Would a Consumer Financial Protection Agency Hinder or Help the Prepaid Card Industry?

There are reports that Senator Dodd will introduce another version of his financial regulatory reform proposal this week. The prospects for a separate Consumer Financial Protection Agency seem dim at this point, although incorporation of at least some of its functions and powers inside of an existing federal regulator does seem likely.

The key here is the word “some”. It seems unlikely that whatever passes the Senate will resemble the House version of the Consumer Financial Protection Agency, Title III of H.R. 4173. The House legislation would empower a new agency with extensive administrative rule-making powers over entities until now regulated only by the states, or not at all, and has little or no Senate Republican sympathy. I have analyzed the House version in detail in an article that can be found on my website, but suffice it to say here that the new agency the House legislation would create would have authority over prepaid card industry participants such as program operators and processors, and would likely have had the authority to adopt the kinds of rules for gift card issuers enacted by Congress in the CARD Act.

In one respect, a federal regulator with authority over the prepaid card industry could be helpful. As anyone in the industry knows, state laws regulating prepaid card programs vary widely in terms of coverage, permissible fees, required disclosures, expiration dates and other terms. Unfortunately, state legislation also varies widely in detail and interpretive guidance, and it is unusual for state legislation to be clarified through published guidance by the state agencies responsible for enforcement of the rules. Whatever else might be said about the federal regulatory agencies, one thing they are good at is in providing interpretive guidance for the legislation they are responsible for enforcing, and the enabling legislation usually requires them to do so. The final CARD Act regulations affecting gift cards from the Federal Reserve are detailed with interpretative guidance.

In practice, the benefit of federal regulatory clarity is undermined by the survival of state laws that are “not inconsistent with” the federal rules or “more protective” than the federal rules. This doctrine of partial preemption is common to federal consumer financial legislation, although certain federal standards do fully preempt state laws (I discuss this issue in the article referenced above).

One of the hotly contested issues with a proposed Consumer Financial Protection Agency (or similar function inside of an existing agency) is the extent to which its rules will preempt state regulation. The House legislation adopted the partial preemption model described above, but proponents of full preemption are stronger in the Senate. If a Consumer Financial Protection Agency or some version inside an existing agency is given the power to preempt state regulation, it could give a boost to national prepaid programs much like the Marquette state usury law preemption decision gave to national credit card programs. I don’t underestimate the power of advocates of state consumer protection rights enforcement, but this is an issue worth following.

Copyright Broox Peterson 2010. The author is a payments legal specialist with over 25 years in the industry providing legal consulting and transactional support services. www.bwplawyer.com and http://blog.bwplawyer.com

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