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Thursday, September 19, 2013

Underwriting Credit Cards & Overwriting Congress

Here is an example of what lawmakers probably should not do: block stay-at-home spouses (which include more women than men, but a substantial number of each) from the credit card market.  This would be inconsistent with the laws—including many family law principles—that treat spouses as a single economic unit.  Yet, it happened.  Not in 1911, but in 2011, and without much media attention. 

In the wake of the economic meltdown, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) on May 22, 2009, which aimed to increase the transparency of the credit card industry and to protect college students from predatory lending. While stay-at-home parents were not targeted by the Act, Title III focused on credit card consumers under the age of 21.

To carry out the CARD Act and its amendments, Congress assigned power (through the Truth in Lending Act's Regulation Z) to the Federal Reserve Board to issue such rules as it considered necessary. The Federal Reserve Board promulgated the "ability to pay" rule, which required credit card issuers to consider only a person's independent income, and not the household's income, when underwriting credit cards.  However, in addition to keeping credit cards away from young adults—the target of the CARD Act—this "ability to pay" rule did the same for a larger group of people: non-income earning spouses that included stay-at-home parents and homemakers.  Except in community property states, where spouses co-own martial assets, a stay-at-home spouse could not open a credit card without the signature of the income-earning spouse.

This “ability to pay” rule problematically conflicted with the law’s historical treatment of spouses as a single economic unit.  Furthermore, stay-at-home parents have never proven to be a credit risk; on the contrary, they are the ones usually responsible for running the household's finances. 

There was also the issue of congressional intent.  The principal authors of the CARD Act, Congresswomen Maloney and Slaughter, had confirmed that the intent of the legislation was to ensure that underage consumers could not apply for credit cards on their parents' income, not to prevent stay-at-home spouses from using household income to apply for credit.  

I have argued in a recent St. John’s Law Review article that a new rule on the issue should have an age limitation or explicit exemption for spouses.  The recently created CFPB did eventually offer a similar solution this summer.  The Bureau’s amendment to the existing regulations allows credit card issues to consider third-party income if the applicant is over 21 years old and has a reasonable expectation of access to the income.  This tightens credit for a population that is the most vulnerable credit consumer according to the studies-those under 21, not stay-at-home parents.  Such an approach achieves the happy balance between the soundness of the credit market and fair access to it by non-income earning spouses, but it is surprising that for two years this century, many stay-at-home spouses could not open their own credit cards.

Posted by Margaret Ryznar on September 19, 2013 at 06:50 PM | Permalink

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Really interesting question: how did the regulatory process fail to catch this one? It seems fairly obvious... where did notice and comment crash?

Posted by: Paul Gowder | Sep 20, 2013 2:49:22 AM

Hi Paul, nice to hear from you. It is pretty unbelievable that this issue slipped through the cracks for awhile. The Federal Reserve Board did hold a comments period for several months in late 2010, but despite numerous comments urging reconsideration of the proposed rules, the Board did not change its position (probably firm in its belief that this made the credit card market more secure). Certain members of Congress, including principal authors of the CARD Act, then called on the CFPB to study and report the impact of the Board’s rule. The CFPB held a public comments period in the first half of 2012, at which point, the issue caught on a bit more, and one stay-at-home parent delivered to the CFPB over 30,000 signatures petitioning against the rule. But, the rule did not garner as much attention as you’d think. I always thought there’d be a lag because not many people really read the Federal Register and get burned up over it, but once people got declined from opening a Macy’s card at the counter in the jeans department, I figured the ACLU would get ahold of the issue, but no. I guess the CFPB fixed the problem before too much of a storm built up.

Posted by: Margaret Ryznar | Sep 21, 2013 12:38:19 AM

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