In some ways, the CARD Act of 2009 was everything health care reform was not. It enjoyed broad bipartisan support, passing the House and Senate by 361-64 and 90-5 respectively. It dealt with topics familiar to most Americans in simple terms. And it was refreshingly short, at only 33 pages.
A person might think that would make it a model for other legislation, an example of how effective government can be if reasonable people cast aside their partisan differences and write simple rules to make our lives better.
Then again, maybe not.
The act packs quite a few provisions into its 33 pages. Many of those may turn out to work just as expected. But an examination of what I consider to be one of the more ill-conceived provisions, the ban on issuing credit cards to those under 21 years of age, reveals a yawning gap between what we thought the law would do and what it really does.
The CARD Act says that giving a card to somebody under 21 is strictly verboten unless either 1) there is an over-21 cosigner or 2) the young consumer himself can demonstrate "an independent means of repaying" the potential debt. That sounds pretty simple. It has been widely reported as being a significant change in the credit card business. I used to think it was too. Then I started spending time reading the regulations published by the Federal Reserve Board that implement the law.
The under-21 bit of the CARD Act is implemented by Rule Z Section 226.51. The first half of that section, 226.51(a), discusses the rule now applicable to all potential credit card customers, that lenders must consider the ability to repay when considering an account application. I wrote about that last week.
Section 226.51(b), under the heading "Rules affecting young consumers" tells us that a person under 21 must either have a co-signer or "an independent ability to make the minimum payments." And what are the criteria for determining if the under-21 in question has those means? Why the same ability to pay rules as in 226.51(a), of course.
In other words, the special rule for consumers under 21 is that they are subject to the same rules as everybody else. (And, as discussed last week, those rules are hardly stringent.) Appearances aside, there is, for practical purposes, no special restriction on extending credit to those under 21 at all.
At first blush, it may seem as if the Fed has subverted the clear intent of Congress. I don’t think so. One bit of the CARD Act says that new accounts cannot be opened "unless the card issuer considers the ability of the consumer to make the required payments." Another part says that new accounts for those under 21 cannot be opened unless the applicant has "an independent means of repaying" the debt.
Did Congress intend "independent means" to be a higher standard than "ability?" If so, what would be an example of somebody with ability to repay but not the independent means to repay? Are we to infer that ability might include cases where a person needed assistance from others, that is, was not independent? As in “I have the ability to fly a jumbo jet” since I can do it with the help of a skilled pilot?
On reflection, I think it is pretty clear that “ability” and “independent means” must mean the same thing. And the Fed came to the same conclusion.
There is the broader issue that, as implemented in the regulations, the practical requirement that lenders consider ability to pay is so minimal as to be almost meaningless. Contrary to widespread belief, there is no legal requirement for credit card applicants to show proof of income or assets. Lenders are permitted to rely on consumer’s statements of such things. In fact, they need not ask about income or assets at all. Lenders are allowed to infer ability to pay from such things as credit histories. In other words, it is not clear that this will change the way card issuers do business in any way.
It is tempting to blame the authors of the regulations for this laxity, but once again I believe they did their level best to implement the law as written. Congress did not, after all, say that consumers must offer proof of anything, nor that lenders must verify anything. They said merely that ability to pay must be “considered.”
And it is the basic absurdity of that language, that card issuers are now required to consider ability to pay, that causes problems. No bank has ever issued a credit card without evaluating the probability it would be paid back by the consumer. (Some banks may have been very bad at making those judgments, but that is another topic entirely.) So the Fed, reasonably, wrote rules that fit nicely into what lenders were doing already because they have been considering ability to pay all along.
I did find one practical effect of the under-21 provisions of the CARD Act. It is trivial and doubtless unintentional. The cosigner for a card for a person under 21 without independent means must himself be over 21. So a 20-year-old with a good income cannot cosign for a 20-year-old without one, including, for example, his wife. He can cosign for a 22-year-old.
My meandering tour through the Fed’s regulations did uncover other disconnects between what we all thought the CARD Act would do and what it will actually do, along with a few peculiar unintended consequences. Stay tuned.
[Photo: Andres Rueda]