A Model of Mortgage Search with Information Disclosure

Recent regulation by the Consumer Financial Protection Bureau (CFPB) and earlier regulation by the U.S. Department of Housing and Urban Development set out to improve the accuracy, clarity, comparability, and timeliness of mortgage disclosures in order to improve consumer decision-making and welfare when selecting a complex mortgage product. This research note provides a formal theory of how more accurate and timely disclosures can, on average, lead to consumers taking out better mortgages.The model makes two contributions. First, it shows that more accurate initial disclosures provided during the course of mortgage shopping improve the ability of consumers to shop since they can more reliably compare offers that are less likely to change substantially. More timely disclosures may similarly provide borrowers more time to shop. These improvements then, on average, improve consumer welfare. Second, in the model, disclosure comparability is likely to be under-provided in a market equilibrium due to an informational externality. This externality is present because, in a search environment, some of the benefits of comparability accrue to consumers and any potential later providers those consumers match with. As a result, firms generally underinvest in disclosure comparability. This result implies that disclosure regulation may be beneficial in this market by improving the comparability of disclosures, just as the CFPB’s integrated mortgage disclosure rule intended to do