The Consumer Financial Protection Bureau (CFPB) is targeting the growing prepaid debit card industry with an 870 page regulation that is likely to have a hugely anti-competitive impact. One major player in the industry and at least several members of Congress don’t like it.
“With that onerous regulation you put restrictions on the ability to innovate,” Chuck Harris, President of NetSpend, a leading provider of pre-paid debit cards, tells Breitbart News in an exclusive interview.
The CFPB was as established as a virtually unaccountable and independent agency within the Federal Reserve Board when Congress passed the Dodd-Frank Act in 2010. President Obama originally nominated current Senator Elizabeth Warren (D-MA) to serve as the agency’s initial director. But in January 2012, when it became clear she would not be confirmed by the Senate, Obama placed current director Richard Cordray in the job using a controversial recess appointment. Though Cordray was ultimately confirmed by the Senate a year and a half later (in July 2013), he is considered by many to be as liberal, if not more, than Senator Warren.
About 68 million Americans either don’t have or don’t want a bank account, according to the FDIC, and the pre-paid debit card industry serves that large segment of the population.
It’s a relatively new industry that most people are familiar with through the Green Dot and NetSpend pre-paid cards available for purchase at grocery stores and drug stores around the country. Walmart also offers a pre-paid card, a private label product offered from Green Dot.
All told, an estimated 6 million Americans currently used pre-paid credit cards.
NetSpend, the “Ford” of the industry to Green Dot’s “General Motors,” offers an innovative overdraft protection product that puts banks to shame, but now the CFPB regulations are about to impose regulations on the product so cumbersome that NetSpend’s cost will increase so much it says it will have great difficulty offering the product any more.
While banks charge customers who write a check that puts their account into the negative an overdraft fee that may range from $25 to $35, NetSpend’s customers who use its overdraft protected cards can charge on a pre-paid account beyond what they’ve deposited to the account–typically up to about $100–and have no fee charged to them for 24 hours. So long as the customer deposits the funds to cover the overdraft within a day, customers are not charged at all for the overdraft.
Customers who miss the 24 hour window are charged a $15 overdraft fee, markedly less than the fee banks charge.
NetSpend’s customers love the feature.
But the CFPB doesn’t like it, and has decided that the company is extending credit to its customers, and must now be regulated under the more cumbersome standards of the credit card industry, rather than what’s known as Reg E–the regulatory standard that governs how banks handle overdraft fees.
During the public comment period of the regulatory process, more than 6,000 people commented on the proposed rule, almost all of them NetSpend customers who opposed it.
But their input apparently did not count for much with the CFPB.
Now, Congress is getting into the act, telling CFPB its new regulations are way off the mark.
On April 17, twenty-one members of Congress wrote a letter to CFPB Director Cordray “to express our concern about the Consumer Financial Protection Bureau’s Notice of Proposed Rulemaking for prepaid cards and similar products.” Among the signators were Mia Love (R-UT), Marlin Stutzman (R-IN), and Blaine Luetkemeyer (R-MO).
“The proposed prepaid card rule,” the representatives wrote, “could needlessly increase the cost of prepaid cards for consumers and limit their access to new and innovative features and services.”
“In particular,” they continued, “we are concerned that the proposed rules for opt-in overdraft protection and other similar services may eliminate companies’ ability to offer these features that consumers have said they want and at times need access to in order to meet their spending needs.”
But the members of Congress are not particularly demanding in their letter to CFPB.
“As you finalize your prepaid rule, we would appreciate your attention to these important issues,” the letter closes politely.
A polite request of CFPB from less than two dozen members of Congress may have little impact on the final rule, which is expected to be announced shortly by CFPB.
That final rule could be very hard on the industry.
“We generally have been regulated by the Office of the Comptroller of the Currency or the FDIC through the banks,” NetSpend’s Harris tells Breitbart News. “Now we have direct regulation through the CFPB.”
Harris calls the proposed 870 page rule in the final stages of promulgation by the CFPB “overreaching, with the real impact of negatively impacting consumers.”
“Overdraft has historically been governed by Reg E, a Federal codification of bank rules that describes how financial institutions covers overdraft for consumer bank accounts,” Harris says.
Some consumers with credit problems or problematic banking histories can’t get bank accounts.
“Banks will deny you a checking account,” Harris says. “We seek to service that part of the market. We issue a prepaid card that functions like your Bank of America debit card with no checks.”
Both NetSpend and Green Dot offer prepaid Visa cards and prepaid MasterCards.
Harris tells Breitbart News NetSpend has 3.2 million users. Green Dot, which also partners with Walmart, probably has more.
“CFPB, in their attempt to regulate the industry has determined that … our overdraft product will now be treated under Reg Z, which means it will now be treated as a credit product.”
That product, Harris notes, is opt-in for customers.
“The first $10 over are free. That’s better than a bank. Let’s say you get over by $80. You get 24 hours to pay us back, for free. If at end of that time you’re still overdrawn, we charge you $15.”
This overdraft product, Harris says, is only available for customers who sign up for the direct deposit of their paychecks.
“CFPB is suggesting an $80 overdraft by one of our customers should be treated like a subprime credit card. That means we need to give you a truth in lending document.” Providing that documentation, Harris says, may well be prohibitively expensive.
Harris notes that CFPB sent out the draft rule for comment on December 23. The comment period prior to the issuance of the final rule closed on March 23.
“We’re going to have a very difficult time continuing to provide this overdraft product to our customers due to the extra cost this new regulatory approach by CFPB will impose upon us,” Harris tells Breitbart News.
Harris is hopeful that Congress will act in an even more forceful manner.
“I think some [in Congress get it] definitely. We’ve had letters written. There was a hearing in House Financial Services recently where a Congressman questioned Cordray about this proposed rule,” Harris says.
“We’ve had an awful lot of customers comment on the proposed rule. We want that input to add choice and option in products in the final rule,” Harris adds.
“6,000 people commented on the proposed CFPB rule,” Harris notes. “5,900 and change were our customers who were supportive of our product to preserve choice. Some of the comments are very telling. One commenter, for instance, wrote ‘I use this to feed our children.’”
Harris is not shy about how NetSpend engaged its customers to lobby CFPB during the rule making process.
“We went out and told our customers: ‘Tell Washington what you think,’ primarily through email communications with them, and our customers responded,” Harris says.
“We’re optimistic the CFPB will consider changing the regulatory framework. We’re hoping for best but planning for the worst,” Harris concludes, a common refrain heard from American business leaders on dealing with Washington bureaucrat these days.
NetSpend, a ten year old company based in Austin, Texas, was acquired by TSYS two years ago.