By Patti Murphy
The Consumer Financial Protection Bureau ruled. Thus, the days of prepaid debit cards generally skirting federal consumer protection requirements will end in October 2017. That's when changes to federal truth-in-lending and electronic funds transfer (EFT) regulations addressing prepaid cards will take effect. Ironically, the new regulatory regime was revealed just days before a federal appeals court ruled that the CFPB's leadership is unconstitutional.
The CFPB was created by the 2010 Dodd-Frank Act as a consumer financial watchdog agency designed to have minimal political interference. It has regulatory jurisdiction over credit cards, mortgages and other financial products directed at consumers. In all, the CFPB's enforcement authority spans more than a dozen federal laws and regulations involving consumer protections. This includes regulations previously enforced by the Federal Reserve, such as Regulation Z (which addresses truth-in-lending practices) and Regulation E (which addresses EFT).
The bureau said its enforcement actions have provided over $12 billion in relief to 27 million consumers in the past five years. Illustrating the scope of the CFPB's regulatory reach, the agency has taken several payment processors to court in recent years for initiating and clearing payments tied to criminal activities, such as online and telephone scams (see "CFPB to processors: Don't turn blind eye to fraudsters," The Green Sheet, June 27, 2016, issue 16:06:02).
On Sept. 8, 2016, the bureau created headlines when it fined Wells Fargo and Co. $100 million for setting up bogus consumer accounts. Despite its successes, the bureau has been highly controversial, particularly among Republicans in Congress. Rep. Jeb Hensarling, R-Texas, Chairman of the House Financial Services Committee, likened the CFPB's director to a "dictator" at a recent panel hearing.
The CFPB's unconventional organizational structure has been under fire from the start. Historically, when Congress has created independent agencies it has entrusted leadership with boards of directors. (The Securities Exchange Commission, Federal Trade Commission and Federal Deposit Insurance Corp. are examples.)
Not so with the CFPB. It has a single director, who is appointed by the president and reports to the Secretary of the Treasury. The CFPB's operating expenses are not subject to congressional appropriations; instead, they come from the monies collected by the Federal Reserve as interest on U.S. government securities it holds, as well as for providing check clearing and other payment services to financial institutions.
PHH Corp., a mortgage company fined over $100 million by the CFPB for allegedly taking kickbacks on mortgage insurance, challenged the constitutionality of the agency along with its fine. Upon being rebuked by a federal district court, PHH took the matter to the U.S. Court of Appeals for the District of Columbia, which dealt the company a partial victory Oct. 11. The appeals court ruling does not address the constitutionality of the CFPB itself. Nor does it negate the PHH's $103 million fine; the appeals court sent that matter back to the lower court for reconsideration.
However, the appeals court did agree the CFPB leadership structure is unconstitutional. Its ruling means that going forward the CFPB's director must report directly to the president, who will now have veto power over CFPB rulings and authority to fire the director at will.
"Because the CFPB is an independent agency headed by a single director and not by a multi-member commission, the director of the CFPB possesses more unilateral authority – that is authority to take action on one's own, subject to no check – than any single commissioner or board member in any other independent agency of the U.S. government," the opinion stated. "Indeed … the director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. government, other than the president. … At the same time, the director of the CFPB possesses enormous power over American business, American consumers and the overall U.S. economy."
Reaction to the ruling was swift. Senator Deb Fischer, R-Neb., who authored legislation that would replace the single director with a bipartisan board, said the ruling reinforces the need for a legislative remedy. Rob Nichols, President and Chief Executive Officer of the American Bankers Association, agreed. "We've long believed that a five-member, bipartisan commission … would strike a reasonable balance between independence and accountability," Nichols said, adding that a board or commission "would provide necessary and appropriate checks and balances" on the CFPB's authority.
Senator Elizabeth Warren, D-Mass., largely credited with drafting provisions of the Dodd-Frank Act creating the CFPB, blasted the ruling. It "bizarrely relies on a mischaracterization of my original proposal," the senator said. She noted that she expects the ruling to be appealed and eventually overturned.
Reactions to final regulations for prepaid debit cards, issued by the CFPB in October 2016, have been similarly divided. The new rules – written as amendments to Reg E and Reg Z – have been in the works for three years. They establish a comprehensive regulatory regime for a swath of the prepaid market: general purpose reloadable cards (including payroll and electronic benefits cards) as well as newer prepaid products.
Online accounts that facilitate person-to-person payment schemes (like those offered by PayPal Inc. and its money transfer service Venmo) fall into the latter category; their inclusion is a departure from previously enacted prepaid regulations. Several government agencies issued regulations related to the use of prepaid cards issued under state and federal assistance programs, and labor laws. "They [PayPal and Venmo] may have gotten the worst end of the stick," said Aaron Mercurio, a Senior Consultant at First Annapolis Consulting.
Prepaid debit cards have been around for decades. But usage has grown significantly over the last decade; so have concerns about a lack of regulations addressing prepaid accounts. According to the Federal Reserve's most recent data, Americans loaded $594 billion onto open- and closed-loop prepaid cards in 2014, up from $358 billion in 2009. Mercator Advisory Group reports that 63 percent of U.S. adults purchased prepaid cards between June 2014 and June 2015.
Within the prepaid space, general purpose reloadable (GPR) cards are the fastest growing prepaid products, rising from 8 percent to 36 percent of total prepaid card loads over that last 10 years, according to the CFPB. Referring to Mercator's data, the CFPB estimated that GPR loads are growing at 5 percent a year, and will continue at that rate through 2019, when GPR loads are projected to exceed $117 billion. Some of that growth will come from payroll cards, as the number of Americans paid via payroll cards now exceeds the number receiving paychecks, the CFPB noted in its ruling.
"Prepaid cards have become a mainstream payment option, but until now the law hasn't kept up with their popularity," said Pamela Banks, Senior Policy Counsel for Consumers Union, which has been pressing for regulations specific to prepaid cards.
Fees and charges vary by prepaid program, however. Drawing from a 2012 study by the Federal Reserve Bank of Philadelphia, the CFPB estimated that the average cost of ownership for GPR cards (including payroll cards) ranges between $7 and $11 a month. Acquirers, their partners and merchants have been left relatively unscathed by the new CFPB rules. One reason: prepaid cards make up only about 4 percent of retail sales, Mercurio noted. That works out to between $200 billion and $300 billion a year by First Annapolis estimates. "The impact we see for the acquiring community is minimal, at least in the near term," Mercurio said.
Stacy Jensen, Global Prepaid Product Manager at CPI Card Group Inc., agreed. She added, however, that it wasn't all bad news for program managers and retailers either. The CFPB has delayed implementation of the new rules until October 2017, which should provide sufficient time to sell off existing prepaid card stock while designing new packaging and processes that conform to the new rules.
"I think it shows that they [the CFPB] did hear folks in retailing on that," Jensen said. It takes significant time and money to pull card stock from retail shelves, and redesign and redistribute prepaid cards, she added.
CFPB staffers said they are convinced prepaid card adoption will grow. Detailing the new rules in a 1,689-page document, they wrote that some consumers who "currently use GPR cards may increasingly find that they no longer want or need to have traditional financial products and services such as a checking account or credit card in addition to their GPR card as these products continue to evolve." The new rules address that evolution by putting prepaid cards on an equal regulatory footing with credit and debit card products.
"Our new rule closes loopholes and protects prepaid consumers when they swipe their cards, shop online or scan their smartphones," CFPB Director Richard Cordray said in a press call about the regulatory change.
Following are key new requirements the rules impose:
The new rules also impose restrictions on programs that allow consumers to overdraft prepaid accounts, and strong credit-related protections for consumers who want overdraft options.
"In situations where prepaid users are accessing credit within a transaction that is offered by the issuer, its affiliate or its business partner, they must receive protections similar to those afforded to credit card users under federal law," Cordray said.
The new rules impose underwriting requirements, requirements for detailed periodic statements, limitations on late fees and charges, and restrictions on total fees charged during the first year credit is extended. Also, prepaid companies will have to observe a 30-day waiting period before offering credit to newly registered prepaid cardholders.
"The rapidly growing ranks of prepaid users deserve a safe place to store their money and a practical way to carry out their financial transactions," Cordray said. "And although many prepaid companies already offer some of these same protections to their customers, it is vital for all consumers to have the settled assurance that these protections are now the law of the land."
Several members of Congress and industry groups have blasted the CFPB over the rulemaking. They complain the rules will hurt consumers who rely on prepaid cards, many of whom are underserved by financial institutions. They point to a 2014 report by The Pew Charitable Trusts revealing that 41 percent of GPR cardholders did not have checking accounts.
The "CFPB has dismissed many of our serious concerns and moved forward with a rule that will harm the very consumers it aims to protect," said Brad Fauss, President and CEO of the Network Branded Prepaid Card Association.
Rep. Scott Tipton, R-Colo., said, "The final regulation is yet another example of the harmful one-size-fits-all regulatory approach we have seen from this Administration, and it's the families who are underserved or underbanked who will suffer the most." Tipton stated he was particularly opposed to the CFPB's decision to include mobile wallets and P2P payments in the definition of prepaid accounts.
Steve Streit, founder and CEO of Green Dot Corp., a leading prepaid card company, praised the CFPB's rulemaking. He noted that many of the new requirements have been standard operating procedure at Green Dot. "It's gratifying to know that prepaid can now move to a level playing field that can better serve consumers while allowing the entire industry to move past the period of regulatory uncertainty," he said.
Next up on the CFPB's rulemaking agenda: payday and similar short-term loan products. The comment period on a far-reaching proposal for reining in these types of loans ended in October. "The Bureau has serious concerns that risky lender practices in the payday, auto title and payday installment markets are pushing borrowers into debt traps," the CFPB said, adding that its research indicates one in five payday loans ends up in default, and most of these loans carry triple-digit annual percentage rates.
The proposal, among other things, calls for borrower full-payment tests and written permission before a lender can automatically debit a customer's bank account to collect loan payments. Any loan products that carry an all-in annual percentage point of 36 percent or higher would be subject to the proposed new rules. The CFPB received an unprecedented number of comment letters on the proposal – over 1 million, just from consumers, according to Jeremy Rosenblum, an attorney with the firm Ballard Spahr LLP, who leads the firm's Consumer Financial Services Group, has reviewed the comments.
Ballard Spahr represents several companies that would be subject to the proposed rules. "Like other commentators, we have made the point that the CFPB has failed to conduct a serious cost-benefit analysis of covered loans and consequences of its proposal, as required by the Dodd-Frank Act. Rather, it has assumed that long-term or repeated use of payday loans is harmful to consumers," Rosenblum wrote in his firm's newsletter, CFPB Monitor.
By the numbers
The Federal Reserve Bank of Philadelphia conducted extensive research on consumer payment preferences. In 2014, the most recent year for which data is available, the average number of payments made per consumer per month was 66.2.
Here's how that breaks down:
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