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 Consumer Financial Protection Bureau in 2015. We find that inexperienced borrowers (first-time home buyers) pay significantly lower interest rates after the disclosure regulation relative to experienced borrowers (repeat buyers), suggesting that simplifying these disclosures reduces mortgage 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 through which simplifying disclosures lowers interest costs: curbing predatory lending and facilitating borrower shopping. We further find that disadvantaged borrowers (Black, Hispanic, and single female) benefit more from simplified disclosures. Last, we do not find that simplifying disclosures affects mortgage loan performance.

Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending

“…As a result of consumers' improved understanding of mortgage terms, TRID should reduce the fees and interest that banks charge. Consistent with this intuition, Kielty, Wang, and Weng [2023] find that first‐time home buyers are charged lower interest rates relative to repeat home buyers following TRID.…”

“…Kielty, Wang, and Weng [2023] find evidence consistent with banks charging lower interest rates to first-time home buyers post-TRID.17 It is unclear whether TRID affects the number of submitted applications, given that consumers only receive TRID disclosures after they have already submitted an application. We confirm that aggregate consumer demand, measured as the number of complete applications, does not increase post-TRID (untabulated).…”

“…In addition to reducing the number of disclosures, TRID also requires a new simplified format that reduces inconsistencies and duplication of information. Kielty, Wang, and Weng [2023] find a 14% reduction in line items and a 65% reduction in words in the new Loan Estimate, compared to the old disclosures it replaced. Under the old rules, due to the separate federal agencies that regulated the disclosures, the presentation of information between the two initial disclosures and the two subsequent disclosures was inconsistent.…”

“…First, the simplified disclosures under TRID facilitate consumers' parsing of information in disclosures and comparisons of rates and fees across different lenders. 1 All else equal, consumers' improved understanding of mortgage information should reduce the interest and fees that banks are able to charge on mortgages (Bhutta, Fuster, and Hizmo [2020], Kielty, Wang, and Weng [2023]). Second, banks may face challenges in selling mortgages on the secondary market.…”

“…For example, investors and firms enjoy greater liquidity when investors' processing costs decrease (e.g., Lang and Stice-Lawrence [2015], Blankespoor, deHaan, and Zhu [2018]). Prior studies focus on the consequences for borrowers of more transparent disclosure (Kielty, Wang, and Weng [2023], Wang and Burke [2021]).…”