Credit Card Repayment Ability Fix Issued by CFPB

By: David A. Tallman , Eric Mitzenmacher

Financial life just got a little bit easier for stay-at-home moms and dads. For over a year and a half, regulations originally promulgated by the Federal Reserve (and reissued by the CFPB) have restricted credit access for “spouses and partners who do not work outside the home,” based on an interpretation of the Credit Card Accountability, Responsibility, and Disclosure Act (the “CARD Act”) that required a creditor to consider a card applicant’s “independent” ability to repay any credit extended. On May 3, the CFPB finalized amendments to Regulation Z that loosen the credit card underwriting standards, allowing consumers over age 21 to qualify based on any income to which they have a “reasonable expectation of access.” By acknowledging that the practical aspects of interfamily relationships may sometimes support a determination that a consumer has an ability to repay even when the consumer may not have a formal legal right to the underlying income or assets, the Bureau acquiesced to the requests of a broad-based coalition of politicians, consumer groups, and credit card issuers to remove an artificial barrier to the ability of stay-at-home spouses and partners to obtain and build credit.

Enacted in 2009, the CARD Act requires a card issuer to consider a consumer’s ability to repay any credit extended under a credit card account. It also requires applicants under the age of 21 to either demonstrate an “independent” ability to repay or include a qualifying, of-age cosigner on the account. Reaching the right balance in implementing these requirements has been an iterative process. The Federal Reserve’s initial CARD Act rules, effective February 22, 2010, did not impose any independence requirement on income or assets for consumers over age 21. Concerned that applicants qualifying based on “household income” could obtain credit without access to the funds necessary to repay debts incurred, the Federal Reserve amended Regulation Z, effective October 1, 2011, to extend an “independent” ability to repay requirement to all consumers. While presumably well intentioned, the Federal Reserve’s actions had unintended consequences, one of which was to disadvantage certain stay-at-home parents.

Following expressions of concern from consumers and card issuers, as well as analysis of data suggesting certain consumers have been systematically denied credit despite “demonstrable access to funding sources,” the CFPB proposed its solution last November. The final rule is substantially in line with that proposal. The Bureau’s approach allows consumers over the age of 21 to qualify for a credit card product based on income or assets to which they have “a reasonable expectation of access,” but still retains an “independent” repayment ability requirement for consumers under age 21. It also clarifies that a creditor’s application of these separate age-based standards is not, in itself, a violation of Regulation B’s prohibition on age-based discrimination.

In one significant departure from its November proposal, the final rule specifies that applying the more relaxed standard for consumers over age 21 is optional. In other words, a card issuer may continue to qualify consumers over age 21 “using an independent-income-or-assets underwriting criterion” without violating the requirement to consider repayment ability. However, the issuer now also has the option to qualify the borrower under the less restrictive “reasonable expectation of access” standard.

The regulatory commentary to the final rule further clarifies that an issuer’s “reasonable expectations” should be based on the regular use of accounts. For example, a consumer will have reasonable access to funds where a third party, such as a member of the consumer’s household, regularly transfers funds from an account for which the consumer is not an accountholder to an account from which the consumer regularly makes payments to the consumer’s credit card account, even if the consumer is not an accountholder for the payment account. There would be no reasonable expectation of access, however, where regular activity indicates the consumer lacks access and the consumer has no legal interest in the funds under federal or state law.

Despite providing commentary that addresses access patterns for individual accounts, the CFPB’s rule does not require any particular income or asset documentation. In fact, the rule expressly allows “stated income” applications, which are currently the norm in the credit card context. In assessing a consumer’s ability to repay, card issuers may rely on information provided by the consumer in response to a request in the application for income or assets in language evoking the “reasonable expectation of access” standard. Therefore, requests for “income,” “available income,” or “accessible income” will provide card issuers information on which they may rely. At this time, the only phrasing identified by the CFPB that will not result in reliable information is “household income,” as the Bureau is concerned about situations in which a consumer provides information regarding members of his or her “household,” such as unrelated roommates, whose relationship to the consumer does not include shared finances.

The final rule became effective upon its publication on May 3, but card issuers are not required to comply until November 4, 2013.

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