A Ponderous Prepaid Rule From the CFPB

Students of federal regulation can be forgiven if they’re not yet up to speed on the Consumer Financial Protection Bureau’s new rule governing prepaid accounts. The document runs a total of 1,689 pages, almost double the length of the draft prepaid rule the CFPB issued two years ago.

Admittedly, the final rule is not 1,700 pages of dos and don’ts. Much of it summarizes the 6,400-plus comments the Bureau received during the rulemaking process and outlines the rationale used to craft the regulations therein. Most provisions don’t take effect until October 2017, but the rule immediately drew praise and fire from many quarters.

One of the most controversial aspects is the rule’s regulation of digital wallets that hold prepaid funds. That prompted some observers to worry about crimping the growth of promising new services such as person-to-person electronic payments, including those from online payments leader PayPal Holdings Inc., owner of the popular Venmo P2P service, and banks that use third-party P2P services such as Popmoney from processor Fiserv Inc., or others.

“Everybody involved in bank P2P … may have new regs,” says researcher Ben Jackson, director of the prepaid advisory service at Maynard, Mass.-based Mercator Advisory Group Inc. “It’s hard to tell. There are 1,600 pages here. The rule is so sprawling it’s hard to tell where it ends.”

Consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures, adds by email that “subjecting digital wallets holding value to the same rules as prepaid accounts accessed by pieces of plastic, while logically coherent, assuredly will suppress payments innovation and value for consumers.”

The Independent Community Bankers of America (ICBA) issued a statement saying it has “serious concerns” with the rule, which the trade group says will “restrict consumers’ access to competitive prepaid accounts.”

But payments-industry analyst Lawrence Berlin, a vice president at Chicago-based First Analysis Securities Corp., sees the rule, even with its digital-wallet provisions, as doing little damage to two publicly held prepaid card companies, Green Dot Corp. and Blackhawk Network Holdings Inc., or to the NetSpend prepaid division of processor Total System Services Inc. (TSYS). Blackhawk specializes in gift cards, which Berlin says lie largely outside the scope of the CFPB’s rule.

“We think the rules will have little effect on companies we cover that issue or work with prepaid cards and peer-to-peer money transfer,” Berlin said in a report. He added, however, that “it will take more time to fully assess the nearly 1,700-page report.”

For their part, Green Dot and NetSpend issued cautious statements saying the rule would bring a measure of certainty to their industry.

The CFPB said the rule will extend to prepaid accounts the protections checking-account holders already receive under the Electronic Fund Transfer Act (EFTA), including free and easy account access, error-resolution rights, and protections for lost cards and unauthorized transactions on them.

The final rule also will require prepaid card providers to produce two forms, one short and one long, with key disclosures about their products, and make their cardholder agreements publicly available. And for prepaid accounts that offer overdrafts, the rule adds credit card protections from the federal Truth in Lending Act and the Credit Card Accountability Responsibility and Disclosure (CARD) Act.

“Millions of Americans rely on prepaid cards every day to pay their bills and manage their finances,” Christina Tetreault, staff attorney for Consumers Union, the non-profit affiliated with Consumer Reports magazine, said in a statement. “But not all prepaid cards are created equal and consumers have lacked the legal safeguards they deserve to protect their money. Now consumers will be able to compare cards more easily to find the most affordable option and have the peace of mind that their money will be safe if their card is lost or stolen.”

While its many critics often cast the CFPB, a creation of 2010’s Dodd-Frank Act, as a regulatory agency run amok, the Bureau declined to regulate virtual currencies in the prepaid rule even though some bank and consumer groups urged it to do so.

CFPB opponents received some good news just days after the rule came out when the federal appellate court in Washington, D.C., ruled that the Bureau’s single-director structure was unconstitutional. But that ruling seems unlikely to have any immediate effect on the prepaid-account regulations.

—Jim Daly