Credit card issuers are scrambling to add new software-based consumer income-estimation tools to their account-approval processes following the Federal Reserve Board’s release last week of the final rules implementing the Credit Card Accountability, Responsibility and Disclosure Act.
Under the new law, which passed last May and goes into effect Feb. 22, issuers for the first time must ensure that prospective borrowers have the ability to repay credit card debts.
In its final rules implementing the law, released Jan. 12, the Fed gave issuers permission to use software models to estimate consumers’ incomes based on their payment histories and other available data. Issuers may “make a reasonable estimate of the consumer’s income or assets based on empirically derived, demonstrably and statistically sound models,” in determining whether the borrower will have the ability to repay his debts, the Fed wrote.
The Fed’s green light for using income-estimation models comes in the nick of time, ending “a lot of uncertainty and anxiety” among issuers, Paul Thielemann, senior vice president of sales and marketing at risk-management software developer Zoot Enterprises, tells PaymentsSource.
To issuers’ relief, the Fed’s final rules did not require official verification of prospective borrowers’ income, which could have been costly and cumbersome, Thielemann says. The Fed’s final rules also relieved issuers’ fears that the new requirement to estimate borrowers’ incomes would throw a wrench into existing instant prescreening credit-application models, which are one of the industry’s most-effective marketing tools, he says.
Instant prescreening, which has been in use for several years, enables issuers to pull data from credit bureaus and other sources to make a firm offer of credit immediately to individual customers through a call center, a Web site or inside a bank branch. The instant prescreening process relies on credit scores and other data, excluding specific income estimates.
“There was a lot of angst among issuers on these issues because of the very short window of time from when the new card legislation was passed to the Fed issuing proposed rules, receiving comment and issuing final rules, says Ed Rice, Zoot general counsel. “It’s all coming together just weeks before the new rules going into effect.”
Not surprisingly, several third-party software developers and credit bureaus are coming to issuers’ rescue with new income-estimation tools that have been in development for the past few months.
Experian PLC recently announced the development of Income Insight, a software model that predicts a consumer’s ability to repay a card loan based on “a deep database of verified income and proprietary credit attributes.”
Income Insight estimates an individual’s annual income using available information about borrowers’ monthly obligations, including payments on mortgages, rentals, and auto and consumer loans, an Experian spokesperson says.
Zoot, which helps issuers integrate a variety of data tools into its own risk-management programs, says “a variety of income-modeling tools” are available to issuers. And many larger issuers are developing their own income-estimation tools to comply with the new credit card rules.
“The new rules will help issuers make the right decision about extending credit to consumers at the very beginning of the process, to make sure this is a creditworthy prospect who won’t get into trouble later,” Thielemann says.
