WASHINGTON Consumer groups are pushing for the Consumer Financial Protection Bureau to go further in its proposal to establish new regulations governing prepaid cards.
The CFPB's sweeping plan would cover any product with a prepaid function and set new standards on disclosures, establish rules for how to fix errors and deal with fraud, and institute new restrictions on fees and credit when they are tied to a prepaid card.
But consumer groups said Nov. 13 that the CFPB was too soft in its proposal, arguing that it should have required more on upfront disclosures, banned overdraft charges, and completely severed prepaid cards from being tied to other types of credit.
"The proposed rule doesn't completely ban overdraft features on prepaid cards and that's one place where we will be urging the bureau to go a little bit further," said Lauren Saunders, associate director of the National Consumer Law Center, who was a panelist at the CFPB's field hearing on prepaid card rules in Wilmington, Del. "We think that companies should be free to offer separate credit products to prepaid card holders but then when the prepaid card is empty, the transaction should just be denied and then the consumer can chose whether to skip the purchase or to pay another way."
The CFPB's proposal includes a set of requirements for when a credit product is tied to a prepaid account. In such cases, the lender would have to comply with other existing regulations governing credit and cards such as verifying the consumer's ability to repay any debt incurred.
Prepaid companies would also have to give consumers at least 21 days to repay debt that is tied to a prepaid account before charging a late fee; and the total fees for a prepaid credit during the first year an account is open cannot exceed 25% of the credit limit, among other restrictions.
Another key component to this part of the proposal is that prepaid companies can no longer automatically move funds from a prepaid account to repay another debt unless the consumer has "affirmatively" allowed it. In such a case, the company cannot withdraw funds more than once per month.
But that was another area of concern for consumer advocates who fear that consumers would be pressured into opting-in to linking accounts, similar to concerns they've raised with overdraft protection where some consumers felt pressured into joining a program that resulted in more overdraft charges.
"In the final rule, the CFPB should clearly delineate what sort of marketing would be allowed with regard to consumers opting-in to linking their prepaid funds and credit repayment," said Susan Weinstock, director of consumer banking at the Pew Charitable Trusts, who also appeared as a panelist at the hearing. "The rules need to ensure that a provider cannot mislead or pressure consumer into opting in to link these two products."
Consumer advocates also called for the CFPB to implement some form of insurance coverage on prepaid card losses similar to the $250,000 limit on deposit accounts backed by the Federal Deposit Insurance Corp.
Prepaid "cards are great in similarity to checking accounts in their functionality, including around direct deposit of paychecks. Yet, there's no way for consumers to track whether their bank holding the prepaid funds is financially sound," Weinstock said. "The CFPB has the regulatory authority to require prepaid card providers to ensure that funds loaded on these cards are federally insured and we would like to see them do that."
The CFPB proposal would require issuers to disclose whether the funds are insured among a list other disclosure standards largely meant to push card issuers to reveal fees upfront and on the outside of packaging so consumers can see key the costs before purchasing a card. The agency is also proposing that prepaid account information be easily accessible and free to find for consumers. CFPB officials recognized that prepaid cards have evolved into something like a typical banking account, arguing that it therefore needs similar protections something consumer advocates have long urged.
"Prepaid products, however, are more than just cards. As the prepaid card market has grown, so has the use of mobile or electronic prepaid accounts. Products like PayPal or Google Wallet can be loaded with and store funds from the consumer or from third parties, and they also can be used for a wide range of transactions, without reliance on a card," said CFPB Director Richard Cordray, during the field hearing. "The new disclosures we are proposing for prepaid accounts would give consumers clear information about the costs and risks before they agree to open the account. And if they choose to connect a credit product to their prepaid account, they would receive the same protections that credit card consumers have. "
The hearing was different in that the industry which is typically quick to cite regulatory overburden when rules are proposed simply asked the CFPB to work with them on any technical issues arising from the proposal. The industry's cautiousness appeared to reflect the fact that it had not yet reviewed the roughly 870-page proposal, which was released hours before the hearing (Additionally, the link to the CFPB's plan was not even working on its website as of mid-day yesterday.)
Still, industry representatives said they recognized the need for more regulation because of the rapid changes to the market.
"I, as a person, and Green Dot as a company, fully support the CFPB's mission. A football game without rules and referees isn't a sport, it's a brawl," said Steve Streit, chairman and chief executive of Green Dot Corp., at the hearing. "Like sports, to be successful, the industry also needs rules and referees to ensure fairness, integrity and safety for all participants."
One area the industry is likely to seek changes, however, is how the plan lines up with other regulations. One audience member representing a federal credit union said it was a "terrific rule and overdue" but cautioned that the CFPB should make sure the proposal lines up with rules regarding electronic documents and the Bank Secrecy Act.
"What we find challenging from a BSA standpoint is when a member loads a card though our reload card product and Visa codes that as a purchase, not as a cash load, so from a tracking standpoint, that becomes tricky," said the audience participant who identified himself as a director of compliance for BSA. The proposal should be married with other recent updates on BSA regulation "so institutions that do chose to offer these products can do it in the most compliant manner as possible."
Weinstock said Pew Charitable Trusts was also "pleased" that the CFPB applied certain rules on checking accounts as to prepaid cards and restricted the use of overdraft fees.
"These are very important provisions," she said. "We plan to work to ensure that the final rule would require FDIC insurance on prepaid card funds and that disclosures include key fee terms and conditions on the outside of the packaging so that consumers can chose the card that works best for them."