Consumers and Credit Disclosures: Credit Cards and Credit Insurance
Durkin, Thomas A., Federal Reserve Bulletin
Over the past three decades, much of the federal consumer-protection legislation for credit has required that certain items of information be disclosed to consumers in mandatory formats at specified times. The most prominent legislation in this area is the Truth in Lending Act. Provisions of the original Truth in Lending Act, enacted as Title I of the Consumer Credit Protection Act in 1968, were extensive and detailed. Since then the act has been amended and expanded many times as markets and needs have changed.
Under the original act, the Federal Reserve has the responsibility for writing the implementing rules, which it has carried out with its Regulation Z. Because this law is so critical for federal consumer-protection policy in the credit area and because it imposes significant compliance costs on creditors, questions have been raised about its effects on consumers' understanding and behavior.
Assessing the direct effects of disclosure legislation in these areas is difficult. For example, an apparent increase in consumers' understanding of credit matters might be explained by improved disclosure laws, but it might also be explained by advances in education, more widespread and frequent use of credit, or by more-effective solicitations for credit, advertisements, and publications that are not specifically tied to disclosure requirements.
Regarding consumer behavior, some consumers may use less credit after the introduction of expanded disclosures if the required information persuades them that credit is expensive. Others may not change their use of credit at all or might even increase their credit use if the required disclosures either confirm their previous view that credit is affordable or increase their confidence that using credit is a desirable option.
In terms of competition, knowing what conditions might otherwise have prevailed in the marketplace in the absence of required disclosures is not possible. And many other factors affect competition, including the number and size of competitors, production costs, and the information conditions prevailing when the disclosure rules are implemented.
The Congress well understood the difficulty of predicting specific outcomes when it passed Truth in Lending. Rather than suggesting that the purpose of the act was to change markets or consumer behavior in some precise manner, the Congress instead stated less specifically that the act's intent was to improve information conditions generally so that consumers could avoid being "uninformed." Section 102 of the act states, "It is the purpose of this title to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit...." Presumably, informed consumers could then make choices that are most appropriate to their individual circumstances.
Even though measurement of the precise effect of particular disclosure requirements on credit-use behavior or competition is problematic, one can study consumers' reports of their views about marketplace information conditions and their uses of required disclosures. To this end, the Federal Reserve Board and others have periodically sponsored and analyzed consumer surveys on disclosure matters since 1969, when the original act was implemented. (1) Over the years, survey questions have covered consumers' experiences with a variety of credit and related products, including mortgages, home equity loans, installment credit, credit cards, and credit insurance. In this article, the results of two surveys undertaken in 2001 of consumers' opinions about information availability are examined in the context of the earlier survey findings. The new data focus on consumers who use two, sometimes controversial, financial products--credit cards and credit insurance. When relevant, consumers' attitudes toward and experiences with these products are compared with earlier survey findings regarding these and other credit products. …