Some banks ask a lot, some very little in enforcing the Fed’s 2011 rule requiring card applicants show an ability to repay what they borrow, CreditCards.com research shows
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Lawmakers, regulators and consumer groups are grappling with these questions after a 2011 regulation that aroused a firestorm over the rights of stay-at-home spouses to get credit cards on their own. The Credit CARD Act of 2009 set the stage for the controversy by requiring card issuers to consider an applicant’s ability to repay money borrowed on a card. The controversy arose when the Fed passed a supporting regulation in 2011. It said that unlike years past, household income shouldn’t be considered in credit card issuing decisions, a ruling that drew fire — especially from advocates for stay-at-home spouses.
In the meantime, card issuers have come up with their own rules for what defines “ability to pay.” CreditCards.com research shows application questions vary wildly in how they probe for “ability to pay,” and the questions may not go deep enough to determine an applicant’s financial resources to repay a debt.
Dan Kreis, director of portfolio management for First Annapolis Consulting, says after working with more than 400 credit card issuers, he’s learned that the formula issuers use to determine a consumer’s ability to pay is more an art than a science. “You would think that there would be more of a cookie-cutter approach, but everyone has their own ideas and their own particular twist,” he says. He adds that income — whether household or individual — hasn’t historically been helpful in predicting future repayment.
CreditCards.com compared the income verification methods used in the card applications from 23 issuers (see chart). We found:
• Vague wording. The vast majority of card applications surveyed used the phrase “annual income” or some variation of it, instead of “household income.” None included the words “personal” or “individual.” The imprecision leaves room for interpretation. Just one major card issuer, Wells Fargo, specifies that spousal income cannot be included in the total; the requests from Bank of America and Target’s retail card ask for “your income.”
• Student loan “income.” None of the cards examined ban students from reporting their student loans as income on their applications, a practice that invites students to list one type of loan to qualify for another. The CARD Act barred card issuers from granting cards to students under 21 unless they have co-signers or demonstrate an ability to repay. A report from the University of Houston Law Center indicated that about one in four students responding to a survey said they listed loans as part of their income to qualify for a credit card.
• Inconsistent requests for employment data. Of the 23 card applications CreditCards.com examined, 12 of them (52 percent) require it, but 11 don’t ask about it at all.
• Inconsistent requests for savings data. Of the applications examined, 35 percent required an applicant to state whether they had a checking or savings accounts. Another 9 percent made the information optional. The remainder — 56 percent — asked no questions about these accounts.
The questions matter because they filter who can and can’t get credit cards. Card issuers had been free to decide on their own who should get credit, and in the past would routinely issue cards based on household income. That changed when the “ability to pay” rule was approved by the Federal Reserve in March 2011, and implemented in October.
Almost immediately, there was a backlash. The rule angered stay-at-home spouses who could no longer use income from a husband or wife as a way to get an individual card (though they could still receive a joint credit card with their spouse). A petition at Change.org asking card issuers to modify the rule has as of late June 2012 garnered more than 39,000 signatures.
The refrain was repeated at a June 6, 2012, hearing in front of the U.S. House Financial Services Committee. An array of groups, including consumer advocacy groups, the American Bankers Association (ABA) and the National Retail Federation (NRF), requested that the provision be removed. At the hearing, Rep. Carolyn McCarthy of New York said that “a small tweak of [the CARD Act] could help countless stay-at-home moms … gain the credit access they rightfully deserve.”
Nessa Feddis, a spokeswoman for the ABA, says the anger is justified. “[Individual] income and assets may not reflect someone’s ability to pay,” she says, noting that stay-at-home spouses, who typically do not have their own income, may still have pristine credit and payment histories, while those with high incomes and assets can’t necessarily manage their money well.
Linda Sherry, a spokeswoman at Consumer Action, meanwhile, thinks it may be a made-up controversy. She suggests that spouses who file their taxes jointly could easily (and honestly) say that half of the income stated for tax purposes belonged to each spouse. “There’s nothing in the rule-making that says that they can’t do that,” she says.
For now, hard numbers about how many people have been affected remain scarce. According to Kreiss, approval rates among some card companies have dropped between 3 percent and 7 percent, though it is not clear that the new guidelines are directly responsible. And variation between banks, he says, can be dramatic. He adds that one regional issuer, which he declined to name, has told him that ability-to-pay requirements have become the No. 1 reason for declining an application. “It’s not endangering the industry, but it is making a difference,” he says.
Sherry says that it’s time for the industry to provide more than anecdotal — or hypothetical — evidence about the impact of the change. “If I were told that 100,000 stay-at-home spouses were denied a credit card last year [as a result of the guidelines], I might be concerned,” she says. “But I haven’t seen any evidence that points to this.” Feddis, meanwhile, says that card issuers are reluctant to release detailed statistics because it would leave them wide open to discrimination lawsuits.
Although several credit card issuers declined to comment for this story, Wells Fargo spokeswoman Natalie Brown says her company issues cards only to existing bank or home loan customers, a factor that has long helped them confirm a customer’s ability to repay. “At Wells Fargo, part of our commitment to responsible lending is working diligently to determine that customers have the ability to repay a loan before we provide it,” she says. “We have historically assessed credit card customers’ ability to repay before offering them a credit card.”
For now, the future of the rule is unclear. Feddis would like to see the rule return to allow the wording “household income.” Sherry says hard numbers could help regulators ferret out potential problems and modify pieces of the rule that aren’t working. Kreiss, meanwhile, says removing ambiguity is critical. “It’s time to state what the banks are supposed to do, and then make it happen.
|Issuer/Bank||Wording of income request||Checking and savings accounts?||Rent/own?||Employment type||Other|
|American Express||Total annual income (R)||Yes, and other investment accounts and total value of these assets (O)||Yes (R)||Yes (R), and employer name and contact information (O)|
|Bank of America||Your income, other income, and total household income (R)||No||Housing status, including rent, own, parents/relatives, dorm; monthly payment (R)||Yes, plus company name and contact information (R), and current position and years with company, as well as previous employer and number of years with previous company (O)|
|Barclay’s||Total annual income (R)||Yes (R)||Yes (O)||Yes (R), and employer contact (O)||How many times in the past 6 months have you taken a cash advance from any of your credit cards?|
|Capital One||Total annual income (R)||Yes, including total balance (R), and investment accounts with total balance (O)||Yes (O), and monthly payments (R)||Yes, and employer name (R)|
|Chase||Gross annual income (R)||Yes (R)||Yes (R)||Yes, plus employer name and years at job (R)||Is credit clear of bankruptcies or seriously delinquent accounts? (O)|
|Citi||Annual salary and wages (R)||Yes, plus money market and whether it’s with Citi or other financial institution (O)||Yes, and monthly payment (R)||No|
|Discover||Yearly income (R), and other income (O)||Yes, plus savings, IRA, or money market account (R)||Yes, and monthly payment and length of time at current residence (R)||Yes, plus employer name, contact, and length of employment (R)|
|PNC||Gross annual income (R)||No||Yes, plus monthly payment (R)||Yes, plus years with employer (R)||Past due credit obligations, limited credit history, filed for bankruptcy? (O)|
|U.S. Bank||Annual income (R)||No||Yes, plus monthly payment and years at residence (R)||Yes|
|Wells Fargo||Gross annual salary (with note that spousal income cannot be included) (R)||Must already be a Wells Fargo customer||Yes, and monthly payment (R)||Yes, plus employer, contact, and length of time at current employer (R)||Currently a director, executive officer, or principal shareholder of any depository institution? (R)|
|Retailer||Wording of income request||Checking and savings accounts?||Rent/own?||Employment type||Other|
|Best Buy||Annual income (R)||Yes (R)||Yes, plus beginning date of residence and monthly housing payment (R)||Yes, plus employment start date (R)|
|BP||Gross annual income (R)||Yes (R)||Yes (R)||Yes, and employer name and length of time at job (R)|
|Brooks Brothers||Annual income from all sources (R)||No||No, but length of time at current address (R)||No|
|Home Depot||Annual salary and wages and other annual income (R)||No||Yes, and monthly payment (R)||No||Must also state that you are clear of bankruptcy, seriously delinquent accounts, and have not been denied credit by Chase within 6 months|
|J.C. Penney||Annual income from all sources (R)||No||No, but length of time at current address (R)||No|
|J. Crew||Annual income (R)||No||No||No|
|Lowe’s||Annual income from all sources (R)||No||No, but length of time at current address (R)||No|
|Macy’s||Annual income (R)||No||Yes, and monthly payment (R)||No|
|Nordstrom||Annual income (R)||No||No, but length of time at address (R)||Yes, and length of employment (O)|
|Sears||Annual salary and wages and other annual income (R)||No||Yes, and monthly payment (R)||No|
|Shell||Annual salary and wages(R), and other annual income (O)||No||Yes, and monthly payment (R)||No, but business phone number (O)|
|Target||Your income (R)||Yes (R)||No, but length of time at current address, and previous address if fewer than 12 months (R)||No|
|Wal-mart||Annual income from all sources (R)||No||No, but length of time at current address (O)||No|