Consumer protections that have been on the drawing board for years are endangered by tide of deregulation in Washington
After years on the drawing board, federal protections for prepaid cards and other financial products are in danger of fizzling out.
Rules crafted by the U.S. Consumer Financial Protection Bureau have gone through lengthy studies and public comment periods. Now they face a new hurdle – a tide of deregulation in Washington.
“[F]inancial regulations promulgated in the last few months of the Obama administration are vulnerable to repeal,” Robert C. Pozen, a senior fellow at the policy think tank Brookings Institution, wrote in a . The most likely candidates are CFPB rules “adopted on prepaid debit cards and the rules in process on payday lending.”The CFPB was created by the 2010 Dodd-Frank Act, which President Donald Trump has vowed to repeal or “do a big number” on. The agency is embattled on several fronts following the election. Republicans in Congress have called to replace its director in midterm, restructure it with less power or even defund it completely. And Tuesday, two Texas Republican members of Congress, Sen. Ted Cruz and Rep. John Ratcliffe, filed twin bills to abolish the agency.
However, those plans likely face long political battles or legal wrangles that could extend into 2018, when director Richard Cordray’s term expires. At that point, the Obama-appointee could be replaced without controversy by President Trump, reshaping the agency’s character in line with the administration’s emphasis on deregulation.
“My expectation is the CFPB will not slow up what it’s doing unless and until there is a change in the director,” said Laurence Platt, a partner in financial services law at Mayer Brown in Washington D.C. “There is a sense they’re going to go out with guns blazing.”
But Republicans in Congress have launched an effort to undo a rule the agency published in 2016, which protects users of prepaid cards. If that effort is successful – which appears likely – it’s doubtful the agency can establish other rules now in its pipeline.
Speedy process for rule repeal
The prepaid rule repeal effort, S.J. Res. 19, uses the authority of the Congressional Review Act (CRA). That means it needs a simple majority to pass, not the super-majority needed to avoid a Senate filibuster. With majorities in both the House and Senate, Republicans have enough votes to pass the repeal measure without bipartisan support.
Indeed, Congress already used review act’s authority to rescind one Dodd-Frank rule, an anti-corruption measure that required energy and mining companies to disclose payments they made to governments.
Isaac Boltansky at Compass Point Research & Trading in Washington, D.C., puts the odds of prepaid repeal at 65 percent. “Our optimism is fueled by the simplicity of the CRA,” he wrote in a Feb. 2 research note, “but we are cautious given floor time restriction and fractures in the financial services industry over the rule’s impact.”
Under the CRA, Congress can reach back to erase rules finalized during the last 60 legislative business days – a span that currently reaches back to mid-2016. Once repealed, the same or similar rules cannot be put in place again without Congress’ permission.
“There will undoubtedly also be CRA Resolutions looking to repeal other forthcoming rules from the CFPB,” the Consumer Federation of America wrote in a Feb. 7 blog post about prepaid repeal.
What’s in the works
The major consumer protections in the works from the agency include:
- Prepaid cards. Under rules finalized in 2016 and due to take effect in October 2017, cards would have to disclose a standard menu of fees on their packaging. They would also have to follow certain consumer protections that apply to credit cards if they make loans via their overdraft services.
- Debt collection. Collection calls would be capped at six attempts per week, or three after making initial contact with the debtor. Collectors would have to tell you if a debt was too old to sue over in court and verify disputed debts with documentation.
- Mandatory arbitration. Companies would have to stop using contract language that prevents their customers from joining a class-action lawsuit against them. Lenders and other financial companies such as credit card issuers and credit bureaus would be affected, not phone companies or others outside the bureau’s jurisdiction. Individual disputes could still be subject to arbitration instead of court, but companies would have to open the process to scrutiny.
- Payday loans. Lenders would have to examine a borrower’s ability to repay the loan before granting credit, or offer an “off-ramp” allowing the loan to be repaid in installments.
Industry on the sidelines
Prepaid card issuers are not lined up behind the repeal push, however. Green Dot, an industry pioneer and the largest of prepaid players, supported the CFPB rule after it was published in October 2016. The rule would level the playing field and block deceptive practices by its competitors, Green Dot said. The company declined to comment on the repeal effort, but a spokesman indicated there was no change in the earlier position.
Netspend, which faces the loss of $80 million in annual revenue from overdraft fees on its prepaid cards, opposes the rule. So does the industry association, the Network Branded Prepaid Card Association. Both Netspend and NBPCA referred to their earlier statements against the rule, and refrained from commenting directly on the repeal effort.
Even if its rule-writing powers are effectively frozen by Congress, the consumer protection bureau can continue enforcement work, such as a recent crackdown on overdraft policies at TCF Bank and the $13 million penalty against RushCard for system failures that froze people’s deposits in late 2015. Such crackdowns have been compared to rules in their effects, as other companies in the industry avoid practices that drew the penalties.
In the longer term, the agency faces more fundamental changes that would undercut its existing consumer protection powers.
Rep. Jeb Hensarling, chairman of the House Financial Services Committee, is preparing to reintroduce a measure to dramatically cut the bureau’s powers, including its enforcement powers, and erase its complaint database. In an opinion piece in the Wall Street Journal Feb. 8, he called for abolition of the bureau, saying its “tyranny has harmed the very consumers it purports to help.”
But it is an open question how much the public will rally behind the idea. Democrats, led by pro-consumer firebrand Sen. Elizabeth Warren, are poised to challenge the effort as a push backed by banks and other financial businesses to roll back oversight of their practices. Some Republicans are reportedly seeking Democrats to agree to a compromise that would restructure the CFPB as a commission instead of a single-director agency, along the lines of the Federal Trade Commission.
“The diehards want nothing more than to get rid of [Cordray],” Platt said. “But [Trump’s] base was white, working-class people who have benefited from the CFPB.”