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New credit card rules allow for income estimation models

After Congress spent the better half of 2009 debating new consumer protections for credit card users, most of the compliance rules for organizations went into effect in February 2010. Included in the rules is a new provision that allows credit card issuers to rely on income estimation models when determining a consumer’s ability to repay debt.

In drafting the legislation, Congress added a new section to the Truth in Lending Act that prohibits issuers from opening a credit card account for a consumer, or increasing the credit limit applicable to a credit card account, unless the card issuer considers the consumer’s ability to make the required minimum payment. After passing the legislation, the Federal Reserve Board then proposed a set of technical rules for organizations to comply with the law. However, in order to comply with the rule, issuers would face a challenge. They would need to develop complicated formulas to determine the minimum payment for each product, including fees, as well as obtain from a consumer information concerning income, assets and current obligations. The policy had the potential to make it difficult for issuers to make instant credit decisions while ensuring compliance with the law.

The Federal Reserve also indicated that it would consider other ways for organizations to meet the “ability to pay” rule. Meeting with Federal Reserve staff, Experian® worked on behalf of its clients to ensure that credit card issuers had alternative options to make the best credit decisions. As a result, when the Federal Reserve issued the final rule, it clarified that card issuers are not obligated to obtain income or asset information directly from a consumer. Instead, card issuers also may rely on information from third parties, including models that reasonably estimate a consumer’s income or assets. The final rule states that “empirically derived, demonstrably and statistically sound models that reasonably estimate a consumer’s income or assets may provide information as valid as a consumer’s statement of income or assets.” 


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