Before the next wave of trick-or-treaters flock through your neighborhood, the CFPB will release its proposed rules for the general purpose reloadable prepaid debit card.
My hope is that the rule will protect consumers. I trust that the CFPB will work hard to make sure this happens. But there
is a political calculus in play. Whatever the CFPB proposes, it needs to be able to survive a contentious comment period. The likely response from industry will be that the CFPB is "choking off" services that are needed by consumers, so advocates need to be ready to articulate a defense to support a strong proposed rule from the CFPB.
As many leaders in the industry are already on the record as being against overdraft, I think it is likely that the CFPB will be comfortable putting a firewall between GPR cards and overdraft. Overdraft doesn't have many friends.
The same is probably not true for credit. Credit has support from leaders in industry, in parts of the non-profit world, and inside the CFPB. True, each of those areas can also count detractors among their numbers. But making a case that some people do not deserve credit under any circumstances is a difficult line to walk. We want people to have full financial relationships. Credit, where properly underwritten and then offered with robust consumer protections, is an important part of how that goal is realized.
Background: Credit is Controversial
When the CFPB launched its rulemaking process on prepaid debit cards back in the spring of 2013, credit (both in the form of overdraft and as an open line) emerged as one of the most contentious issues on the table.
At the time, credit had effectively been eliminated in the prepaid sector. The Office of Thrift Supervision had ordered Metabank to withdraw its i-advance line of credit. That line evoked all kinds of concerns: it effectively bore an interest rate of at least 120 percent if not more, MetaBank was collecting on outstanding debts as soon as the borrower received his or her next direct deposit, and there was a good reason to believe that it was leading some borrowers into a pattern of roll-overs.
Proponents of overdraft also used the field hearing as a moment to press on overdraft. If you go back to the comments submitted during the initial stages of the rulemaking, you can see that scores of NetSpend cardholders sent statements to the Bureau. Some hinted of the fact that they had been apprised of the likelihood that the CFPB was going to "take away" their overdraft. I would not be surprised to learn that NetSpend (now "a TSYS company") asked some of its cardholders to contact the CFPB.
Shortly, the CFPB will release its proposals for both, along with answers on a variety of other questions that were a part of the request for comments.
My guess is that they will rule against overdraft, while making some accommodation to the provision of a credit instrument. Overdraft is a difficult product, even as currently regulated under a system of opt-in enrollment.
My hopes for the decision on credit
I think the decision on credit will reflect a desire to balance the desires of industry with the perspective of advocates. As with the case of their ability-to-repay standard, I expect that the CFPB will frame its specific rule-making with a set of underlying principles that underscore its decision.
Here are my suggestions for those principles:
- Product Silos: One of the problems with the i-advance was that it was set up as a convenience product. Once you had enrolled, the line was linked directly to your prepaid account. If credit is to be offered, then it should be delivered through an un-linked account. This is consistent with a no-overdraft rule. The line should be separate, as should the costs and the disclosures.
- No Automatic Collection: Another problem with the i-advance was that it was set up to automatically collect at the moment when a deposit hit the prepaid account. That should not be the case here. A virtue of prepaid is that it does not allow a consumer to go into the red. I like that about prepaid.
- Intentionality: It should take some work to establish credit. If the previous principle underscores how issuers can collect on debts, than this one establishes the guidelines for how a consumer should be able to open a credit account.
- Consistency: Applying the Truth-in-Lending-Act to any type of prepaid-related credit is the most important means for operationalizing credit. For a long time, people have been saying that "like products" need to be regulated in the same way as other "like products." If a credit card account is bound by TILA, then the same rules should apply here as well. Using TILA means that lenders will be subject to a disclosure standard, to rules on disputed charges, to the provision of statements, and to a host of other compliance standards. Once TILA is in place, intentionality is operationalized.
- Underwriting: The CFPB has repeatedly employed ability-to-repay as a standard for gauging when credited is being offered appropriately. It should be the same principle with prepaid. A lender should have to be able to demonstrate that the borrower has the means to pay back their debt. The prepaid card cannot become a lead generator for abusive debt-trap borrowing. Thus it follows that the "like product" concept would mean that the CFPB carries the ability-to-repay standard from the CARD Act over to the prepaid rule. For issuers, this infers that credit checks would a standard business practice whenever a cardholder wants to add credit to his or her prepaid card.
- Patient: The consumer should be able to repay the loans in installments. Balloons are fraught with problems, not the least of which is their tendency to trigger rollovers.
- Affordable: This is an element of TILA, but it bears another mention. A disingenous issuer might try to append a variety of fees on to a credit account while simultaneously holding the opinion that it had a very low rate of interest. Fees should be collapsed into the APR calculation.
- No mandatory arbitration: No mandatory arbitration. No mandatory arbitration.
Couple these principles with enforcement and voila - we are on the right track. As always, the details will matter. Exceptions to TILA and EFTA have been made for overdraft on checking accounts, but those exceptions should not be extended to prepaid.
I would encourage advocates to support TILA-based credit.
If it came down to one or the other, I would probably prefer to see a proposed prepaid rule that prevents any form of overdraft. Overdraft is by its very nature much easier for consumers to use. There is no ability-to-repay standard for overdraft. Overdraft is offered based upon ability-to-collect.
With credit, the ideal answer requires more nuance. It simply is not a tenable position to say that credit should be firewalled without exception. A better principle is that credit should be available when appropriate. If the CFPB does decide to issue a proposal with room for credit on the prepaid platform, then I hope its does so with the previous set of conditions.