Second Thoughts: CFPB And Prepaid Card Rules

When Richard Cordray and the Consumer Finance Protection Bureau (CFPB) finalized its prepaid card rules in October of 2016, it was a tale of consensus and controversy.

There was broad agreement on the part of consumer advocates and industry representatives that better and clearer regulations were needed.

There was a consensus that transparency needed to be baked into fee and account disclosures, and to respond to consumer questions and issues in a timely manner.

But when the CFPB rolled out a set of regulations that covered money cards across the spectrum: traditional prepaid cards, reloadable cards, mobile wallets, P2P payments systems, payroll cards; student financial aid disbursement cards; tax refund cards and certain federal, state and local government benefit cards — such as those used to distribute unemployment insurance and child support — consensus deteriorated into contention.

Under the new CFPB rules, prepaid cards with overdraft protection would be regulated just like any other extension of credit — and therefore extended only after a review of a customer’s ability to repay.

Industry representatives across the board pushed back on those requirements as excessive, since prepaid cards are marketed as and function as debit cards linked to an account with funds. When consumers use more funds than what they have in those accounts, banks often allow them to do it to avoid a returned payment, but charge an overdraft fee.

Issuers said that since overdrafts on prepaid products resemble the behavior of overdrafts when using debit cards, they should be regulated as such. They also noted that not doing so would add unnecessary expense without adding any real protections — because most of the “credit” extended by prepaid companies is less than $50 and is repaid within a few days.

Despite vigorous industry objections, the CFPB finalized its prepaid card rules last fall. There was some thought (wishful thinking perhaps?) that the new rules may never see the light of day since the new Congress would have been able to repeal the law before it went into effect under the Congressional Review Act. However, legislators only had until May to do so — and despite some efforts from Congressional Republicans, the votes simply weren’t there to pass a dual resolution in both Houses of Congress to actually make it happen.

So, the prepaid rules — as finalized — seemed destined to take effect in April of 2018.

Until a funny thing happened this month.

Soliciting New Input

Last week, the CFPB announced news of its intent to revise its prepaid card rules. The changes come in response to two specific concerns raised about them by industry stakeholders.

The first concern regards dispute resolution and sections of the new rules that ease restrictions on card issuers when a consumer whose identity has not been authenticated challenges a charge to a money card. The rules as passed last year require issuers to provisionally credit a cardholder’s account for the disputed amount if the case cannot be resolved within 10 days. The complaint within the industry is the rules are written in such a way to create perverse incentives for fraud.

The new version of the rule would remove the 10-day limitation, unless the cardholder can verify their identity in that period of time.

The second concern related to rules that apply to mobile wallet issuers that have a stored value feature (Square Cash and Venmo, for example). The 2016 proposal required a 30-day waiting period before a linked prepaid card could be tapped to replenish the mobile wallet. The new proposal allows wallet-holders to link their mobile wallets to a credit card without delay.

Industry Response

As the news broke, there was some cautious optimism for the revisions as posted by the prepaid industry.

“We are encouraged that the CFPB has listened to our members’ concerns by opening a new comment period and proposing amendments to its Final Rule in a variety of different areas, including the final rule’s requirements for unregistered cards,” noted the Network Branded Prepaid Card Association in an emailed statement.

Financial Innovation Now (FIN), a trade group comprising Google, PayPal, Intuit, Amazon and Apple, said that it “is encouraged by the Bureau’s willingness to consider revisions to the prepaid rule,” in an emailed statement.

There has been no move, however, to roll back the provision in the 2016 rule that would subject prepaid cards that routinely extend overdraft protection to the regulations that govern credit cards — despite the volume of complaint about it.

Many companies have pushed for the CFPB to delay the rule’s effective date beyond April 1, 2018, a deadline the CFPB reset from the originally proposed Oct. 1, 2017. The June 15 proposal asks for comments on whether that deadline could push that effective date back some more.

“Today’s request for comment shows we are listening closely to feedback on our rules,” CFPB Director Richard Cordray said in a statement.

The comment period will last 45 days after the proposal is published in the Federal Register.

Two down, one more to go.