Compliance Blog

Written by Bernadette Clair, Regulatory Compliance Counsel

Recently, I blogged about the CFPB’s final rule amending Regulation Z’s ability to pay rules for credit cards to allow card issuers to consider income and assets that a consumer has a reasonable expectation of access to when determining the consumer’s ability to pay.

In my previous blog, I mentioned that under the final rule a card issuer could choose to consider income and assets to which a consumer age 21 and over has a reasonable expectation of access, OR they could choose to limit consideration of a consumer’s income or assets to the consumer’s independent income and assets. While this flexibility may seem to be a good thing, there are potential pitfalls to keep in mind if your credit union chooses to only consider a consumer’s independent income and assets when determining ability to pay.

For example, some commenters raised concerns that if a card issuer decides to use only the independent ability to pay criterion, it could be risking Equal Credit Opportunity Act (ECOA) and Regulation B violations based on sex or marital status.  From the preamble to the final rule:

“As noted above, one trade association expressed concern that issuers who decide to use only the independent ability-to-pay criterion for applicants age 21 or older might risk violating ECOA and Regulation B—on the theory that doing so would disadvantage non-working spouses, who are likely to be predominantly female, while another industry commenter expressed concern that application of the reasonable expectation of access criterion may result in potential ECOA and Regulation B violations based on marital status. As discussed above, the final rule permits card issuers the flexibility to consider a consumer's ability to pay using the reasonable expectation of access criterion adopted in the final rule or instead using the independent ability-to-pay criterion. The Bureau recognizes that, depending on their business models, some card issuers may decide to use the independent ability-to-pay criterion. The Bureau understands that card issuers regularly make decisions about their tolerance for repayment risk and that such decisions are a proper and entirely appropriate consideration in crafting underwriting decisions. The final rule specifically provides flexibility on this point. The Bureau expects that card issuers will give careful consideration to how to use the discretion allowed under the rule's flexible approach, in light of the issuers' loss experiences, risk appetites, and other pertinent factors, including the potential effect of the decision on an ECOA protected class. The Bureau does not expect that issuers will necessarily have conducted a quantitative analysis in support of those decisions, but that they will be able to explain the reasoning that went into their decisions and the effects of those decisions. The Bureau is committed to engaging with stakeholders as they implement the new rule.” (Emphasis added).

The CFPB notes that the rule specifically allows for the flexibility to use the independent ability to pay criterion, but at the same time states that it expects card issuers to consider pertinent factors, including the potential effect of the decision on an ECOA protected class.  Comforting words indeed!

Given the current environment of increased regulatory scrutiny on fair lending issues and the reputation risk associated with even the perception of having a discriminatory lending policy, this new underwriting flexibility may be somewhat dubious.

Looking for a real world example?  Take a look at this blog post.