By Elvina Nawaguna
WASHINGTON (Reuters) - Republican lawmakers at a hearing on Tuesday said that the U.S. consumer watchdog should stop attempts to regulate overdraft charges on prepaid cards even as the agency considers tighter rules on the practice.
The Consumer Financial Protection Bureau in November proposed rules to treat overdraft fees on prepaid cards as a form of credit and give consumers time to repay.
"Our thinking is that when you have credit on a prepaid card, that this could be treated similar to the way it's treated under the credit card rules and the card act," agency Director Richard Cordray said at a hearing on the agency's semi-annual report to Congress on Tuesday.
Republicans on the committee that oversees financial services disagree, fearing that tightening the grip on prepaid card overdrafts could cause card issuers to eliminate the overdraft option on which some people rely during cash-strapped times.
The CFPB has sounded the alarm on overdraft fees in general, saying they take advantage of often low-income people.
Overdraft fees on checking accounts average $34, and are mostly on transactions of $24 or less, according to the agency. Consumers end up paying the equivalent of over 17,000 percent in annual interest rates. Current rules prohibit overdraft fees on ATM or prepaid card transactions unless a customer opts for it.
The CFPB is mulling options to further regulate overdraft charges, but faces pushback from the financial industry and Republicans, who say it is overstepping its authority.
"Sometimes, I think you are trying to do good, but in the end, what you do creates harm to an industry where people are using products that they actually know what they're getting into," Wisconsin Republican Representative Sean Duffy said.
But Democrats like Maxine Waters of California and David Scott of Georgia, want the Consumer Financial Protection Bureau to regulate overdraft fees, with Waters calling for a total ban.
Republicans, long critical of the agency created by the 2010 Dodd-Frank law, say it lacks accountability. Texas Representative Randy Neugebauer plans to introduce a bill later this week to replace the agency's director with a five-person commission appointed by the president.
Other Republicans, including Jeb Hensarling of Texas and Lynn Westmoreland of Georgia, said their constituents want the right to use overdraft options, especially in emergencies.
"True consumer protection empowers consumers and respects their economic freedoms to make important informed choices with freedom from government interference," Hensarling said.
(This story corrects that Republicans were referring to overdrafts on prepaid cards not on bank accounts in headline and throughout story)
(Editing by Lisa Shumaker)