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Improving Mortgage Default Collection Efforts by Employing the Decoy Effect

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Abstract

We test the ability of the Decoy Effect to enhance debt collection efforts and find that by disclosing the Annual Percentage Rate (APR) in settlement offers, participants are less influenced by the decoy and more apt to select the repayment option that is in their best interest. At the same time, by reporting the APR, borrowers are more willing to make repayments on the modified loan, resulting in a net gain to debt collection efforts. Because disclosing the APR is Consumer Financial Protection Bureau (CFPB) compliant, this simple disclosure has the ability to increase debt collection returns while helping borrowers make better decisions when selecting debt modification repayment plans. Our results suggest an applicability to all types of defaulted debt including mortgages, sub-prime auto loans, credit cards, student loans, and payday loans.

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Notes

  1. Additional studies examining the decoy effect include, but are not limited to, Ratneshwar et al. (1987); Simonson (1989); Wedell (1991); Mishra et al. (1993); Redelmeier and Shafir (1995); Highhouse (1996); Herne (1997); Herne (1998); Schwartz and Chapman (1999); Slaughter et al. (1999); Slaughter (2007); Lombardi (2009); Clippel and Eliaz (2012); Gerasimou (2013); and Ok et al. (2014).

  2. Pub.L. 111–203; 124 Stat. 1376–2223.

  3. https://www.hmpadmin.com/portal/programs/hamp.jsp. Accessed on March 27, 2018.

  4. Spacing the APRs associated with the three options by a lesser (greater) percentage will reasonably be expected to allow the decoy effect to be more (less) effective. We selected this amount because a 9% increase in yield is certainly enough of a boost in debt collector returns to warrant serious policy adoption consideration.

  5. Anyone can join MTurk by going to their website and registering as a “worker.” While MTurk does not publish the profile of their workers, it is reasonable to assume they cover a broad spectrum of society. Any adult with a computer and access to the Internet is eligible to join. www.mturk.com. Accessed on March 27, 2018.

  6. Funding for this experiment comes from the personal research budget of one of the authors.

  7. Employing a more selective 10 s screen yields qualitatively identical results.

  8. For further information on these metrics, see http://www.usfinancialcapability.org/quiz.php. Accessed on March 27, 2018.

  9. 2013 American Housing Survey, http://www.census.gov/programs-surveys/ahs/data/2013/ahs-2013-summary-tables/national-summary-report-and-tables%2D%2D-ahs-2013.html

  10. Although our instructions indicate that the respondents should not be concerned about the size of the payment, some respondents may include their actual income constraints in their payment decision. As a robustness check, when restricted to higher income respondents (incomes over $60,000), our results remain unchanged (available upon request).

  11. We also investigated whether the results are sensitive to participant and state-specific attributes. Individual characteristics tested include the level of financial literacy, previous default, and net worth. State-specific attributes investigated center around foreclosure rules including whether the states require judicial foreclosure, is a recourse state, whether the state allows statutory redemption, and average foreclosure time. Our results are robust to all these additional checks.

  12. While beyond the scope of the current investigation, these latter results with respect to our control variables may well be due, at least in part, to issues of perceived affordability of the mortgage repayment options. While all experimental respondents were told to assume they could afford all proffered alternatives, the effective cost or implied magnitude of the designated terms may well be perceived differently across wealth, age, and/or geographic groupings.

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Acknowledgements

We would like to thank participants at the London School of Economics (LSE), University of Virginia, Consumer Financial Protection Bureau (CFPB), and the FSU-UF-UCF symposium for comments on this paper. We would particularly like to thank McKay Price, Jim Shilling, and John Glascock. All errors remain our own.

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Authors and Affiliations

  1. College of Business Administration, University of Central Florida, Orlando, FL, 32816, USA

    David M. Harrison

  2. Kogod School of Business, American University, Washington, DC, 20016, USA

    Kimberly F. Luchtenberg

  3. Raymond A. Mason School of Business, Department of Finance, College of William & Mary, PO Box 8795, Williamsburg, VA, 23187, USA

    Michael J. Seiler

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  1. David M. Harrison
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  2. Kimberly F. Luchtenberg
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Correspondence to Michael J. Seiler.

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Harrison, D.M., Luchtenberg, K.F. & Seiler, M.J. Improving Mortgage Default Collection Efforts by Employing the Decoy Effect. J Real Estate Finan Econ 66, 840–860 (2023). https://doi.org/10.1007/s11146-021-09876-8

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