by Jeff Sovern
I have been listening to the audio version of Dan Areily's book, The Honest Truth About Dishonesty, and it may shed some light on consumer protection. Ariely explores the causes and limits of dishonesty. He reports on a series of experiments that suggest that many people cheat a little, but not so much as they could get away with, or, to put it another way, so much as economists presuming rational behavior would predict they would. Ariely believes that the reason people don't cheat more is that they want to believe that they are good, and that if they cheated more, it would make it hard to believe that. But he also reports that the internal limits to cheating are relaxed in some circumstances.
One such circumstance is if people are able to steal not money but something different. For example, an employee might feel perfectly comfortable taking pens from an employer, but not money. That may shed light on why mortgage originators were willing to submit false applications--perhaps they saw the false applications as being different from stealing money because they enabled people to obtain homes they were not able to pay for, which is a step away from stealing money.
Another circumstance is if conflicts are disclosed. Ariely reports that when agents report a conflict of interest, they feel comfortable giving more self-interested advice than if the conflict is not disclosed. Ariely also found that while principals discounted the advice somewhat when the conflict was disclosed, they did not do so enough to overcome the amount the agent's self-interested advice cost the principal. Now think about how mortgage brokers got paid more when consumers took out subprime loans with higher payments than when the brokers put the consumers into lower-cost prime loans. Many brokers steered consumers who could have qualified for prime loans to such subprime loans. Under the TILA disclosure forms in use at the time, broker compensation, in the form of a yield-spread premium, was disclosed under a line captioned "POC." That line was surely meaningless to most consumers, but perhaps it enabled mortgage brokers to feel that their conflict was disclosed, and so that they could steer consumers to higher-cost loans without feeling they were cheating the consumers. All this raises an odd question: are consumers better off sometimes if conflicts are not disclosed?
Ariely also reports on experiments finding that reminding people to be honest seems to increase honesty on tests and in other contexts. The effect is more prounouced if the reminder comes at the outset. We might do well to include at the top of forms--including mortgage broker contracts--certifications that the signer is being honest. It's a nudge with minimal cost.