As many of our readers are likely aware, the Credit Card Accountability, Responsibility and Disclosure Act (the “CARD Act”) largely becomes effective in just a few days – February 22, 2010. The CARD Act was signed into law in May 2009 to establish new regulations, standards and disclosure requirements for open-end consumer credit plans. In addition to several entirely new regulations that card issuers will be required to follow and implement in the course of their issuing processes and procedures, the CARD Act amends the Truth-in-Lending Act.
One particular regulation contained within the CARD Act requires that a card issuer take into account a consumer’s ability to pay before opening a new consumer credit account and/or increasing the person’s pre-existing credit limit. While the spirit behind this regulation is certainly admirable, how is this supposed to play out in the marketplace?
In October 2009, the Federal Reserve Board (“FRB”) proposed regulations that would have required an issuer (like a Macy’s or Home Depot, that issues its own department store cards) to consider a consumer’s income, assets and current financial obligations. The FRB further proposed that the issuer would be permitted to rely on information provided by the consumer, as well as information in a credit report.
Understandably, retailers expressed serious reservations over these proposed regulations. The mere thought of asking a consumer to disclose his/her income or asset worth at a check-out counter (where most store-brand credit cards are issued) made these retailers shudder. Moreover, there was even concern that a consumer who wished to apply for a store-branded credit card may be required to provide underlying substantiation and documentation, like a tax return, pay stub or W2 to verify such person’s income. Besides the embarrassment this would inevitably cause a consumer in having to show intimate, personal records to essentially complete strangers, retailers expressed concern over the likelihood of consumers abandoning purchases at the point of sale, and the delay that would result from a significantly more involved application and approval process.
Fortunately for retailers, the FRB provided further guidance (and a touch of reality) to clarify its proposal when it finalized the CARD Act regulations in anticipation of the looming February 22, 2010, effective date. Essentially, under the regulations, a card issuer must still review any reasonably available information regarding a consumer’s income, assets or current obligations before issuing or increasing credit. However, an issuer may “consider information obtained through any empirically derived, demonstrably and statistically sound model that reasonably estimates a consumer’s income or assets.” While the regulation still requires some heightened level of checks and balances in determining a consumer’s credit-worthiness when issuing credit at a point of sale, the regulation seemingly allows the issuer (aka retailer) to rely upon a credit report or some other third-party verification without having its team of accountants, bookkeepers and credit analysts pore over a consumer’s tax return in the midst of a President’s Day Sales Bash.
Why this Matters: Based on the FRB’s revised guidance and the allowance of a retailer to make credit decisions on the basis of credit reports and the like, little will probably change on a day-to-day basis, except that what was previously good business practice will soon be law. Certainly retailers and consumers should be pleased with the outcome of this legislation, though the real question will now be what additional measures retailers will adopt and integrate into their credit review process in this climate of consumer protectionism to avoid not simply having bad debt on its books, but also a lawsuit or investigation.