Amendments to Regulation Z

Effective Date

Voluntary compliance with the rule was effective on May 3, 2013 when it was published in the Federal Register. Compliance is mandatory by November 4, 2013.

Background

The Consumer Financial Protection Bureau (CFPB) has issued a final rule that amends Regulation Z and its Official Staff Interpretation in order to address concerns about interpretation of requirements of the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). Specifically, the final rule focuses on the determination of a credit card applicant’s ability to repay. The CARD Act requires that card issuers evaluate a consumer’s ability to repay before opening a new credit card account or increasing a credit limit on an existing account.
Prior to this final rule, card issuers were required to consider the consumer’s independent ability to pay, regardless of the consumer’s age. The effect of this rule has been that non-working individuals with access to a spouse or partner’s income have been denied credit cards because they are not able to verify that they have an independent ability to make the required payments. Credit card issuers have expressed concern that the actions they take in accordance with this requirement may have the effect of discriminating against certain consumers based on age and/or marital status.

Summary of Changes

The CFPB has taken a close look at the language in the CARD Act and has determined that the correct interpretation is that the independent ability to repay requirement was only intended to apply to consumers under the age of 21. Consumers 21 and over who do not work may qualify for credit cards if they have a reasonable expectation of access to income from a partner or spouse.
The final rule addresses four primary areas.

  • First, the rule no longer requires that card issuers determine that a consumer who is 21 or older has an independent ability to pay.
  • Second, the final rule permits card issuers to consider income or assets to which the applicant or accountholder who is 21 or older has a reasonable expectation of access.
  • Third, the final rule continues to require that consumer who are under the age of 21 either have an independent ability to pay the required minimum payment or provide a cosigner or similar party who is 21 years or older who has an independent ability to pay.
  • Lastly, the final rule clarifies that the independent ability to pay provision for applicants under age 21 does not violate Regulation B based on age discrimination.

Operational Requirements

Policies and Procedures, Section 1026.51(a)(ii)

Financial institutions must adopt and maintain reasonable written policies and procedures to consider an applicant’s ability to make the required minimum payments under the terms of the account based on the applicant’ s income or assets. Financial institutions are not required to consider income or assets to which an applicant 21 years or older has a reasonable expectation of access. However, the institution’s policies and procedures should address how or whether it will evaluate these “reasonable access to income” situations. Reasonable policies and procedures should also address consideration of at least one of the following:

  • The ratio of debt obligations to income;
  • The ratio of debt obligations to assets; or
  • The income the consumer will have after paying debt obligations (disposable income).

The Official Staff Interpretation to this section explains that the financial institution’s evaluation of the ability to pay can be based on consumer reports, credit scores and other factors consistent with Regulation B. The Official Staff Interpretation provides guidance for those financial institutions that elect to consider income or assets to which the applicant or authorized user has a reasonable expectation of access. Income includes current or expected salaries, wages, bonuses, tips, commissions, dividends, retirement benefits, public assistance, alimony, child support, separate maintenance payments and proceeds from student loans (but only to the extent that those proceeds exceed the amount disbursed or owed to a financial institution for tuition and other expenses). A bank or credit union may also consider income that is being deposited on a regular basis into an account on which the applicant is an account holder (either as an individual account or as a joint owner on an account). In addition, the financial institution may consider the joint ownership of income or assets granted under State community property laws.
The Official Staff Interpretation also provides examples of situations where an applicant’s access to a non-applicant’s income would be reasonable for the bank or credit union to consider as income for the applicant:

  • The non-applicant’s salary or other income is deposited into an account to which the applicant does not have access. However, the non-applicant regularly transfers a portion of the income into the applicant’s individual account. In this situation, the financial institution can consider the portion of the income that is being transferred to the applicant as reasonably expected income; or
  • The non-applicant’s salary or other income is deposited into an account to which the applicant does not have access, but the non-applicant regularly uses a portion of that income to pay the applicant’s expenses. Again, the bank or credit union can consider the amount used to pay the applicant’s expenses.

However, it would not be reasonable for a financial institution to consider a non-applicant’s salary or other income to which the applicant does not have access and which is not used on a regular basis to pay the applicant’s expenses and to which community property laws do not apply.
Banks or credit unions may use a single, common application form or process for all credit card applicants, regardless of age. In addition, for applicants that are 21 or older, the credit union does not have to verify information income or asset information provided on the application, as long as the application questions gather sufficient information to allow the bank or credit union to satisfy the above requirements.

Special Rules for Applicants Under Age 21, Section 1026.51(b)(1)

Financial institutions cannot open a credit card account or increase in the credit limit for an existing account for an applicant under the age of 21 unless the applicant has submitted a written application. The bank or credit union must then determine that the applicant has an independent ability to make the required minimum payment or has submitted the written application with a cosigner, guarantor or joint applicant who is at least 21 year old and who has the ability to make the required minimum payment. A bank or credit union does not have to request further verification if the application request that the applicant provide his/her “salary,” “income,” “personal income,” “individual income,” “assets” or other language that requests the applicant provide his/her current or reasonably expected income. However, the financial institution cannot rely solely on information provided in response to a request for “available income,” “accessible income,” or similar language. Additional verification, such as a follow-up conversation with the applicant, would be required here to determine that the income reported is reasonably expected income. In other words, while a credit union or bank can rely on reasonably expected income for a young applicant, it is not permitted to rely on a young applicant’s reasonable expectation of access to a non-applicant’s income to support the credit card request.