Does Ability to Pay Discriminate?

March 31, 2012 by  Filed under: Loans 

The CARD (Credit Card Accountability, Responsibility, and Disclosure) Act was passed into law by President Obama in 2009. The intention of this law was to protect consumers from unfair lending practices that were becoming commonplace in the credit card industry. The CARD Act, like many other regulations, was implemented to protect consumer rights, but some experts argue it may actually be preventing certain consumers from being able to obtain and build credit.

One part of the CARD Act, which has become a topic of much debate, is referred to as Ability to Pay. This section of the regulation requires financial institutions (FIs) to “consider the independent ability of the consumer to make the required minimum periodic payments under the terms of the account” during account opening, and this must be “based on the consumer’s income or assets and current obligations”. The law also specifically calls out consumers who are 21 or younger and requires them to have a cosigner to open an account if they cannot prove that they are independently able to take on the debt.

The main issue that FIs, retailers, and consumers have with the Ability to Pay section of the CARD Act is in the inclusion of the word independently. This word implies that a person cannot use their household income on an application for credit. So, when a stay-at-home parent, who technically doesn’t have an income, fills out an application for a credit card, they aren’t able to claim any revenue. Without an income, they are not able to take on any debt, so they are immediately declined. This prevents stay-at-home parents and other consumers with similar situations from having access to, or the ability to build, credit.

Supporters of the CARD Act and Ability to Pay argue that a stay-at-home parent can have access to credit through joint accounts with their spouse, which do build the credit of both parties. Ability to Pay does allow FIs to use income information provided by the consumer on an application without having to verify the information, but normal consumers do not know that. This would allow the stay-at-home parent to claim that part of their spouse’s income is theirs because they are a contributing member of their household. The FI must, however, also look at the consumer’s obligations or debt as well. So a consumer who independently makes a small salary may be disqualified for credit based on their debt to income ratio if the consumer has, say, a joint mortgage.

The CARD Act was meant to protect consumers from obtaining credit when they lacked the ability to make their monthly payment, among other initiatives. The implementation of this rule, however, may infringe upon the ability of some consumers to obtain credit that, as a member of a household, they are actually qualified for. Should regulators take into account those who may not have a documentable flow of income into their legislation? Does this law discriminate against stay-at-home parents? It’s up to you to decide.

Kristie is an Online Marketing Specialist for Zoot Enterprises. She holds a BS in Marketing and Spanish from the University of Wisconsin La Crosse.

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