Dodd-Frank’s Consumer Bureau Starts to Mull Regulations for Prepaid Cards

The federal government’s new Consumer Financial Protection Bureau fixed general-purpose reloadable prepaid cards in its regulatory sights Wednesday with a notice of proposed rulemaking and a public hearing in Durham, N.C., where its senior officials heard both praise for and condemnations of the cards.

The CFPB said it would examine prepaid card fees, disclosures, possible changes in existing regulation, and other information about the fast-growing payment channel. In opening the hearing, CFPB director Richard Cordray noted that consumers use prepaid cards for many different purposes.

“All of these consumers need and deserve products that are safe and whose costs and risks are clear up front,” he said. “Yet right now prepaid card cards have far fewer consumer protections than bank accounts or debit cards or credit cards, and that is especially troubling because the people who use prepaid cards are in many instances the most vulnerable among us. Every dollar they pay in hidden fees is a dollar they cannot spend on supporting their families or themselves.”

Created by 2010’s Dodd-Frank Act, the CFPB has broad regulatory power over a host of consumer financial products. The new bureau specifically said it intends to propose extending the protections in Regulation E, the rules implementing the Electronic Fund Transfer Act, to GPR prepaid cards. Reg E covers transactions involving ATMs, the automated clearing house, and conventional debit cards, but with prepaid cards its protections currently are confined to payroll cards. Dodd-Frank transferred rulemaking authority over Reg E from the Federal Reserve to the CFPB.

The CFPB assembled two panels for the hearing, one from the payment industry and another with leaders of consumer groups and other non-profits. Not surprisingly, the panels differed on the need for regulation and the question of whether the cards exploit consumers.

Martin Eakes, chief executive of the Center for Responsible Lending, took aim at prepaid cards that require the user to give up the right to sue providers and instead agree to mandatory arbitration to settle disputes. He also said no prepaid cards should have tie-ins to loan products or permit, as some have, customers to overdraw their balances but then be charged non-sufficient-funds fees or overdraft charges.

“Prohibiting overdraft and NSF fees is the single most important step for CFPB to take at this time,” Eakes said. “If a customer needs debt, let them get a regulated credit card, which is designed for that purpose.”

But prepaid card executives noted that their products already have extensive protections and fill a void left by banks in serving lower-income consumers. Daniel R. Henry, chief executive of NetSpend Holdings Inc., a big prepaid card program manager, noted that even bank employees choose prepaid cards because they can’t find other products to serve the purpose. Of NetSpend’s more than 1 million customers who have direct deposit to prepaid cards, about 5,000 are employees of Bank of America Corp., JPMorgan Chase & Co., and Citigroup Inc., Henry said.

Jeremy Kuiper, managing director of the Payment Solutions Group at prepaid card issuer The Bancorp Bank, said he foresees prepaid cards linked to remote deposit capture services and mobile phones, and he urged the CFPB not to stifle industry innovation. “Prepaid in its very DNA is innovation,” he said.

Ben Jackson, a senior analyst at Mercator Advisory Group Inc. who follows the prepaid card industry, says that while Reg E is part of the debate, various laws, including the Durbin Amendment in the Dodd-Frank Act that put restrictions on debit cards, already affect prepaid cards and that the CFPB faces a difficult task in promulgating effective regulations. “It’s a tangled web we weave when it comes to prepaid,” he says.

Jackson also says he hopes any regulations benefit actual card users and reflect more than merely the wishes of interest groups. “The people who have perhaps the most stake in this are the ones least likely to be heard, the unbanked and underbanked,” he says. “They\'re not exactly going to flood the regulators with comment letters.”

The CFPB is taking comments until July 22. Links to information about the CFPB’s plans and its rulemaking notice can be found here.