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From Banking and Finance Law Daily, November 14, 2014

Trade associations commend CFPB for actions on prepaid cards, but more needed

By Stephanie K. Mann, J.D.

Prepaid cards and other prepaid fund accounts would be subject to strong consumer protection requirements under rules proposed by the Consumer Financial Protection Bureau on Nov. 13, 2014. The bureau is proposing to require prepaid product sellers to give consumers account-opening disclosures and periodic statements. The proposal also would establish error-resolution procedures, limit consumer liability for unauthorized charges, and impose rules that would govern prepaid cards offering credit features, such as those that allow overdrafts. The changes would be accomplished through amendments to Reg. E—Electronic Fund Transfers (12 CFR Part 1005) and Reg. Z—Truth in Lending (12 CFR Part 1026) (see Nov. 13, 2014, issue of Banking and Finance Law Daily).

The CFPB proposal is not limited to accounts that rely on physical cards. It also would apply to accounts that give consumers access to prepaid funds through cell phones or other electronic means. It covers general purpose reloadable cards, payroll cards, and other types of prepaid fund accounts that are not considered to be gift cards. The proposal relies on a CFPB study that analyzed 325 prepaid account program agreements.

Forced arbitration. According to Public Citizen, prepaid cards increasingly have become a convenient tool for consumers. A shopper can simply add value to a card that can be used later to buy a product or service at a cash register or online. Because of their ease of use, the market for prepaid cards has grown dramatically over the years, outpacing debit and credit card use.

However, said Public Citizen, most prepaid card terms deprive users’ ability to sue financial institutions that violate the law and harm users in the process. Instead of court, prepaid card terms force users to settle disputes in private arbitration. Overwhelmingly, forced arbitration in prepaid cards also prohibits users from banding together in class actions. Class actions allow consumers to seek remedies not only for themselves but for others similarly victimized by the same bad practices, argued the trade association.

The CFPB has been conducting an ongoing arbitration study and reported the prevalence of arbitration clauses and class-action bans in numerous financial products. In prepaid card terms, it found that:

  • about 81 percent of the prepaid cards studied (51 of 63 prepaid card contracts), and all of the cards for which market share data are available, have arbitration clauses in their cardholder contracts;

  • the overall use of arbitration clauses in prepaid card contracts is greater than in either credit card or checking account contracts; and

  • 96.1 percent of clauses in the CFPB’s prepaid study sample did not allow arbitration to proceed on a class basis.

Public Citizen has urged the bureau to release the results of this study as soon as possible so the CFPB can act on forced arbitration measures.

CBA reaction. The Consumer Bankers Association has previously supported clear and informative disclosure of fees and account terms for prepaid cards and regulation protecting consumers without stifling innovation. Therefore, the trade association supports the proposed application of Regulation E to prepaid card products with minor exceptions to ensure prepaid cards maintain the value afforded to consumers. “Many prepaid providers already voluntarily apply these protections and we look forward to working with the CFPB to ensure consumers are provided with safe and effective financial service products at reasonable terms and suited to sustain the viability of the prepaid product. CBA continues to review the proposed rule and how it may affect the prepaid marketspace.”

Continued improvements necessary. The Pew Charitable Trusts has commended the CFPB for putting forward proposed rules that will make general purpose reloadable prepaid cards safer and more transparent. Pew said that prepaid card users stand to benefit from CFPB's suggested rules for enhanced consumer protections; however, Pew is also calling for further improvements—including to the proposed consumer disclosures—as the bureau continues its work on the rules.

In response to the CFPB’s announcement, Susan Weinstock, director of Pew’s consumer banking project, stated, "The CFPB has now taken important steps toward making prepaid cards a safe and viable option for consumers. By proposing to extend the liability protections that cover checking accounts to prepaid cards, the CFPB will give consumers a level of protection they now lack.”

However, Pew believes that the new disclosure rules will not eliminate the guesswork in deciding which prepaid card to purchase. Because the full disclosures will only be on the companies’ websites, and not at the point of sale, consumers will be unable to comparison shop.

In addition, Pew believes that the final rule must include federal deposit insurance coverage because consumers would have no way of knowing whether the bank holding their prepaid funds is financially sound. “The CFPB has the regulatory authority to require this, and it should. We look forward to working with the bureau during the next phase of rule development to incorporate these and other improvements."

Companies: Consumer Bankers Association; Pew Charitable Trust; Public Citizen

MainStory: TopStory ConsumerCredit CFPB CreditDebitGiftCards

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