Last month at FICO World, in a packed conference room, we held a lively panel discussion on best practices for addressing the ability to pay rule of the Credit Card Accountability Responsibility and Disclosure (CARD) Act. Much of our discussion focused on the required calculation of a debt-to-income ratio before granting credit. The consensus? Even though it’s been four years since the Act’s passage, compliance challenges are far from resolved.
Part of this challenge stems from the fact that the regulatory rules continue to shift. In the days leading up to FICO World, the CFPB issued two amendments to the existing CARD Act rules.
The first revision, which did not address the ability to pay provisions, clarified that fee limitations during the first year only apply during the twelve months following the opening of the account. The second revision, however, did make a significant change to the ability to pay rule. Originally, the regulations required card issuers to consider a consumer’s independent ability to pay before issuing a credit card or a line increase. The rule now permits issuers to consider “income and assets to which such consumers have a reasonable expectation of access” for consumers 21 years or older.
Even without ongoing regulatory change, card issuers continue to grapple with how to balance their own profitability goals while keeping to the letter of the law. At our recent FICO World panel, a dominant topic was the challenge of initiating automated credit line increases. As a result of the CARD Act rules, many of our clients have simply halted most, if not all, automated line increases. All panel participants—which included a banking client, a trade association executive and a regulator—confirmed that many banks are struggling with compliance requirements in this area.
The difficulty stems from card issuers’ inability to utilize an “income estimator” that meets regulatory scrutiny. CARD Act rules allow for the use of an income estimator if it is “empirically derived, demonstrably and statistical sound.” Issuers would prefer to grant automated credit line increases without having to ask customers the often-sensitive questions about income or assets. Unfortunately, regulators have yet to find an income estimator that is accurate enough to pass compliance muster.
We are working with clients on a number of strategies to facilitate the gathering of income information in compliance with ability to pay requirements. One strategy is for an issuer to leverage data from existing banking relationship (e.g., DDA account information) to approximate a customer’s income. Another is to take advantage of enhanced customer engagement initiatives that foster effective client interaction, including getting stated income from customers. But no matter how income is acquired, it is crucial that issuers maximize its analytic value so that the investment drives return.
We've just published an Insights white paper on this topic, entitled Building “Ability to Pay”-Compliant Growth Strategies (requires registration), which I invite you to download. In addition, we continue to have an open dialogue with regulators to share our research and insights related to CARD Act compliance.
The passage of the CARD Act may be four years behind us, but compliance challenges are still front-burner issues. As a result, I would not be surprised if we end up conducting another CARD Act session at FICO World 2014 in San Diego.