By Patti Murphy
ProScribes Inc.
The Consumer Financial Protection Bureau is finalizing a rule that eliminates the regulatory free ride that many prepaid debit card companies enjoy. Meanwhile, the number of complaints about prepaid cards the CFPB fields from consumers is growing at triple digit rates, according to the agency's Monthly Complaint Report for January 2016.
During the last three months of 2015, the CFPB received 459 consumer complaints about prepaid cards, compared with 138 complaints during the same period in 2014. That's a 233 percent increase, year-over-year, the report stated. However, the report shows that far more consumers filed complaints about bank accounts (2,079 during the fourth quarter of 2015, compared with 1,492 during the same period in 2014); credit reporting (3,896 compared with 3,607); and debt collection (6,524 compared with 6,308).
The report also lists 10 companies with the most consumer complaints. Five are banks: Bank of America Corp., Capital One Financial Corp., Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co.
The CFPB, created under the 2010 Dodd-Frank financial reform legislation, has enforcement authority for consumer protection laws previously enforced by bank regulators and the Federal Trade Commission. Proponents of the arrangement argued that regulators were too close to banks and credit unions, and too focused on the safety and soundness of the financial system (and banks' profitability), to sufficiently champion consumer protections.
In a recent report to Congress, the CFPB said its supervisory actions during 2015 resulted in financial services providers paying $209 million to over 877,000 consumers.
The CFPB has been highly controversial from the start, with lawmakers gunning for it to be disbanded, or for restrictions on its regulatory authority over banks and nonbank providers of financial services. Republicans and Democrats, alike, for example, back a pending bill that would restrict CFPB efforts to rein in payday lenders and similar short-term lending enterprises.
The CFPB laid out a suggested regulatory framework for these lenders in 2015 and has promised a proposed set of regulations this year. Of the more than 21,600 consumer complaints the CFPB received during the fourth quarter of 2015, just 438 concerned payday lenders.
While detractors may be successful in diminishing the CFPB's regulatory muscle, a total disbandment of the organization is unlikely. Congress and the Executive Branch can be quick to create agencies to carry out new mandates, but they're not so fast at sunsetting them. I discovered this when, in the early 1980s, I worked at the Bureau of Alcohol, Tobacco and Firearms. Ronald Reagan, both as a candidate and as President, championed gun rights and promised to disband the ATF, then an agency of the Treasury Department. We kept waiting for pink slips; none came. The ATF exists today as part of the Department of Homeland Security.
The prepaid card rules the CFPB is preparing to issue would extend federal electronic funds transfer and truth-in-lending rules (Regulations E and Z) to general purpose, reloadable prepaid debit cards. Key consumer disclosure and protections from those regulations would be applied to both physical (plastic) prepaid cards and mobile apps; gift cards would be exempt.
According to a report released by the CFPB on March 1, 2016, the agency has received a total of 4,300 consumer complaints about prepaid card products since it set up its consumer complaint process. The complaints fall into four key categories:
"Consumers also complained that they did not know that prepaid cards expire and that they have experienced differences in error resolution procedures among issuers," the CFPB wrote last month in a report to Congress.
The proposed prepaid rules were released for comment in December 2014, along with a 29-page report to Congress titled Study of prepaid account agreements. That study examined 325 different account agreements for prepaid programs that would be subject to the proposed rules. Specifically addressed are error resolution, limited liability protections, access to account information, pass-through deposit insurance, fee disclosures, and overdraft and negative balance fees. Little in the report suggests serious problems in most of these areas. For example, 85.5 percent of all prepaid card agreements reviewed contained fee information; just 14.5 percent had limited or no fee information.
The most contentious parts of the proposal target overdraft features of prepaid debit card programs. Proponents argue that overdraft offerings are necessary, especially for consumers without bank accounts and those who can't access bank credit. The CFPB counters that these types of overdrafts can be debt traps. Yet, according to CFPB's study, an overwhelming majority of prepaid debit card agreements reviewed (96.2 percent) did not include any overdraft features, and 77.5 percent imposed no fees for negative balances.
"The Bureau notes that many of the provisions in its proposed rule are similar to existing requirements for certain types of prepaid products," the report stated. But it goes on to warn that "this Study is, in many ways, subjective," so it may not be a true measure of the marketplace.
The CFPB has been vocal about checking account overdraft fees, also, arguing the fees are one reason why so many Americans are unbanked. "Over the years, overdraft programs have become a significant source of industry revenues, and a significant reason why many consumers incur negative balances," CFPB Director Richard Cordray said during a Feb. 3 field hearing on checking account access. "Too many problems with overdrafts can cause people to give up on the banking system or force them out of it altogether."
Cordray added that he had sent letters to chief executives of 25 of the largest U.S. retail banks urging them to create and market low-risk deposit accounts that help consumers avoid overdraft fees. The agency also issued a bulletin warning banks to do a better job of screening customers at account opening.
CFPB officials assert that many banks fail to meet accuracy obligations when contributing information to reporting agencies. "Consumers should not be sidelined out of the basic banking services they need because of the flaws and limitations in a murky system," Cordray said.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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