I was mulling over the proposed legislation that would create the Consumer Financial Protection Agency, torn between admiration and scepticism, when I received a comment from Bruce Cundiff from Javelin Research.   He was responding to an earlier entry about the Cuomo vs. Clearinghouse Association case (posted before it was decided) discussing the importance of federal preemption for the prepaid card industry.  He wonders whether companies issuing payroll cards will qualify as agents of a national bank and thus be insulated from state prepaid card regulation as was found in SPGGC v. Ayotte 488 F.3rd 525 (1st Cir. 2007), or whether the employers will be considered issuers themselves, separately regulated under those state laws.  Nothing in Cuomo changed my usual answer to that question, which is that if the issuing bank retains control over the terms and conditions of the card issuance and the allocation of any fees that are charged then the company distributing the cards will likely be viewed as merely the agent of the bank.  In the case of payroll cards this test would seem pretty easy to satisfy.  However, as lawyers like to say, all that is probably moot in the near future. 

The proposed Consumer Financial Protection Agency (CFPA) enabling legislation contains amendments to the National Bank Act that will significantly reduce the current federal preemption protection national banks (and their subsidiaries, affiliates and agents) enjoy from state consumer protection regulation.  These amendments subject national banks to non-discriminatory state consumer protection laws and regulations that are not inconsistent with applicable federal laws, although, as in Cuomo, enforcement is permitted only by state attorneys general through the courts.  The prepaid card industry is upset with the prospect of losing federal preemption protection, arguing that having to comply with a patchwork of differing state laws will stifle innovation and reduce consumer availability.  There is truth to this claim, since many state laws applicable to prepaid cards were originally adopted to regulate gift certficates, and then gift cards, but they can apply as well to reloadable payroll and network-branded repaid cards (e.g. Amex, Discover ,MasterCard or Visa prepaid cards).  These are quite different products and some of the state restrictions adopted in connection with gift certificates/cards such as prohibition of activation fees, dormancy fees, monthly service fees or expiration dates may in fact be essential to the viability of reloadable prepaid products.  In the Ayotte case cited above one of the issues was enforceability of a New Hampshire law prohibiting expiration dates on prepaid cards.  The prepaid cards in question were Visa-branded prepaid cards, and by Visa rule these cards were required to have an expiration date (for fraud control purposes), which meant that the cards could not be issued to New Hampshire residents if New Hampshire's law applied to the federally-chartered financial institution-issued cards.  Federal preemption saved the program in that case, but that precedent will be overturned by the CFPA legislation.

I do love irony, and think that there is plenty of opportunity for it with the proposed CFPA.  Limiting myself to the prepaid card issue discussed here, I see vanilla as the flavor that will save the prepaid card industry's bacon (or something like that).  The CFPA will have the mandate to ensure that consumers are enabled to make informed choices in utilizing consumer financial products.  One of the tools to do so is defining by regulation "vanilla" products that are easily explained and understood and which can be the benchmark against which to measure more complicated products.  While credit cards and overdraft facilities are likely to get first attention due to the current noteriety of those products, the prepaid card industry may want to get itself on the agenda as soon as possible.  Whatever else you may want to say about federal regulatory agencies, when they adopt a rule, they really grind through a process in doing so and try to balance competing interests. If the CFPA adopts a vanilla prepaid card product rule, it is going to be one that is economically and practicably viable since that is the only way they will be complying with their mandate.  If certain terms and conditions and fees are truly essential to the viability of prepaid cards then the vanilla product will have to permit them.  The fun part follows, although its possible only a laywer would think so.  Although the CFPA legislation expressly provides that states may adopt more restrictive rules in areas where the CFPA has regulated, those rules cannot be inconsistent with the federal regulation.  Once a vanilla product has been defined by the CFPA, wouldn't any state restriction on a feature contained in the vanilla product be inconsistent and thus preempted?  The legislation is silent on this, but to find otherwise would undermine the purpose of defining vanilla products in the first place, so I expect the agency would find preemption appropriate and necessary.