Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2009-04
Do Financial Counseling Mandates Improve Mortgage Choice
and Performance? Evidence from a Natural Experiment
March 2009
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2009-04
Do Financial Counseling Mandates Improve Mortgage Choice
and Performance? Evidence from a Natural Experiment
March 2009
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Do Financial Counseling Mandates Improve Mortgage Choice
and Performance? Evidence from a Natural Experiment
Sumit Agarwal#
Gene Amromin#
Itzhak Ben-David*
Souphala Chomsisengphet§
Douglas D. Evanoff#
March 2009
ABSTRACT
We explore the effects of mandatory third-party review of mortgage contracts on the terms, availability,
and performance of mortgage credit. Our study is b ased on a natural experiment in which the State of
Illinois required ‘high-risk’ mortgage applicants ac quiring or refinancing properties in 10 specific zip
codes to submit loan offers from state-licensed lenders to review by HUD-certified financial counselors.
We document that the legislation led to declines in both the supply of and demand for credit, with state-
licensed lenders and lower-quality borrowers disproportionately exiting the affected area. Controlling for
the salient characteristics of the remaining borrowers and lenders, we find that the legislation succeeded
in reducing ex post default rates among counseled borrowers by close to 4 percentage points (about 35%
decline). We attribute this result to actions of lenders responding to the presence of external review and,
to a lesser extent, to counseled borrowers renegotiating their loan terms. We also find that the legislation
nudged some borrowers to choose less risky loan products in order to eschew counseling
Keywords: Financial literacy, Lax screening, Subprime crisis, Household finance
JEL Classification: D14, D18, L85, R21
We thank Edward Zhong for outstanding research assistance and Tom Davidoff, David Laibson and seminar participants at the
2009 AEA meetings, University of California Berkeley, Bocconi University, the Federal Deposit Insurance Corporation (FDIC),
Federal Reserve Bank of Chicago, Tel-Aviv University, Office of the Comptroller of the Currency, University of California San
Diego, University of Illinois at Chicago, and Vanderbilt University for their comments. The authors thank the FDIC, Paolo Baffi
Centre at Bocconi University, and the Dice Center at the Fisher College of Business, Ohio State University for supporting this
research. The views in this paper do not reflect those of the Federal Reserve System, the Federal Reserve Bank of Chicago, or of
the Office of the Comptroller of the Currency.
Contact author: Itzhak Ben-David, Fisher College of Business, Ohio State University, bendavid@fisher.osu.edu
# Federal Reserve Bank of Chicago
* Fisher College of Business, The Ohio State University
§ Office of the Comptroller of the Currency
and Performance? Evidence from a Natural Experiment
Sumit Agarwal#
Gene Amromin#
Itzhak Ben-David*
Souphala Chomsisengphet§
Douglas D. Evanoff#
March 2009
ABSTRACT
We explore the effects of mandatory third-party review of mortgage contracts on the terms, availability,
and performance of mortgage credit. Our study is b ased on a natural experiment in which the State of
Illinois required ‘high-risk’ mortgage applicants ac quiring or refinancing properties in 10 specific zip
codes to submit loan offers from state-licensed lenders to review by HUD-certified financial counselors.
We document that the legislation led to declines in both the supply of and demand for credit, with state-
licensed lenders and lower-quality borrowers disproportionately exiting the affected area. Controlling for
the salient characteristics of the remaining borrowers and lenders, we find that the legislation succeeded
in reducing ex post default rates among counseled borrowers by close to 4 percentage points (about 35%
decline). We attribute this result to actions of lenders responding to the presence of external review and,
to a lesser extent, to counseled borrowers renegotiating their loan terms. We also find that the legislation
nudged some borrowers to choose less risky loan products in order to eschew counseling
Keywords: Financial literacy, Lax screening, Subprime crisis, Household finance
JEL Classification: D14, D18, L85, R21
We thank Edward Zhong for outstanding research assistance and Tom Davidoff, David Laibson and seminar participants at the
2009 AEA meetings, University of California Berkeley, Bocconi University, the Federal Deposit Insurance Corporation (FDIC),
Federal Reserve Bank of Chicago, Tel-Aviv University, Office of the Comptroller of the Currency, University of California San
Diego, University of Illinois at Chicago, and Vanderbilt University for their comments. The authors thank the FDIC, Paolo Baffi
Centre at Bocconi University, and the Dice Center at the Fisher College of Business, Ohio State University for supporting this
research. The views in this paper do not reflect those of the Federal Reserve System, the Federal Reserve Bank of Chicago, or of
the Office of the Comptroller of the Currency.
Contact author: Itzhak Ben-David, Fisher College of Business, Ohio State University, bendavid@fisher.osu.edu
# Federal Reserve Bank of Chicago
* Fisher College of Business, The Ohio State University
§ Office of the Comptroller of the Currency