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Boston University School of Law




Economic analysis can serve many functions when applied to the law, most notably prediction (how people' react to laws and lawmaking processes), evaluation (whether these reactions result in social efficiency), and description (which features of laws, and lawmaking are salient). Here we propose to describe. We use economic analysis to show a legal difference without an economic distinction. We demonstrate the economic equivalence of two practices in the mortgage market. Interestingly, widespread bans exist on one of these practices, but no restrictions exist on the other.

Specifically, in this essay we examine the relationship among points, prepayment penalties, and financial regulation. We show that a mortgage loan with points contains an implicit, and easily calculable, prepayment penalty. Paradoxically, however, while many states and federal agencies ban explicit prepayment penalties, all accept points. Furthermore, lenders must disclose explicit prepayment penalties to borrowers. Yet, while regulations routinely require disclosure of other implicit information, such as the true interest rate (APR) of loans with points,' no regulation requires disclosure of the implicit prepayment penalties created through points.

Although we use economic analysis- here primarily to describe, even mere description can, and does, lead to policy recommendations. in this case, descriptive economic analysis, coupled with existing norms for disclosure, suggests the desirability of additional disclosure requirements. Furthermore, by revealing contradictions in the treatment of points and penalties, this descriptive economic analysis indicates a need to rethink the current bans on mortgage penalties and the current treatment of points.

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