Store-Card Regulations Not as Tough as Feared

Store cards have dodged a bullet.

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."

That "triangulation" can be done with the help of vendors like the credit bureaus, which already crunch data on payment history, assets and liabilities for lenders.

According to the Fed, "to provide flexibility regarding consideration of income or assets, the final rule permits issuers to make a reasonable estimate of the consumer's income or assets based on empirically derived, demonstrably and statistically sound models."

For bureaus like Equifax Inc., which has already started selling a Personal Income Model to lenders, helping clients comply with the new rules is relatively easy, not to mention lucrative. "We've already had orders from several private-label issuers," Dann Adams, president of Equifax's Consumer Information Solutions business, said last week. (He would not identify any of them.)

Nordstrom Inc., one of the few remaining retailers to issue its own private-label and cobranded credit cards, said it is already eyeing such "an automated solution." Though that will undoubtedly add to Nordstrom's expenses, Colin Johnson, a spokesman for the Seattle luxury retailer, was sanguine about the Fed's new requirement. "We really don't think it's going to negatively impact the shopping experience for our customers," he said.

Target Corp., which in 2008 sold a minority stake in its receivables to JPMorgan Chase & Co., was slightly more pessimistic.

"Overall, the Credit CARD Act has significantly reduced or eliminated strategies Target has used in the past to manage our credit portfolio," Eric Hausman, a Target spokesman, said by e-mail. Nevertheless, Target's "modifications to our in-store and mail-in applications are under way to properly consider applicants' ability to repay incurred balances on their accounts."

JPMorgan Chase said it was "continuing to study the new rules."

Citigroup Inc., which is attempting to sell off or unwind its large retail-partner card portfolio, said it "is working closely with our retail partners to execute and comply fully with the necessary CARD Act and Regulation Z provisions by the deadlines imposed."

Many general-purpose card issuers — and even some retailers offering store cards — have already collected income information from credit applicants, "because it has been a consideration for underwriting," said John Grund of First Annapolis Consulting. Some store cards, however, have traditionally used less stringent underwriting, to facilitate on-the-spot issuance and to encourage customers to spend more money at the retailer.

The income and liabilities requirement is only one additional pressure attached to store cards — and, some say, not the most onerous.

Many issuers have raised interest rates or finance charges across store-card portfolios — or even, in the case of Alliance Data Systems Inc., started charging cardholders for receiving paper statements.

"The biggest challenge is that … the majority of issuers have already made changes that have made these cards less attractive," Jacowitz said.

"The issuers are saying, 'We need to do this because we're not going to be able to do it in the future,' " when restrictions on raising rates kick in.

"But retailers who have private-label programs generally feel that they're pretty important to running their business — it's all around, 'How do I get the customer to do more?' " Jacowitz said.

The result of measures like rate hikes or charging for paper stataments, he said, is that "by making them less attractive, it's making it a little more difficult to sell a credit card to a consumer."