Last week, the Consumer Financial Protection Bureau (CFPB) proposed a new rule regarding consumer protections and disclosures in the prepaid debit card industry. The rule would help bring the prepaid card industry under the Electronic Fund Transfer Act and Truth In Lending Act while also providing a disclosure mechanism to help consumers when they are comparing prepaid products.1
Many financial and commercial firms offer clients the opportunity to purchase and use prepaid cards. Consumers can load or store money onto these cards directly, circumventing the need for a checking account, and then use them for purchases like any other debit card.2 While still uncommon, usage has skyrocketed over the last decade, from $1 billion loaded in 2003 to nearly $100 billion in 2014.3 Most importantly, many users of prepaid cards are unbanked, meaning they have no funds in a bank, making them more financially at risk relative to the general public.4 At the same time, the industry as a whole is under regulated – the industry is new and has yet to be included under major financial protection acts. This combination led to an environment ripe for exploitation, and to the CFPB’s new rule proposals.
Generally, the proposals bring prepaid card companies under the Electronic Fund Transfer Act and Truth In Lending Act. Many of the rules themselves are not new but simply applications of preexisting rules to the prepaid card industry.5 The key provisions include an error resolution mechanism for double charges or charges in error (where before a consumer would likely have no remedy), liability protections in instances where consumer cards are lost or stolen and periodic or available online financial statements to card holders.6 Additionally, some prepaid cards offer credit, whereby consumers can spend more money than they have loaded onto their cards. These options would now be treated as credit cards and subject to the same regulation as any other credit cards.7
Another prong of the proposed rules is called “Know Before You Owe,” and regulates disclosures by card issuers to consumers.8 Prepaid card companies, in advertising and pitching their products, disclose information to potential consumers about the prepaid cards offered for sale.9 These disclosures provide information on fees, using the cards, reloading the cards, etc. for each card plan offered by the company.10 However, each company provides disclosures in different forms, which make comparison of card products difficult for most consumers.11 Under the CFPB proposal, issuers would be required to use either a short or long standardized form provided by the CFPB.12 The short form will provide general information regarding fee structures directly related to their cards while the long form will contain all short form fees as well as any other possible fees related to the account.13 Such standardized fee disclosures will make it much easier for consumers to compare card options and choose the package most fitting for them while avoiding the potential risk of hidden, fine print fees.
These proposed rules, if enacted, are likely to only increase the growth of prepaid cards.14 With disclosure and transparency rules, consumers will know exactly what products they are buying and have the ability to truly pick and choose between products while avoiding predatory fee structures.15 Prepaid card issuers are also likely to compete in a race to the top in consumer-friendly terms exactly because of this transparency. Firms and ratings agencies such as Fitch do not expect any real threats to card issuers under the proposed rules due to these firms’ infrastructure, scale, and marketing16
The CFPB’s proposed rules are a great boon for consumers and a promising step from the recently formed CFPB. Even though only a small portion of the population uses prepaid cards, these individuals are financially vulnerable and the industry is growing rapidly. The CFPB is attempting to stem off problems before they arise.
For general information on the proposed rules, see the CFPB’s proposal for strong federal protections for prepaid products at http://www.consumerfinance.gov/newsroom/cfpb-proposes-strong-federal-protections-for-prepaid-products, while the proposed standardized forms can be found at http://files.consumerfinance.gov/f/201411_cfpb_prepaid-model-sample-disclosure-forms.pdf.
CFPB, Study of Prepaid Account Agreements 3-4 (2014), available at http://files.consumerfinance.gov/f/201411_cfpb_study-of-prepaid-account-agreements.pdf [hereinafter Prepaid Account Agreements]. ↩
Richard Cordray, Director, CFPB, Prepared Remarks of CFPB Director Richard Cordray at the Prepaid Products Field Hearing (Nov. 13, 2014), available at http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-prepaid-products-field-hearing/. ↩
CFPB, CFPB Proposes Strong Federal Protections for Prepaid Products (2014), available at http://www.consumerfinance.gov/newsroom/cfpb-proposes-strong-federal-protections-for-prepaid-products [hereinafter Federal Protections]. ↩
Cordray, supra note 2. ↩
Prepaid Account Agreements, supra note 1. ↩
Cordray, supra note 2. ↩
Eric Goldberg, Prepaid Cards: Help Design a New Disclosure, CFPB (Mar. 18, 2014), available at http://www.consumerfinance.gov/blog/prepaid-cards-help-design-a-new-disclosure. ↩
Federal Protections, supra note 3. ↩
Fitch: Top Prepaid Card Issuers May Benefit From New CFPB Regs, MarketWatch (Nov. 14, 2014) http://www.marketwatch.com/story/fitch-top-prepaid-card-issuers-may-benefit-from-new-cfpb-regs-2014-11-24. ↩
Cordray, supra note 2. ↩
MarketWatch, supra note 14. ↩
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