The Center for Responsible Lending is a non-profit research and policy organization dedicated to protecting home-ownership and family wealth.
Let's begin with the following premise: In terms of technology and hence core product costs, general purpose reloadable prepaid cards are indistinguishable from debit cards associated with checkless checking accounts.
Both prepaid and debit cards must maintain a database of individual account records; both access the same payments system through a bank member of a funds transfer network such as Visa or MasterCard.
Both prepaid and debit cards have a requirement to "know your customer" since the accounts must pass through a bank to access the payments network.
Hence, the biggest differences between prepaid cards and debit cards are differences not in technology but in regulation, or what is often described as "regulatory arbitrage" in favor of the unregulated providers.
Some examples of regulatory arbitrage between bank providers of checkless debit card accounts and currently unregulated prepaid card providers include:
- Debit cards have periodic written statements of account under Regulation E;
- Regulated debit card providers have mandated minimum capital requirements;
- Debit cards have consumer protections for lost cards or unauthorized card usage; and
- Prepaid cards are exempt from the Durbin interchange requirements, at least for the smaller, rent-a-charter banks.
Prepaid cards must be required to meet the following three rules:
- No mandatory arbitration clauses
- No tie-in to debt products, either prior to the prepaid card load or after the card balance has been expended.
- No penalty fees such as nonsufficient funds or overdraft fees
I pulled last night the account disclosure form for Netspend, one of the largest prepaid card providers. Customers must read and agree to these terms before signing up for a Netspend prepaid card on-line.
I challenge any person in this room to read this disclosure form, 12 pages of microscopic print laid out horizontally across two pdf print pages. Buried in the print on the tenth page is a requirement of mandatory arbitration, and only as an individual, not as a group action.
Actual discrimination or customer deception cannot be re-dressed by an individual consumer in a mandated arbitration forum.
Debt product tie-in
A prepaid card should have no tie-in to a debt product whatsoever. On the front end, using a payday loan to fund a prepaid card is an invitation to abuse.
If prepaid card fees take 10 percent of the prepaid card balance to convert to cash, a 450 percent annual interest rate payday loan has been deceptively converted into a 700 percent APR loan, thereby circumventing state or federal usury restrictions, including those protecting military personnel.
The Netspend tie-in with payday lending, and its seeking to offer payday loans directly through its prepaid card, are simply unacceptable. The Office of Thrift Supervision was right to prohibit Netspend's i-advance program.
The single most-cited reason for customer choice of a prepaid card is to limit spending to funds actually present in the account. The very label "prepaid card" communicates the promise that the account cannot be overdrawn, which by definition would otherwise be a "postpaid" card.
Overdrafts should not be permitted in any form on a prepaid card. Prohibiting overdraft and nonsufficient fund fees is the single-most important step for CFPB to take at this time.
If a customer needs debt, let them get a regulated credit card, which is designed for that purpose.
Thank-you, Mr. Cordray and Mr. Date and the CFPB staff for holding this important field hearing.