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CFPB Prepaid Card Rule: How It Affects You

Prepaid accounts will get federal protections that already exist for checking accounts and credit cards.
May 3, 2018
Banking, Banking Basics, Banking News, Prepaid Debit Cards
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Prepaid debit cards have become a popular budgeting tool as well as an alternative to checking accounts for many Americans, but historically they haven’t had laws to guard consumers from fraud or loss, among other things.

That changes with the Consumer Financial Protection Bureau’s rule, which gives prepaid accounts federal protections that already exist for checking accounts and credit cards.

» Want to compare prepaid options? See our list of the best prepaid debit cards

Quick details about the CFPB prepaid card rule

  • When the rule goes into effect: April 1, 2019 (originally was April 1, 2018)
  • Types of prepaid accounts affected: Prepaid debit cards, digital wallets, peer-to-peer transfer apps that hold balances (such as Venmo, PayPal and Square Cash), payroll cards, tax refund cards, government benefit cards
  • Types of prepaid accounts not affected: Gift cards, disaster-relief and health- and transit-related cards
  • What’s changed since the original rule published: The rule was originally announced in 2016. In January 2018, the CFPB pushed back the date when the rule would take effect from April 2018 to April 1, 2019, and limited fraud protections and the right to dispute errors to registered accounts only, meaning ones that have identities confirmed.

Protections for all prepaid debit cards

People with prepaid debit cards, in particular, benefit from the new rule. Many financially disadvantaged Americans have begun using these cards as substitutes for checking accounts, so the new rule aims to treat the cards more like those accounts. The rule includes:

A prepaid card issuer must provide short- and long-form disclosures that list fees and any overdraft programs that you can opt in to. Such programs let transactions, such as purchases or ATM withdrawals, go through even if your account balance drops below zero, but those fees can be expensive.

The disclosures also will have to note whether an account is eligible for deposit insurance (or “FDIC insured”), which lets you get your money back if the prepaid company goes bankrupt. You’ll see disclosures on issuers’ websites as well as on the back of prepaid card packaging.

Prepaid issuers won’t be required to offer periodic statements like checking accounts do, but alternatives must be provided.

The issuer must let you access your account balance by phone, review at least 12 months of online account transaction history and request at least two years’ worth of written transaction history for free. The issuer also must include a summary total that shows all fees charged to your account.

If you inform your card issuer of an error on a card you’ve registered, the company usually must confirm or deny it within 10 business days, depending on the type of transaction. The issuer may take longer than 10 days only if it credits the account with the alleged error.
Previously, prepaid card issuers offered voluntary protections that they could withhold at will. Under the new rules, though, you will have some guaranteed protection against unauthorized charges on lost or stolen cards as long as you’ve registered the card. You’ll be responsible for only up to $50 of fraudulent charges provided you report the incident within two days of learning about it. After that period, the loss limit goes up.

Note: If a prepaid account is unregistered, then the last two rights and protections above don’t apply. Registering involves providing your personal information, which can include your Social Security number, to the prepaid company or bank, generally through an online form, to identify the account under your name. The process is similar to opening a bank account. When registered, you’ll receive those protections for problems from that point onward.

Protections for prepaid debit cards with credit components

Prepaid debit cards are not credit cards nor do they build a user’s credit history. But some of them let you borrow money through features such as overdraft programs, cash advances or other credit services. The CFPB calls these cards “hybrid prepaid-credit cards” and includes the following rules to regulate them:

Prepaid companies can’t contact you about overdraft or other borrowing services until you’ve had an account with them for 30 days. This will let you learn more about your account before you choose whether to add a credit service.
No card issuer can sign you up for an overdraft or other credit service without your consent. This is in line with overdraft policies for checking accounts.
You’ll receive statements, which will include fees, other charges and information on how to repay debt.
Prepaid companies must give you at least 21 days to pay back any debt before they can charge a late fee. And that fee must be “reasonable.” This new repayment policy is better than overdraft policies for checking accounts, some of which can charge fees on overdrawn accounts after four or five business days.
The total fees for using credit features can’t go over 25% of the credit limit during the first year that the credit component is opened.

What experts say

It’s a win for consumers, says Thaddeus King, an officer for Pew Charitable Trusts’ consumer finance project. The rule “protects against automated credit products, which are triggered by overspending.”

The nonprofit research group in Washington, D.C., has advocated for better consumer protections on prepaid debit cards for many years.

“For consumers who use prepaid cards to avoid overdraft fees,” King says, “the rule — even with the updates — guarantees that these consumers will have a product that they can use.”

Core protections are in place for prepaid card users.

The updates to the rule addressed some issues financial institutions had, such as providing fraud protections to unregistered cards, “without touching the core protections that the original rule provides,” King adds.

The prepaid industry views the rule changes positively as well.

“By making adjustments to the prepaid accounts rule, including providing additional time for compliance, the CFPB has taken a step to protect consumer access to prepaid products,” says Brian Tate, current president of the Network Branded Prepaid Card Association, in a January statement.

Overall, the rules aim to bring more transparency to a prepaid marketplace that’s been criticized for taking advantage of the unbanked and other financially vulnerable consumers.

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