CFPB Proposes New Federal Rules to Protect Users of Prepaid Cards
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November 13, 2014

The Consumer Financial Protection Bureau (CFPB) Thursday proposed new federal rules that would provide more consumer protections for users of prepaid cards.

If approved, the new rules would require prepaid companies to limit consumers' losses when funds are stolen or cards are lost, investigate and resolve errors, provide easy and free access to account information and adhere to credit card protections when credit services are used. Disclosures would also be required so that consumers have clear information about the costs and risks before enrolling.

The prepaid products covered by the proposal also include: payroll cards; certain federal, state, and local government benefit cards such as those used to distribute unemployment insurance, child support, and pension payments; student financial aid disbursement cards; tax refund cards; and peer-to-peer payment products.

"Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts," said CFPB Director Richard Cordray. "Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment."

Prepaid cards or mobile accounts are loaded with funds by a consumer or a third party, such as an employer. Consumers use the cards to make payments, store funds, get cash at ATMs, receive direct deposits and send funds to other consumers. Some cards offer credit services similar to credit cards. Unlike credit cards and debit cards, though, prepaid cards don't offer the same protections against fraud, account errors and don't have the same transparent disclosures that banks and credit card companies are now required to provide.

People are increasingly using the cards in lieu of traditional checking accounts. The CFPB reports that the amount of money consumers loaded onto general purpose reloadable prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. The total dollar value loaded onto general purpose reloadable cards is expected to continue to grow to nearly $100 billion through 2014.

Under the new rules, companies offering prepaid cards would be required to either provide periodic statements or make account information easily accessible online and for free. Companies would also be required to provide disclosure forms that list the fees associated with the account in a clear and easy-to-understand manner. These disclosure forms would also be made available for free online so that consumers can comparison shop and make informed decisions.

Like credit card companies, prepaid companies would be required to work with consumers who encounter errors on their account, like a transaction that was double charged. The rules would require that companies work with consumers so long as errors are reported in a reasonable time frame. Prepaid cards currently work like cash, in that if they are stolen or used fraudulently, there is little a consumer can do to recoup their funds. The new rules would limit the consumer's responsibility for these unauthorized transactions so long as they are reported in a timely manner. Consumers' responsibility would be limited to $50.

For prepaid companies that offer credit services, they would be required to provide similar protections afforded to users of traditional credit cards. Prepaid companies must first make sure that consumers have the ability to repay their debt before offering credit services. These services could only be offered 30 days after a consumer enrolled in a prepaid account and funds from the prepaid account could not be used to repay a credit debt unless the consumer has authorized such a transaction.
Companies must provide a monthly billing statement and provide reasonable time to pay a limits on late fees. Limits would also be placed on fees and interest charges.

The proposed rules will be available for public comment for 90 days. A copy of the proposed rules and instructions for providing public comments can be found here.