Congress Might Shred Prepaid Card Rules Before They Take Effect

In what is perhaps the latest attempt to challenge the authority of the Consumer Financial Protection Bureau, new consumer protections for prepaid cards that the agency scheduled to go into effect next year might be blocked by Congress as soon as next week.

The prepaid card rules, which the CFPB issued last October, give prepaid cards the same consumer protections that debit cards have. They're intended to protect the millions of people who use them instead of debit cards tied to traditional bank checking accounts.

“Whether you’re using a prepaid card to buy groceries, pay bills, or make rent, you should have the same protections that debit and credit card users have," says Sen. Sherrod Brown (D-Ohio), the ranking member of the Senate Banking Committee.

The rules requires prepaid card fees to be more transparent so users have a better idea of what they're getting and are less likely to be hit by hidden charges. It also puts in place protections that limit liability in cases of unauthorized transactions or fraud. And it places limits on overdraft fees on the very few prepaid card brands that actually let consumers spend more money than they have loaded onto the card.

If the rules are stopped in its tracks, consumers will have to take other steps to protect themselves.

The attack on the rules is being led by Sen. David Perdue (R-Ga.), who is encouraging other members of Congress to nullify the consumer protections using a Congressional Review Act measure. Last month he wrote a guest column posted on forbes.com entitled "Send the Prepaid Card Rule to the Shredder."

Why do away with these consumer protections?

Perdue's office says the rules are too broad because they include a range of prepaid debit products, including payroll cards used by employers to pay wages, benefits cards from government agencies, digital wallets and even mobile peer-to-peer payment apps that are tied to credit and debit cards.

His office also says the rule's extension of mandatory protections against unauthorized charges to unregistered prepaid cards would lead to widespread fraud.

Yesterday, the CFPB determined that a new proposed rulemaking process should revisit at least two of these issues—the linking of credit cards to digital wallets that are capable of storing funds, as well as error resolution and liability limits for unregistered prepaid accounts.

The CFPB said the same proposed rulemaking may also address some other concerns raised.

The office also says the cost of compliance with the rules will be too high and will be passed on to consumers. Another concern is that bringing peer-to-peer payment services like Venmo and PayPal under the rule will stifle innovation, and that regulating overdrafts will “deprive” struggling low-income consumers who don’t have bank accounts of “their only source of credit.”

But very few prepaid cards allow overdrafts. One that does, NetSpend, says the rules would cost the company $85 million in lost overdraft revenue in the first year. Its parent company, TSYS, happens to be based in Perdue’s state.

Charles Harris, NetSpend's president, says allowing overdrafts is an important service that gives its customers needing emergency funds more affordable access to extra money. He says his company charges about $5 to $15 less than the typical $30 overdraft fee banks charge on a debit card and is much cheaper than high-interest payday loans.

But not everyone is convinced. “Most people who turn to these cards specifically want to avoid overdraft fees,” says Thaddeus King, an officer with the Pew Charitable Trust’s consumer finance project, which has surveyed and studied prepaid card users extensively.

And Christina Tetreault, staff attorney at Consumer Union, the policy and mobilization arm of Consumer Reports, says that the many benefits of the rules outweigh the concerns raised by Perdue and Harris, and that those against it have other motives. “Opponents of the CFPB say they want more oversight," she says, "but their real aim is to cripple its ability to protect consumers from financial abuses."

Lauren Saunders, associate director of the National Consumer Law Center, is also worried about the future of the prepaid card rule, based on recent history. Every Obama-era rule "that has come up for a vote so far has been repealed,” she says. “But we also hope a lot of senators will understand this is just common-sense protection."

Steps to Protect Yourself

If the prepaid card protections are blocked, follow these tips:

Review our prepaid card ratings. Choose a card from among the ones we recommend. These cards have low ATM fees, are widely accepted, and offer services such as online bill pay. They also voluntarily offer fraud protection and come with FDIC insurance.

Register your card with the issuer. While some prepaid cards don’t require that you register them, it’s a good idea to do so. Some prepaid cards require registration in order to get the protections.

Take steps to reduce fees. You can do this by using the nationwide networks of thousands of fee-free ATMs commonly available with major prepaid cards, monitoring your transactions and balances online or with the card's mobile app, and loading money onto the card free of charge via direct deposit.

Editor's Note: This article was updated on April 21, 2017 to include news that the CFPB had determined that some concerns about the prepaid card rules should be revisited.

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