Question:

Hi Heather, 

I have a question regarding a new credit card product that we are about to launch.  This card will have a pledge of shares to back it as collateral. Because of this we will not require a credit pull or verification of income.  Will this create a problem if the applicant is under 21?  I know that we are required to establish they have the ability to pay the loan.

Thank you!

Great Question!

You don’t ever have to verify income under Reg Z’s Ability to Pay (ATP) rules for credit cards. But you still have to gather and consider income for all applicants, not just those under 21:

1026.51(a)(1)(i): (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.

Even though the credit card ATP requirements allow you to consider a consumer’s assets when determining ability to pay, in my opinion, the deposit is pledged collateral and not available for making “required minimum periodic” payments.  The cardholder can’t access the pledged collateral to make payments and the credit union only gets to take the pledged funds if the cardholder has missed enough payments to default. 

There is also this foot note from the preamble to the final regulation:  

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.   (See page 46, footnote 35)

The footnote applies specifically to the young consumer section of the ATP rule, however, it shows regulators considered exempting secured cards from the Ability to Pay requirements and chose not to.

For ANY secured credit credit cards you don’t have pull credit or verify income by looking at documents, but you do have to ask for income information and consider an applicant’s ability to make required minimum payments. For under 21 consumers, you have to gather enough information to ensure they have an “independent ability to make the required minimum periodic payments.”

Nutshell – IMO, the pledged security doesn’t change anything.