I had a chance to attend yesterday's field hearing in Wilmington, Delaware, where the Consumer Financial Protection Bureau announced its proposed rule-making for general purpose reloadable prepaid cards.
From my perspective, there is a lot to like about the proposed rules.
Credit and Overdraft
I think the CFPB took a nuanced and entirely defensible approach to the issue of credit on prepaid cards. The CFPB's solution - which I suggested might be their conclusion in a Bank Talk entry last month - was to allow credit, but only in a form that complies with the Truth-in-Lending Act and the CARD Act. By saying "yes" to credit but by simultaneously requiring best-in-class consumer protections, the CFPB can deflect critiques that it is trying to deny needed credit services for under-banked Americans, while also satisfying consumer advocates.
As has been the case whenever they have interpreted rules on credit products, the CFPB is setting up a standard that requires lenders to vet borrowers for their ability-to-repay a loan. Part of that is preventing a lender from making an automatic collection on the next direct deposit in to the account.
The rules require a payment term of no less than 21 days (as is the case with the CARD Act). Similarly, it says that consumers must be given an advance warning 45 days prior to an interest rate increase.
I am still looking for more detail on some possible card structures that could evade this principle. For example, what happens if a card makes an automatic transfer from a credit account over to a spend account?
Either way, the CFPB was clear that credit should be contained in a separate account.
In implementing an agreement with a consumer, such a system would mean that the issuer has to send TILA disclosures. Ultimately, this will not be "credit of convenience," but instead a form of intentionally sought and intentionally underwritten lending.
Steve Streit, one of three industry panelists who spoke at the hearing, told the audience that he felt that these rules would help his business. To paraphrase his comment:
"A positive view of prepaid cards helps our business, and the CFPB rule does that. The time is coming when people will no longer see a difference between a prepaid card account and a demand deposit account. They will only see that they are both bank accounts, with FDIC insurance."
Green Dot released a statement in support of the rule.
But while a firewalled credit account will probably accommodate the concerns of advocates, the decision to allow overdraft could become a major point of dissension. I think it is easy to assume that an opt-in system means that overdraft is "fixed," but the truth is that it remains a problematic form of credit. Many may not realize that a person can still be charged for an overdraft even if he or she has never opted-in. That is because some transactions are not housed within the universe of opt-in. Many banks can still place an overdraft fee when a consumer makes an overage at the point-of-sale. True, banks will not honor a check unless the account holder approves, but there is no such system in place to protect people at the register. Plenty of individuals would choose to use a different payment instrument, or instead to put back a few of the items in their cart.
Their disclosure seems to address some of the challenges to this question. A standardized method for disseminating the costs of a prepaid card is difficult. Consumers differ in how they use the card, the cards themselves differ in their functionalities, often prices are conditioned on usage, space on a j-hook is very finite, and some program managers have different account types.
The CFPB addressed these in several ways. First, there is space for un-specified incidence fees. This is where a unique fee might be mentioned. It is where a discount based upon spending and loading behavior might be communicated. In turn, the form also makes reference to the presence of other un-named fees.
The space issue was answered by creating short forms and long forms. Consumers are advised of the presence of a long form. That form will be included inside the packaging. It is also possible to find the long form by going online.
For program managers that design cards to give consumers a choice about fee style, the CFPB created a form with categorical columns. Mainly, this addresses the a-la-carte approach to pricing with pay-as-you-go cards. Again, it is a workable solution.
I think there are still a few gaps. For one, if these cards are going to have overdraft, then it is possible that an incidence fee will not be descriptive enough. Credit is likely to come with both fees and interest. As well, I'll be interested to see how they help consumers to navigate from a short form to a long form before they open the package. The disclosure does not have a QR code, so that means that to do research in a store would require a consumer to type in a web address into their smart phone. One more thing - I think they need to give consumers a tip if they can use remote deposit for a paper check or if their card comes with an opportunity to reload with cash at a register.
All in all, this is a great proposal. I hope these ideas find support. The CPFB opened a 90-day comment period.