Credit Card Disclosures, Solicitations, and Privacy Notices: Survey Results of Consumer Knowledge and Behavior
Durkin, Thomas A., Jones, Christine N., Federal Reserve Bulletin
The mandatory dissemination of certain information by financial institutions is a key aspect of consumer protection law. It offers two significant advantages for consumer protection in the financial area over the alternative of direct government intervention into product pricing and content. First, information disclosure is compatible with competition, a significant market force already at work to protect consumers by keeping price rises in check. Because of competition, institutions already have incentives to make their products known, to reveal favorable pricing and product features, and to treat consumers fairly by keeping them generally informed about what they want and need to know. When a financial institution employs these strategies, it generates a good business reputation that will produce referrals and repeat customers. Actions that firms use to accomplish these goals include advertising their prices and supplying clients and potential customers with useful information about product prices and features.
The requirements for disclosures assist in the dissemination of financial information by standardizing concepts and terminology, such as the finance charge and annual percentage rate under the Truth in Lending Act and the annual percentage yield under the Truth in Savings Act. Such standardization advances consumers' knowledge about pricing and features of the financial products and institutions and lowers consumers' transactions costs by making shopping easier. The standard format of required disclosures helps highlight the performance of the best institutions and exposes the inadequacies of the poorer ones. Well-informed shoppers help keep markets competitive, which benefits buyers of products and services by minimizing the spread between producers' production costs and market price. (1)
The second advantage of information disclosure over direct intervention through mandating specific product pricing or features is that the government need not know, or presume to know, the product feature preferences of all consumers. With effective disclosures, consumers can decide what their preferences are in the tradeoff between price and product features; the success of the disclosure approach to consumer protection does not depend on consumers' preferences being the same. Disclosure requirements may also be less costly for financial institutions to implement and for the government to enforce than consumer protection approaches that limit product features.
TRUTH IN LENDING ACT AND DISCLOSURES
The Congress in May 1968 passed the Truth in Lending Act, the first in a series of federal consumer protection laws that addressed primarily financial disclosures. (2) This act was designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the credit arrangement and all credit costs. The law was implemented in 1969 by the Federal Reserve Board through Regulation Z, which prescribes uniform methods for computing the cost of credit, for disclosing credit terms, and for resolving errors on certain types of credit accounts. In 1976, the Congress amended the act to cover consumer leasing, and the Federal Reserve implemented Regulation M, which covers the rules of all consumer leasing transactions and includes disclosure of leasing terms.
Credit cards are the most widely used method of generating consumer credit. The credit card industry estimates that more than 1 billion credit cards were in the hands of customers in the United States at the end of 2004. (3) When they use their cards, consumers receive monthly account statements that contain disclosures about credit use, costs, and obligations for payments. Elsewhere on the monthly statements, consumers receive disclosures concerning such items as grace periods, membership fees, minimum finance charges, and procedures for questioning and resolving billing errors. In addition, consumers frequently receive mailed solicitations for new accounts, and these mailings carry disclosures. …