Price Regulation in Credit Markets: A Trade-Off between Consumer Protection and Credit Access

Cuesta, José Ignacio; Sepulveda, Alberto

doi:10.2139/ssrn.3282910

Cited by 21 publications

(24 citation statements)

References 43 publications

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“…A rich set of control variables, already established as influencing credit behaviours, was used to investigate the influence of financial literacy on the interest rate associated with mortgage debts, as well as the probability of refinancing a mortgage. A close link between the socio‐economic factors, financial standing, credit scores and, consequently, loan prices, is well‐documented in the literature (Arya et al., 2013; Bialowolski et al., 2020c; Cuesta & Sepulveda, 2018; Davies et al., 2019; Hollo & Papp, 2007; Kamleitner & Kirchler, 2007). Consequently, we controlled for demographics (gender, age, marital status, education, race and ethnicity), wealth and income (possession of savings, income levels), labour market status, health conditions (body mass index) and place of residence (division, i.e., higher administrative unit comprising between three and nine U.S. States in close geographical proximity).…”

Section: Methodsmentioning

confidence: 84%

Consumer financial literacy and the efficiency of mortgage‐related decisions: New evidence from the Panel Study of Income dynamics

Białowolski

Cwynar

Xiao

et al. 2021

Int J Consumer Studies

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This study evaluated the link between financial literacy and household mortgage decisions. To this end, the longitudinal data set for the U.S. population from the Panel Study of Income Dynamics (PSID) was used. Evidence for links between financial literacy levels and (1) mortgage uptake, (2) mortgage interest rates and (3) mortgage refinancing decisions were examined using the two waves (2015 and 2017) of PSID data, combined with the 2016 PSID supplementary questionnaire examining the measured financial literacy of household members. Our results revealed a positive link between financial literacy and mortgage possession and, additionally, between financial literacy and the subsequent decision to take out a mortgage. Moreover, higher financial literacy scores were associated with lower mortgage interests and a greater likelihood of mortgage refinancing. On average, a household that refinanced its mortgage was able to reduce its interest rate by almost 0.7 percentage points, providing evidence of the positive role of financial literacy in securing better mortgage terms.

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Section: Methodsmentioning

confidence: 84%

Consumer financial literacy and the efficiency of mortgage‐related decisions: New evidence from the Panel Study of Income dynamics

Białowolski

Cwynar

Xiao

et al. 2021

Int J Consumer Studies

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“…Recent papers, however, by Galenianos and Gavazza (2019) and Agarwal et al (2014) find that usury ceilings can be beneficial for consumers as they limit the ability of banks to exert price discrimination in contexts with product differentiation and consumer inattention, without causing a significant reduction in the volume of credit. Cuesta and Sepulveda (2019) find a contrasting result in the context of the Chilean consumer credit market. They propose a structural model of demand and supply of consumer loans to provide evidence of the effects of interest rate caps on market outcomes and welfare, finding that the adverse implications of tightening the usury ceiling on credit access dominate the consumer protection effects.…”

Section: Related Literaturementioning

confidence: 80%

“…While there are plenty of studies that describe the evolution of credit markets after the modification of an interest rate cap for different countries and periods (see: Temin and Voth, 2008;Benmelech and Moskowitz, 2010;Maimbo and Gallegos, 2014), only few studies provide a quantification of the welfare effects of this type of policy. Recent developments in this direction, by Cuesta and Sepulveda (2019) and Galenianos and Gavazza (2019), make use of comprehensive data sets that include detailed information on individual loan operations. Unfortunately, this information is often unavailable in low-income regions, where the development of microfinance has been significant and perhaps most relevant.…”

Section: Introductionmentioning

confidence: 99%

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The Effects of Usury Ceilings on Consumers Welfare: Evidence from the Microcredit Market in Colombia

Romero¹

2021

SSRN Journal

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Interest rate caps, also called usury ceilings, are a widely used policy tool to protect consumers from excessive charges by loan providers. However, they are often cited as a barrier for the advancement of financial inclusion, as they may reduce the incentives to provide loans to lower-income borrowers and and to invest in branching networks, particularly in remote and isolated locations. In this paper, I exploit a change in the usury ceiling applied to micro-loans in Colombia to understand the effects of this policy across geographic markets. To quantify the welfare implications of this policy, I structurally estimate a demand and supply model that incorporates the changes in size and composition of the potential market caused by this policy change, in a context where the distribution of branching networks has a crucial role in the optimal pricing strategies of loan providers. I find that the policy generated an increase in consumer surplus at the national level that is explained by greater credit availability for riskier borrowers and the expansion of branching networks in areas that were previously underserved. A counterfactual exercise reveals that the welfare gains associated to this policy depend greatly on additional investment in branching networks, as the opening of new branches in some locations is needed to compensate the consumer welfare loss associated with the subsequent increase in interest rates after the relaxation of the ceiling.

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“…On average, loan requests submitted by women are 9.9% smaller relative to those requested by men, a difference that 10 Some small banks are considered retailers with a portfolio that is focused on consumer loans, while others are more focused on loans to companies or higher income segments. For additional details about the market structure of the consumer credit market in Chile, please see Cuesta and Sepúlveda (2019).…”

Section: Institutional Backgroundmentioning

confidence: 99%

Bad Taste: Gender Discrimination in the Consumer Credit Market

Montoya¹,

Parrado²,

Solis³

et al. 2020

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Price Regulation in Credit Markets: A Trade-Off between Consumer Protection and Credit Access

Cited by 21 publications

References 43 publications

Consumer financial literacy and the efficiency of mortgage‐related decisions: New evidence from the Panel Study of Income dynamics

Consumer financial literacy and the efficiency of mortgage‐related decisions: New evidence from the Panel Study of Income dynamics

The Effects of Usury Ceilings on Consumers Welfare: Evidence from the Microcredit Market in Colombia

Bad Taste: Gender Discrimination in the Consumer Credit Market

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