Say what you will about the NRA and the AARP, the most powerful lobby around might be that of motherhood. Just think: public pressure from women’s groups in the interest of stay-at-home mothers actually led the Consumer Financial Protection Bureau to go back and tweak the landmark CARD Act of 2009 – legislation enacted to reform the personal finance landscape.
The Change That Sparked a Movement
You see, the CARD Act contained a so-called “ability-to-pay” clause which required banks to abandon the long-held practice of evaluating household income and personal debts in making credit card approval decisions. In order to help issuers better gauge applicants’ disposable income, issuers were to start considering both debts and liabilities on the individual level.
While the change stood to help reduce delinquency and charge-off rates by ensuring that people could only get credit cards if they could afford the monthly bills, thereby reducing strain on banks, it also made it more difficult for stay-at-home parents to access credit. There are more than 16 million stay-at-home parents in the United States, according to Census data, and the vast majority of them are women.
This “unintended consequence,” as it was characterized by CFPB Director Richard Cordray, sparked outrage from advocacy groups like Moms Rising and The Feminist Majority Foundation, prompted Reps. Carolyn Maloney (D-NY) and Louise Slaughter (D-NY) to speak out against the rule change, and led to more than 40,000 people signing a petition posted on Change.org. It’s worth noting that Maloney was the principal author of the CARD Act.
Reactionary Rulemaking by the CFPB?
In response to this public pressure, the CFPB proposed a rule change last October that would essentially revert back to the old household income system. More specifically, the consumer watchdog suggested that we “remove the independent ability-to-pay requirement for consumers who are 21 and older, and permit issuers to consider income to which such consumers have a reasonable expectation of access.”
Following a 60-day public comment period, the CFPB in April enacted that rule unchanged. “Today the Consumer Financial Protection Bureau (CFPB) updated existing regulations to make it easier for spouses or partners who do not work outside of the home to qualify for credit cards,” the organization’s April 29 press release read. “Today’s amendment … allows credit card issuers to consider income that a stay-at-home applicant, who is 21 or older, shares with a spouse or partner when evaluating the applicant for a new account or increased credit limit.”
You’ve perhaps already seen CardHub’s commentary on the matter, but the concern is that the CFPB’s approach will unnecessarily jeopardize the safety and soundness of banking institutions by making credit card underwriting more opaque and thereby preventing institutions from properly assessing risk. That’s especially true since it seems there are less drastic solutions the CFPB could have implemented but didn’t for simplicity’s sake, because they wouldn’t mollify activists, or some combination of the two.
But in the interest of gaining different perspectives, we reached out to experts in women’s rights and banking policy for their take. You can check out what they had to say below.
How can you balance the need for stay-at-home parents to access credit with the safety and soundness of the banking system?
“This is in large part an empirical question, to which I don’t have the answer. How many of these fulltime homemakers are likely to rack up huge bills without their partner’s knowledge and consent? This may not be a huge problem for the soundness of the banking system.”
- Elaine McCrate, University of Vermont
“It is certainly a balancing act, and I’m not sure anybody really knows the optimal solution (in theory or in practice). On the one hand, maintaining the safety and stability of the financial system has become a top priority for US and global regulators, with the hopes that we can prevent another financial crisis from happening (a naive hope) or at least not make the same mistakes and be better prepared for the next financial crisis when it happens (a more realistic goal). However, at the same time over-regulation could potentially restrict economic growth and in this credit-driven economy it is important to ensure that businesses, households, and individuals have access to credit for consumption and investment needs.
That being said, if underwriting standards are lowered, then it increases the risk of borrower default; and if enough borrowers default then it can lead to distress at the institutional level; and depending on the speed, scope and scale, it could potentially be a systemic problem (that was the transgression that lead from subprime defaults in 2006-2007 to a Global Financial Crisis in 2008-2009.”
- Michael B. Imerman, Lehigh University
“I would say that there should be some kind of allowance that if a customer is going to use household income that it be specified as household income and say who else has access so that the bank can access those parties’ credit profiles. I think it’s worth pointing out that the American Bankers Association supported [the CFPB’s proposed change] and lobbied for it, and the banks have been using household income for years before the CARD Act.
I think it could hurt consumers because they could end up getting more debt than they can afford or couples can divorce and then the stay-at-home spouse would not be able to afford the credit anymore. But for banks, this is what they’ve been doing all along.
I think [the ABA] and probably the CFPB too decided that it’s just too much of a hot-button issue to say you’re coming out against stay-at-home spouses getting credit.”
- Angela Littwin, University of Texas School of Law
“Access to credit by stay-at-home parents and the soundness of the banking system are not mutually exclusive in a society such as ours, which most often views the married couple as a single economic unit. The idea that they may be mutually exclusive arose only a few years ago, merely as a by-product of efforts to tighten young adults’ access to credit by limiting their reliance on their parents’ income.”
-Margaret Ryznar, Indiana University Robert H. McKinney School of Law
“From the credit card company’s perspective, it makes the most sense to tie an individual’s income and expenses to the individual’s ability to repay. This gives the credit card company the most transparent information. Linking the individual’s financial situation to the individual’s ability to repay also promotes better risk management and greater safety and soundness among financial institutions. This must be balanced against one of the goals of Congress and society, which is broad access to credit for all individuals. The two goals can be in conflict, since broader access to credit may include providing credit to those who have additional financial-risk characteristics. There is no easy answer to this issue. A good outcome will provide broad access and also have in place safeguards to promote safety and soundness, but the tension between the two conflicting goals will remain. The problem is a general one in banking, and another good example is in the housing mortgage market.”
- Linda Hooks, Washington & Lee University
“In reading the CFPB final rule of April 29, 2013, it seems to have taken from the passage of the CARD Act in 2009 to last month to address the issue of working spouses and partners’ incomes being used by non-working spouses and partners to support their credit worthiness on individual credit cards. The safety and soundness of the banking system and card issuers should not be significantly affected by a more liberal ruling on access to income of spouses or partners to support a credit card. In the analysis of the credit worthiness of the borrower, bankers will take into account the income and debts of both spouses/partners in making a judgment on whether to extend credit and by how much to either spouse/partner individually.
Strictly from a credit worthiness assessment, non-employed spouses rely upon the income of employed spouses for support of the couple. Divorce and bankruptcy laws can be applied under conditions of separation, divorce or bankruptcy. I am assuming that such laws that apply to married spouses do not apply to partners. If my assumption is correct, CFPB’s extension of the rule to partners poses a greater risk to banks extending credit in these situations than to those married. This may not apply to same-sex partners joined by a civil union or marriage. From this perspective, the CFPB’s ruling in my opinion is an adequate solution to a problem of extending credit to an individual without a source of income, but has access to funds from a spouse or partner in a relationship that legally binds the two individuals. Of course, there is always the option of a joint credit card or the income earning spouse/partner cosigning the credit card loan agreement.”
- Gerald Hanweck, George Mason University
What is your take on the Consumer Financial Protection Bureau’s handling of this issue, from the time it rose to prominence in 2011 to now?
“The Consumer Financial Protection Bureau effectively addressed concerns raised by the public and by certain members of Congress that the Federal Reserve had misinterpreted Congressional legislation on this issue. The Bureau now separates the treatment of those over 21 and those under 21 in evaluating creditworthiness. This tightens credit for a population that is the most vulnerable credit consumer according to the studies–those under 21, not stay-at-home parents.”
- Margaret Ryznar, Indiana Law
“The Consumer Financial Protection Bureau is a new organization, and as such, has some start-up issues. However, its general approach has been similar to that of regulators before it, the Federal Reserve, so it does have general continuity within the subject.”
- Linda Hooks, Washington & Lee University
In your opinion, is there a better way to satisfy the credit needs of stay-at-home parents?
“If you’re using household income, creditors should be allowed to ask about who else in the household has access to that income and look at their credit score as well so that you’re making a household determination based on assets and liabilities. [note: Professor Littwin actually credits this idea to one of her students – Jennifer Johnson]
I would also say there is a lot of need on the domestic violence point, that this would enable somebody who needs to leave an abusive relationship to get a credit card based on the other person’s income. This is something I’ve done a lot of research on – debt taken out in abusive relationships. And I’ll say there’s also the situation where it’s the abuse victim who’s the primary earner, and this would allow abusers to take out credit under that person’s income as well.
Abusers were already fraudulently taking out credit cards in victim’s names, so this doesn’t change it too much, but it gives them a legal way to take out credit cards using the victim’s income, even if it’s the abuser who’s going to be the one liable for it.
[Access to credit for stay-at-home spouses] is a more complicated issue than some of the people who were advocating for it on domestic violence grounds were saying. … They gave the situation where the victim could take out a credit card in order to get essential funds that would enable her – mostly it’s her – to leave. But then I worry that she’s left the relationship and now has all kinds of debt that she can’t pay back. In addition, she may already have debt that the abuser racked up in her name as well, and so this could add another amount to it. There are no great answers here is what I would say. There’s not a really good way to handle this. …
In non-abusive situations, I do think the argument for doing things the way the CFPB did is that it values women’s contributions to the household because it usually is women who are staying at home, and I do think that’s an important reason to do it.”
- Angela Littwin, University of Texas Law
“One other way would be to explicitly allow spouses to use each other’s assets and income in applying for credit, but not to permit children to use their parents’ assets and incomes.”
- Margaret Ryznar, Indiana University Law
“It is my understanding that joint credit card accounts are still available. A joint credit card account could help a couple in which one person does not have an outside source of regular income.”
- Linda Hooks, Washington & Lee University
At the end of the day, there are many competing interests when it comes to credit card underwriting requirements, and that means the odds of finding a solution that satisfies everybody are rather low. Now that the CFPB’s rule is final it’s unlikely to be changed anytime soon, anyway. It’s therefore now incumbent upon the banking industry to step its credit card risk management game up in order to prevent the change made at the behest of stay-at-home spouses from having unintended consequences of its own.