The Green Sheet Online Edition
October 24, 2016 • Issue 16:10:02
CFPB issues rules for reloadable prepaid debit cards
The Consumer Financial Protection Bureau adopted tough new rules for prepaid debit cards that are set to take hold in October 2017. The new rules apply specific federal consumer protections to mobile wallets, person-to-person payment products and other electronic accounts that store funds, as well as to general purpose prepaid debit cards.
"Many consumers rely on prepaid cards to make purchases and access funds, but until now they were not guaranteed strong consumer protections under federal law," said CFPB Director Richard Cordray. "This rule closes loopholes and protects prepaid consumers when they swipe their card, shop online or scan their smartphone. And it backs up those protections with important new disclosures to let consumers know before they owe."
Prepaid debit cards are the fastest growing consumer payment method in the United States, ballooning from $1 billion in card loads in 2003 to nearly $65 billion in 2012. And card loads are expected to grow by more than 72 percent, to $112 billion, by 2018, according to the CFPB. However, they have existed largely in a regulatory no-man's land.
The industry's rapid growth has attracted much attention and more than a few concerns from consumer groups and regulators. Early on, the cards were criticized for high fees, and more recently for technology glitches. RushCard, for example, sustained massive technical glitches in 2015 that kept hundreds of thousands of cardholders from accessing their accounts for days.
The CFPB began working on a set of prepaid rules in 2014. The final rule, published Oct. 5, 2016, and weighing in at just under 1,700 pages, applies specific consumer protections to the cards, including provisions of the federal Truth-in-Lending Act (as implemented by Federal Reserve Regulation Z) and the Electronic Funds Transfer Act (Regulation E). Specific provisions require:
- Free and easy access to account information, such as online or by telephone
- Error resolution rights and provisional credits for disputed transactions
- Limited cardholder liability for unauthorized transactions ($50 limit)
- Easy-to-understand disclosure statements
- Easy access to standardized card agreement information (via the web or paper) to support comparison shopping
The most contentious provisions, however, spell out specific consumer protections for prepaid card products that allow cardholders to overdraw their prepaid accounts. The CFPB had proposed disallowing overdrafts, which the National Consumer Law Center estimates cost consumers over $50 million a year. Prepaid companies balked, and the final rule instead imposes Reg Z protections on these activities. The final rule includes provisions for underwriting requirements, detailed periodic statements, limits on late fees and charges, and a 30-day waiting period before a new cardholder can be offered overdraft privileges.
The prepaid card industry is not happy with the final rule. "Instead of fostering financial innovation and inclusion, the CFPB's rule will ultimately limit access to an essential mainstream consumer product that helps millions of Americans participate in the digital economy, affordably manage funds and safely hold money," said Brad Fauss, President and Chief Executive Officer of the Network Branded Prepaid Card Association.
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