by Jeff Sovern
Traditional consumer protection rules drew on law and economics models that assumed that consumers were rational and that when consumer markets functioned poorly, all that needed to be done was give rational consumers the ability to protect themselves. For example, the Truth in Lending Act's focus on disclosures presupposes that rational consumers would read them and use them to make appropriate decisions. More recently, the 2003 FACTA Act amended the Fair Credit Reporting Act to allow consumers to obtain a free copy of their credit report each year from each of the big three credit bureaus. Again, rational consumers should take advantage of that opportunity to protect themselves from identity thieves.
But behavioral law and economics has shown that consumers are often irrational in predictable ways. To the extent that law-makers fail to take these irrationalities into account in formulating rules, the rules will fall short of what is needed to protect consumers. More recent laws, like 2009's Credit CARD Act and 2010's Dodd-Frank Act have used some of these insights to create rules which fit real consumers better (my co-author, Dee Pridgen, wrote about this in her paper, Sea Changes in Consumer Financial Protection: Stronger Bureau and Stronger Laws, 13 Wyoming Law Review (2013)).
As for the specific examples I noted above, I have previously written about failures of disclosure, as have plenty of others. But what about the right to obtain free credit reports? It turns out that less than 20% of consumers check their credit report annually, according to the CFPB. In other words, more than 80% of consumers are not taking an easy, free opportunity to determine if they have been victims of identity theft (I wonder how many readers of this blog post fall into that category).
So if the vast majority of consumers do not protect themselves, the government has a choice in making rules: it can continue to depend on consumers to protect themselves, knowing that many will not and therefore will not be protected, or it can provide protections that do not depend on consumers to act.