Prepaid card users, whose ranks have swollen in part due to consumers using the cards in lieu of checking accounts, should have the same protections as those who do bank, the Consumer Financial Protection Bureau (CFPB) said on Thursday.
The CFPB proposed a sweeping set of rules that would require prepaid companies to limit consumer losses due to theft or loss, to investigate and resolve errors, to give consumers a simple and free way to get information about their accounts, and to provide clear disclosures about fees and risks.
"Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts," CFPB Director Richard Cordray said in a statement. "Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment."
The prepaid market was less than $1 billion loaded onto cards in 2003, but it's expected to hit nearly $100 billion this year, the CFPB said. The cards, which can be replenished with cash, can be used to make purchases, receive funds, draw cash from ATMs and even to get paid by employers and receive government benefits.
Currently, prepaid cards have few of the federal protections that cover users of credit cards, debit cards and checking accounts, the CFPB said. In a speech in Delaware on the issue of prepaid card reform, Cordray noted that extending those protections to prepaid cards is particularly important given that so many people are using the cards instead of banks.
"Many of these prepaid consumers are living paycheck to paycheck, and are engaged in a constant battle to make ends meet," he said. "They are some of the most economically vulnerable among us, and most of them have no idea that the prepaid cards they choose to purchase are largely unregulated at the federal level and carry few if any protections under federal consumer financial law."
The CFPB said many of the prepaid cards are linked to credit card brands and can be used in much the same way, so when a prepaid card has a credit card component, federal credit card protections should apply. That would include requiring a monthly billing statement showing the interest rate, what's owed and relevant information about repaying the debt.
Among the other proposals, the rules seek to limit when and how much a consumer can be penalized for a late payment. And the CFPB wants to restrict card issuers from being able to grab money that was loaded onto the cash side of the card and apply it as a payment to the credit side.
A full copy of the proposed rules can be found on the CFPB website.
Consumer groups agree changes are needed and suggest even more could be done to protect card users, such as mandatory insurance from the Federal Deposit Insurance Corp.
"It's time for consumer protections to catch up with this fast growing new way to pay," Christina Tetreault, staff attorney for Consumers Union, said in a statement. "The CFPB has proposed some important new safeguards that will make a real difference for consumers. But there's more work to be done to ensure consumers get the protections they deserve when they rely on prepaid cards."