants to inconsistent law-on-the-ground, as successive officials—each with their own party-driven priorities—enter office. To assess this concern, this article studies the effect of party switches in state attorneys general (AGs)—who are charged with enforcing key federal and state mortgage-lending and consumer-protection laws—on mortgage lenders’ activities. Viewing lenders’ observed behavior as a window into their expectations about enforcement levels, we utilize detailed data on residential mortgages to examine whether lender activity changes following a switch in the partisan identification of a state’s AG. Overall, we find little to no evidence that an AG’s party has a significant impact on mortgage markets. Most models indicate that lenders’ behavior is not materially different in states with a Republican AG versus a Democrat. In the face of an increasingly partisan climate in which state attorneys general operate, mortgage markets display a remarkable degree of stability.