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A Strong Rule on Prepaid Cards from the CFPB

Adam Rust's picture

Posted October 5, 2016

I applaud the CFPB for writing a strong final rule for prepaid debit cards, as it will greatly enhance the protections afforded to the millions of consumers who use these cards as their main banking account. Nonetheless, there are areas where the rule could have been stronger, as it still leaves open the possibility that some consumers will pay overdraft fees.
Update: The rule will go into effect today. You can see more about the terms of the final rule at the following site. 
While the final rule was announced in 2016, the CFPB proposed a minor change in the fall of 2017. Those changes have been added to the final rule and will be a part of the new regime governing the cards going forward today.
Due to comments from some program managers regarding charge-back rights on some funds, the CFPB narrowed the protections on only accounts where the account holder had registered his or her identity.  As a result, when a person deposits funds via a "load," the money does not receive error resolution and charge-back protections until the person completes the process of giving their personally-identifiable information to the company. Some commenters from the industry made the point that the loophole if left open, would have invited fraud.
The CFPB is making sure that consumers with prepaid debit cards receive the same protections as do those individuals that use a checking account. In some respects, the scope of protections for prepaid cards may be even stronger than what currently exists for a traditional bank account.

The rule has the effect of putting fraud and error resolution protections for prepaid cards on the same level as those that already exist for a traditional checking account. Because of the rule, prepaid card account holders will have stronger protections if funds are stolen from their accounts. Similarly, if a consumer wants to contest a charge, the process will be the same as it would be for a checking account.

A significant impact of the rule, perhaps the most significant in terms of financial impact, is the part that requires companies to wait thirty days before allowing an applicant to receive an overdraft service. The rule says that companies must demonstrate a process of underwriting, as well. NetSpend, the largest purveyor of overdraft services on prepaid debit cards, will lose out on a revenue stream of $80 million per year.
Prepaid debit protections:
  • Uniform long and short form disclosures with specific data points for the most common fees. 
  • Error resolution rights and fraud protection rights that are consistent with standard checking accounts.
 Credit protections on overdraft services:
  • Companies will have to wait 30 days before offering an overdraft service to a new prepaid card account holder.
  • Full CARD Act protections for billing and late fees; the rule established limitations on late fees and gives consumers the right to a periodic statement.
  • Interest and fee charges may not exceed one-fourth of the credit line in the first year that account is open.
  • Banks need authorization from the consumer to pull funds from a prepaid account in order to satisfy an overdraft obligation.
The rule falls short by failing to require deposit insurance on every account. Issuers only have to disclose whether or not consumer's deposits are protected. Still, the industry has been moving in the right direction, and most issuers offer FDIC or NCUA pass-through insurance.

Much of the rule focuses on issues related to how overdraft and credit will be applied to the standard prepaid debit platform. Specifically, the Bureau's rule establishes a regulatory framework designed to protect consumers and prevent future evasions - for example, any future iterations of a hybrid form of a prepaid card and a credit card that are abusive.

This forward-thinking portion of the rule ensures that if prepaid card issuers do offer credit cards in connection with the prepaid card in the future, then consumers will receive full CARD Act protections. The CFPB is creating a firewall, where prepaid is prepaid and credit is credit.

The CFPB's action today is very important. Millions of American households, and most often those that have less wealth, are currently using prepaid debit cards as their main transaction account. Prepaid cards can save people money, as the decision to receive funds on a card allows a person to avoid the cost of check cashing fees.

The rule covers general-purpose reloadable prepaid debit cards, payroll cards, student cards, mobile wallets, P2P payment services, tax refund cards, and some government benefit cards.

For more, see "8 Principles for the Reform of the Prepaid Debit Card."

Our comment on the proposed final rule, published March 23rd, 2015: