Feds Urged To Ban Overdraft Fees On Prepaid Cards
Consumer groups claim prepaid cards in danger of becoming new payday loans
Saturday, July 28, 2012
Consumer groups submitting comments to the Consumer Financial Protection Bureau (CFPB) for rules on prepaid credit cards urged the government watchdog to ban overdraft and credit features on the cards.
“The most important step that the CFPB can take to ensure that prepaid cards fulfill their promise, and to prevent unfair, deceptive or abusive practices, is to ensure that prepaid cards are true to their essence as a prepaid transaction product,” the groups said in their comments.
The comments were submitted by the Center for Responsible Lending, the National Consumer Law Center and the Consumer Federation of America.
Similar to debit cards
Prepaid cards work like debit cards. Consumers “load” them by depositing money to their accounts, much like they would do at a bank. In fact, prepaid cards are growing in popularity because so many consumers have stopped using banks to escape high fees. But prepaid cards come with plenty of fees of their own.
Now some prepaid card issuers are also offering credit features, which the consumer groups say is a bad idea, undermining the integrity of the prepaid card market and the safety of the consumers who use the cards.
“Prepaid cards users are vulnerable consumers, who want controls on overspending,” the groups said. “Prepaid card credit features are promoted for large or unexpected expenses but designed to be used routinely, encouraging a cycle of debt -- a practice that is especially pernicious since prepaid cards do not underwrite for ability to pay.”
The groups say banning overdraft fees and credit features will minimize account closures and protect access to transaction accounts.
Card features are changing
Theoretically, you shouldn't be able to overdraw your prepaid card because the spending limit should be determined by how much money is on the card. In the past, many cards didn't offer that feature. If you tried to spend money you didn't have, the card would be declined.
Some consumers actually closed their bank accounts and obtained prepaid cards for that very reason. Now, the consumer groups warn that feature is being undone by the addition of overdraft and credit features, which they argue are just expensive loans.
“Prepaid credit features will undo the elimination of rent-a-bank payday lending that was laboriously achieved a decade ago and be much more difficult to control if left to spread,” they warn. “Prepaid credit features are already being used to circumvent the law, but it is early enough to nip this trend in the bud.”
Evading the law
The groups charge credit on prepaid cards evades federal and state laws protecting public benefits and wages needed for necessities and protecting military service members. Prepaid cards with credit features are credit cards, they argue, but escape Truth In Lending's credit card protections.
CFPB asked for comments on prepaid cards in May, suggesting at the time that it viewed the evolving industry as a potential problem for consumers. The agency said its rulemaking will focus on “General Purpose Reloadable” prepaid cards which allow consumers to load the cards with money upfront and use them as if they were checking account debit cards.
According to a 2009 FDIC study, 9.7 percent of all households used these prepaid cards. Mercator Advisory Group reports that the prepaid market totals $57 billion and is expected to grow at a rate of 42 percent per year from 2010-2014. The two largest prepaid card program managers have reported a jump from 3.4 million active cards in 2009 to over 7 million this year. It is projected that the total dollar amount loaded onto prepaid cards will hit $167 billion in 2014.
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