The federal government has primarily relied upon mandatory disclosures of specified loan terms and costs to protect consumers from predatory lending. This research investigates the effects of intermediaries (such as mortgage brokers and lenders) leading consumers through disclosure forms on whether consumers read them, which sections they read, and how they process, evaluate, and remember the disclosed information.
With the use of a series of experiments, this research focuses on five cognitive psychological phenomena that might prevent consumers from gleaning the information from disclosure forms that Congress intended and interfere with intervention strategies intended to address these phenomena. First, under confirmation biases, consumers might skim forms looking for information that confirms, rather than disconfirms, their prior beliefs about the loan, causing them to miss important provisions. Second, consumers might also be more likely to miss important provisions if they look over forms investigating whether they were told the truth than if they look them over investigating whether they were lied to. Third, in conversation people assume that their conversational partners are cooperating with them in exchanging information and telling them about the most important things. This mistaken assumption might cause consumers to be misled if intermediaries emphasize unimportant provisions and thereby suggest that important provisions are less important or not worth looking at. Memory difficulties might also reduce the effectiveness of disclosure forms. Under list-strength memory effects, spending more time on some items reduces people's ability to remember other items, so discussing unimportant or innocuous features on the disclosure form could reduce people's abilities to remember important and potentially risky features. Under part-set cuing memory effects, sophisticated consumers who know that they ought to look for certain provisions might forget to look for them if they are reminded of some of the features they knew to look for, but not others.
Understanding how consumers process and use information directed at protecting them from predatory lending practices is important in two regards. It provides insight into how existing practices may have contributed to the current mortgage crisis. And, it can inform the development of new policies and revision of existing policies to better achieve congressional objectives.
