In an effort to continue to provide more transparency to the financial industry, the Federal Reserve Board approved an amendment to Truth in Lending Act, Regulation Z.
The amendment requires credit card issuers to evaluate the yearly income when making a decision to approve or extend credit.
Regulation Z, which implements the Truth in Lending Act, already required banks, lenders and credit card issuers to disclose the details of a loan in order to provide consumers with a clear and simple understanding of a given loan.
Details such as how much interest a consumer will incur on a loan in terms of annual percentage rate are covered under Regulation Z.
The new rule clarifies the implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit Card Act).
Specifically, the rule states “credit card applications generally cannot request a consumer's ‘household income' because that term is too vague to allow issuers to properly evaluate the consumer's ability to pay. Instead, issuers must consider the consumer's individual income or salary.”
The new requirement is intended to help credit card issuers better determine if a consumer will be able to pay off the credit card and will provide consumers with better protections from incurring unaffordable credit card debt.
The new addition requiring disclosure of individual income comes with two additional clarifications:
- The same protections provided under the Credit Card Act for promotional programs which apply a reduced rate for a specified period of time will be applied to promotional programs that waive interest charges for a specified period of time. For example, a credit card issuer offering to waive interest charges for six months will be prohibited from revoking the waiver and charging interest during the six-month period, unless the account becomes more than 60 days delinquent.
- Limitations will be placed on application and other fees required of a consumer to pay before a credit card account is opened the same as limitations under the Credit Card Act on fees charged during the first year after an account is opened. The total amount of fees must not exceed 25% of the credit account’s initial credit limit. For example, should a credit card company charge a $75 application fee for a credit card with a $400 limit, the card issuer generally will be prohibited from charging more than $25 in additional fees during the first year the account is opened.
The new rule was approved on March 18, 2011 and according to the Federal Reserve is “intended to enhance protections for consumers who use credit cards and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations.”