Do Financial Consumers Discipline Bad Lenders? the Role of Disclosure Awareness

We examine whether financial consumers penalize predatory lenders in the U.S. mortgage markets. We identify predatory lenders using enforcement actions issued by the CFPB and state regulators. Although regulators have developed a website for borrowers to easily access enforcement actions, borrowers neither reduce loan applications to sanctioned lenders nor receive lower interest rates from these lenders following the enforcement actions. The borrower inaction is not due to their unsophistication or lack of lender choices, but instead, primarily due to borrowers’ unawareness of enforcement disclosures. The lenders who are penalized by borrowers subsequently improve their service quality, whereas the sanctioned lenders that escape borrower discipline do not. Last, we find that lenders adopt more alternative company names following their enforcement actions. Overall, our findings suggest that financial consumers can effectively discipline lenders, but public disclosure alone does not elicit their actions, likely because average consumers do not actively search for disclosures and have high information awareness costs.