Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending

• Published date: 01 December 2023
• Author: ALLISON NICOLETTI,CHRISTINA ZHU
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/1475-679X.12498

DOI: 10.1111/1475-679X.12498

Journal of Accounting Research

Vol. 61 No. 5 December 2023

Printed in U.S.A.

Economic Consequences

of Transparency Regulation:

Evidence from Bank Mortgage

Lending

ALLISON NICOLETTI∗AND CHRISTINA ZHU∗

Received 11 February 2022; accepted 5 June 2023

ABSTRACT

We examine the economic consequences of a rule designed to improve con-

sumers’ understanding of mortgage information. The 2015 TILA-RESPA In-

tegrated Disclosures rule (TRID) simplifies the mortgage disclosures pro-

vided to consumers. As a consequence, TRID-affected mortgages become a

less attractive investment opportunity to banks. Our main results document

that mortgage applications affected by TRID are less likely to be approved

following the rule’s effective date. We find evidence consistent with both

a decrease in consumers’ information processing costs and an increase in

∗The Wharton School, University of Pennsylvania

Accepted by Rodrigo Verdi. We thank an anonymous Associate Editor, an anonymous re-

viewer, Anne Beatty, Gauri Bhat, Jennifer Blouin, Anna Costello, Ed deHaan, Yiwei Dou, Paul

Fischer,Wayne Guay, Luzi Hail, Michael Iselin, Maria Loumioti, Mario Milone, Chris Williams,

several bank compliance supervisors, and seminar participants at University of Amsterdam,

University of Colorado Boulder,Fordham, Georgetown, INSEAD, Northwestern, Notre Dame,

University of Oklahoma, Rice, University of Rochester, Southern Methodist University, Stan-

ford, UCLA, Wharton, the 2021 CUHK Accounting Research Conference, the 2022 FDIC Bank

Research Conference, and the 2022 INSEAD Accounting Symposium for helpful comments.

We thank Dengsheng Chen, Timur Magzhanov, Frankie Shi, and Cong Xiao for data assis-

tance. We gratefully acknowledge support from the Wharton School and the Jacobs Levy Eq-

uity Management Center. Allison Nicoletti is grateful for financial support from the Alfred

H. Williams Faculty Scholar Award. An online appendix to this paper can be downloaded at

https://www.chicagobooth.edu/jar-online-supplements.

1827

© 2023 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business.

1828 a. nicoletti and c. zhu

banks’ secondary market frictions, providing insight into the potential chan-

nels through which this reduction in mortgage credit operates. We also find

that banks partially compensate for reduced mortgage lending by increasing

small business lending, and that fintechs absorb mortgage demand in areas

with reduced mortgage lending by banks. Our study documents real actions

that firms take in response to disclosure transparency regulation and con-

tributes to the literature on the economic consequences of such regulation.

JEL codes: D18; D83; G21; G28

Keywords: information processing costs; consumer disclosures; real effects;

mortgage lending; banks; fintechs; transparency regulation

1. Introduction

We investigate the potential consequences for lenders of regulation de-

signed to improve consumers’ ability to understand mortgage disclosures.

Prior research indicates that some households, particularly those with lower

income and less education, obtain unfavorable mortgage terms due to

the complexity of financial products offered to them (Campbell [2006]).

Therefore, improving the ability of consumers to process information sur-

rounding mortgage terms is an important policy objective of bank regula-

tory bodies, such as the Consumer Financial Protection Bureau (CFPB).

The CFPB recently implemented a new rule, the TILA-RESPA Integrated

Disclosures rule (hereafter, “TRID”), that simplifies the disclosures pro-

vided to consumers. Our study examines the consequences of this rule for

banks’ mortgage lending decisions. Thus, we complement prior studies ex-

amining whether and how consumer disclosure regulation influences firm

behavior (e.g., Jin and Leslie [2003]).

After a consumer applies for a mortgage, the lender is required to pro-

vide disclosures to the consumer. Historically, these disclosures had dis-

parate formats and were separately regulated by two federal statutes, the

Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedures

Act (RESPA). The Dodd–Frank Wall Street Reform and Consumer Protec-

tion Act (Dodd–Frank Act) included a directive for the CFPB to implement

an integrated and simplified disclosure. The motivation behind this direc-

tive was to protect consumers, to ensure a fair and efficient mortgage mar-

ket, and to reduce disclosure complexity. Although the TRID rule did not

change the information content of disclosures, it simplified the presenta-

tion of key information relevant to consumers, such as information about

mortgage expenses.

A complete understanding of the consequences of TRID requires an as-

sessment from both the lender and consumer perspective. Although TRID

aims to benefit consumers by improving their ability to understand mort-

gage information, the effects on lenders are less clear. There are differing

narratives regarding whether TRID affects lender decisions and ultimately,

credit availability. Specifically, lenders claim that TRID requirements may

economic consequences of transparency regulation1829

impact credit availability, despite regulators stating that TRID should not

affect mortgage originations (CFPB [2020b]). Therefore, examining how

TRID affects bank lending decisions is an important step toward fully as-

sessing the overall consequences of TRID. Although TRID may affect both

benefits and costs of mortgage lending to banks, our paper focuses on

the lending changes banks make in response to TRID-related increases in

their costs. Nevertheless, in additional analysis we explore the possibility

that some banks may experience select benefits, such as fewer disputes with

consumers.

We posit two primary effects of TRID that reduce the relative attractive-

ness of mortgages from the lender’s perspective. First, the simplified dis-

closures under TRID facilitate consumers’ parsing of information in dis-

closures and comparisons of rates and fees across different lenders.1All

else equal, consumers’ improved understanding of mortgage information

should reduce the interest and fees that banks are able to charge on mort-

gages (Bhutta, Fuster, and Hizmo [2020], Kielty, Wang, and Weng [2023]).

Second, banks may face challenges in selling mortgages on the secondary

market. These challenges stem from concerns regarding potential TRID

violations from third-party firms hired to evaluate loan quality in sold mort-

gages and from uncertainty about which party (i.e., the buyer or seller) is

responsible for TRID violations. Although concerns regarding TRID vio-

lations are likely to be an ongoing friction, uncertainty regarding the re-

sponsible party is potentially more short term in nature. Taken together,

these arguments suggest that, after TRID, mortgages become less attrac-

tive to banks, relative to their other investment opportunities. Combined

with banks’ funding and capital constraints, the reduction in relative attrac-

tiveness of mortgages should result in banks reducing their TRID-affected

mortgage lending and reallocating those funds to other investment

opportunities.

Our analysis uses a sample composed of mortgage applications reported

under the Home Mortgage Disclosure Act (HMDA) from 2011 to 2019. We

conduct our tests at the application-level, which allows us to account for a

rich set of applicant characteristics, loan characteristics, and time-varying

county-specific economic conditions that affect the probability of approval.

To address the inherent challenge of separating the effects of TRID from

other changes in the mortgage lending market following the 2007–2009

financial crisis, we use a control group of applications unaffected by the

rule. Exploiting within-bank-year variation in whether or not the applica-

tion is affected by TRID mitigates concerns about correlated omitted vari-

ables at the bank-year level. TRID only applies to closed-end mortgages,

which are extensions of credit secured by a lien on a dwelling and are not

1TRID applies to all lenders that issue more than five mortgages in a year.Nevertheless, our

tests focus on banks in order to ensure that the lenders we examine face similar regulatory re-

quirements and financing constraints. Hereafter,we use “bank” and “lender” interchangeably,

except where noted in additional tests of fintech lending.