Banks are in for tougher negotiations with retailers over store credit card programs if a Federal Reserve proposal is finalized.

Analysts said the plan would severely limit the number of people who qualify for a store card, likely leading to the reduction or end of incentive payments and other perks standard in private-label program contracts today.

The Fed wants to clarify parts of the Credit Card Accountability, Responsibility and Disclosure Act by requiring issuers to use individual (not household) income when determining an applicant's ability to pay. Retailers such as Home Depot, David's Bridal and Dress Barn argue this would disqualify a huge target audience for their store cards — stay-at-home moms — who lack independent income. The proposed clarification would apply to other credit card accounts, too.

"What will be the response is economics 101 — banks and retailers will be looking to serve their own self-interests," said Robert Hammer, the chairman and chief executive of the credit card consulting firm R.K. Hammer. "One of the things that will happen is less attractive renegotiation terms for the retailers. Some will not even be renegotiated at all. They will be canceled."

Regulations have already caused retailers and banks to change existing contracts.

J.C. Penney Co. Inc. in October said it amended its agreement with General Electric Co.'s GE Money Bank "to offset the financial impacts" to the bank of the CARD Act. The contract change eliminated an annual signing bonus and an "application bounty payment" J.C. Penney received. J.C. Penney and General Electric did not respond to inquiries.

Citigroup and Zale Corp. announced a renewal to the jewelry retailer's private-label card agreement in September. The new contract lowered the amount of net credit card sales Zale had to maintain, but also gave Citi the right to cancel the program if Zale's net credit card sales fell 20% or more in a 12-month period.

The companies did not cite the CARD Act as the reason for the new terms, but Hammer and others said regulations were likely a factor.

The days of "multimillion-dollar signing bonuses" for retailers have "gone the way of the buggy whip," Hammer said Friday. "It's just not practical with the costs associated of being in this space."

Ivan Szeftel, the president of retail card services for Alliance Data Systems, which manages and processes private-label programs, said the Fed's clarification rule could stall the improvement that store-card programs have experienced in recent months. Szeftel said that programs have already seen a "fairly significant reduction" in credit lines.

The result could be a "suboptimal situation where certain people who should be getting a credit card are not getting it or" are qualifying for less.

In letters to the Fed, retailers and issuers have expressed concerns that the pending clarification to the CARD Act would further reduce the availability of credit for consumers and hurt store sales.

"At its center, the 'ability to pay' provision in the CARD Act was designed to prevent poor underwriting practices," Carl Howard, general counsel for Citi, wrote in a Dec. 20 letter. "It was not intended to require a higher standard than sound underwriting or to impose formulaic standards that could impact an issuer's flexibility to make sound credit determinations. We are concerned that doing so could potentially prevent many Americans who are sound credit risks from having meaningful access to credit."

Home Depot, which offers private-label cards through Citi, echoed that sentiment.

"By limiting income to an individual's independent income, both approval rates and line assignments will be negatively impacted beyond the levels that currently exist," Dwaine Kimmet, the vice president of financial services and treasurer of Home Depot, wrote in a Dec. 22 letter.
Dress Barn said in a letter that the clarification would have a "detrimental impact on nonworking spouses, who are predominantly women and who depend on credit to manage the family household" and hurt its "profitability during this time of economic recovery."

Private-label cards, which typically carry smaller credit lines than regular bank cards, on average account for 25% to 30% of a retailer's sales, Hammer said, though that can vary widely depending the success of the program.

The Federal Reserve released the proposed clarification in October, stating its intent was to resolve confusion regarding amendments to the Truth in Lending Act that took effect last year under the CARD Act. A provision that took effect in February 2010 requires that borrowers under 21 demonstrate independent means to pay or have a co-signer.

The Fed said in its proposed rules in October that it could be "inconsistent" to "permit a card issuer to open a credit card account for a consumer without income or assets based on the income or assets of a spouse or other household member" unless the consumer has an ownership interest in the assets.

The Fed acknowledged the clarification could prevent a consumer without income or assets from qualifying for a credit card but "the board has previously concluded that it would be inconsistent with the intent of the Credit Card Act for a card issuer to issue a credit card to a consumer who does not have any income or assets."

Laurie Roth, a director with Auriemma Consulting Group in New York who has managed private-label programs for Saks, said the clarification would be particularly arduous for niche retailers that cater specifically to women. "Let's say you're a private-label card that caters to maternity clothes, what are you going to do?" Roth said. "How do you change your marketing?"

The Fed's comment period closed on Jan. 3. It has not said when it will release its final rule.
Hammer said he estimates the current cost to book an account, which includes marketing, credit processing, mailing and other expenses, is about $75 to $80 for a private-label program. The cost could reach "well over $100" as a result of the provision.

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