- - Monday, May 1, 2017


Be wary whenever a federal agency issues a professedly benign regulation.

Even the devil can quote scripture.

Under the Administrative Procedure Act (APA), 5 U.S.C. 553(e), federal agencies are required to “give … interested person[s] the right to petition for the issuance, amendment, or repeal of a rule.” In other words, if persons or organizations believe that free market forces are deficient in protecting their interests, they may petition a federal agency to promulgate a curative rule. This opportunity casts suspicion over every self-initiated agency rulemaking that purports to promote the public interest. The beneficiaries of the rule would presumably have petitioned for it under section 553 (e) if it truly advanced the public interest. They would not have slumbered in the hopes that the agency would act spontaneously.

Yet self-initiated agency rules that are worse than the diseases they ostensibly cure continue to pour forth like water over Niagara Falls. An egregious example is the Consumer Finance Protection Bureau’s (CFPB) prescriptions for prepaid cards and accounts issued on October 5, 2016, pursuant to Regulation E, which implements the Electronic Fund Transfer Act; Regulation Z, which implements the Truth in Lending Act; and the official interpretations to those regulations.

Among other things, the regulation strangles in red tape ordinary prepaid cards, Google wallet, Pay Pal, payroll cards, student financial aid disbursement cards, tax refund cards, and certain federal, state, or local government cards used in the administration of unemployment insurance, family leave, or child support. It was four years in the making. It is 1,689 pages long. And it is a safe bet that that no one has read the entire regulation except regulators and lawyers who bill by the hour.

The prepaid card industry is competitive. The total dollar value of prepaid cards is expected to double to $112 billion by 2018. Government and private enforcement of the federal antitrust laws, the Magna Carta of economic liberty, are ordinarily sufficient to insure optimal consumer welfare in any line of commerce. Any federal agency seeking to regulate beyond the antitrust laws should be required to document some dysfunction in the relevant marketplace.

The CFPB prepaid card directives would fail the test. They were not initiated by card users under section 553 (e) because of alleged marketplace unfairness. Additionally, the CFPB cure harms the consumers it is purporting to help — like raising the minimum wage for disadvantaged youths to $50 per hour, which would price them out of the labor market and make them unemployable.

The predominant users of prepaid cards are blacks, youths, the unemployed, the disabled and low-income earners who are unbanked. They will lose access to the market if prohibitive costs are imposed on prepaid card issuers and passed on to their customers. The industry projects the cost of compliance with the CFPB regulation at $1.5 billion. Tim Sloane, the Mercator Advisory Group vice president, has lamented that, “While lawyers and paper mills profit, the unbanked and underserved, which were supposed to be protected by this regulation, will now see higher prices and fewer choices as suppliers with low volumes and profits become unsustainable under the weight of this regulation and pull out of the market.”

Overdraft protection may disappear as a feature of prepaid cards to the detriment of users. Shalynn Hill explained at a CFPB hearing: “Life happens, and no, I don’t use it every month, but some months two things may happen in one day and I may need the overdraft. Limiting too much is not realistic, because things happen.”

Congress by statute should void the CFPB’s prepaid card rule. It should also require the agency to prepare a consumer welfare impact statement in conjunction with all future rules, including a description of how the rule would yield marketplace results superior to what would obtain by enforcement of the federal antitrust laws. Finally, Congress should subject the CFPB to the regular annual appropriations process to insure proper oversight and to deter future regulatory capers.

At present, the agency receives funding from the Federal Reserve, which encourages CFPB rules untethered to the sentiments of the American people.

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