A showdown is brewing in Washington over how federal regulations should treat prepaid debit cards. The debate hasn't garnered much traction, however, because the federal agency at the center of it all - the Consumer Financial Protection Bureau - remains leaderless, a casualty of legislative gridlock.
Acquiring isn't in the cards at CFPB, for now
With the possible exception of prepaid card programs, the new Consumer Financial Protection Bureau doesn't have regulatory authority in the merchant acquiring space - at least for now.
"The whole goal [in establishing CFPB] is to look at consumer risks and to protect consumers, and ISOs don't really interact with consumers," said Ray Carter, Principal, at First Annapolis Consulting. "It may be that there's some impact on acquiring down the road, but I don't see it in the cross hairs at this point."
Independent consultant Paul Martaus agrees. Although there were legislative proposals early on that might have had ramifications for acquirers and ISOs, none survived to make it into the final Dodd-Frank Act of 2010. "There's nothing in it for the acquiring sector," Martaus said.
Some groups are unhappy about that outcome. And some consumer advocacy groups have asked the CFPB to include member services providers (MSPs) and ISOs under its supervisory purview.
"We believe the simplest way to regulate the prepaid field is to focus on the MSP/ISO and to put responsibility for the actions of the retailers back to the MSP/ISOs," the Community Reinvestment Association of North Carolina wrote in its comment letter to the CFPB. The group said this would be in line with the approach federal regulators take when a bank hooks up with an unscrupulous tax-refund-anticipation lender.
Meanwhile, the coalition of Merchants Against Unfair Interchange (MAUI) said in the summer of 2010 that it intends to push the CFPB to address debit card interchange in its rule-making.
At issue is the governing structure of the CFPB. Created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB is intended to be a federal super-cop with a jurisdictional reach that includes all dealings between financial services companies and consumers. The law calls for the bureau to be led by a single director. However, Senate Republicans have repeatedly rejected nominations for the position and have vowed to continue doing so until the CFPB is restructured so that it is led by a five-member board.
This is just the latest in a series of political moves that have softened the power-punch that was expected when the CFPB was proposed under the Dodd-Frank Act. "In the end, it was a nonevent," said industry consultant Paul Martaus.The CFPB is supposed to operate as an independent, autonomous entity within the Federal Reserve. The Dodd-Frank Act stipulates that the U.S. Treasury Department watch over the bureau until it has a full-time, permanent governing structure, but it stops short of allowing the Treasury Department to step in and start running the bureau.
The CFPB has been operating without a director since opening its door on July 21, 2011. And until it has a full-time director, its authority is limited to examining banks with assets over $10 billion and affiliates of those banks for compliance with federal consumer financial protection laws, such as the Electronic Fund Transfer (EFT) Act enacted in 1978 and the Equal Credit Opportunity Act enacted in 1974.
The agency is also supposed to field consumer complaints about financial services providers. The four federal financial institution regulators - the Federal Deposit Insurance Corp., the Federal Reserve Board, the National Credit Union Administration and the Office of the Comptroller of the Currency - retain oversight authority for institutions with less than $10 billion in assets. And the Federal Trade Commission will continue to bring enforcement actions against nonbanks for violations of consumer protection statutes.
Although the bureau lacks rule-making authority absent a full-time director, that hasn't stopped it from working on new rules. "Under the new law, our nonbank supervision program will be able to look at companies of all sizes in the mortgage, payday lending and private student lending markets," the bureau noted in a statement. "But for all other markets - like consumer installment loans, money transmitting and debt collection - the CFPB generally can supervise only larger participants."
The CFPB identified six types of companies for potential supervision. Those involved in:
In a statement, the CFPB said its interest in prepaid cards is about terms and conditions. It added 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."
Undeterred by the lack of a CFPB chief, a group of consumer advocates has asked for a legal "clarification" from the CFPB that prepaid debit cards are bound by debit card rules set forth in the federal EFT Act. The group - which includes Consumers Union, the Consumer Federation of America and the National Consumer Law Center - insisted the extension of coverage has become an imperative as more consumers use prepaid cards in lieu of checking accounts.
"General use, reloadable prepaid cardholders should have the same protections that debit cardholders enjoy," the group wrote in a letter to Raj Date, a Treasury Department adviser and temporary Director of the CFPB. Those desired protections include:
"Finally, while we believe that overdraft fees should be completely eliminated from prepaid cards and that credit should not be tied to a deposit account, at a minimum the protections of Regulation E should apply," the group stated in its letter to Date.
The letter came on the heels of a 49-page document the group submitted in response to a request for comment the CFPB issued in June, seeking input on its supervisory reach.
"Prepaid cards are very complicated products involving many different players in the supply chain including the payment network, the card issuer, the fulfillment and transaction processor, the program manager, the loading network, and the distributor or vendor, " the group wrote in that letter. "It is essential that the CFPB design a supervision system that enables it to protect consumers fully in such a complicated product."
The Center for Financial Services Innovation, which champions efforts to reach unbanked and other financially underserved Americans, has taken a similar position. "Most major prepaid card providers already offer basic consumer protections, such as deposit insurance, fraud and error resolution procedures, and account disclosures," the CFSI wrote in a July 2011 policy paper. "But consumers need assurances that any general purpose reloadable (GPR) prepaid card account in the marketplace has these protections."
Voters say yes to consumer watchdog
Partisan political wrangling may have stymied the Consumer Financial Protection Bureau, but a recent poll of voters suggested Americans are anything but divided about wanting a consumer watchdog agency like the CFPB.
The poll, taken in July as CFPB was set to open for business, found likely voters across the board - Democrats, Republicans and Independents - favor the Dodd-Frank Act (which created the CFPB) by a margin of five to one. Seventy-one percent of those polled by Lake Research Partners for a trio of consumer advocacy groups favored the law; just 14 percent said they were opposed.
An even larger share of voters (74 percent) told pollsters they supported a single federal entity with a mission of protecting consumers from deceptive practices. Asked about specific issues, 93 percent of voters said they favored an agency that would require clear explanations of rates and fees for consumer financial products; 73 percent wanted an agency that would regulate financial services providers that presently lack government oversight, such as prepaid card companies, payday lenders and mortgage brokers.
Consumer advocates, in their joint letter, also asked the CFPB to consider broadening its supervisory power to include companies like Wal-Mart Stores Inc. that "have other products that may interact with prepaid cards and could merit independent attention." And it asked the bureau to specifically address "those retailers that exercise control over the terms and conditions of the card." The Dodd-Frank Act specifically exempts retailers from the CFPB's jurisdiction. Automobile dealers also got a legislative pass.
The joint letter was one of more than 500 submitted by financial institutions, consumers and policy wonks in response to the CFPB's June request for comments. Letters from financial institutions and their advocates echoed the call for a broader definition of what firms are subject to the bureau's oversight. In its June proposal, the CFPB suggested using a market share approach to deciding what nonbank companies it regulates - a strategy some warn could allow large retailers to escape oversight.
The National Association of Federal Credit Unions specifically urged the bureau "to regulate Walmart, Home Depot and other large retailers with growing financial services portfolios." It concluded with this plea: "the CFPB should strive to ensure that all financial services providers are subject to the same strict oversight currently employed for financial institutions." Not surprisingly, retailers balk at the notion of CFPB oversight. "The retail industry's record in serving the needs and best interests of our customers, the consumers that the rule was designed to protect, is clear," the Retail Industry Leaders Association stated in its comment letter to the CFPB.
The American Bankers Association amplified the NAFCU's battle cry, insisting that online and mobile payment services providers be on the list of nonbanks subject to CFPB oversight. Citing data provided by Gartner Inc., the ABA said more than 140 million consumers now use mobile devices to pay for goods and services and that virtual currencies are being used outside the Internet, "and their use can be expected to expand even further."
In addition, the Consumer Bankers Association wrote, "In our view, an equitable, competitive environment is best achieved when all financial services competitors operate under the same set of rules. If the CFPB establishes categories [of companies subject to its jurisdiction], then there would be the risk of excluding certain financial services providers that should be included, to the detriment of both consumers and financial institutions."
Rob Garver, a Washington-based writer, counseled bankers to be careful what they wish for. A one-time bureau chief at American Banker, Garver recounted in a recent blog post how banks for years fought to keep Wal-Mart from owning a bank, and one result has been that Wal-Mart now is a bank in all but name for millions of low-income Americans.
Wal-Mart's pricing of financial services undercuts that of most of the banks and nonbank providers it competes against, Garver said. "Walmart still cannot accept deposits and doesn't make loans, but in terms of serving the day-to-day financial needs of lower-income consumers, that doesn't much matter," Garver wrote in The Fiscal Times blog at, www.thefiscaltimes.com.
In a related development, Sen. Robert Menendez, D-N.J., introduced legislation to specifically regulate prepaid debit cards. The bill, proposed in December 2011, would limit fees and extend the reach of Regulation E (the Federal Reserve's rules implementing the EFT Act) to explicitly include prepaid debit cards.
"Unsuspecting consumers are finding out the hard way that prepaid cards often give you much less than the dollar amount you load onto them, thanks to unnecessary fees," Sen. Menendez said in announcing his bill (S. 2030). "We need to ensure that families who rely on prepaid cards are not surprised by hidden charges."
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