The Federal Reserve Board's latest round of credit card rules require retailers and their issuing partners to consider some additional information about customers who apply for private-label or cobranded cards at the cash register, including their income and existing obligations.
Many in the industry had braced for worse.
Specifically, retailers had worried they would be required to verify income or assets by collecting copies of customer pay stubs, tax returns or bank statements. But the final version of the rule, which the Fed released this month, allows issuers to estimate income and assets using computer models.
"I think they are all breathing a big sigh of relief," said Steven Jacowitz, a former credit executive at Saks Fifth Avenue, Bloomingdale's and Filene's, and now the director of alliance development at Auriemma Consulting Group.
Under the Credit Card Accountability, Responsibility and Disclosure Act, beginning Feb. 22 all issuers granting line increases or new accounts will have to consider the applicant's ability to make the minimum monthly payment. Part of the Fed's rules — all 1,155 pages of which landed on Jan. 12 — defines "ability to pay," and says the assessment must include "a review of the consumer's income or assets as well as current obligations."
The rules apply to all issuers, but had the potential to particularly hurt retailers that take applications and almost immediately issue cards at the point of sale.
That's because few shoppers take their tax returns or bank statements with them to the mall. And those consumers who apply for "instant" credit cards at the checkout counter are unlikely to wait for a lengthier approval process — or be willing to provide detailed financial information to store clerks in a public setting.
"We are pleased that the final rules are more balanced than some versions that had been discussed," said Mark Williams, the president of financial services for Best Buy Co. Inc.
The electronics retailer had specifically asked the Fed, in a November comment letter, for reassurance that "its intent is not to require retailers in an 'instant credit' environment to collect or verify written documentation … from consumers as part of the credit application process."
Williams said by e-mail Monday that Best Buy now expects "minimal disruption" from the finalized rules. "I do expect the number of instantly approved accounts to reduce by a nominal amount and there will be some customer confusion, but both of these will improve as both consumers and lenders become used to the process," he wrote. "We have plans in place to help consumers through the process and optimize the number of customers approved." (HSBC Holdings PLC, which issues Best Buy's cards, would not discuss the matter.)
The Fed's requirement that a store-card issuer consider an applicant's income and liabilities "will have an impact, but probably not as great an impact as many retailers allege," said Duncan Douglass, a lawyer who advises financial companies and retailers as a partner at Alston & Bird LLP. "There's no obligation on the part of the retailer or issuer to verify income — nobody has to bring a pay stub in. That doesn't really change the historical practice."
Of the Fed's preliminary rules, first announced in September, the one "that probably caused the greatest consternation was the one around annual income," Jacowitz said. "It was everyone's belief that there would be a requirement for annual income, and now the regulations have come out in a way that allows the credit grantors to triangulate the income, to find it in a way other than asking a consumer."
