Do you have to comply with the Ability to Repay requirements for secured credit cards? These are not secured by a home or dwelling.

From the preamble to the final rule eff 5-3-13:

35 One industry commenter a requested that the Bureau specifically exempt secured credit cards from the
independent ability-to-pay standard set forth in § 1026.51(b)(1)(i). The final rule does not exempt secured credit
card accounts from the requirements of § 1026.51(b)(1)(i). The Bureau believes that adopting such an exemption is
outside the scope of the changes considered as part of this rulemaking

Thanks!

It looks like the reference to 1026.52(b)(1)(i) pertains to consumers under the age of 21. We have an application for a credit card to a consumer over 21 who has no income, but wants to secure the card with a deposit account. Do we need to show ability to repay in such an instance?

(b) Rules affecting young consumers. (1) Applications from young consumers. A card issuer may not open a credit card account under an open-end (not home-secured) consumer credit plan for a consumer less than 21 years old, unless the consumer has submitted a written application and the card issuer has:
(i) Financial information indicating the consumer has an independent ability to make the required minimum periodic payments on the proposed extension of credit in connection with the account; or

The ability to repay rules in 1026.51(a)(1) are not limited to people under 21.

While consideration of the secured deposit account might be a consideration when determining the ability to repay based on the consumer's income or assets and the consumer's current obligations, with no income, what are you expecting them to live on?

Good point - thank you!! We have an applicant with no income but can secure the card - lender wants to know why he has to do ATR!! Thanks again!!!

Bringing this old thread back up.

I wonder if we could do something where we secure the account with excess funds. For example, if a credit limit is $1000.00, we could secure the account with something like $2,500. This would secure the $1,000 balance, and the additional $1,500 would be enough to make minimum payments for 5 years. 5 years was chosen because this is a period longer than the average employment.

Not sure how feasible this is, just spit balling. Seems to me, that securing 5 years worth of minimum payments would better prove ATR than looking at current income. Any thoughts? Would this program be compliant?

Just my thoughts -

30+ years ago I managed a credit card portfolio for a local bank that is now part of Chase. If the applicant didn't have the ability to make the monthly payment based on income then we would not grant a secured card. If the reason for denial was due to credit, job time or in our case back then we had a lot of foreign students that had no ties to the US other than their schooling that applied for a credit card. In these cases we would offer the secured credit card but they still had to meet our established income requirements at the time.

IMHO, putting 5 years of payments in a reserve account does nothing to improve the consumer's ability to make their monthly payment. It guarantees the bank they will get paid but it does not change the fact the consumer does not have the income to service their debt.

Would it be compliant - that is a discussion to have with your EIC.

I get what you're saying, but couldn't the same statement be true for any asset? It doesn't say specifically that you need to consider income. So, I think the question is, how many assets are enough to say the consumer has the ability to make the minimum payment?

I guess my follow-up question would be if they have the assets to come up with 5 years of payments to put in a reserve account then why do you need to secure the card if you are basing the ATR on the applicant's assets instead of income?

I may be old school but I don't agree securing any type of loan with a "payment" reserve to meet ATR standards. The person either has the ability to make the monthly payments or they do not.

ATR is require whether a card is secured or not. So, I am not sure what other options there may be.

1026.51—Ability to Repay
(a) General rule. (1)(i) Consideration of ability to pay. A card issuer must not open a credit card account for a consumer under an open-end (not home-secured) consumer credit plan, or increase any credit limit applicable to such account, unless the card issuer considers the consumer's ability to make the required minimum periodic payments under the terms of the account based on the consumer's income or assets and the consumer's current obligations.

Did not read your post correctly the first time. I guess the reason you use the assets as additional security is that you could make that money available for payments and only payments. If someone has a checking account with a $5,000 balance, that seems like sufficient amount of assets to make $25 minimum payments. But, they could also spend it all tomorrow. That is why putting it in a security reserve would be beneficial.

See post #2277413 for the option being discussed. I know ATR is required, but am wondering if that option meets ATR.

Sounds like a UDAAP to me. You want to offer a secured credit cards and require then to pledge 250% of the credit limit as collateral. Where is the logic in that and how does that prove ATR? If they have $2,500 to hand you (which is about the average retirement savings for many people), why do they need a secured card?

If someone has a checking account with a $5,000 balance, that seems like sufficient amount of assets to make $25 minimum payments. But, they could also spend it all tomorrow.

That's a true statement but what underwriter in their right mind would consider a current checking account balance as an asset for the ability to repay future debt without supporting documentation of future income being available to replenish the account and what average balance has been maintained in the account, or other assets the consumer would have access to if needed.

I never considered the UDAAP aspect of it, or the potential fair lending implication if the 250% is not required for all persons receiving a secured credit card.

We are looking to serve and underserved community who are primarily cash first operators but want to start credit. It would not be a requirement. It is a product available to people who are unable to qualify for a standard credit card product. They prefer a credit card over a traditional loan because they can payoff the balance each month without accruing any interest.

So why that 250% security deposit if they are going to pay it off monthly?

Because the regulation is requiring me to verify ATR and those funds are my proof.

Those funds do not provide you proof the borrower has the ATR.

Those funds prove:

1. Your borrower had the ability to come up with a one time payment for a required amount.
2. The bank has collateral they can foreclose on in order to repay the debt if the borrower defaults.

They in no way support the borrower's ability to meet their monthly obligation.

I agree - a security deposit, as we have previously stated, is not proof of ATR.

1. The one time payment is set aside as an asset to be used for minimum payments. It is enough to cover 5 years of minimum payments. It almost seems like that could be a better was to prove ATR than simply looking at current employment income which of course can end or change tomorrow.
2. Yes, we do have the collateral which is the base $1,000. The additional assets are available to make payments if the borrower so chooses, so they do prove ability to repay.

You are making no sense what-so-ever to me.

You say you want to have this product "to serve and (sic) underserved community who are primarily cash first operators". If they are underserved due to financial issues, since they apparently cannot otherwise qualify for a simple $1,000 credit card, how many of these people are just going to have $2,500 lying around that they are going to be willing to tie up?

You then stated " They prefer a credit card over a traditional loan because they can payoff the balance each month without accruing any interest." If this group of people can and it is anticipated that they will pay off this credit card on a monthly basis, then why do they not have a traditional documentable ability to repay.

I would really like to know what your proposed interest rate that you are planning to charge this underrserved community might be, since this is secured with free funding for the bank. If as you say that the extra $1,500 is enough to pay off the credit card over 5 years, I calculate that to equate to something like 30%.

I just think this is an ill-conceived product and it is doomed to failure along with presenting the risks that both Dan and I pointed out. But everyone is free to advise their own institution as they see fit.

Thanks. The interest rate would be the same as our regular secured card.

Most of these people are new to the United States and hence they have limited credit history, but often they have money put away in cash. This is something they're community is asking for as we meet with community organizations.

That still does not get you over the ATR requirement, unless these are foreign nationals, then Regulation Z does not apply. Of course, you then also used to need an International BIN to issue a credit card to a foreign national.