The Credit Card Act recently signed into law by President Obama will put significant restrictions on the ability of credit card companies to lend to consumers under the age of 21. Under the new law, consumers under the age of 21 will now need to either have a co-signor who has attained the age of 21 years or proof of income. The co-signor may include a parent, legal guardian, spouse or any other individual who has reached the age of 21 and is willing to assume repayment for the debt incurred on the credit card account.

The law also prescribes new practices for lending to full-time college students. In order for a college student to obtain a credit card without a co-signor he or she must provide proof of independent means of repaying the debt obligation. If the college student submits an application without a co-signor, the bank is prohibited from opening a credit card unless it is able to verify these independent means of repayment.

I’ll admit that when I first heard about the restriction of credit to adults under the age of 21, I questioned whether or not it was the government’s place to regulate the borrowing choices of a portion of our adult population. My argument was that it was the parent’s responsibility to raise responsible citizens and that maybe these regulations were taking things a bit too far. However, now that I have had time to review the actual text of the law, these restrictions make a whole lot of sense.

Fundamentally, sound lending is based on the lender’s assessment of the willingness and ability of the borrower to repay the loan. The ability of a borrower to repay is predicated on either a proven credit track record (typically 3 or more years) of borrowing experience or sufficient income to repay. Since most borrowers under the age of 21 don’t have a proven track record of responsible credit use, it makes sense that lenders should require proof of sufficient income to repay the debt.

Under the new law, college students with verifiable income will still be able to obtain credit cards on their own. Those with a parent or another adult over the age of 21 who is willing to co-sign will also be able to get a credit card.

There are still a couple of important open issues regarding the implementation of this part of the law. First, the requirement that a lender has to verify that an applicant has an independent means of re-payment means that the credit card issuers will need to receive either pay stubs, W-2 forms or banking records as proof of ability to repay. Many credit card issuers’ approval systems do not currently require this type of information from applicants. Therefore, they will have to develop processes to receive and use this additional information. In addition to costly and time-consuming computer changes, this may require banks to use additional human resources in order to the verification, which will add to the cost of processing credit card applications. The added cost of processing will likely be passed on to consumers as higher interest rates and fees.

The second open issue is that the law does not specify the appropriate level of income or assets a college student must have in order to be approved. Like many other parts of the law, this appears to be left to the Fed’s interpretation and implementation. If they decide not to provide specific requirements, credit card companies will be allowed to determine what requirements make sense on their own. One implication of this is that college students may have a better chance of being approved by certain issuers than others.

My belief is that while this part of the new CARD Law is intended to protect young borrowers from getting into financial trouble, it will also benefit everyone by requiring credit card companies to follow sound lending practices when lending to young adults.

As with many other aspects of the Credit CARD Law of 2009 the interpretation and implementation has yet to be detailed. Stay tuned to CreditGumbo.com as we follow all of the developments.

Labels: Credit Card, Credit Card Law