I Promise to Pay
Consumers are more likely to keep a repayment promise they make themselves. When a scheduling conflict prevents a borrower from attending a mortgage closing, a power of attorney (POA) empowers a third party to promise that the borrower will repay the loan. On a matched sample of POA and non-POA loans, and comparing within borrower and within property, I link POAs to greater delinquency and foreclosure. Although POAs are uncorrelated with cash flow shocks, they reflect reduced promise keeping when borrowers undergo financial distress. This association vanishes for originator-servicers’ loans, which suggests that financial intermediation plays a role in consumer lending.
"I Promise to Pay,"
Journal of Law and Economics: Vol. 62:
1, Article 4.
Available at: https://chicagounbound.uchicago.edu/jle/vol62/iss1/4