The New Legal Paternalism: Light-Touch Regulation for Consumer Mortgages
Keywords:
behavioral law and economics, bounded rationality, default rules, Consumer Credit Directive (2008/48/EC), EU Mortgage Directive, Finnish Consumer Protection Act, US Truth in Lending Act (TILA)Abstract
Consumer mortgages have provoked extensive public debate, but traditional regulatory responses — more disclosure, product restrictions and usury laws — are widely seen as clumsy and ineffective. This article examines the possibility of improving consumer mortgage markets through light-touch regulations inspired by behavioral economics. Three regulatory strategies are investigated: targeted and simplified disclosure rules, cooling-off regulations, and the designing of a model mortgage. These strategies are examined using examples from recent or proposed EU and US legislation as well as ideas proposed by experts. With respect to novel disclosure and cooling-off rules, the proposed EU Mortgage Directive is found to include several positive ideas such as the European Standardised Information Sheet. Yet the most promising path seems to be the creation of a model mortgage for unsophisticated borrowers. In addition to proposing novel regulatory strategies, the article contributes to the wider debate on the acceptability of legal paternalism.
