The significant increase in the number of consumer transactions, along with the expansion of information technology, has created massive amounts of detailed information on an individual’s credit history. Consumer credit reporting agencies (CRAs) play an important role in this financial information market.
Although the credit-reporting system has significant economic benefits, CRAs have a tarnished reputation 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, the CRAs have little or no incentive to protect consumers’ privacy and ensure the accuracy of every single credit report. Such lack of incentive has resulted in numerous consumer problems, including inaccuracies in credit reports and erroneous credit scores; infringement of consumers’ right to privacy; contribution to the prevalence of identity theft; and the creation of a fertile ground for consumer manipulation through targeted marketing lists.
This Article suggests that the current regulatory system has been captivated by the misconception of the consumer as a homo economicus. Existing regulations have given consumers a significant role in facilitating the production of more accurate credit, envisioning rational, vigilant, and alert consumers who regularly monitor their credit reports, dispute errors, and opt out from marketing lists. Studies have shown, however, that consumers’ rationality in decision-making is in fact doubtful, and so too is the justification of imposing monitoring responsibilities on consumers.
This Article challenges the economic-regulatory approach through the behavioral-economic approach—a relatively new model that aspires to explain consumers’ biases and cognitive limitations, which are absent in the standard economic framework. This Article explores two potential consumer protection mechanisms, drawn from the behavioral-economic framework: applying psychological tools, such as disclosure and framing, for a better-designed system; and enhancing consumer financial literacy.