A regulation requiring proof of personal income in credit card applications has justly been described as “anti-housewife”. The rules hurt the ability of nonworking spouses to access credit and build their own independent credit standing. There is a smart solution to the problem—but it’s not the one currently being proposed by the Consumer Financial Protection Bureau.
Before getting to that, a bit of background is in order. In response to the widespread overleveraging that left much of society teetering on the edge of financial disaster, Congress included an ability-to-pay clause in 2009’s CARD Act. This essentially requires credit card companies to evaluate whether or not one’s independent income and assets enable them to at least make minimum payments on a credit card account.
Sounds pretty reasonable: If you want a credit card, you should be pay off the debts incurred with the card.
Well, in what some regulators are calling an “unintended consequence,” the law has hampered the ability of stay-at-home spouses to build credit independently, thereby creating quite the stir, especially among women’s groups. Even though the existence of joint credit card applications makes credit cards and their credit building powers attainable for most stay-at home spouses, the Consumer Financial Protection Bureau (CFPB) has succumbed to the pressure of a well-publicized Change.org petition bearing the names of 45,000 people demanding that the rule be altered. The CFPB issued a notice of proposed rulemaking October 17 that, if enacted, would enable all credit card applicants over the age of 21 to “rely on third-party income to which they have a reasonable expectation of access.”
Yes, such a system would give stay-at-home spouses better access to credit. But it would also come with unintended consequences of its own. For example, imagine that a credit card company receives applications from the following two married consumers:
Consumer A has $50,000 in income and $200,000 in debts
Consumer B has $0 in income and $0 in debts
Which consumer would be OK’d for a card? Neither is a good candidate for credit, actually, and both would get turned down. But what if Consumer B applies using the couple’s shared income? And what if Consumer B did so while neglecting to report the family’s shared debts of $200,000? Then it would appear as if Consumer B had a lot of disposable income and would get approved for a high credit line—despite the fact that the household probably shouldn’t be getting its hands on yet another credit card. This would only increase their family’s already-significant debt, bringing them one step closer to default and perhaps even bankruptcy.
Therein lies the rub. First off, the CFPB’s proposed change defeats the purpose of the original ability-to-pay requirement. Perhaps more importantly, the CFPB’s actions ultimately compromise the safety and soundness of financial institutions, which isn’t technically the consumer watchdog’s purview. Specifically, in order to solve a consumer issue in the easiest possible manner, the CFPB is adjusting a rule intended to correct an inefficiency in credit card underwriting and help prevent widespread over-borrowing.
Even if the CFPB’s change had only been a minor tweak, without the potential to cause significant problems down the road, it would still be setting a bad precedent. When roles and responsibilities are blurred between different regulatory agencies, we end up with subpar rulemaking across the board. These very dynamics speak to one of the main concerns surrounding the CFPB when this new central regulatory body was established back in July 2011.
So, is there a better solution?
We could simply hope for the best and pray that the slippery slope the CFPB has started down is not an obstacle-riddled black diamond. But there is a much simpler solution that would alleviate the concerns of stay-at-home spouses, without compromising the safety and soundness of our nation’s banks: The CFPB should 1) require credit card issuers to offer joint applications and 2) exempt secured cards from income and asset requirements.
The first component would give couples the broad ability to apply for credit cards together, incorporating their combined income as well as their combined debt obligations. Account information would be relayed to both parties’ credit reports, enabling both to build independent credit standing, which could prove very important in the unfortunate event of divorce or a death. Underwriters would also be able to make sound approval decisions because they’d be able to see a full picture of the household’s financial situation.
The second component makes sense because of the way secured cards work. Unlike with a traditional credit card, a secured card customer doesn’t really have a line of credit. A secured credit card’s spending limit is equal to the security deposit a consumer is required to place when opening it. In other words, issuers of secured cards shouldn’t have to require applicants to display income, independent or otherwise, because the deposit would be used to cover debts incurred with the card. If this policy was in effect, so long as an adult member of the household had the cash for the deposit required with a secured card, he or she would have the ability to build credit, without the need to apply jointly or even bother consulting a husband or wife.
This two-part plan is certainly doable. It’s also far more preferable to preventing stay-at-home spouses from obtaining credit, to sacrificing the integrity of our regulatory system, and to jeopardizing the soundness of our financial institutions, as well as the economy as a whole.
Odysseas Papadimitriou is a former Capital One senior director and the current CEO of Card Hub, a website that helps consumers improve their credit card use, and Wallet Hub, a social network built from the ground up around personal finance.