Cordray appointment puts prepaid in scope

In a controversial move, President Obama appointed former Ohio Attorney General Richard Cordray to the position of director of the newly created Consumer Financial Protection Bureau. The Jan. 4, 2012, appointment raises the issue of what regulatory power the agency will have over the prepaid card industry.

A glimpse of what is to come is contained in a Jan. 5, 2011, CFPB blog post that announced the CFPB's Nonbank Supervision Program. The program will "assess whether nonbanks are conducting their businesses in compliance with federal consumer financial laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act."

The CFPB will review nonbanks' business practices, including consumer directed marketing materials, program details, and compliance systems and procedures. It will require nonbanks to file reports when requested and will generally notify a nonbank in advance of an upcoming examination, according to the blog.

The CFPB, created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is intended to provide federal oversight to the financial services industry. The law calls for a single director to head the agency. But Republican members of Congress, concerned about the extent of that director's powers when the office holder is a political appointee, have pushed for a restructuring of the CFPB so that it is led by a five-member board.

The CFPB has been operating without a director since it was formed on July 21, 2011. But the agency has identified six types of companies for potential supervision, one of which are prepaid card providers. In a statement, the CFPB said its interest in prepaid cards is about terms and conditions and that it would "need to consider carefully whether to cover all or only certain types of prepaid card products in an initial rule, and, for those included, how to define the relevant market or markets."

A group of consumer watchdog agencies said prepaid debit cards should be bound by debit card rules set forth in the federal Electronic Fund Transfer Act. The group, which includes the Consumers Union, said consumer protections should be extended to prepaid card users because more consumers are turning to prepaid cards as a viable financial alternative to traditional demand deposit bank accounts.

In December 2011, the Consumers Union came out in favor of Cordray's appointment. The consumer watchdog said opposition to the nomination prevented the CFPB from exercising its consumer protection powers.

The Cordray nomination may be challenged in federal court as an unconstitutional extension of the president's executive powers.

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