In the letter, the ABA makes the following key comments:
- Additional clarity is needed in the definition of the term “prepaid account” to avoid banks being subject to second-guessing by examiners and plaintiffs’ attorneys. The ABA recommends that the CFPB narrow the definition of prepaid account to cover an account whose underlying funds are only accessed through a card (or card number) that is processed through the card networks.
- The proposed treatment of overdrafts linked to prepaid accounts as open-end credit under Regulation Z is contrary to law because TILA’s definition of “credit” clearly excludes overdrafts, which convey no “right to defer” payment, the essential characteristic of credit under TILA.
- The proposal amounts to an effective ban on offering overdraft services or credit through a prepaid card because of the operational and compliance costs and risks. As a result, it will harm consumers by limiting consumer access to overdraft services and credit. The proposal also hobbles efforts of banks to offer small-dollar affordable credit as an alternative to nonbank small-dollar loans such as payday loans.
- The proposal will even affect prepaid cards that do not offer overdraft services because it transforms prepaid cards into credit cards if any fee is charged when the account is in overdraft status—even if the overdraft is unavoidable, for example, when a deposited check is returned unpaid or the final card transaction exceeds the amount authorized. Although ABA member banks that offer prepaid cards generally do not offer overdraft or credit services with their prepaid cards, the proposal exposes them to new operational and compliance risks associated with application of the proposed credit and overdraft rules to their current products. The new regulatory risks and costs may cause these banks to withdraw from the market for prepaid products and the ABA anticipates that the proposal will make other banks, particularly community banks, reluctant to enter the market.
- By significantly hindering banks’ ability to offer prepaid cards, the proposal will suppress the opportunity for prepaid cards to serve as a promising “bank account” alternative for low-income customers or those without bank accounts.
- By allowing holders of prepaid accounts to overdraw an account and avoid not only overdraft fees, but potentially any fee, including those regularly assessed on the account, the proposal will cause prepaid cards to lose their usefulness as a starting ramp to greater financial responsibility and increased access to banking services. Instead of encouraging customers to improve their financial management skills, the prepaid account contemplated by the CFPB’s proposal would send a message that there are few adverse consequences to overspending or not managing finances. Consumers, in the long term, will be ill-served by this message as it will lead to poor financial decisions with regard to bank accounts and other financial products.
The ABA also urges the CFPB to set an effective date that is no sooner than 18 months after adoption of a final rule rather than nine months after adoption as the CFPB has proposed.