The FTC said Palo Alto, Calif.-based payday loan marketer Swish Marketing Inc. worked with San Clemente, Calif.-based debit card provider VirtualWorks LLC to design the payday loan application form that, when filled out on various websites, duped applicants into signing up for Visa Inc. and MasterCard Worldwide-branded prepaid debit cards.
Thousands of consumers were charged an enrollment fee of up to $54.95, and many were also charged fees and penalties from their banks when the prepaid card accounts were overdrawn. An FTC spokesman said the banks that issued the prepaid cards were not disclosed because they were not mentioned in the litigation, making their identities not public information.
The FTC, which settled with the defendants in August 2009, is mailing over 110,000 refund checks to affected consumers. The average check is between $10 and $15.
Terry Maher, General Counsel for the Network Branded Prepaid Card Association, said it is difficult to determine whether the payday loan-prepaid card scheme is a prevalent one but that it may be the result of The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the Credit CARD Act), which limited "harvester fees" on credit cards.
Harvester fees were at issue in the FTC's case against CompuCredit Corp. in 2008. The credit card marketer was charged in June of that year with, among other things, charging consumers upfront, ill-disclosed fees that drained the available balances on so-called secure credit cards. The case was settled in December 2008 and forced CompuCredit to return at least $114 million in credits to consumers.
The fee restrictions imposed by the Credit CARD Act may have forced scammers to shift from credit card to prepaid card schemes, Maher said. He noted that the Federal Deposit Insurance Corp. slapped CompuCredit credit card issuers First Bank of Delaware and Brookings, N.D.- based First Bank & Trust with "some very substantial fines because they weren't necessarily monitoring some businesses that were marketing credit cards on their behalf."
In the current case, the issuing banks were apparently not caught up in litigation because "all they did was issue a prepaid card with no balance," Maher said. The scam may have been harder to detect because of that fact, he added. "As far as the issuer is concerned who issues the card, all they know is the GPR [general purpose reloadable] card went out with a zero balance, which is not unusual," he said.
According to Maher, the real fraud occurred when, having obtained consumers' bank account information, the scammers transferred funds from those bank accounts via the automated clearing house to pay the upfront fees on the prepaid cards.
Since the inception of the Credit CARD Act, oversight responsibilities have been clarified for financial institutions (FIs) that sponsor card programs marketed by third parties, Maher said; it boils down to FIs knowing what companies they do business with.
"The financial institutions that are members of the NBPCA take seriously their obligations to do appropriate due diligence and oversight and monitoring of the business partners," Maher noted.
Toward that goal, the NBPCA is in the process of forming a prepaid card anti-fraud forum that allows issuing banks, processors and program managers a venue for the real-time exchange of information about fraud and fraud patterns, Maher said. The NBPCA is also working on anti-fraud best practices to be disseminated to association members in "the next several months," he added.
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