WASHINGTON — The prepaid card industry is ramping up its advocacy efforts on Capitol Hill as the Consumer Financial Protection Bureau readies a final rule targeting such products.
The agency unveiled a proposal in 2014 that would regulate the industry in a number of ways, but one that has proved to be particularly sensitive is treating overdraft features on prepaid cards as "open-end credit," putting them under the same rules as credit cards.
"It becomes challenging to continue to offer that product" if that provision is kept as part of the final rule, said Chuck Harris, president of prepaid card manager NetSpend, a unit of Total System Services (TSYS). "At the end of the day we built the feature for a very important need of our customer…that really fits in a market or segment where there is a gap."
The CFPB's proposal would require prepaid cards with overdraft fees to comply with Regulation Z, the same rule that credit cards must follow. Under that rule, firms must first conduct an assessment to ensure borrowers have the "ability to repay" any overdraft, a move that makes compliance more expensive. Traditional overdraft fees fall under Regulation E, which carries less compliance costs.
The CFPB was initially expected to finalize the rule earlier this year, but its release date was pushed back. Businesses such as NetSpend are using the extra time to pressure lawmakers to weigh in on their behalf. They are hoping to persuade the CFPB to make an exception to the Regulation Z requirement.
"There is still time on the clock so we are going to play and play hard until the rule is final and try and find a workable compromise," Harris said.
NetSpend most recently flew six of its customers to Washington, D.C. to meet with lawmakers and provide first-hand accounts of their experience with the product.
"I broke my ankle a while back and I was on medical leave and you don't get 100% of your pay when you are on medical leave, but the bills are still 100%" said Angela Estrada, a NetSpend customer since 2008 from Austin, Texas who visited lawmakers while remembering a time when being able to overdraft on her card came in handy.
She said sometimes she just needs a little extra money to "get me over to the next day and sometimes it literally is the next day before you get paid."
Harris and groups like the American Bankers Association have argued that applying credit card compliance requirements to prepaid overdraft would make it difficult for companies to offer overdraft and could force more customers to turn to pricier alternatives — like payday loans, which the CFPB is also trying to restrict.
"There is a dollar amount where it is probably more of a Regulation E type product, and that is probably in the $100 to $200 range," Harris said. "If you are extending $500 or $1000, well that is credit, and that should be treated" like a credit card with Regulation Z requirements.
Some lawmakers have been receptive to those advocating for an overdraft exception.
Rep. Sanford Bishop, D-Ga., sent a letter to the CFPB in January asking that the agency create an exception to the Regulation E requirements for companies that have a "low-dollar overdraft program."
Bishop's proposal would also require customers to opt-in to overdraft rather than have it being automatically provided, cap negative balances at $150, offer a $10 overdraft buffer where no fee would be incurred and provide a 24-hour grace period.
Rep. Henry Cuellar, D-Texas, also sent a letter to the CFPB defending overdraft for prepaid cards saying, "There are few option for people who find themselves in situations where they need less than $100 to cover an emergency or make ends meet at the end of the month."
"If kept at a modest limit, this feature…can be a helpful tool for consumer to choose in managing their finances," he added.
But not all lawmakers agree. Rep. Carolyn Maloney, D-N.Y., has argued that overdrafts on prepaid cards "amount to high-cost loans that trap consumers."
"While the vast majority of prepaid cards do not allow such overdrafts, we must make sure this practice is not allowed for any prepaid card," she said in an emailed statement.
Consumer advocates, including The Pew Charitable Trusts also point to data that supports the CFPB's proposal. A 2014 Pew survey of low-income prepaid card users found that more than 86% of unbanked and 81% of banked prepaid card users would rather have a transaction denied than incur a $35 fee. When asked about a hypothetical $15 fee, that figure fell just slightly to 77% for banked consumers and to 71% for unbanked consumers.
"What we found when we did research into prepaid cards and their users is that many of these people are turning to prepaid cards because they had trouble with checking accounts and the trouble around checking accounts centered around overdraft," said Nick Bourke, director of the small-dollar loans project at Pew. "We find that people look to prepaid cards as a way to manage their money and avoid debt and if you have overdraft on a prepaid card that defeats that purpose."
Deborah Goldstein, executive vice president at the Center for Responsible Lending, agrees the CFPB should take out any guesswork.
"Prepaid cards were really designed to provide a cash tool for borrowers, so it is really not appropriate to have overdraft on prepaid accounts because it really confuses consumers on the usage of the card," she said.
She added that if the CFPB's prepaid rule does allow for overdraft, the agency should at least mandate an "ability to repay" requirement.
"For consumers, prepaid looks a lot like a credit card, acts a lot like a credit card and it shouldn't be confusing for consumers on how these things work," Goldstein said.
But Estrada said she prefers using NetSpend's prepaid card to a traditional checking account.
"I see it as a normal bank, the only thing is I don't go walk in anywhere because there is no brick-and-mortar" she said, noting that NetSpend has a number of features that she finds more convenient like speedy updates on account balances. "I would definitely still use the product if they didn't have overdraft just because of the services that they offer."
She added that it is often a misconception that people who use prepaid cards as an alternative to traditional bank accounts are unaware of the fees or unable to manage their money.
"It is people that are educated that do know how they are handling there money and are doing it in a way that is better designed to their everyday use," she said.