Posted: 1/13/2017

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With so many consumers already a part of the prepaid account market, and many more projected to be using these financial products in the future, new protections will go into effect late 2017 to protect prepaid account users. Check out a breakdown of what is to come.

prepaid cards

Millions of consumers use prepaid debit cards or access prepaid accounts on a daily basis as an alternative to traditional checking accounts. They allow consumers access money to take care of everyday expenses, to pay bills, for shopping, to transfer money to others, and withdraw money from an ATM. Many find these accounts to be an easy way to receive income and benefits by direct deposit or even items such as tax refunds without waiting for a check. With so many consumers already a part of the prepaid account market, and many more projected to be using these financial products in the future, new protections will go into effect late 2017 to protect prepaid account users. Check out a breakdown of what is to come.

Starting October 2017, financial institutions offering prepaid cards and accounts will have to limit consumers’ losses when funds are stolen or cards are lost. They will also have to investigate and resolve errors and give consumers free and easy access to account information. In addition, consumers must receive clear, up-front information on fees and other details. Also, if the prepaid companies allow consumers to use credit on their accounts to cover transactions that they lack the money to cover, the company must provide protections similar to credit cards.

The new rule covers traditional prepaid cards, including general purpose reloadable cards, and also applies to mobile wallets, person-to-person payment products, and electronic prepaid accounts that can store funds. Also included are:  payroll cards, student financial aid disbursement cards, tax refund cards, and certain government benefit cards such as those used to distribute unemployment insurance and child support.

A Breakdown of Protections

A more detailed look into the new protections published by the Consumer Finance Protection Bureau (CFPB) details exactly what protections will be in place for account users:

  • Free and easy access to account information. Account information—including balances, transaction history, and fees incurred—must be provided for free by phone, online, and in writing upon request, unless periodic statements are provided.
  • Error resolution. Consumers who report errors, unauthorized charges, or fraudulent charges on their accounts have the right to have the financial institution investigate and resolve the incidents in a timely manner and, where appropriate, restore missing funds. If the institution cannot complete this process within 10 business days, they will generally be required to provisionally credit the amount in dispute into the consumers account until their investigation is completed. The bank can reverse the credit if they find that the transaction was authorized.
  • Lost card and fraudulent transaction protection. If a consumer’s card is lost or stolen, the new rule will limit their liability for unauthorized charges to $50, as long as the consumer promptly notifies their financial institution of fraudulent transactions, such as withdrawals and purchases.

What Prepaid Institutions Must Disclosure

One of the main goals of the new protections for prepaid accounts is transparency. The CFPB aims to have financial institutions give consumers standard, easy to understand, up-front information about prepaid accounts. Setting an industrywide standard on how fees are disclosed allows consumers the ability to compare plans and make well-informed decisions. Under the CFPB rule, consumers will have access to disclosures in both short and long form.

Short form disclosures will clearly and concisely highlight key account information, including fees such as periodic fees, per purchase fees, ATM withdrawal and balance inquiry fees, cash reload fees, customer service fees, inactivity fees, and additional types of fees that may be charged. A long form will also be available to provide a comprehensive list of fees and key information disclosure. The information will be accessible to all consumers before they acquire an account. In addition, prepaid account issuers will be required to post on their website their account agreements.

Credit Protection Extensions

Most prepaid financial products are debit accounts where consumers can only use the money they add to the card. Some accounts allow consumers to add on credit products that allow them the option to spend more money than they have deposited into their prepaid account. Under the new rule, prepaid issuers must give consumers protections similar to those on credit cards if they are allowed to use credit products if their funds don’t cover transactions.

The financial institution must make sure consumers have the ability to repay the debt before offering credit. They cannot open a credit card account or increase a credit line related to a prepaid account unless they take into consideration the consumer’s ability to make required payments.

Additionally, prepaid companies will have to provide regular statements to consumers that detail fees, applicable interest rates, how much is owed, and other crucial information about repaying the debt.

Customers will be allowed at least 21 days to repay the debt before they access any late fees. Any late fees must be reasonable and proportional to the violation of the account terms.

Finally, during the first year a credit account is open, total fees for credit features cannot exceed 25 percent of the credit limit. In general, the interest rate on an existing balance cannot be hiked up unless the account holder has missed back-to-back payments. In instances where card issuers do raise the interest rate in advance of new purchases, they must give the consumer 45 days advance notice, allowing the consumer the opportunity to cancel the credit account.

More information on these protections that are set to be implemented in October 2017, a copy of the rule, and other key points regarding the regulation, can be found on the CFPB website at http://www.consumerfinance.gov/prepaid-rule/.

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Tags: Consumer Financial Protection Bureau, prepaid debit card, new laws

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