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Abstract

For decades, Congress has primarily relied upon the use of mandatory disclosure forms to protect consumers from entering into ill-advised loans by disclosing the terms of an offered loan before the borrower enters into it. This policy is not likely to change any time soon due to congressional gridlock. Frustratingly, despite improvements, consumers still have difficulties using these forms to obtain the key information and data they need to make wise decisions. These disclosures contain a great deal of information, and assume that consumers are capable of reading, understanding, and using all of it. Contrary to this assumption, research on the cognitive science of decision-making has repeatedly demonstrated that the amount of information that consumers can absorb and use is very limited (a phenomenon called “bounded rationality”). To overcome the limitations of bounded rationality, disclosures should engage consumers, focus their attentions on the most important information, and be tailored to their individual situations.

In this Article, we propose online, individualized, and interactive disclosures that are data-based to address these and other limitations of current disclosures. These interactive, data-based disclosures can be implemented by government agencies without congressional action, thereby sidestepping the current congressional gridlock. Consumers would interact with these disclosures by entering information that is needed to individualize the information presented in the disclosure to their personal situations. For example, such interactive features should allow consumers to see how their APRs—the prices of their loans—change based on how long they hold loans. Such interactive features might also allow consumers to see how the APRs of their loan offers compare with average APRs for others with their credit score, thereby enabling borrowers to gain a sense of whether loan offers are the lowest-priced and most suitable loans that they can qualify for. We report the results of an experiment that we ran on both experienced home-loan borrowers and less experienced consumers designed to test a specific example of how these disclosures can be made interactive, individualized, and able to respect consumers’ bounded rationality. We describe how making disclosures online, individualized, interactive, and data-based can be incorporated into other important aspects of home-loan decision-making, as well as student loan decision-making to better enable student-loan consumers to make rational, wealth maximizing decisions on student-loan offers.

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