When credit union consultant Marvin Umholtz gets worked up, it makes my blogging life a breeze. All I have to do is cut and paste. While a number of bankers would rather drink Drano rather than follow a newsletter dedicated to credit unions, I assure all of you bankers who bleed red rather than blue that you will love Marvin, especially when he goes after one of this blog’s bête noire, the Adjustment Bureau, as he did in his latest email newsletter:
This correspondent knew that the self-righteous and meddlesome Consumer Financial Protection Bureau’s (CFPB) www.consumerfinance.gov zealous crusaders had targeted overdraft protection programs for the agency’s peculiar brand of “reforms,” yet the arrival of that CFPB intervention still came in a surprising way. In an 870-page proposed rule http://files.consumerfinance.gov/f/201411_cfpb_regulations_prepaid-nprm.pdf ostensibly regulating prepaid products, the CFPB reclassified overdraft services as an extension of credit and overdraft fees as the cost of credit. The agency has set its precedent in this prepaid products rule for all future treatment of overdraft services. If the CFPB extends the credit definition to all overdraft services in every circumstance as it is expected to do based on this prepaid products proposal, then it will effectively ban overdraft services – period. As a result of the loss of overdraft services many credit unions’ fee income would drop precipitously. The only conclusion that a rational person could come to would be that the CFPB has become the biggest threat to safety and soundness that credit unions now face. And since this proposed prepaid products rule also covers mobile and other electronic prepaid accounts, PayPal, Google Wallet, and scores of other innovators should also watch their backs. The CFPB’s proposed prepaid accounts rule was loaded with intended and unintended consequences.
The CFPB’s proposed rule amends Regulations Z and E to regulate prepaid cards, codes, or other devices capable of being loaded with funds and usable at unaffiliated merchants or for person-to-person transfers, and that are not gift cards, with overdraft services or credit features. The agency’s action effectively bans overdraft services use with prepaid cards since the CFPB proposal also requires the prepaid card provider determine the customer’s “ability to repay” prior to linking overdraft services to the product. With the added underwriting costs, the overdraft services would likely be uneconomical to the provider. The ramifications from the CFPB reclassifying overdraft services as credit would be widespread. For example, the Department of Defense’s proposed Military Lending Act rule that imposes a 36% federal usury limit on loans to military service members and their families for all consumer loans (other than those secured by real estate or a vehicle) is still pending. Should it be finalized as is expected, it would make the overdraft fee on all CFPB re-defined credit extensions via overdraft coverage have excessive and illegal annual percentage rates (APRs) due to the hefty fee charged for the overdraft. Operationally a credit union could not then allow any service member or member of their family to have overdraft services on their deposit accounts. Such a distorted approach to the marketplace would be problematic at best. It would certainly be inefficient; and it could generate ill will. It might also generate class action lawsuits. And that is just one illustration of the potential fallout from the CFPB’s reclassification of all overdraft services as credit extensions.
According to the CFPB, “Among other things, prepaid cards that access overdraft services or credit features for a fee would generally be credit cards subject to Regulation Z and its credit card rules. Moreover, the proposal would require that consumers consent to overdraft services or credit features and give them at least 21 days to repay the debt incurred in connection with using such services or features. Further, Regulation E would be amended to include disclosures about overdraft services or credit features that could be linked to prepaid accounts. The compulsory use provision under Regulation E would also be amended so that prepaid account issuers would be prohibited from requiring consumers to set up preauthorized electronic fund transfers to repay credit extended through an overdraft service or credit feature.” The CFPB’s lengthy rule included 89 pages of summary and background before it even began to discuss the proposal on a section-by-section basis. The legal language of the rule followed that analysis. Once the rule is published in the Federal Register, there would be a 90-day comment period.
The agency announced the proposed prepaid products rule in a November 13th press release www.consumerfinance.gov/newsroom/cfpb-proposes-strong-federal-protections-for-prepaid-products and in conjunction held a prepaid accounts field hearing in Wilmington, Delaware. The field hearing included opening remarks by CFPB Director Richard Cordray www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-prepaid-products-field-hearing and a panel presentation featuring prepaid products industry representatives and consumer activists. In his remarks Director Cordray once again made it abundantly clear that the CFPB’s intent was to socially re–engineer the financial services marketplace to meet a decidedly left-leaning partisan agenda. At the close of his speech he said, “Just because consumers may not be able to afford or qualify for a bank account, or just because they do not want to be part of the brick-and-mortar banking system, this does not mean they deserve to be treated as second-class citizens. Like anyone else, they deserve to have a safe place to store their money and a practical means of carrying out financial transactions. And though many prepaid companies already have opted to offer some of these basic, common-sense protections, it is important to ensure that they are not simply optional but instead are cemented as the standard for the industry and enshrined in law.” Apparently, the CFPB knows what is best for all. It seems like the agency routinely uses the “protecting the most vulnerable” as the excuse for big government intervention and the imposition of innovation-crushing regulations.
Every time the in loco parentis CFPB acts purportedly in this correspondent’s best interests it seems more like the agency is trampling on his individual liberties. As a colleague once speculated during a conversation with this correspondent, the next thing the CFPB is likely to do is a full takeover of checking accounts. It’s only a matter of time. The CFPB will tell financial services providers what services people can have, how much service they can have, what they will pay for the service, and when the financial service provider is permitted to stop providing the service. There was also some discussion about the timing of the controversial “overdraft as credit aspect” of this prepaid products rule coming after the midterms rather than before. Was it deliberate or just a coincidence? There certainly were a lot of Democratic members of the House and Senate running for re-election November 4th who had sponsored legislation that restricted overdraft programs that were probably drafted by the consumer activists. These members of Congress, at least those who were re-elected, and the activists now have the CFPB to do their dirty work.
If you’d like to subscribe to the newsletter, email Marvin at firstname.lastname@example.org. Tell him the Texas curmudgeon referred you. I mean, you simply have to love a guy who uses “in loco parentis” when referring to the Death Star.
CFPB Delenda Est!