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New rules on prepaid debit cards are here

Federal agency grants new consumer protections

The Consumer Financial Protection Bureau today announced new regulations that will strengthen consumer protections for prepaid accounts and cards.

The new rule, which runs nearly 1,700 pages long, will also apply to mobile wallets and person-to-person payment products.

Prepaid accounts are an alternative to traditional checking accounts, particularly for those who are unbanked. Typically, a third party, such as an employer, will load funds onto the prepaid card, and the user can make purchases, pay bills or withdraw cash with it.

Prepaid cards have been a booming business. About 23 million individuals use them regularly, according to the Pew Charitable Trusts. In 2012, customers loaded nearly $65 billion onto re-loadable prepaid cards, up from less than $1 billion in 2003, according to the Consumer Financial Protection Bureau.

A woman holds her Green Dot prepaid debit card in Monrovia, Calif.
Damian Dovarganes | AP
A woman holds her Green Dot prepaid debit card in Monrovia, Calif.

The new framework put forward by the CFPB requires financial institutions to disclose their cards' fees to their clients, and applies credit protections for those who use prepaid cards that allow small overdrafts. The rules also set guidelines for issuers who wish to charge clients for that additional credit.

In all, the regulations provide users with consumer protections that are akin those offered to checking account holders. The new rules are effective as of October 1, 2017.

"Though many prepaid companies already offer some of these same protections to their consumers, it is vital for consumers to have assurance that these protections are now the law of the land," said Richard Cordray, director of the CFPB.

The new regulation includes a "Know Before You Owe" disclosure, which customers can use to compare fee information across different cards. Applicable costs on a prepaid card include monthly fees, extra charges for customer service and fees for ATM withdrawals and balance inquiries.

Individuals who buy a prepaid card at a retailer will find the short-form disclosure on the back of the card's packaging. Those who sign up for a prepaid account on the web will receive this disclosure electronically.

Fee disclosure

Long-form disclosures, meanwhile, include all of the fees that may apply to consumers. You'll receive this information prior to opening the prepaid account, and you can access it on the web or by phone if you're buying a card at a store.

If your card is lost or stolen, the new regulation will protect you from unauthorized transactions, limiting your liability to $50 — provided you report the card missing within two business days.

In a bid to make comparison shopping easier for customers, the rule also requires companies to post their card agreements online and submit them to the CFPB, which will upload them to a site for viewing. Institutions have until October 1, 2018 to send their applications to the Bureau.

Some prepaid cards have overdraft credit features, in which the institution will process a small charge that exceeds the balance on the card. Typically, institutions will charge an additional fee for that overdraft protection.

Overcharge and credit protections

The new rule will now require that prepaid companies ensure that consumers are able to repay the debt before they extend credit. Those companies will also need to provide these clients at least 21 days to pay down the credit before they can assess a late charge.

Further, the new rule has put a cap on fees for this overdraft protection. For the first year in which a customer has opened the account, the total cost for the credit features may not exceed more than 25 percent of the credit limit.

Issuers must also provide customers with 45 days' notice if they raise interest rates prior to new purchases. In that time, the client may cancel the account.

"The biggest deal is that this rule prevents consumers from incurring overdraft fees," said Thaddeus King, an officer for the consumer banking project at The Pew Charitable Trusts.

"The reason most people turn to prepaid cards is to avoid debt and overdraft fees," he said. "For the past few years, there haven't been any federal regulations on this subject."