In order to help stay-at-home moms and dads get credit cards, do we really have to jeopardize the health of our banking system? The Consumer Financial Protection Bureau (CFPB) sure seems to think so. It recently proposed a rule change that will make it easier for roughly 16 million consumers to access credit, yet promises to undermine the effectiveness of underwriters and thereby ultimately serve as a drain on the economy.
More specifically, the CFPB is suggesting an about-face when it comes to reporting income on credit card applications. The new CARD Act requires consumers to list their independent income, rather than household income. The rule was enacted to ensure that only those who can afford credit cards will get approved, but it has also made it harder for stay-at-home spouses to build credit independently, forcing them to become more reliant on their significant others. Calling this an “unintended consequence,” the CFPB essentially wants to eliminate the rule.
Here are four reasons why we should reject that solution:
It promotes overleveraging. Congress included an ability-to-pay provision in the CARD Act of 2009 for a reason: When consumers apply for credit cards using household income, issuers have no way of knowing how much can actually be used to pay for a new account and how much is already dedicated to debt obligations linked to their spouse. Even if individuals use household income, they still only have to list personal debts, which means banks must guess about what’s missing from the equation. Thus, people who can’t afford high lines of credit are mistakenly granted them. That in turn leads to a greater number of defaults and bankruptcies on a personal level as well as significant banking losses and downward pressure on the economy in a broader sense.
Credit card terms will worsen. Without the ability to gauge consumer risk, banks will have to implement a profit “buffer zone” of sorts by reducing rewards, raising interest rates, and cutting other consumer benefits. In other words, by adhering to the CFPB’s plan to provide everyone access to credit, we’d also be ensuring that what we’re accessing is average.
The CFPB is missing the complete picture. Financial regulators have two traditional roles: 1) consumer watchdog and 2) protector of the safety and soundness of financial institutions. By implementing a rule that will help a certain consumer demographic but hurts banks, the CFPB is sacrificing its latter obligation. It’s therefore surprising that the CFPB was so quick to settle on this easy fix instead of searching for a universally beneficial solution.
There is a better solution. There’s no need to choose the lesser of two evils here. The most logical course of action would be to require that all credit card companies offer joint applications and approve anyone who can place a security deposit for a secured credit card.
Joint applications enable couples to apply for a shared account, using the incomes and debt liabilities of both parties. This would give issuers the proper perspective on applicants’ overall ability to pay, and since information about shared accounts is reported to both parties’ credit reports, would enable stay—at-home spouses to build independent credit even if they don’t have independent income. When it comes to secured cards, the deposit you’re required to place also acts as your credit line, which means issuers don’t have to worry about getting repaid and income verification is redundant. The ability for stay-at-home spouses to obtain their own credit card account with a simple lump-sum payment would prevent them from having to involve their significant other if they don’t wish to do so.
It’s unfortunate that many of the folks who recognize the flaws in the CFPB’s plan perhaps are afraid to speak up for fear of being labeled sexist or coldhearted. The choice is not between financial security and stay-at-home spouses. Instead, it’s a choice between lazy rulemaking and getting the job done right, and we can only hope that enough people realize that before the public comment period for the CFPB’s new rule closes.
– Odysseas Papadimitriou is the CEO of Card Hub, a leading website that covers the credit card market, and Wallet Hub, a personal finance social network, where you can review banks and other financial companies and professionals. He previously served as a senior director in Card Hub’s credit card division.