And because the penalties whose relevance borrowers mispredict are large, these welfare implications are typically large even if borrowers mispredict their taste for immediate gratification by only a little bit and firms observe neither borrowers’ preferences nor their beliefs. Accordingly, for any positive proportion of nonsophisticated borrowers in the population, a policy of disallowing large penalties for deferring small amounts of repayment—akin to recent new US regulations limiting prepayment penalties on mortgages and certain interest charges and fees on credit cards—can raise welfare
