ST. PETERSBURG, Fla.—The Consumer Financial Protection Bureau’s proposed rules for prepaid will likely put a stop to tying the cards to overdrafts, and are only the bureau’s first volley against overdrafts, according to several analysts.
There is concern, too, that the CFPB will eventually extend similar rulemaking to checking, cutting back overdraft offerings with that product, as well, and that there will be a raft of new compliance issues.
Despite all that, several analysts see parts of the CFPB’s sweeping new set of rules for prepaid bringing needed change in what one person called “a wild, wild west” of a market—one that will see an estimated $100 billion in card dollars loaded in 2014.
Currently 16% of banks offer prepaid cards, while 26.8% of credit unions offer the product, according to Moebs $ervices.
Experts acknowledged that not many FIs, particularly credit unions, now attach overdraft to prepaid. But they see the CFPB moving early to prevent the practice’s spread. Chris Joy, director of credit card consulting at PSCU’s Advisors Plus, believes the CFPB has learned of more FIs intending to tie overdraft to prepaid.
“So this is a proactive step, fixing something that is not yet broken,” he said.
CFPB Classifies Overdraft As Credit
The proposal classifying overdraft as credit is a huge impediment to providing OD with a prepaid card, said Joy. “Now you open the prepaid card up to all of the Reg Z requirements that this product previously did not face. These rules are a disincentive to connect overdraft with prepaid.”
Michael Moebs, economist and CEO at Moebs $ervices, Lake Forest, Ill., termed the CFPB’s move “sneaky.”
“If the CFPB wanted to regulate overdrafts, they should do that in separate rulemaking,” said Moebs. “Using prepaid as an end-around is unprof
Odysseas Papadimitriou
essional.”
While there are many parts to the 900-plus-page proposal, the overdraft component will have the biggest impact on banks and credit unions, analysts conceded.
“Some of the components are non-events,” said Odysseas Papadimitriou, CEO of WalletHub and CardHub, Washington. “I admit I was surprised the CFPB classified overdraft as credit. And I think they want to move some of these same rules to checking. This is an attempt to discourage financial institutions from offering overdrafts. There are banks now that make most of their money from overdraft fees, and the CFPB does not like that.”
Papadimitriou pointed out that FIs face many operational and disclosure changes when overdraft is treated as credit. “For example, you have to start delivering monthly statements, considering the person’s ability to pay before extending overdrafts . . .”
If the CFPB extends the rules to checking, Papadimitriou wonders what the small credit union that does not offer credit cards, but offers checking and overdraft, will do. “They will have to follow a bunch of new (credit) rules they previously did not have to bother with.”
Former NCUA chairman Dennis Dollar, principal at Dollar Associates in Birmingham, Ala., said the CFPB’s position on prepaid cards is likely a very good indicator of where they are headed on checking accounts. “And it should give both banks and credit unions great pause.” (See story at right)
Jeff Falk, prepaid product manager at The Members Group, Des Moines, Iowa, pointed out the rules might also dictate that FIs have to re-disclose to existing prepaid cardholders. “We see the impact of the rule in three areas—the line of credit attached to the card, cost and operational considerations, and alignment of prepaid with Reg E requirements.”
Defined Rules Good For Disclosures
Michael Moebs, Moebs $ervices
Brian Godwin, director of regulatory compliance at Policyworks, a TMG sister company, hopes the fact the rules provide a framework for prepaid offerings will be good for FIs, as well as for consumers.
“Maybe this is something that spurs prepaid innovation now that the rules are more clearly defined,” said Godwin.
Papadimitriou thinks FIs will welcome having defined rules around prepaid disclosures.
“I think financial institutions have been struggling with how to disclose (with the prepaid product),” he said. “Standardized disclosures will make life easier and even save money. Credit unions and banks won’t have to wonder if their disclosures are in compliance and pay legal and compliance experts for their opinions.”
Despite the CFPB’s approach to regulating overdrafts, Moebs sees the prepaid guidelines, overall, as good for credit unions and consumers.
“There are now benchmarks to follow,” said Moebs, who called the prepaid space “the wild, wild, west. There will be greater transparency with prepaid offerings, which is good for the consumer and the changes will not cost FIs a great deal. Consumers should have all the information they need to make a decision about whether to use prepaid or not.”
Moebs added that the CFPB should make sure financial institutions have enough time to implement the rules once the final rule, out for 90-day public comment, is issued. Norm Patrick, director of strategic consulting at Advisors Plus, reminded that redoing prepaid disclosures and statements will involve adding monthly and annual fee information.
“So there is going to be some information technology investment in terms of reprograming,” he said. “The CFPB is allowing nine months to implement following a final rule. That may seem like a long time, but nine months can go by fast. I advise credit unions to pay close attention to this rulemaking.”
Related
CFPB To Propose Consumer Protections For Prepaid