The CFPB released a report, “Tools for saving: Using prepaid accounts to set aside funds,” that presents the results of a research project involving a pilot program offering an incentive to prepaid card users to use a savings feature.

In December 2014, as part of its Project Catalyst, the CFPB’s initiative for facilitating innovation in consumer-friendly financial products and services, the CFPB announced a new research pilot program using insights from behavioral economics and an American Express pilot program to evaluate the effectiveness of certain practices to encourage prepaid card users to develop regular saving behavior.

From January to March 2015, American Express launched a pilot program to encourage prepaid card users to use a feature that allows users to set money aside dedicated for savings and keep it separate from funds in their main prepaid account. The trial program included about 540,000 prepaid card users, with certain of such users receiving various forms of encouragement to sign up for the savings feature. The company used four strategies consisting of emails highlighting the benefits of savings, direct mail sending a refrigerator magnet highlighting the benefits of savings, an offer of $10 if an individual saved $150 by March 31, and encouragement to use an automatic transfer feature they could sign up for.

The project findings included the following:

  • The  $10 incentive was highly effective in encouraging card users to enroll in the savings feature.
  • Usage of the savings feature was tracked for nine months after the three-month pilot program ended.  The study found that for customers still using the savings feature, savings balances generally did not decrease after the pilot ended.
  • Users who were offered the $10 incentive reported significantly less payday loan use than those who were not offered the incentive.

The CFPB has released its Spring 2016 rulemaking agenda.  The agenda sets the following timetables for key rulemaking initiatives: 

Arbitration.  The Spring 2016 agenda does not reflect the CFPB’s release of its proposed arbitration rule on May 5, 2016, stating only that the CFPB “is preparing to issue a Notice of Proposed Rulemaking this spring.”  The CFPB’s proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.  We do not expect to see a final rule until next year.

Payday and deposit advance loans.  The Spring 2016 agenda also does not reflect the CFPB’s announcement that it will hold a field hearing on small dollar lending in Kansas City, Missouri on June 2, 2016.  We anticipate the field hearing will coincide with the CFPB’s release of its proposed rule which is expected to cover single-payment payday and auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  The Spring 2016 agenda indicates only that the CFPB is “conducting a rulemaking to address consumer harms from practices related to payday loans and other similar credit products” and gives a June 2016 estimated date for issuance of a Notice of Proposed Rulemaking (NPRM).

Prepaid financial products.  In November 2014, the CFPB issued a proposed rule for prepaid financial products, including general-purpose reloadable prepaid cards and certain digital and mobile wallets.  The Spring 2016 agenda estimates the issuance of a final rule in July 2016.  The Fall 2015 agenda had estimated that a final rule would be issued in March 2016.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Fall 2015 agenda had estimated a January 2016 date for further prerule activities, the new agenda moves that date to August 2016.  In light of the fact that most of the banks subject to CFPB supervisory jurisdiction have changed the order in which they process electronic debits, we believe the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process such debits.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that “it is in the process of analyzing responses to a survey seeking information from consumers about their experiences with debt collectors and is engaged in qualitative testing to determine what information would be useful for consumers to have about debt collection and how that information should be provided to them.”  The agenda estimates that further prerule activities, which are expected to involve the convening of a SBREFA panel, will occur in June 2016.  The CFPB had estimated in its Fall 2015 agenda that further prerule activities would occur in February  2016.

Larger participants.  As it did in its Fall  2015 agenda, the CFPB states in the Spring 2016 agenda that it is considering  “larger participant” rules for “consumer installment loans and vehicle title loans.”  It also repeats the statement in the Fall 2015 agenda that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  While the prior agenda estimated a September 2016 date for prerule activities, the new agenda estimates a December 2016 date.

Small business lending data.  Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  The Spring 2016 agenda estimates a December 2016 date for prerule activities.  We recently reported that the CFPB had filled the position of Assistant Director for the Office of Small Business Lending Markets.  The CFPB’s job posting indicated that the Assistant Director would head the CFPB’s team involved in developing rules to implement Section 1071.  In the Spring 2016 agenda, the CFPB states that it “will focus on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and appropriate procedures, information safeguards, and privacy protections for information-gathering under this section.”

Mortgage rules.  In November 2014, the CFPB issued a proposal to amend various provisions of its mortgage servicing rules.  The Spring 2016 agenda estimates issuance of a final rule in July 2016.  The previous agenda had estimated a June 2016 date.  The new agenda also estimates a September 2016 date for issuance of a proposed interagency rule to implement Dodd-Frank amendments to FIRREA concerning appraisals.  The previous agenda had estimated an April 2016 date.  In April 2016, the CFPB announced its intention to reopen the rulemaking for the TILA/RESPA Integrated Disclosure rule.  At that time, the CFPB indicated that a NPRM would likely be issued in late July and, consistent with that timetable, the Spring 2016 agenda estimates a July 2016 date for a NPRM.

Student Loan Servicing and Consumer Reporting.  As they were in the Fall 2015 agenda, both of these topics continue to be listed as “long-term action” items in the Spring 2016 agenda.

 

Politico has reported that the CFPB is not expected to issue a final prepaid card rule until this May or June “according to two sources familiar with the talks.”

In November 2014, the CFPB issued a proposed rule for prepaid financial products, including general-purpose reloadable prepaid cards and certain digital and mobile wallets.  The CFPB’s Fall 2015 rulemaking agenda estimated the issuance of a final rule in March 2016.

The CFPB has issued its February 2016 complaint report which highlights complaints about prepaid cards and complaints from consumers in Texas and the Houston metro area.  The CFPB began taking complaints about prepaid cards in July 2014.

General findings include the following:

  • As of February 1, 2016, the CFPB handled approximately 811,700 complaints nationally, including approximately 21,800 complaints in January 2016.  For January 2016, debt collection continued to be the most complained-about financial product or service, representing about 31 percent of complaints submitted.  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 67 percent of the complaints submitted in January 2016.
  • Complaints about “other financial services” showed the greatest percentage increase based on a three-month average, increasing about 77 percent from the same time last year (November 2014 to January  2015 compared with November 2015 to January 2016).  This category includes complaints about debt settlement, check cashing, credit repair, refund anticipation checks, and money orders.  Complaints during those periods increased from 100 complaints in 2014/2015 to 178 complaints in 2015/2016.
  • Payday loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 12 percent from the same time last year (November 2014 to January 2015 compared with November 2015 to January 2016).  Complaints during those periods decreased from 467 complaints in 2014/2015 to 409 complaints in 2015/2016.
  • Arizona, Delaware, and North Carolina experienced the greatest complaint volume increases from the same time last year (November 2014 to January 2015 compared with November 2015 to January 2016).  The volume of complaints from Arizona, Delaware, and North Carolina increased by, respectively, 33, 28, and 27 percent.
  • Hawaii, the District of Columbia, and South Dakota experienced the greatest complaint volume decreases from the same time last year (November 2014 to January 2015 compared with November 2015 to January 2016) with decreases of, respectively, 15, 13, and 10 percent.

Findings regarding prepaid card complaints include the following:

  • The CFPB has handled approximately 4,300 prepaid card complaints, representing about 0.5 percent of total complaints.
  • The most common issues identified by consumers involved managing, opening, or closing an account (such as inability to access funds and companies declining to reissue cards with balances remaining on expired cards) and unauthorized transactions or other transaction issues (such as unauthorized withdrawals occurring shortly after card activation or an initial transaction and freezing of balances after disputing a charge).

Findings regarding complaints from consumers in Texas and the Houston metro area include the following:

  • As of February  1, 2016, approximately 63,200 complaints were submitted by Texas consumers of which approximately 15,700 were from consumers in the Houston metro area.
  • Debt collection was the most-complained-about product, representing  33 percent of the complaints submitted by Texas consumers and 36 percent of the complaints submitted by consumers in the Houston metro area.  (Nationally, debt collection complaints averaged 26 percent of all complaints received by the CFPB.)
  • Credit reporting and mortgages were, respectively, the second and third most-complained-about financial products by Texas and Houston metro area consumers.  The percentage of credit reporting complaints submitted by Houston and Texas consumers exceeded the national average while the percentage of mortgage complaints submitted by such consumers was lower than the national average.

On December 2, 2015, the CFPB denied a petition for modification of a Civil Investigative Demand (CID) filed by UniRush, LLC.  In doing so, the CFPB reinforced its view that such petitions are disfavored.  However, in denying the petition, the CFPB actually gave UniRush the relief it sought – additional time to provide a proposed production schedule – by ordering UniRush to provide the requested production schedule within 10 days of the order denying the petition.

The CID UniRush sought to modify contained 56 requests.  The CFPB issued the CID on October 27, 2015, with a response date of November 10, 2015 – merely two weeks after service.  Based on our review of UniRush’s petition and the attached correspondence, UniRush appears to have made an effort to meet and confer with the CFPB regarding the scope of the CID and its need for additional time to respond.  However, according to the CFPB’s order denying the petition, the problem that led to the petition was that UniRush never outlined a plan for completing its production in response to the CID.

We know from our prior CID investigations that the CFPB expects a high degree of specificity in connection with requests to modify CIDs, routinely requesting information relating to when specific requests will be responded to, dates by which productions will begin and end, etc.  However, here, it was exactly that information that UniRush could not provide because it needed time to interview the custodians regarding the sources of responsive information and formulate a realistic production plan.  Therefore, UniRush was in a difficult position in that it simply could not provide the information it needed to the CFPB in order to obtain the requested relief.

Notably, even in denying the petition, the CFPB did provide UniRush some of what it originally requested – time to complete its investigation and an opportunity to further confer on the scope and timing of its response.  Hopefully, this is because the CFPB recognizes the position UniRush was put in as a result of the short response date.  At the end of the day, consumers and companies alike are best served by efficient, streamlined investigations that avoid formulaic, position-based responses from either side that can contribute to delay and confusion.

In its new report containing its findings from a survey of prepaid card users, The Pew Charitable Trusts urges the CFPB’s “speedy adoption” of its proposed prepaid card rule.  The CFPB’s proposal, which would mandate new disclosures, error resolution procedures, consumer liability limits for unauthorized transactions, fee limits, and added requirements for cards with overdraft or credit features, was issued in November 2014.  In its Spring 2015 agenda, the CFPB indicated that it expects to issue a final rule in January 2016.

The Pew report states that its findings are based on “a nationally representative telephone survey of [general purpose reloadable] prepaid cardholders—defined as adults who use these cards at least once a month.”  Among the report’s key findings are that:

  • Prepaid card use is becoming more common, with use jumping by more than 50 percent between 2012 and 2014
  • Unbanked prepaid cardholders use their prepaid cards more like traditional checking accounts and to manage their budgets, checking their balances more regularly, reloading more frequently, and registering their cards more often than banked cardholders do
  • Most prepaid card users do not want the option to overdraw their accounts
  • Most users do not know whether their liability for fraudulent use is limited, funds are FDIC-insured, or cards have arbitration clauses

According to Pew, its findings “demonstrate the need for the [CFPB] to finalize its proposed rules on prepaid cards.”  Pew “commends the CFPB for the proposed rule” and states that it “would promote clear disclosure and ensures protections that limit liability for unauthorized transactions and ban high-cost credit products.”

Among the issues highlighted in comments on the proposal submitted by industry are the difficulties industry members would face in implementing the proposal’s new disclosure requirements as well as the vagueness of other new requirements.  We are hopeful that the CFPB’s timetable is an indication that the CFPB is giving careful consideration to these comments.

 

The American Bankers Association has submitted a 46-page comment letter on the CFPB’s proposed prepaid card rule.

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.

On Tuesday, March 3, CFPB Director Richard Cordray appeared before the House Financial Services Committee to answer questions regarding the Bureau’s Semi-Annual Report to Congress and the President, which it published on December 4 of last year.  As we anticipated shortly before Director Cordray’s testimony, the report merely provided a backdrop for the hearing, which, in reality, served as a forum for committee members to question the Director on a range of issues significant to their respective constituents.  Much like the report itself, Director Cordray’s testimony largely rehearsed information with which we were already familiar, much of which we have covered on this blog.  Among the talking points we expected, however, a few newsworthy points emerged:

  • The Bureau plans to use its five-year review of the ability-to-repay (ATR) rule, mandated by section 1022(d) of the Dodd-Frank Act, to assess whether to extend, modify, or make permanent the temporary provisions that currently exempt loans backed by Fannie Mae and Freddie Mac from critical portions of the rule’s rigorous underwriting requirements. In response to questions from the committee’s chairman, Rep. Jeb Hensarling, Director Cordray indicated that the Bureau installed the sunset provision at least in part to give Congress time to undertake substantial reform of Fannie and Freddie.  Cordray acknowledged, however, that in light of Congress’s inaction on GSE reform, industry uncertainty tied to the pending sunset of the exemption constitutes a “legitimate concern.”
  • The Bureau plans in short order to convene a Small Business Review Panel (SBRP) to analyze proposals under consideration for a rulemaking governing payday loans and payday lenders. Payday loans and deposit advance products first appeared on the CFPB’s unified agenda in the Spring of 2013, and Bureau staff have since published two whitepapers on the matter—one in April 2013 and another in March 2014.  Hence, the Bureau’s decision to engage the SBRP process, which is a necessary precursor to release of a notice of proposed rulemaking (NPR), comes as no surprise.  That said, it tees up circulation of a document that will offer useful insight into the likely substance and consequence of the forthcoming NPR—the SBRP’s final report.  With respect to timing of the SBRP process for a payday loan rulemaking, Cordray told Rep. Maxine Waters, the committee’s ranking member, to “check back soon.”
  • Director Cordray indicated that the Bureau continues to be interested in learning more about, and potentially crafting responses to, unintended consequences of its various mortgage rules, particularly consequences tied to specific products tailored to, and offered in, limited geographical areas. Rep. Michael Capuano, who represents a large swath of the Boston metro area, raised concern that loans for the purchase of so-called “triple-deckers” (i.e., the three-floor, three-unit dwellings that line many of Boston’s streets) cannot feasibly satisfy the definition of a single-family property under the ATR rule.  Likewise, Rep. David Schweikert, who represents much of Phoenix, expressed concern over the rules’ implications for seller financing arrangements and contracts for land sales, which are popular, relationship-based transaction mechanisms in deed-of-trust states.  Director Cordray invited both members to engage in further discussions at the staff level in an effort to better understand the issues.
  • The Bureau has no plans to push forward the August 1, 2015, effective date for the TILA/RESPA integrated disclosures rule. Director Cordray indicated that CFPB examiners had no intention of “bringing the hammer down on the first day,” but he repeatedly emphasized that institutions will have had 21 months from the date of the rule’s publication to prepare.
  • For better or worse, the Bureau’s much-discussed “Rate Checker” tool appears here to stay. The tool, which allows consumers to view mortgage rates being offered to borrowers in their area, has been the subject of sharp criticism.  Citing concerns over the tool’s accuracy, among other things, the American Banker’s Association called for the CFPB to remove the tool from its website altogether.  Facing questions from the committee about the tool’s accuracy, Director Cordray said only that the tool is “quite accurate,” and he encouraged committee members to direct their constituents to the tool for help in shopping for their next mortgage.

The hearing failed to provide any news of note on other significant issues, including the evolution, if any, of the Bureau’s rulemakings on prepaid cards and home mortgage disclosure, or the progress of pre-rulemaking activities on debt collection.  Director Cordray did indicate in passing that action on overdrafts would likely follow planned rulemakings on payday loans and debt collection, both of which are slated for later this year.  Presumably, then, movement on overdrafts appears relegated to late 2015 at the earliest.

The Director has yet to appear before the Senate Banking Committee, as he typically does following circulation of the Semi-Annual Report.  To date, Senate Banking has not published any schedule for a pending appearance by Director Cordray.

Kelly Cochran, CFPB Assistant Director for Regulations, addressed the CFPB’s prepaid card rulemaking in a January 12 presentation to the American Bar Association Consumer Financial Services Committee in New Orleans.  She acknowledged the complexity of the CFPB’s proposal and difficult choices facing the CFPB and encouraged the submission of comments on the proposal.

We are largely supportive of the proposal.  However, the Q&A following the presentation gave us the opportunity to informally comment on two of our concerns:

  • Language and Terminology: The language of the proposed rule and commentary is opaque.  Thus, for example, there are repeated references to “credit cards under Regulation Z where extensions of credit are permitted to be deposited directly only into particular prepaid accounts specified by the creditor” (with minor variations).  Why not simply use a shorthand reference to “account number credit cards” or like language?  Such a change would dramatically improve readability.
  • Treatment of Linked Credit Plans:  Short of prohibiting entirely all extensions of credit in connection with prepaid cards, the CFPB’s proposal would seem to have done all it could to erect as many obstacles as possible to such credit extensions.  These restrictions threaten to deny consumers access to credit programs with manifest consumer benefits, such as a “hybrid” prepaid-credit card that would allow access, at a consumer’s request, to a low-rate overdraft credit line that might be far cheaper than other credit alternatives.

The CFPB’s rationale that most consumers have said that they want prepaid cards without credit features is unpersuasive.  The needs of these consumers are fully addressed by the CFPB’s proposed requirement that consumers must affirmatively opt-in if they want credit features in conjunction with prepaid cards.  Even if they are in the minority, the substantial numbers of consumers who want credit with prepaid cards should not be denied the opportunity.

Obviously, the CFPB and the consumer advocates who have so much influence over the CFPB are concerned about high-cost, short-term credit.  That concern should be addressed directly in the upcoming payday lending rulemaking and not through unnecessary and counter-productive restrictions in the prepaid card rule.

There is much of value in the proposed prepaid card rule.  Hopefully, the comment process will result in an even better final rule.