The Effects of Mandated Financial Counseling on Household Mortgage Decisions: Evidence from a Natural Experiment

Sumit Agarwal (), Gene Amromin, Ben-David, Itzhak, Souphala Chomsisengphet and Douglas D. Evanoff
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Gene Amromin: Federal Reserve Bank of Chicago
Ben-David, Itzhak: Ohio State U
Souphala Chomsisengphet: Office of the Comptroller of the Currency
Douglas D. Evanoff: Federal Reserve Bank of Chicago

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We explore the effects of mandated financial counseling to borrowers on the terms and availability of mortgage credit. Our study is based on a natural experiment in Cook County, Illinois that took place in 2006. The County issued a legislation that required low credit mortgage borrowers in 10 zip codes in Cook County to take financial counseling before accepting loan proposals from state-licensed lenders. Our results are based on a difference-in-differences analysis. We document that as a consequence of the legislation, both supply and demand of credit declined, with marginal borrowers being pushed out of the market. Due to the change in composition of buyers, market adjusted property prices increased over the period and the remaining treated borrowers borrowed at lower rates (controlling for credit quality). The fraction of full documentation loans increased over the treatment period.

JEL-codes: D14 D18 L85 R21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ure
Date: 2008-10
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Persistent link: http://EconPapers.repec.org/RePEc:ecl:ohidic:2008-20

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