New rules aim to tame prepaid cards


Prepaid cards, the Wild West boomtown of finance, are getting new rules. The Consumer Financial Protection Bureau Thursday announced extensive new protections for consumers who store money -- or borrow it -- using the cards.

"[I]f consumers lose their card, our proposed rule would protect their funds; and if their card or their password is stolen, our rule would protect them against fraud," CFPB director Richard Cordray said in prepared remarks for a public hearing Thursday.

The proposed regulations, which will become effective 90 days after publication in the Federal Register,* extend many of the protections on credit cards and debit cards to the largely unregulated world of prepaid. The cards are among the fastest growing financial tools, especially among people who don't use banks. Users put nearly $65 billion on the type of prepaid cards known as "general-purpose reloadable" in 2012, up from less than $1 billion in 2003, the CFPB said.

Prepaid cards can be loaded with money from your paycheck, government benefits, tax refunds and student financial aid, among other payments. You can use them to take cash out of ATMs, buy things online, pay bills and make in-store purchases as you would with other forms of plastic.

Consumer advocates applauded the rules, saying they should stop some of the cards' most dangerous financial traps.

"There are still abuses out there -- this will help consumers make a better choice," said Lauren Saunders, managing attorney at the National Consumer Law Center's office in Washington, D.C.

The rules' centerpiece is a disclosure requirement designed to help consumers compare card costs. The CFPB released a model form showing the fee disclosures companies should provide on the outside of their packaging, including the most common costs: ATM fees, monthly fees, cash reload charges and swipe fees.

The model's summary format should help consumers understand a card's most important points without overwhelming them in fine print, said Pamela Banks, senior counsel for Consumers Union. "Oftentimes if consumers see too much information, they tend not to read it," she said.

Prepaid card issuers at the hearing Thursday said that the cards are a boon for people who otherwise have to pay check cashers to cash their paycheck and buy money orders to pay their bills. The rules should level the playing field among cards and increase consumers' comfort level with the new financial tool.

"It doesn't take too many consumers to lose their money, or not be dealt with fairly, to destroy an industry," said Steve Streit, founder of prepaid pioneer Green Dot Corp.

Highlights of new prepaid rules
Among the other requirements are:

  • Protection for lost cards or fraudulent charges. Consumers who register their cards are covered for losses over $50, if they notify the issuer quickly.
  • Rights to dispute charges. Card companies must set up a process to investigate complaints about billing errors and incorrect charges. In some cases, companies would have to credit the account for the disputed amount while they investigate the problem.
  • Free account information. Card companies have to make account information available online or provide cardholders with regular account statements.
  • Credit card-like protections for cards that, despite the "prepaid" name, allow borrowing. Credit features such as overdraft privileges are subject to a lengthy list of new requirements, including many that now cover credit cards under the Credit CARD Act and the Truth in Lending Act.

Consumer advocates had called for a ban on lending by prepaid cards, saying it can lead to a spiral of high-cost loans.

The CFPB issued new rules for prepaid cards Thursday, including model disclosure forms such as the one above. Click image to enlarge.

"We think prepaid should be prepaid," Saunders said. However, the rule "should stop the abuse of overdraft features we see today," she added.

Cards that extend credit will have to evaluate the borrower's ability to repay loans and limit the total fees to 25 percent of the credit limit. Perhaps most important, funds loaded on the prepaid card are blocked from automatically being siphoned off to repay borrowed funds. "So they can't just grab your paycheck as it comes in," Saunders said.

Cards that make loans can take repayments from loaded funds only once a month, and then only if the consumer opts in, according to the CFPB news release. Cordray, in prepared remarks, suggested that some prepaid cards might drop their lending provisions, rather than take on the new requirements. However, the protections are important, he said, especially because many people opt for prepaid cards to avoid getting into debt.

"All in all, I think it's a good start," Banks said of the proposed rules.

Features of prepaid cards
Few cards offer overdraft lending features, according to a CFPB study on prepaid accounts released Thursday. Ninety-seven percent of 325 cards surveyed had no overdraft service and 1 percent offered an overdraft cushion for purchases only, meaning card users couldn't take the borrowed money out of an ATM.

Error resolution rights are more widespread, but not universal. Seventy-eight percent of cards provide full resolution rights and a provisional credit for the disputed amount.

Eighty-nine percent of the cards limited users' liability to the same extent that debit card users are protected under the Electronic Funds Transfer Act, the CFPB found. Another 8 percent gave card users partial liability protection.

Federal deposit insurance, a bedrock protection for bank accounts, is uncertain in the prepaid arena. Eleven percent of card agreements said that federal deposit insurance did not cover funds loaded on the card and another 6 percent made no mention of insurance. On the CFPB's model disclosure form, cards that are not backed by federal deposit insurance would say so prominently.

The proposed rules extend to electronic versions of prepaid cards, including virtual cards used by payment apps such as PayPal and Google Wallet, the CFPB said. Gift cards are not covered.

Prepaid going mainstream
Even though many prepaid cards lack protections that bank account users take for granted, they are rapidly becoming a mainstream financial tool for households, according to figures from the FDIC. Nearly 8 percent of all households used prepaid cards, the FDIC's 2013 survey said, and 22.3 percent of unbanked households turned to prepaid as an alternative.

Competition is bringing down fees and making cards a more attractive financial tool, Consumers Union said in a statement Wednesday, released on the eve of the proposed rules.

The organization released a report rating best and worst prepaid cards, based on value, convenience, safety and fee clarity. The report gave top marks to the Bluebird card from American Express and Wal-Mart, for people with or without a bank account.

See related: Survey: Costs of prepaid cards vary widely

*Correction: As originally published, the effective date of the proposed rule was misstated. See's correction policy.

Published: November 12, 2014

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Updated: 10-23-2016

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