Starting Feb. 22, lenders must comply with changes in Regulation Z, part of the Credit CARD Act of 2009. This regulation is designed to promote the informed use of consumer credit by requiring disclosures about its terms and cost. It also regulates certain credit card practices and provides a means for fair and timely resolution of credit billing disputes.
To meet the new guidelines, lenders need to consider and assess a consumer's ability to pay as well as income data. In order to get an accurate assessment of this, lenders must take into account several different criteria.
While part of the Regulation Z amendment requires lenders to obtain income or asset data, it should also include consideration of at least one of the following: the ratio of debt obligations to income, the ratio of debt obligations to assets or the income the consumer will have after paying debt obligations (residual or disposable income).
However, many questions remain about how and where they can obtain such information and even which specific information they will need. The new guidelines to Regulation Z do not differentiate between aggregated models (which look at all households within a nine-digit zip code) and individual models, enabling lenders to determine what model is acceptable for their evaluation.
While lenders may secure this information directly from consumers through stated income, card issuers may also obtain this information through third parties as well as statistically sound models that reasonably estimate a consumer's income or assets.
Lenders should also be aware that Regulation Z implements new guidelines around credit line increases. For example, credit issuers need to update income/asset/obligation information prior to considering whether to increase a consumer's credit line. While there had been some debate as to whether issuers could comply by using info from the original application, the direction is clear — only updated income information at the time of the credit line increase can be used. As we've learned, having current verified income and understanding what a borrower is truly capable of paying is invaluable in managing risk.
However, obtaining updated, valid consumer-provided income at the time of the credit line increase will be a challenge, at best, and one that presents a level of uncertainly that a credit issuer may not want to accept. This creates a need for more automated solutions that can quickly provide access to up-to-date employment and income verifications. Risk would effectively be mitigated as the data would come directly from the most accurate sources of information — employers themselves and the IRS.
Lenders must quickly evaluate their internal capabilities to ensure that they remain compliant and well positioned to meet the credit needs of the marketplace.