Market Watch: Congress May Roll Back Protections for Consumers Who Use Prepaid Cards

By Maria Lamagna

A U.S. senator is leading efforts to repeal a rule that would protect consumers who use prepaid debit cards. This week, his opponents are making a last-ditch effort to make sure he doesn’t.

U.S. Senator David Perdue, a Georgia Republican, has led efforts to repeal a rule the Consumer Financial Protection Bureau finalized in 2016. It would require prepaid debit card companies to give customers more protections.

For example, it states that if consumers “promptly” let their financial institution know their card has been lost or stolen, and has unauthorized charges on it, the consumer’s responsibility for the charges would be capped at $50. It would also require companies to give consumers two forms of disclosure (a short form and a long form) that are easy to understand, that will let them know which fees the card comes with, such as a fee for reloading with cash, an ATM withdrawal fee, monthly fees or other customer service fees. Now, because disclosures can be hard to find, or even inside packaging, it’s harder for consumers to comparison shop before choosing a card, the CFPB said.

The rule also has stronger protections for consumers that use credit products associated with their prepaid account, which allow them to spend more money than they have loaded on the card at the time. It would require prepaid card companies to consider consumers’ ability to make required payments before letting them open a credit card account or increase a credit line. And for consumers under 21, companies would be required to assess their independent ability to repay, apart from their parents or guardians.

Allied Progress, a progressive advocacy organization, on Monday launched a “six-figure” television ad buy in Washington, D.C., Alaska, Maine and Nevada to encourage members of the public to lobby their representatives there to oppose Perdue’s efforts. The organization said if he does not succeed in repealing the rule by May 9, he will no longer be able to use the special legislative process he is using to try repeal it, which falls under the Congressional Review Act. As a result, he is pushing for a vote before then. “We couldn’t risk not having made a big deal out of this,” said Karl Frisch, the executive director of Allied Progress. “This isn’t about the CFPB or Allied Progress, it’s about the millions of Americans who would be screwed.”

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An estimated 23 million Americans use prepaid cards, often as an alternative to the traditional banking system, according to Pew Charitable Trusts, a nonprofit based in Philadelphia.

“Should Congress employ the (Congressional Review Act) to repeal the prepaid card rule, there would be nothing to safeguard consumers from products that fail to protect funds, include surprise fees, or use harmful credit practices,” wrote Thaddeus King, an officer at Pew Charitable Trusts’ consumer finance project. “This transparency is vital.”

In many cases, they have low incomes and specifically use the prepaid cards because they fear the banking system and the fees that sometimes come with it, or they don’t have enough money to meet minimum balances in traditional savings accounts.

But prepaid cards sometimes come with their own issues. The CFPB in February fined payment companies MasterCard MA, -0.58% and UniRush, whose co-founder is entrepreneur Russell Simmons, for “breakdowns” on reloadable prepaid “RushCards” that left customers unable to access their money. Simmons called the fiasco “one of the most challenging periods in my professional career.”

The CFPB’s rule was scheduled to go into effect on Oct. 1, 2017, but the CFPB has now delayed that effective date until April 1, 2018, after some companies in the prepaid-card industry said the original date would be too difficult to comply with, the CFPB said in a statement.

The proposed rule “closes loopholes and protects prepaid consumers when they swipe their card, shop online or scan their smartphone,” said the CFPB’s director, Richard Cordray.

Perdue, however, is trying to stop the rule from becoming law by using a special process under the Congressional Review Act, a law enacted under former House Speaker Newt Gingrich in 1996.

Perdue has received campaign donations from a company called Total System Services, the parent company of a Georgia firm, Netspend, which supplies prepaid cards, the Atlanta Journal Constitution said. A spokeswoman for Perdue told MarketWatch he has worked for more than two years “to try and hold the CFPB accountable and provide oversight.”

If the CFPB’s rule were implemented, Netspend could lose up to 12%, or $85 million, in revenue each year, American Banker reported. A spokesman for Netspend told MarketWatch the CFPB rule “will limit unbanked and underbanked consumers’ access to products and features they find valuable. Until changes are made that address these concerns, Netspend will continue to support full repeal.”

Perdue has faced plenty of opponents. “The fact that there are companies whose business model is dependent on overdraft revenue is a real problem,” said Rohit Chopra, a senior fellow at the Consumer Federation of America, an association of nonprofit consumer organizations.

Another major prepaid card supplier, Green Dot, which provides prepaid cards to organizations including Wal-Mart, said it “embraced” the new rule when the CFPB first proposed it. “We fully support the CFPB’s mission to ensure fairness, integrity and consumer protections for all participants in the financial system,” the company said in a statement at the time.

The Attorneys general of several states including California, New York, Hawaii, Maine, Maryland and Massachusetts also sent a letter to Congressional leaders in early April, urging them to oppose Perdue’s efforts.

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