Prepaid card regulations survive GOP repeal effort in Congress
Rules on surprise fees, other issues, to go in effect 2018
By Fred O. Williams | Published: May 11, 2017
Expert on consumer credit laws and regulations
Users of prepaid cards will be protected from surprise fees, fraudulent charges and other headaches next year, now that an Obama-era regulation has unexpectedly survived a repeal effort from Republicans in Congress.
“A lot of people rely on prepaid cards as their de facto bank accounts, and they made their voices heard,” said Carter Dougherty, communications director at Americans for Financial Reform, a coalition that mounted an anti-repeal campaign.
Reloadable prepaid cards are used by about 10 percent of U.S. households, according to data from the Federal Deposit Insurance Corp., and their adoption is growing fast. But the relatively new form of plastic lacks the legal framework that protects users of credit cards and other established financial products.
The Senate did not schedule a vote on the repeal because the bill lacked sufficient support, despite the GOP’s two-seat majority, consumer lobbyists said. Industry sources said the bill may just not have been a priority for the Senate as prepaid card companies are divided, with some supporting the rule.
Either way, Thursday marked the final day that Congress could use its Congressional Review Act authority to repeal the rule, which was published in November. The authority can only reach back 60 legislative days, meaning days when Congress was in session.
The surprise victory gave consumer advocates hope that Republican plans to block coming regulations on payday loans and forced arbitration clauses may fall short as well, despite the Republican Party’s dominance in Washington.
“A lot more people have been harmed by payday lending and forced arbitration, and you can bet those people are ready to make their case as well, if and when the moment comes,” Dougherty said.
However, Georgia Sen. David Perdue, author of the repeal bill, reportedly warned in a statement that he will use the authority again to fight “future overreaching rules” being developed by the Consumer Financial Protection Bureau – the federal agency charged with being a watchdog for consumer financial products, which was created during the Obama administration.
Prepaid cards and the
Reloadable prepaid cards from companies such as GreenDot, American Express and Netspend are easy to find in dollar stores, big box retailers and payday loan shops. They’ve become popular as a financial convenience for setting funds aside, or funneling money to kids at school – or as a financial mainstay in place of a traditional checking account. Once loaded with users’ funds, they can be used as a debit card for purchases at the checkout counter or online, or for cash at ATMs.
A centerpiece of the new prepaid card rules is a standardized price disclosure that will let card buyers compare fees for loading money, using an ATM, and a host of other charges. A CreditCards.com analysis in May 2016 found that of 10 major cards, only three met federal guidelines for fee disclosures. Two cards, commonly sold in payday loan stores, sometimes came without any written information on their fees.
The rule published in November 2016 was originally set to take effect this October. But the CFPB delayed it until April 1, 2018, to give companies more time to comply. The agency also said it is revising the rule in two areas: the linking of credit cards to digital wallets, and liability limits for unregistered prepaid accounts.
"The rule had a lot of problems in the industry’s view," said David Beam, a partner at Mayer Brown in Washington, “but there’s a lot of optimism that the CFPB is listening and willing to explore changes that address some of the most acute problems."
The delay and revision did not seem to soften opposition in Congress, however. Perdue renewed his opposition in a March statement, calling the CFPB a “rogue agency” willing to choke off innovation with overly burdensome rules. “Ultimately, the CFPB should scrap this rule altogether, and I will continue working to protect consumers,” he said.
Opponents of the rule said it will hinder the development of new, electronic financial services such as digital wallets, which fall within its scope. Opposition also centered on restrictions on overdraft loans on prepaid accounts. For overdrafts over $10, the rule requires these high-cost loans come with credit card-like statements and fee limits. Netspend, the only major prepaid company that allows overdrafts, said the rule would make the business prohibitively expensive, cutting off a source of credit to unbanked consumers.
First battle of many
The push to repeal prepaid rules was initially seen as a likely win for Republican opponents of the prepaid rule because it needed zero Democratic support. Under the Congressional Review Act, rules published within the legislative time limit can be repealed by a simple majority in both houses, plus White House approval.
The repeal’s failure Thursday “shows that there are at least a handful [of Republicans] who are unwilling to go along with efforts to kill common-sense regulations,” said Lauren Saunders, associate director of the National Consumer Law Center.
The consumer protection bureau has other regulations in its pipeline that may face stiffer opposition. The agency is working on restrictions on debt collectors, including a provision that would require them to tell you when a debt is too old to be the basis for a lawsuit. Its proposed rule on payday lenders would require them to make sure of the borrower’s ability to repay. Also in the works is a rule limiting the use of mandatory arbitration, which blocks consumers from taking a company to court when they have a dispute.
“We worked hard,” Saunders said. “We’ll work even harder as the threats get tougher.”
The coming protections face stronger industry opposition, which was divided over the prepaid rule, consumer advocates and industry experts said. The arbitration rule faces such tough political opposition that the agency may not bother to publish it, one said.
See related: 9 things you need to know about prepaid cards
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