The CARD Act and Updates to the Ability to Pay Standard

On May 22, 2009, President Obama signed the Credit Card Accountability, Responsibility and Disclosure Act of 2009 ("CARD Act") into law. The CARD Act is intended to enhance consumer protections for credit card customers, with a focus on:

• Enhanced clarity and simplicity in disclosures and account information;
• Limits on how rates, fees and credit limits can change;
• Improved billing and payment practices.

The CARD Act promotes and enhances standards set by Regulation Z ("Reg Z") , which requires credit card issuers to disclose information about the terms and cost of credit. Throughout 2010 and 2011, the Federal Reserve Board (the "Fed") adopted a series of rules amending and clarifying portions of Reg Z, including new rules on the customers' Ability to Pay ("ATP"). These rules are intended to help institutions further evaluate a consumer's capacity to meet payment obligations on credit before granting or extending additional credit.

While the rules for ATP, first introduced in 2009, were primarily focused on lending to young adults (ages 18-21), the final rule established a single ability to pay standard for anyone seeking credit. The final ATP standard became effective October 1, 2011, and requires that before opening a new credit card account or increasing a credit line, card issuers must first consider a consumer's ability to meet the monthly payment obligations associated with the card. To achieve this, lenders must undertake a more comprehensive review of each individual applicant's personal finances by assessing monthly income and core expenses.

The revised ATP standard aims to protect consumers and ensure that financial institutions lend more prudently. At the same time, as a result of these new standards, the regulation has the potential to reduce consumers' access to credit.

Prior to taking effect, some financial institutions, as well as some advocacy and community-based organizations voiced concern over the proposed changes. Their concerns centered on the rule's potential impact on groups of borrowers and their ability to obtain credit, such as non-wage earning, stay-at-home spouses who may be unable to demonstrate an independent means of income. The final rule now prohibits the granting of credit to one spouse based on the non-applicant spouse's income. The rule, however, still permits the non-income producing spouse to be a joint applicant for credit with the income producing spouse.

Further, the new rule replaces the consideration of household income with individual income on credit applications. In other words, when an individual applies for a credit card or an increase to an existing line of credit, it is solely that individual's income that is assessed, not the overall income of the household. To meet the requirements of the rule, creditors may also request additional information in the credit application process. Additional information may include income and housing expenses (rent or mortgage amount). The need for this information applies equally to consumers seeking new lines of credit and those seeking increases to existing credit lines.

With the standing up of the new Consumer Financial Protection Bureau, authority over the CARD Act and these new rules has been transferred from the Fed to the Bureau.

What do you think about the ATP rule? Would you have written it differently?

Other Reading Material:

There are a number of articles related to this topic that are available via the internet. Here is one from the American University Law Review, which may be of interest: https://www.wcl.american.edu/journal/lawrev/60/williams.pdf?rd=1