Prepaid Card Rules: CFPB is Having Second Thoughts on the Payday Loans Alternative

When CFPB and Richard Cordray finalized its prepaid card rules to curb consumers from using payday loans in October 2016, it is a story about controversy and consensus. On the part of the consumer advocates and representatives of the industries, there was a broader agreement that clearer and much better regulations were required.

There was also the need of transparency in terms of account and fee disclosures, as well as, response to consumer questions in a timely manner.

However, when the bureau rolled out regulations that covered money cards including reloadable cards, traditional prepaid cards, P2P payments systems, mobile wallets, tax refund cards, student financial aid disbursement cards, payroll cards and certain state, federal and local government benefit cards like the ones used to distribute unemployment insurance and child support, the consensus dwindled into contention.

As per the new rules of the CFPB, prepaid cards that come with overdraft protection is going to be regulated like any other extension of credit, and hence, it will be extended only after the customer’s ability to pay has been reviewed.

The representatives of the industry across the board said that the requirements were far too extreme since prepaid cards are marketed as and also functions as debit cards that are linked to an account with funds. When consumers make use of more funds that what is there in their accounts, the bank usually allows it to avoid a returned payment, but charge an overdraft fee.

Issuers are of the opinion that overdrafts on prepaid products are a lot like overdrafts when using debit cards and they should be regulated the same way. They even pointed that by not doing so, there would be unnecessary expenses added without any protection.

CFPB finalized its prepaid cards amidst a lot of objections. There was some thought that may be the new rules will never see the light of day because the new Congress will be able to repeal the law before it went into effect under the Congressional Review Act. But, legislators only had till May to do so. Even though there were a lot of efforts from the Congressional Republicans, there were simply not enough votes to pass a dual resolution in both Houses of Congress to actually make that happen.

So, the prepaid rules seemed to be destined to take effects in April 2018. However, that was until a funny thing happened.

Requesting for new input

The bureau announced the news of its intent to revise its prepaid card rules. The changes come in response to 2 very specific concerns that was raised by the industry stakeholders.

The 1st concern was regarding dispute resolution and sections of the new rules that simplify restrictions on card issuers when a customer whose identity has not been authenticated challenges a charge to a money card. The laws that were passed last year needed the issuers to credit the account of a stakeholder for the disputed amount if the case was unresolved within ten days. The complaint regarding the rule is that it is written in such a way that it creates incentives for fraud.

The modified version of the rule will be removing the ten day limitation unless the cardholder is able to verify their identity within the timeframe.

The 2nd concern is regarding the rules that are applicable to mobile wallet users that have a stored value feature, such as Venmo and Square Cash. As per the 2016 proposal, a waiting time of thirty days was required to link prepaid card to the mobile wallet.

The new proposal enables wallet-holders to link their mobile wallets to their credit card without any delay.

Response of the industry

As soon as the news broke, there was some optimism for the revisions of the prepaid industry.

The Network Branded Prepaid Card Association said that they are encouraged that the bureau has heard the concerns of their members by opening a new comment period and proposing amendment to its Final Rule.

FIN (Financial Movement Now), a trade group consisting of PayPal, Google, Amazon, Intuit and Apple said that it is motivated with the bureau’s willingness to consider revisions to the prepaid rule.

However, there has been no move to roll back the provision in the rule of 2016 that will subject prepaid cards that extend overdraft protection routinely to the regulations that govern credit cards.

A lot of companies have pushed CFPB to delay the rule’s effective date beyond 1st April, 2018.

The payday loans providers ought to take note of the developments happening in the prepaid card industry. The date of the rule finally becoming effective is not revealed yet.

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