The CARD Act Does Not Ban Cards for Under-21s After All

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]

Credit Cards, Government | Frank Curmudgeon | February 15, 2010 12:59 pm

No Comments

By Andrew Stevens, February 15, 2010 @ 4:24 pm

It’s not clear to me that this isn’t a change. Yes, of course, if the under-21 lies about his income, they’ll issue a card anyway. However, let’s say a dependent college student with no income whatsoever signs up for a credit card, truthfully saying that he has no income (at the moment). If I’m reading you correctly, they would have to decline to issue a card now while they would have issued before. The college student does not have an independent means of repaying the debt. (Previously, credit card companies were not terribly worried about being repaid. If they didn’t just keep paying interest and the minimum balance until they got a job, there was a good chance that Mommy and Daddy would bail them out.)

I think this gets the under-21s the law is concerned about – college students without a job and whose parents won’t cosign for the card, while still granting credit to under-21s who are in the work force or whose parents are willing to cosign.
By Dave_W, February 16, 2010 @ 7:05 am

I can’t claim to have been following the CARD Act (I’m not American), but from a quick read I do think there was intended to be a change here which both you and Andrew have hit upon.

“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?”

Yes, I think that’s precisely what we’re meant to infer. Specifically, I think this is meant to preclude issuing cards to under-21s on the assumption that their parents are de facto co-signing (because they’ll step in if Junior runs up a massive debt) or perhaps even speculatively on grounds that they’re bound to get a decent job by the time they’re deep in the hole.

I don’t know whether or not it’s justifiable to regard an under-21′s “ability” to repay as being backed by their parents, but to me the wording of the change suggests that this was happening.
By John H, February 16, 2010 @ 12:59 pm

I have to disagree with you on this point. I think a distinct difference exists between “ability” and “independent means” when referring to college students. I’m fairly certain that I could walk into any one of my college classes right now and ask who has the ability to make a credit card payment (with parents help) and get many more hands raised that if I asked who has the independent means (without parents help) to pay off a credit card each month.

I think the intent was to limit these under 21′s that are in college and not working while still allowing under 21′s that have a full time job to still obtain a credit card.

Now obviously these students could lie to obtain credit cards but at least the credit card companies have to ask. Also, the intent of the law is to protect someone from themselves. So I guess the idea is if someone lies to get around the law they are either smart enough to get around it or they have made their own bed and can deal with it on their own.
By Frank Curmudgeon, February 16, 2010 @ 4:16 pm

First, just to be clear, the part of the federal government whose job it is to enforce this has decided that ability and independent means are the same thing. Nobody else’s opinion, including mine, really counts.

Second, there is no requirement that lenders ask about income at all. They can use statistical models to infer ability to pay from other data. The argument could be made (by qualified lawyers, not me) that this would allow giving cards to students at certain well regarded colleges, based only on the fact that they are students there, becuase it can be demonstrated that in the past they almost always pay back what they borrow.
By Dave_W, February 17, 2010 @ 8:56 am

Sorry Frank, I don’t think it’s that cut and dried.

The wording of 226.51(a)(1)(i) (the general rule that the card issuer has to assess the ability of the consumer to make payment) does not include the word “independent”. It’s not actually very prescriptive at all, as you’ve noted – it just says that the issuer has to do something in order to show that it has given the matter due consideration.

226.51(b)(1)(i) (the under-21 rule) says that the card issuer must have (in the absence of a co-signor) information indicating that the consumer has “an independent ability to
make the required minimum periodic payments on the proposed extension of credit in
connection with the account, consistent with paragraph (a) of this section”. (my emphasis)

There are two ways of reading those two sections together.

The first way is that the under-21 test is exactly the same as the over-21 test, and that whole section of the legislation is purposeless. In that reading, the language “consistent with paragraph (a) of this section” infers that the test for ALL card applicants must be of their independent means – so card issuers cannot give a card to, for example, the unemployed spouse of a multi-millionaire. Why those people would want one is beyond me, but you take the point.

The other reading is that the two tests are different – the general test of ability to pay can consider marital resources (for example), but the test for under-21s has an overlay that it can consider only the independent means of the consumer.

I think the thing that pushes me into the second interpretation is this excerpt from the Reg Z publication to which you linked (last para on page 263):

Furthermore, many industry commenters asked the Board to permit card issuers,
in determining whether consumers under the age of 21 have the “independent” means to
repay debts incurred, to consider a consumer’s spouse’s income. The Board believes that
neither Regulation B nor § 226.51(b) compels this interpretation. Pursuant to TILA
Section 127(c)(8)(B), card issuers evaluating a consumer under the age of 21 under
§ 226.51(b)(1)(ii), who is applying as an individual, must consider the consumer’s
independent ability. (emphasis in original)

If the answer was that spousal income is NEVER something that can be considered, because the two tests are exactly the same as with your interpretation, I think the answer in that paragraph would have to say so. Instead the answer fits in with the second interpretation – the test for under-21s requires an evaluation of their independent means (implying that the test for adults does not, and in fact the very asking of the question also heavily implies that this is a practice within the industry).

I freely admit that there’s nothing determinative about that – as far as I’m concerned it’s still a jump ball as to which way the interpretation will go, and only if something comes to court would you ever have a definitive answer (and even then, maybe not…). I’m just not convinced it’s as settled as you’ve said.
By creditcards, November 10, 2011 @ 8:12 pm

Hi, just wanted to say, I loved this post. It was helpful. Keep on posting!

Bad Money Advice

Because Mainstream Personal Finance Advice Is Not What It Should Be