The Ability to Repay credit card debt was a component of the CARD Act of 2009, which requires U.S. credit card issuers to do a means test: can the borrower afford to pay back the debt that underwriters qualified him/her for? According to the text:
- Regulation Z currently requires that issuers consider the consumer’s independent ability to pay, regardless of the consumer’s age; in contrast, TILA expressly requires consideration of an independent ability to pay only for applicants who are under the age of 21.
- The final rule amends Regulation Z to remove the requirement that issuers consider the consumer’s independent ability to pay for applicants who are 21 or older, and permits issuers to consider income and assets to which such consumers have a reasonable expectation of access.
Despite strong and steady growth, issuers have done a nice job of complying to the guidelines, as evidenced by numbers on household debt published by the Federal Reserve here. Indicators show that “Household Debt Service Payments as a Percent of Disposable Personal Income” dropped in the U.S. from a peak of 13% to the current rate of 9.l8% in 2018.
That is good when you think about it. In a household budget, expenditures should be about 35 or so percent to cover rent or mortgage, < 10% for debt, 25% for taxes, etc, leaving you with perhaps 10% for discretionary items like going out to the moves, soccer fees for kids, and the like.
Problems are brewing for our Canadian brethren, however.
Today’s Global News reports that “Canadian Households (are) now using 14.9% of income for debt payments.
- The measure was “just a whisker” below the record high reached at the end of 2017, noted BMO economist Priscilla Thiagamoorthy.
- And a growing share of Canadians’ income — 7.3 percent, the most in nine years — is going toward interest charges, she added.
- Canadians’ household debt reached a seasonally-adjusted average of $1.79 for every dollar of disposable income, up slightly from $1.78 in the June to September period.
- Debt is eating up an increasing share of household disposable incomes even as Canadians pull back on borrowing.
- Although the end of 2018 saw a pick-up in mortgage loans, on an annual basis household borrowing declined 19.5 percent in 2018 to the lowest level since 2014.
The CBC has similar input:
- The agency reported that seasonally adjusted household credit market debt, as a proportion of disposable income, increased to 178.5 percent in the fourth quarter. That compared with a revised reading of 178.3 percent in the third quarter.
- That means there was roughly $1.79 in credit market debt for every dollar of household disposable income in the fourth quarter.
- Earlier this month, Equifax Canada reported that consumer delinquencies climbed higher in the fourth quarter of 2018 and the credit monitoring company warned that rising delinquency rates are likely to become the norm this year.
No one wants to call in the regulators, but perhaps it is time to tone down growth above the 49th parallel?
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
