Consumer Bureau Offers Prepaid Card Protections, But A Critical Safeguard Is Needed

The Consumer Financial Protection Bureau (CFPB) today announced new rules of the road that aim to make the use and costs of prepaid card accounts more transparent for users.

However, a fundamental flaw of most prepaid cards — that their terms deny consumers their right to go to court – may undermine the impact of these new rules.

Prepaid cards – formally known as general-purpose reloadable (GPR) prepaid cards – increasingly have become a convenient tool for consumers. A shopper can simply add money to a card that can be used later to buy a product or service at a cash register or over the Internet. Because of their ease of use, the market for prepaid cards has grown exponentially over the years, outpacing debit and credit card use.

But consumer advocacy groups have reported weak protections for prepaid card users, particularly for people in vulnerable communities who do not, or are unable to, open and maintain bank accounts. Advocates also have pointed to the lack of transparency in how prepaid cards are run, including how fees are charged on cards.

It’s significant that the CFPB has examined the problems and responded with a proposed rule that would, among other things, improve disclosures, add protections for lost and stolen cards, and make it easier for consumers to access their prepaid accounts. Notably, the CFPB also proposes to bring some prepaid cards protections under the Electronic Fund Transfer Act (EFTA) – a law that safeguards consumers engaging in electronic financial transactions.

However, some restrictions in prepaid card contracts could interfere with the EFTA protections that the CFPB seeks to provide to card users. Most prepaid card terms include a forced arbitration clause, which restricts users’ ability to sue card providers and financial institutions that violate the law and harm users in the process. Instead of court, these prepaid card terms require users to settle their legal disputes in a private arbitration system. Overwhelmingly, the prepaid card arbitration clauses also contain class-action bans. Class actions enable consumers to act and seek compensation not only for themselves but for others similarly harmed.

One prepaid card for example, requires arbitration of disputes, designates arbitration providers American Arbitration Association or JAMS to settle the disputes, and prohibits cardholder participation in class actions against it.

These provisions could block consumers who seek to enforce their rights under the Electronic Fund Transfer Act. Along with its protections, the EFTA contains language that grants consumers remedies for violations of its provisions. The law even provides guidance for consumers to join together in class actions to seek accountability. Yet, the prepaid card terms restrict that feature for consumers.

The CFPB is well aware of this problem across the financial services sector, and specifically in the prepaid card sector. In an ongoing arbitration study, it reported the prevalence of arbitration clauses and class-action bans in prepaid card terms:

• About 81 percent of the prepaid cards studied (51 of 63 prepaid card contracts), and all of the cards for which market share data are available, have arbitration clauses in their cardholder contracts.

• The overall use of arbitration clauses in prepaid card contracts is greater than in either credit card or checking account contracts.

• 96.1 percent of clauses in the CFPB’s prepaid study sample did not allow arbitration to proceed on a class basis.

The CFPB cannot act on forced arbitration until the study is completed. The agency must release the study as soon as possible, so it can write a rule to banish the predatory practice of forced arbitration from prepaid cards and all other consumer financial products and services.