CFPB Proposal Would Expand Reg E Protections for Prepaid Cards

WASHINGTON — The Consumer Financial Protection Bureau said Tuesday it plans to issue a rule that would expand Regulation E consumer protections for prepaid cards.

Although some protections already apply to certain kinds of prepaid cards, such as gift or payroll cards, the agency is proposing to extend the rules to general purpose reloadable cards.

In an advanced notice of proposed rulemaking issued late Tuesday, the bureau said it will evaluate how fees and terms for those cards should be disclosed, the costs and benefits of requiring providers to protect consumers from unauthorized transactions, and the issues related to special card product features, such as small dollar loans or lines of credit.

CFPB Director Richard Corday said that prepaid card users are some of the most vulnerable consumers.

"All consumers need, and deserve, products which are safe and whose costs and risks are clear upfront," Cordray said in a press release. "Yet right now prepaid cards have far fewer regulatory protections than bank accounts or debit or credit cards. That's why we are launching a rulemaking to promote safety and transparency in this emerging market."

The popularity of general purpose reloadable cards has skyrocketed in recent years, with many consumers now using them in a manner similar to a debit card that is linked to a checking account, the agency said.

The bureau is hosting a field hearing on the prepaid card market in Durham, N.C., on Wednesday. It also launched an interactive tool, Ask CFPB: Prepaid Cards, with answers to frequently asked questions about the prepaid cards.

The prepaid card market now totals $57 billion, and is expected to grow 42% per year between 2010 and 2014, according to data from Mercator Advisory Group and provided by the bureau. The total amount loaded onto prepaid cards is projected to hit $167 billion by 2014.

The agency also said most of those consumers appear to be using the cards as a substitute for a checking account. The largest pre-paid card program manager in the country has reported that funds directly deposited onto cards increased by nearly 70% from 2010 to 2011, and the second largest program manager said 42% of customers had direct deposit linked to their accounts at the end of 2011.

The bureau said its goals are to ensure that consistent minimum standards apply across similar consumer financial products; that fees are transparent; and that risks of fraud or loss are appropriately allocated.

Although Regulation E has applied to payroll cards since August 2006, the Federal Reserve Board — which previously administered the rule — opted not to extend the rules to general purpose reloadable cards at that time because they believed the cards may only be used on a short-term basis and hold minimal funds, according to CFPB.

The board also extended some protections to general purpose gift cards — including limits on dormancy fees, service fees and expiration dates on gift cards — but noted that the protections did not apply to general purpose reloadable cards used as replacement products for checking or deposit accounts, the bureau said in its proposal.