CFPB adopts new prepaid card consumer protections

Wednesday, October 05, 2016

The Consumer Financial Protection Bureau (CFPB) has set new standards to protect prepaid account consumers. The rule covers general purpose reloadable prepaid cards; payroll cards; student financial aid disbursement cards; tax refund cards, and federal, state and local government electronic benefit transfer (EBT) cards, such as those used to distribute Social Security benefits and unemployment insurance. The rules also apply to mobile wallets that store funds. Prepaid rules will take effect in October 2017. (Read the full regulation.)

• Transaction statements: Basic information about transactions made using the card must be available for free by phone and online (and in writing upon request) unless the issuer provides automatic periodic account statements. Cardholders can view their account balances, transaction history and any fees they are charged.
• Error resolution: Issuers must cooperate with cardholders who find unauthorized or fraudulent charges—or other errors—on their accounts. Issuers must investigate and resolve cardholder complaints in a timely way and, if applicable, restore any missing funds. If disputes are not resolved shortly, issuers will be required to provide credit for the disputed amount while they investigate the cardholder's dispute. 
• Lost cards and unauthorized transactions: The new rule protects against withdrawals, purchases or unauthorized transactions that happen when lost or stolen prepaid cards are reported to the issuer. The rule limits consumers’ liability for unauthorized charges and creates a timely way for cardholders to get their money back. Cardholders must promptly notify (within 2 days after learning of the problem) their financial institution to limit responsibility for unauthorized charges to $50. (These rules closely track Reg E, the Electronic Fund Transfer Act, which currently applies to bank account debit cards.)

Disclosures

It has been difficult for consumers to learn about fees and other costs of using specific prepaid accounts before they purchase. This is because the disclosures typically have been inside the packaging and have been hard for non-cardholders to find online. This has made it difficult to comparison shop and make well-informed decisions. The new rule sets an industry-wide standard on fee disclosures for prepaid accounts, requiring two forms, one short and one long, with easy-to-understand disclosures. The short form is designed to highlight key prepaid account information, including any fees and cardholder costs, at a glance.

To make comparison shopping easier, the rule requires prepaid account issuers to post account agreements on their websites. Additionally, by the fall of 2018, issuers must submit all agreements to the CFPB for public posting on the bureau's website.

Click here to see examples of the disclosures. 

Credit and overdraft prohibitions

The new rule doesn't prohibit credit or overdraft features but sets rules for any plan that lets consumers spend more money than they have in their prepaid account.

• Ability to pay: Issuers must make sure prepaid cardholders can repay the debt—before they are offered credit. Issuers are prohibited from allowing cardholders to open a credit card account or increase a credit line related to a prepaid card until they assess the cardholder's ability to pay. Companies will be required to ensure that young people under age 21 have adequate "independent" income to handle the credit line.
• Monthly credit billing statement: Prepaid companies have to give consumers regular statements like those credit card consumers receive. The credit statement must detail fees, and if applicable, the interest rate, what they have borrowed, how much they owe and other key information about repaying the debt.
• Reasonable time to pay: Prepaid companies, like credit card issuers, will be required to give consumers at least 21 days to repay their debt before they are charged a late fee.
• Limits on late fees: Late fees must also be “reasonable and proportional” to the violation.

During the first year a credit account is open, total fees for credit features cannot exceed 25 percent of the credit limit. Generally, card issuers cannot hike the interest rate on an existing balance unless the cardholder has missed two required payments in a row. Card issuers may raise the interest rate in advance of new purchases, but generally must give the consumer 45 days advance notice, during which time the consumer may cancel the credit account.

The CFPB rule requires companies to wait 30 days after a consumer registers the prepaid account before offering the credit feature to the consumer. Prepaid companies cannot automatically seize a credit repayment when a prepaid account is loaded with funds nor can they automatically take funds from the prepaid account when a credit payment is due without the cardholder's permission. Automatic payment withdrawals, if authorized by the consumer, can take place only once per month. Payment cannot be required until 21 days after the cardholder's statement is mailed.

The new rules apply as of Oct. 1, 2017. The requirement that issuers submit cardholder agreements to the CFPB takes effect in October 2018.

In the coming months, Consumer Action will be updating our prepaid educational materials to reflect the new rules. Until next October, our existing materials are accurate.