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CFPB prepaid card rule could be industry burden or opportunity

The Consumer Financial Protection Bureau's new governing prepaid cardaccounts is drawing the ire of some industry representatives, but others involvedin the space say official standards could even out the competition.  

The CFPB rules extend credit card protections to prepaidaccounts and restrict how banks use credit or short-term loans to provideoverdraft protection. The regulations are scheduled to take effect Oct. 1, 2017.

The rules cap consumer liability for lost or stolen cards at$50 and charges that customers claimed are fraudulent will be credited to theiraccounts while banks investigate them. Account access must be simple and freeto use, and issuers must provide "Know Before You Owe" disclosuressimilar to those in mortgages and student financial aid documents.

Several representatives from banking and payment-relatedindustry groups objected to provisions in the finalized rule, saying theregulatory burdens will harm the consumers the federal government intends toprotect.

A spokesman for the Network Branded Prepaid Card Associationsaid the rule makes the definition of prepaid account too broad, and that sometypes of accounts will not be able to afford compliance. Some of the disclosurerequirements are also not consumer friendly, association president and CEO BradFauss said in a statement.

"[The] final rule maintains the requirement to providemultiple similar, but not quite identical, fee disclosures which will likelyserve to only further confuse consumers," Fauss said.

The Independent Community Bankers of America is stronglyopposed to the regulations covering overdrafts in prepaid accounts. Overdraftrequirements for prepaid accounts should not be more stringent than thosecovering regular bank accounts, the organization said in a statement. Presidentand CEO Camden Fine said that the group will work with the CFPB on implementingthe new rules.

Not all the response from the industry was negative.Green Dot Corp.founder and CEO Steven Streit said his company has always provided consumerprotections similar to checking accounts and has never charged overdraft orpenalty fees on prepaid checking cards. Streit in a welcomed the clarity of thenew regulations.

"It's gratifying to know that prepaid can now move to alevel playing field that can better serve consumers while allowing the entireindustry to move past the period of regulatory uncertainty," he said.

Aite analyst Shirley Inscoe said the rules cover too much ofthe mobile payments space. The CFPB regulations not only deal with 15 differenttypes of prepaid cards, but also mobile wallets and other digital paymentservices that are dissimilar, she wrote in an email.

"The CFPB extended these rules to cover so manydifferent forms of payments that problems will definitely arise, and that islikely to hamper innovation in payments," Inscoe said.

Kevin Petrasic, a legal adviser in the financial space whohas followed the rulemaking process, said in an interview that he hoped theCFPB would not be as restrictive on banks extending payday loans foroverdrafts. A number of providers had extended the short-termloans for overdraft protection with restrictions that regulators had alreadyimposed on the practice, said Petrasic, who heads the global financialinstitutions advisory practice at White & Case LLP.

"Some card issuers have used overdraft protection as apayday loan in a responsible way," he added.

The turnaround time the CFPB gave the industry to implementthe requirements could be a challenge the bureau might need to reconsider,Petrasic said, as large programs will have a short time to make many changes.

"Even for smaller programs that don't have theresources available, that could be challenging," he said. Petrasic addedthat he will not be surprised if the CFPB decides to extend the time forimplementation.

Prepaid cards did attract some aggressive outliers, andimposing the same set of standards on all players could benefit the industry.If applied properly, the rules could allow scrupulous companies to grow whilepreserving consumer choice, he said.

"A lot of this will really depend on how the regulationis implemented and enforced rather than what it says on paper," he said.