The Fed’s new amendment to Reg Z regardingindividual ability to pay is a double-edged sword-on one hand aprotection against the abuses which propagated the mortgage crisisthrough lack of verification of income, and on the other, asignificant risk to the origination of retail credit, especiallyin-store.
In brief, the rule requires issuers to consider individual incomeas a factor in ability to pay a loan. Household income can beconsidered only for joint applications. So, in the frequentscenario where a non-working spouse is asked to apply for credit inthe checkout line, but neglected to bring his/her spouse withhim/her, then that individual would likely have no or insufficientindividual income. Retailers and issuers are justifiably concernedthat in-store credit issuance will be suppressed.
Implementation of the rule will doubtless have ripple effects andunintended consequences in the short run (see Mercator ViewpointThe New Reg Z Rules and Household Income: What’s In A Name?).Consideration of consumers’ ability to pay any type of loan is acritical safeguard to mandate. But it may also be over-cautious todisallow consideration of the household income of individual adultapplicants, who in most cases have the ability to pay based ontheir household income.
