Prepaid Debit Cards Users Will Get New Federal Protections
Prepaid Debit Cards Users Will Get New Federal Protections : Prepaid debit cards are a financial lifeline for many people, but a risky one. They lack many of the basic consumer protections that credit cards and bank debit cards are required to offer. That will change next year, with a raft of new federal rules intended to clamp down on a product that has been growing rapidly despite concerns about high fees, poor disclosures and weak protections for customers when something goes wrong.
Beginning in October 2017, packages containing prepaid debit cards — which are typically sold in convenience stores and other establishments — will be required to carry a standardized disclosure of the card’s monthly fee. They will also have to detail charges for cash withdrawals, customer service calls, reloading the card and other activities.
Such fees, which average around $11 a month and can swallow most of the card’s initial value, have been termed predatory by consumer watchdogs. The new rules, announced early Wednesday by the Consumer Financial Protection Bureau, are meant to shed light on a product that is often the subject of complaints.
“The rules bring prepaid cards out of the shadows, with protections that in many ways are stronger than those for traditional bank accounts,” said Lauren Saunders, the associate director of the National Consumer Law Center, which lobbied for the new rules. For instance, she said, the rules require clear fee disclosures and limits on overdraft fees — protections she would like to see extended to bank accounts.
Prepaid card issuers will also have to offer liability protection on par with the coverage that applies to credit cards. If a customer’s prepaid card is lost or stolen and the cardholder notifies the provider within two days of discovering the loss, responsibility for unauthorized charges will generally be capped at $50.
The new requirements are the result of a process begun more than four years ago by the Consumer Financial Protection Bureau, which was concerned about the proliferation of loosely regulated cards.
In late 2014, the agency released a draft of the rules. The final version, released this week, covers a broad swath of products, including government cards used for Social Security payments and other benefits, payroll cards and funds stored in mobile apps like PayPal and Google Wallet.
For many Americans, particularly low-wage workers, prepaid cards have become an alternative to bank accounts. More than $100 billion will be loaded this year on general-purpose reloadable cards like those sold by American Express, Green Dot and NetSpend, up from less than $1 billion in 2003, according to Mercator Advisory Group, a research company. About 27 percent of people who regularly use such cards do not have a bank account, according to a study by the Pew Charitable Trusts.
One of the most controversial provisions in the new rules relates to the credit lines some providers offer on their cards, which kick in when a customer’s balance dips below zero. Those fees can take customers by surprise and become a debt trap, critics say.
The rules require prepaid card merchants to evaluate a customer’s ability to repay before issuing them a credit line, and impose a 30-day waiting period before companies can offer a credit line on a new card account.
Card issuers opposed that rule. Tighter regulation on credit lines and overdraft fees would “effectively eliminate these features,” the Network Branded Prepaid Card Association, the industry’s main trade group, wrote in a letter of complaint to the consumer bureau.
In response to the new rules, the trade group said in a statement, “While we are still analyzing the lengthy final rule to determine its full impact, it is already clear that the C.F.P.B. has dismissed many of our serious concerns and moved forward with a rule that will harm the very consumers it aims to protect.”
By contrast, consumer advocates praised the changes as vital protections for cardholders.
“Research shows many consumers turn to prepaid cards to control spending and to avoid overdraft fees,” said Nick Bourke, the director of consumer finance at the Pew Charitable Trusts.
Pew conducted an extensive survey of customers who use a prepaid card at least monthly, and found that more than 80 percent of them said they would rather have a transaction declined than pay a $35 overdraft fee.
But the new regulations do not directly address one of the biggest hardships for prepaid card customers: the cascade of financial problems that system failures can set off.
Thousands of RushCard customers were cut off from their money for several days last year when a botched computer conversion froze many accounts. The company later agreed to pay $19 million to settle a cardholder lawsuit over the incident. A month later, after a failure that affected Walmart MoneyCard customers, several lawmakers demanded answers about the card’s technical glitches and called for “more oversight and consumer protection” in the prepaid market.
The rules do not detail remedies and penalties for such incidents, but they give regulators more leeway to hold companies accountable.
“No amount of rule making can create a force field around providers’ systems and products to categorically prevent this from happening in the future,” said Kristine Andreassen, a lawyer with the Consumer Financial Protection Bureau.
Source : http://www.nytimes.com/2016/10/05/business/prepaid-debit-cards-users-will-get-new-federal-protections.html
