Two years after the Consumer Financial Protection Bureau first proposed rules aimed at making prepaid cards safer and less costly for the 24 million unbanked consumers who make use of these sometimes costly and fee-laden financial products, the agency is releasing the final version of the rules that will kick in a year from now. 

The 1,689-page rule [PDF] will take effect on Oct. 1, 2017 and covers the vast range of prepaid debit products, including: cards you purchase at retail and load via ATM (or through direct deposit); payroll cards used by employers to pay workers’ wages; benefit cards offered by federal, state and local agencies; school ID cards used to disburse student loan funds; and even mobile debit products that don’t use a physical card.

Rather than take aim at each specific product, the CFPB’s proposed rules are intended to add protections — and increase transparency through improved disclosures — to ensure people who use any of these cards or services have a better idea of what they are buying into.

The finalized rule includes slight variations from those proposed in 2014, initiated after the Bureau received and sifted through more than 65,000 comments from consumers, advocacy organizations, the financial industry, and others.

“Many consumers rely on prepaid cards to make purchases and access funds, but until now they were not guaranteed strong consumer protections under federal law,” CFPB Director Richard Cordray said on a conference call with press on Tuesday. “This rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone. And it backs up those protections with important new disclosures to let consumers know before they owe.”

For years, prepaid cards have provided the unbanked and under-banked with services that replicate a number of features usually offered through traditional checking accounts: making payments, storing funds, withdrawing cash from an ATM, receiving direct deposits, or sending money orders.

The popularity and accessibility of these cards has increased significantly in recent years. In 2003, consumers loaded less than $1 billion onto prepaid cards. By 2018, it’s estimated that this will grow to $112 billion. Despite this growth, the protections afforded to these accounts have remained stagnant.

The new rule will extend the following protections under the Electronic Funds Transfer Act to most prepaid debit products:

• Easy & Free Access To Account Information: Financial institutions have two options when it comes to making certain account information — including balances, transaction history, and fees that have been charged — available to cardholders.

Banks must either offer periodic statements to account-holders or make that balance information available by telephone, with at least 12 months of electronic account transaction history, and upon the consumer’s request, at least 24 months of written account transaction history — all for free.

• Error Resolution Rights: Currently, some prepaid card users have difficulty resolving disputes over questionable transactions, like being overcharged or charged twice for the same purchase.

Under the new rule, card issuers must cooperate with customers to investigate or resolve these incidents in a timely manner. When appropriate, the issuers must restore the missing funds.

If this process cannot be completed within 10 business days, the issuer will be required to temporarily credit the disputed amount to the consumer while it finishes its investigation. If the query finds that the transaction was authorized, the bank can reverse that credit.

• Lost Card & Fraud Protection: Unlike credit or traditional debit cards, where customers face limited (or no) liability for fraudulent activity on lost and stolen cards, not all prepaid debit cards offer that level of protection. Instead, it’s up to the financial institutions that issue prepaid products to set a liability policy.

The new rule will limit consumers’ liability for unauthorized charges on prepaid cards. If a cardholder notifies their financial institution within two business days of learning of an unauthorized charge, their responsibility will be limited to $50. Conversely, if a cardholder does not notify the financial institution within two business days of learning of the unauthorized charges, they can be held liable for up to $500.

There is a seemingly endless array of prepaid card options out there, each with their own set of fees and charges. However, prospective cardholders have expressed difficulty in deciphering what fees apply to the prepaid accounts before purchasing — sometimes because those disclosures are on a folded piece of paper that can only be read by opening up the package containing the card; sometimes because the disclosures are difficult to find online.

A recent report from our colleagues down the hall at Consumer Reports found that card issuers are doing better — but far from perfect — at disclosing the fees associated with prepaid accounts, the fees for reloading funds, withdrawing cash.

Of the 20 prepaid cards used as a substitute to traditional bank accounts, CR awarded 14 with the highest possible rating for Fee Accessibility & Clarity. That’s an improvement from the six cards that received the rating in 2014 [PDF].

Despite this increased transparency, fees and their associated disclosures still vary from card to card. To that end, the CFBP’s finalized rule aims to standardize how card fees and limitations are presented to potential customers with “Know Before You Owe” disclosures.

The disclosures — similar to those now used for mortgages and student financial aid offers — simplify, organize, and present information in a way the consumer can easily understand and compare. The CFPB proposal calls for two variations on the disclosure form, which can be seen in this PDF.

The “Short” Form: This disclosure — printed on the prepaid card’s packaging — calls out the most important account info, including: monthly fees; fees per purchase; fees for ATM withdrawals; and fees to reload the account.

Additionally, the short form provides statements regarding registration and Federal Deposit Insurance Corporation (FDIC) deposit or National Credit Union Administration (NCUA) share insurance eligibility, and whether an overdraft credit feature may be offered in conjunction with the account.

The “Long” Form: This disclosure includes the complete list of fees and certain other key information. Per the new rule, before a purchase is made at a retail location, the consumer must have access to the full slate of fees and other relevant information. This can be detailed though a long form disclosure online or by telephone — access for which would be made available via website or phone number included on the short form.

To further make comparison-shopping easier for potential prepaid card buyers, the CFPB rule requires card issuers to submit all agreements to the CFPB, which intends to post them on a public, Bureau-maintained website at a future date.

While most prepaid products function as debit accounts where holders can only spend what they add to the card, some issuers will add credit-like functions to cards.

In many cases these options are offered by payday loan operations and are not always sold as “credit” accounts, but as overdraft “protection,” despite the fact they often don’t protect consumers from anything.

Whether or not these options are specifically marketed as a credit product, the issuers are effectively extending a line of credit to consumers. For this reason, the CFPB’s finalized rule entitles these cardholders to many of the same protections afforded to traditional credit card accounts under the Truth in Lending Act and the CARD Act.

These protections include: ensuring that consumers have the ability to repay their debt; providing customers with regulator statements that detail fees, interest rates, balances, and other information; creating reasonable time to pay and limits on late fees; and limiting fees and interest charges.

Ability To Repay: The new rule states that companies cannot open a credit card account or increase a credit line related to a prepaid card unless they consider the consumer’s ability to make required payments. For consumers under 21, the companies will be required to assess these consumers’ independent ability to repay.

Monthly Credit Billing Statement: Prepaid card companies must provide credit customers with regular statements like those credit card consumers receive. This statement will detail fees, and if applicable, the interest rate, what they have borrowed, how much they owe, and other key information about repaying the debt.

Reasonable Time To Pay & Limits On Late Fees: Like credit card issuers, prepaid card issuers will be required to give consumers at least 21 days to repay their debt before they are charged a late fee. Additionally, late fees must also be “reasonable and proportional” to the violation of the account terms in question.

Limited Fee & Interest Charges: During the first year a credit account is open, total fees for credit features cannot exceed 25% of the credit limit. Generally, card issuers cannot hike the interest rate on an existing balance unless the cardholder has missed back-to-back payments. Card issuers may raise the interest rate in advance of new purchases, but generally must give the consumer 45 days advance notice, during which time the consumer may cancel the credit account.

While the bulk of the CFPB’s rule pertaining to credit is the simple extension of credit card protections to prepaid credit products, there are two ways in which the Bureau differentiates the two credit products.

For starters, the new rule will require companies that dabble in credit products to wait 30 days after a consumer registers the prepaid account before offering the credit feature. This, the CFPB claims, gives consumers time to gain experience with the basic prepaid account before deciding if they want to apply for the credit feature.

The proposal would also put up a “wall” between the funds on the prepaid card and payments to the creditor. This means the card issuer can’t automatically deduct funds from an account to repay a credit debt unless the consumer has affirmatively opted into these deductions.

Even so, card issuers would be limited to once-monthly deductions from the prepaid account to repay the credit debt, and payment cannot be required until 21 days after the statement is mailed.

The long-awaited prepaid rules were generally welcomed by consumer advocates.

“Millions of Americans rely on prepaid cards every day to pay their bills and manage their finances,” Christina Tetreault, staff attorney for Consumers Union, said in a statement.  “But not all prepaid cards are created equal and consumers have lacked the legal safeguards they deserve to protect their money.  Now consumers will be able to compare cards more easily to find the most affordable option and have the peace of mind that their money will be safe if their card is lost or stolen.”

The National Consumer Law Center echoed the need for the prepaid rules, noting that it brings “prepaid cards out of the shadows, with protections that in many ways are stronger than those for traditional bank accounts.”

Still, many feel that the prepaid rules are just one small part in the overall need for financial reform and consume protections.

“Consumers will have protection from fraud, costs will be more transparent, and dangerous overdraft fees will be curtailed, but unfortunately not eliminated,” Lauren Saunders, associate director of the National Consumer Law Center, said in a statement. “Banks must do more to make traditional bank accounts safer and the CFPB needs to rein in overdraft fee abuses. But in the meantime, prepaid cards can be safer, cheaper, and more convenient than relying on cash or paying check cashing fees,” Saunders explained.”

On the flip side of this issue, a trade group representing the prepaid card industry is voicing concerns about the CFPB rule. Brad Fauss, CEO of the Network Branded Prepaid Card Association is accusing the CFPB of ignoring the industry’s concerns, and that the cost of complying with the rule might drive some issuers out of the market.

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