NRF Says Fed Policy Jeopardizes Instant Credit

Washington, D.C., Nov. 25, 2009--The National Retail Federation has asked the Federal Reserve to reconsider proposed new rules that threaten retailers’ ability to offer customers instant credit.

“The proposed rule would curtail or eliminate many routine credit granting practices that are safe, valued and desired by both retailers and our customers,” NRF Senior Vice President and General Counsel Mallory Duncan said in a news release.

“The effect of the proposed language would be much more disruptive than we believe was ever intended or envisioned by Congress.”

Duncan said instant credit is no different than the process of filling out paper credit applications a generation ago except that technology “has allowed the assessment process to move so quickly that it appears to the customer at checkout as if the decision were instant.”

Duncan’s remarks came in comments filed with the Federal Reserve on regulations the Fed has proposed in order to implement a provision in the recently enacted Credit Card Accountability, Responsibility and Disclosure Act that would change the way retailers are required to judge the creditworthiness of customers when issuing credit cards or upgrading a customer’s existing credit limit.

Retailers currently use computerized systems that rely on a customer’s credit score and other credit-related information to assess individuals’ payment history on existing and/or previous credit and provide a yes-or-no decision within a manner of seconds.

But the Credit CARD Act would bar credit from being granted unless the issuer “considers the ability of the customer” to pay under the terms of the account.

 The Fed has interpreted that as meaning retailers must review the credit applicant’s income or assets along with their current obligations. Income and asset information is not readily available in a central database, so the Fed proposal would turn “instant” credit into a process that could take days to gather the required information.

“Very few consumers carry current pay stubs or financial statements with them to the store (and) many would be disinclined to share those documents with store associates even if they did,” Duncan said.

“Worse still, many who are requested to provide unsubstantiated income information may not be inclined to report it accurately. Thus not only would the proposed rule’s requirements unnecessarily slow the credit authorization process at the point of sale, the likely-unreliable data … could generate a less creditworthy decision.”

Duncan said eliminating instant credit could also deprive consumers of substantial discounts and special interest rates retailers often offer to customers who open or upgrade a credit card account when making a purchase.

In addition to blocking consumers from instantly opening new accounts, the Fed regulations would keep consumers from obtaining instant increases in credit limits to make a purchase that goes above their existing limits, he said.

NRF believes that the proposed regulations go beyond what was required under the legislation, and asked the Fed to accept the use of credit scores as an acceptable means of considering a customer’s ability to pay.