Late Fees and Household Rental Debt

• In Event: Housing Instability for Low-Income Renters: Evictions, Arrears, and Policy Solutions

Abstract

Late and nonpayment of rent can be conceptualized as landlords extending households a line of credit. As in other credit markets, landlords and property managers use late fees to penalize delinquency. For bank loans, credit cards, and mortgages, studies have found late fees to be correlated with household default risk, regressive across income, and disproportionately harmful to minority households, prompting regulation in those settings. By contrast, late fees in rental housing are loosely regulated and understudied, despite growing concerns about rental fee practices and how they add to tenant cost burden, particularly during an affordability crisis. 

Late fees may affect tenant payment behavior through two competing mechanisms: moral hazard and financial distress. Moral hazard would predict that in the absence of a financial penalty, households that have the capacity to pay rent on time may choose to delay payment. By penalizing this type of strategic behavior, late fees should reduce late and nonpayment. However, for households experiencing financial distress, late or nonpayment of rent reflects financial hardship rather than a strategic choice. Additional charges like late fees may compound existing arrears, reducing the likelihood of recovery. The extent to which late fees encourage timely payment or exacerbate financial distress for households experiencing income shocks remains unknown. 

This paper presents the first quantitative and causal analysis of the relationship between late fees and rental debt. I leverage administrative transaction-level rent data from a large landlord that owns and manages properties nationally. Using quasi-experimental variation in the timing of properties adopting late fee policies, I examine the drivers of property-level policy adoption and whether late fees promote timely payment on average. I further ask for which households late fees encourage payment versus impede arrears recovery, a distinction with direct implications for policies related to the financial stability of low-income households.  

Preliminary findings suggest that late fees are effective at the property level, as households are less likely to fall behind on rent after adoption.  But among those who do fall behind, late fees reduce the likelihood of recovery, suggesting that late fees could exacerbate housing instability, and raising concerns about their use and current level of regulation.

Author

• Kristen Nicole Tauber, New York University
  Presenting Author