On November 13, the Consumer Financial Protection Bureau unveiled a comprehensive slate of consumer protections for prepaid debit cards that could increase the customer base for the financial product.  The proposed rules (found here) are the most comprehensive set of federal standards for the fast-growing prepaid industry.  Consumers are expected to load nearly $100 billion onto general-purpose prepaid cards this year, up from $19.5 billion six years ago.

The CFPB announced that the proposed rule would require companies selling the cards to limit consumers’ losses when funds are stolen or the cards are lost, to investigate and fix errors, to provide free access to account information, and to apply credit card protections if credit is offered in connection with the prepaid account.  Companies would be required to provide standardized disclosures about prepaid account fees, including the monthly fee, fee per purchase, ATM withdrawal cost, and fee to reload cash to the account.  Prepaid account issuers would also be required to post their account agreements on their websites and submit the agreements to the CFPB to be posted on a public website.

Unlike gift cards, general-purpose prepaid cards can be loaded with cash or direct-deposit payroll checks and used anywhere traditional credit or debit cards are accepted.  The cards are primarily utilized by individuals without bank accounts, providing a vehicle to pay bills electronically or make online purchases.  Approximately 8% of all U.S. households use prepaid cards, but that number rises to more than 22% of households without bank accounts, according to a 2013 survey by the FDIC released last month.

Under the proposed rule, consumers opting to use a credit product related to a prepaid account would also receive the same protections as current credit card consumers receive under the Truth in Lending Act (TILA) and the Credit Card Accountability Responsibility and Disclosure Act (CARD ACT).  According to the CFPB, prepaid companies would be required to ensure that consumers have the ability to repay debt before offering them credit, to give consumers a reasonable amount of time to pay on the account, and to place limits on fees and interest charges.

Notably, the CFPB is not permitted to cap fees for the cards, which often include initial and monthly charges as well as fees for loading cash onto the cards.  Instead, the agency is aiming to help consumers understand how the cards work and make it easier for them to compare fees.  “We are proposing to give consumers the basic protections, including safety of the funds, they have come to expect when they pull a debit card out of their wallet or shop online with it,” said CFPB Director Richard Cordray.  “Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts,” he added.  “Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”

The proposed rule also would cover mobile and electronic prepaid accounts that can store funds, such as PayPal and Google Wallet, in addition to traditional plastic prepaid cards.  Other prepaid products covered by the proposal are payroll cards, some federal, state, and local government benefit cards (including cards used to distribute unemployment insurance, child support and pension payments), student financial aid disbursement cards, and tax refund cards.

In a companion report on prepaid card agreements released on November 13, the CFPB found that the majority of card issuers already had error resolution policies in place.  The report noted, however, that CFPB staffers often had to dig up multiple documents to retrieve information about fees.  Additionally, the agency indicated that some agreements were so vague about customer liability if a prepaid card was lost or stolen that the CFPB’s staff had trouble determining when a customer could be held liable for unauthorized transactions.