Do Financial Consumers Discipline Bad Lenders?
The Role of Disclosure Awareness
Mark J. Flannery, Warrington College of Business, University of Florida
Philip Wang, Warrington College of Business, University of Florida
Cathy Zhang, Warrington College of Business, University of Florida.
Abstract
Our study provides the first look at market discipline in the financial consumer markets and highlights the importance of disclosure awareness in enhancing market discipline. Specifically, we examine whether U.S. mortgage borrowers penalize lenders that engage in predatory lending practices. We identify predatory lenders using enforcement actions issued by the Consumer Financial Protection Bureau and state regulators. We find that despite a low cost of acquiring lenders’ enforcement action information, borrowers neither reduce loan applications to sanctioned lenders nor receive lower interest rates from these lenders after the disclosure of enforcement actions. Therefore, the borrower market on average does not penalize predatory lenders. However, we do find a significant drop in loan applications and a significant reduction in interest rates following enforcement actions that attract high media coverage. We also find evidence of market discipline at sanctioned lenders whose corporate identity is not confusing. In short, borrowers penalize predatory lenders when they are aware of enforcement records (likely) through media or word of mouth. Last, we find that the lenders penalized by borrowers subsequently improve their service quality, as reflected in fewer consumer complaints, while the lenders that escape borrower discipline receive more complaints in the future.
The Role of Disclosure Awareness
Mark J. Flannery, Warrington College of Business, University of Florida
Philip Wang, Warrington College of Business, University of Florida
Cathy Zhang, Warrington College of Business, University of Florida.
Abstract
Our study provides the first look at market discipline in the financial consumer markets and highlights the importance of disclosure awareness in enhancing market discipline. Specifically, we examine whether U.S. mortgage borrowers penalize lenders that engage in predatory lending practices. We identify predatory lenders using enforcement actions issued by the Consumer Financial Protection Bureau and state regulators. We find that despite a low cost of acquiring lenders’ enforcement action information, borrowers neither reduce loan applications to sanctioned lenders nor receive lower interest rates from these lenders after the disclosure of enforcement actions. Therefore, the borrower market on average does not penalize predatory lenders. However, we do find a significant drop in loan applications and a significant reduction in interest rates following enforcement actions that attract high media coverage. We also find evidence of market discipline at sanctioned lenders whose corporate identity is not confusing. In short, borrowers penalize predatory lenders when they are aware of enforcement records (likely) through media or word of mouth. Last, we find that the lenders penalized by borrowers subsequently improve their service quality, as reflected in fewer consumer complaints, while the lenders that escape borrower discipline receive more complaints in the future.