Trump should work with Congress to block regulations on prepaid cards

The Hill recently highlighted seven major regulations promulgated by the Obama administration that the White House has targeted for reversal. While this is a good start, one major costly, onerous and unnecessary regulation was left on the list – the prepaid card rule.

The Consumer Financial Protection Bureau (CFPB) recently released a tidal wave of red tape that will drive up costs for prepaid cards, a financial product popular with working class and minority communities. The 1,700-page rule effectively eliminates credit for millions of American unable to secure loans from traditional financial institutions.  Additionally, the rule regulates mobile technologies like Venmo and PayPal, products used by millions of Americans on a daily basis without problems that might require federal intervention.

{mosads}As proposed, the CFPB rule on prepaid cards would require providers to remove and replace all prepaid cards presently on the shelves in retail stores. The cards would be replaced with products that comply with the new rules.

The rule defines prepaid cards so broadly that it regulates additional products that are not considered prepaid cards, such as gift cards from Visa and MasterCard that cannot be reloaded. Subjecting these non-reloadable cards to the rule risks eliminating those products from the market altogether since compliance costs could exceed the revenue from the sales of those cards.

Prepaid cards issuers will also be required to send full disclosure of the card terms a second time to the consumer, in addition to the disclosure of terms that come with the prepaid card. That would typically involve mailing the full terms of disclosure to the consumer, adding an unnecessary expense for a duplicate disclosure of terms to the consumer. This is an expense that could only be passed along to the consumer, raising the cost of purchasing the prepaid cards. 

In short, the rules seek to impose the same kinds of regulations on prepaid cards that have applied to credit cards and checking accounts. Implementing those requirements on prepaid cards will increase the cost of providing such services to consumers, directly leading to higher costs for consumers who use prepaid card services. The regulations go so far as to include accounts that don’t even use cards, such as payments services offered via smartphone apps.

Prepaid cards are an important part of the U.S. economy, given that $150 billion in federal, state, and local funds are disbursed in this manner, and the use of prepaid card accounts are common among the nearly 67 million unbanked or under-banked consumers.

Several senators, including David Perdue (R-GA), Tom Cotton (R-Ark.), Mike Enzi (R-Wyo.), Johnny Isakson (R-Ga.), Ron Johnson (R-Wis.), James Lankford (R-Okla.), Mike Lee (R-Utah), and Mike Rounds (R-S.D.) have introduced legislation to stop the 1,689-page rule.

“The CFPB’s prepaid card rule is a disaster for consumers attempting to access prepaid cards,” said Cotton, who sits on the Senate Banking Committee. “It’s this kind of over-regulation of the financial industry that’s caused regulatory costs to skyrocket while millions of Americans lack access to the banking system. I’m proud to support efforts to roll it back and bring regulatory relief to consumers across the country.”

Democrats have the same concerns. Reps. Rubén Hinojosa (D-Texas), Joyce Beatty (D-Ohio), and John Carney of (D-Dela.) wrote a letter to CFPB Director Richard Cordray expressing criticism that the regulations would restrict consumer access to the credit products being regulated. The members are asking the CFPB to reconsider how the rule regulates certain features on prepaid cards, including small-dollar short-term overdraft services.

The new CFPB rules could very well eliminate important credit products used by tens of millions of Americans who lack access to other credit products, such as credit cards and checking account overdraft protection. Considering the bipartisan consensus on the issue, President Trump should work with Congress to move swiftly and stop the rules from being implemented.