The Misconception of the Consumer as a Homo Economicus: A Behavioral-Economic Approach to Consumer Protection in the Credit-Reporting System

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TABLE OF CONTENTS    I. Introduction  II. Background: Credit Reporting Agencies in the United States      A. The Consumer-Credit-Reporting Industry      B. Credit Reports and Credit Scores      C. CRAs, Clients, and Consumers: Relationships         and Incentives         1. Inaccuracies in Credit Reports         2. Information Is Provided with No "Permitted            Purpose" Under the Law         3. Identity Theft         4. Fertile Ground for Manipulation Through Marketing            Lists      D. Regulatory Efforts for Consumer Protection         1. The Fair Credit Reporting Act         2. The 1996 FCRA Amendments         3. The Gramm-Leach-Bliley Act         4. The Fair and Accurate Credit Transactions Act III. A Weak Link in the Current Regulatory System: Consumers'        Cognitive Limitations        A. The Misconception of the Consumer as Homo Economicus        B. Unawareness and Financial Illiteracy        C. The Status Quo Bias        D. Self-Control Problems        E. Overoptimism  IV. The Implications of Consumers' Irrationality in the        Credit-Reporting System        A. Unawareness of Rights Under the FCRA           1. Unawareness of the Right To Receive a Free Credit              Report           2. Unawareness of the Right To Dispute Errors for              Free        B. Exploiting Biases Through Marketing Lists    V. Consumer-Protection Mechanisms      A. Consumer Protection Under the Policy of Libertarian         Paternalism         1. The Policy and Its Benefits         2. "Nudging" the Credit-Reporting System            a. Disclosure and Framing                 i. The Problem with Excessive Information                ii. Disclosure of Right To Opt out and Right                    To Dispute Errors               iii. Unlimited Access to Credit Reports and Credit                    Scores            b. Defaults      B. Consumer Financial Education         1. Why Is Education in the Credit-Reporting System            Appealing?         2. The Limitations of Consumer Education            a. Doubtful Efficacy            b. Predominant Biases            c. Costs VI. Conclusion 

I. INTRODUCTION

Consumer credit availability in the United states has grown dramatically throughout the twentieth century. The significant increase in the number of consumer transactions, along with the expansion of information technology, has resulted in the creation of massive amounts of detailed information on an individual's purchasing and credit history.

Consumer credit reporting agencies (CRAs) play an important role in the financial information market. (1) These agencies collect, process, and analyze financial information received from various furnishers to create consumer reports and credit scores. such consumer reports assist, among others, lenders, retailers, employers, and landlords in assessing consumers' creditworthiness. Major CRAs also offer personalized and demographic data to their clients for marketing purposes.

The credit-reporting system has significant economic benefits. It renders various financial and purchasing opportunities--such as credit, employment, housing, and insurance--more available and affordable to consumers. (2) CRAs have a tarnished reputation, however, as far as consumer protection is concerned. While making their business out of gathering, compiling, and analyzing consumers' information, CRAs generally do not have privity of contract with those very same consumers. Thus, CRAs have little or no incentive to protect consumers' privacy and ensure the accuracy of every single credit report. (3)

This lack of incentive has caused numerous problems for consumers, including major inaccuracies in credit reports and erroneous credit scores; infringement of consumers' right to privacy by providing information with no permitted purpose under the law; contribution to the prevalence of identity theft; and the creation of a fertile ground for consumer manipulation through targeted marketing lists. …