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Lawmakers, regulators target prepaid card overdraft fees

Kelly Dilworth

Prepaid cards that allow you to overdraft your account for a hefty fee could soon face extinction if federal regulators and Democratic lawmakers get their way.

Earlier this month, Senator Jeff Merkley introduced a consumer protection bill dubbed Stopping Abuse and Fraud in Electronic (SAFE) Lending Act that threatened overdraft fees and “any other predatory fees on prepaid cards.” The bill, co-sponsored by Senators Bernie Sanders, Elizabeth Warren and 10 other Democratic senators, mostly focuses on predatory payday lending, but it also includes a provision outright banning prepaid card issuers from charging overdraft fees.

In a press release, Senator Merkley framed the provision as a way to stop unscrupulous payday lenders from gaining access to consumers’ prepaid accounts and draining them, thus inflicting further financial damage. Some payday lenders distribute their loans on prepaid debit cards. But the text of the bill covers all prepaid cards, not just prepaid cards distributed by payday lenders.

According to Merkley, the harms caused by overdraft fees on prepaid cards are similar to overdrawn checking accounts and so deserve additional regulation. “Let us assume you have perhaps $50 in your account, you buy something for $52 and maybe you immediately get charged a $35 fee,” said Merkley when introducing the bill to the Senate. “Then, because you don’t know it is an overdraft because they didn’t turn down the transaction, you buy a pack of gum for 50 cents and there is another $35 fee. You buy a hamburger for lunch and there is another fee. So you can see how these predatory fees line up quickly.”

Meanwhile, the Consumer Financial Protection Bureau is taking aim at overdraft fees on prepaid cards as well, but instead of banning overdraft fees completely, it’s considering treating prepaid cards that allow overdrafts like credit cards. In 2014, the consumer watchdog proposed tough new rules requiring prepaid card issuers to assess cardholders’ ability to pay an overdraft fee before issuing a card and to comply with other credit card rules imposed by Regulation Z when issuing cards that allow overdrafts. The CFPB’s proposed rules would also require cardholders to specifically opt into overdraft protection.

Industry advocates say that, if passed, the CFPB’s proposed rules on prepaid cards would cripple the industry and effectively squelch prepaid card issuers’ ability to offer overdraft protection. In an interview with American Banker, prepaid card executive and NetSpend President Chuck Harris hinted that NetSpend might stop offering overdraft protection on its cards if the CFPB’s rules are implemented. “It becomes challenging to continue to offer that product,” said Harris in the interview. “At the end of the day we built the feature for a very important need of our customer.”

Unlike the Senate bill, which is unlikely to get passed anytime soon, the CFPB rules are likely to be announced sometime in the near future, potentially reshaping the prepaid card market for good. After a nearly two-year comment period, the CFPB is expected to release its prepaid card rules sometime this spring.

Last month, the CFPB hinted that it could release its updated prepaid card rules relatively soon when it highlighted prepaid cards in its monthly consumer complaint snapshot. “A variety of fees — replacement card, monthly, inactivity, transaction, balance inquiry, PIN change and overdraft — are a major concern for consumers,” said the CFPB in its March 2016 snapshot.

“Prepaid products provide a crucial financial lifeline to many unbanked and under-banked households,” added CFPB Director Richard Cordray in a statement. “It is important that consumers who rely on this important financial product can do so safely and efficiently, without undue hassles and runarounds.”

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