New Rules for Prepaid Debit Cards

Prepaid debit cards are very popular depsite the fact that they are largely unregulated and often charge high fees with little disclosure. As new rules have targeted credit cards and traditional debit cards, many banks have increased their presence in the prepaid debit card market.

Today the Consumer Financial Protection Bureau introduced a preliminary rule for prepaid products, the first ever. Most fees on these cards will not be regulated, such an average $5 monthly maintenance fee. However, the rule will require companies to reimburse consumers for unauthorized charges.

Card providers argue that they offer a competitive price and help consumers control their spending. Some regulators and consumer advocates are concerned that companies are leading low-income consumers into a relatively expensive product as opposed to simple checking accounts. In 2009 borrowers had approximately $29 billion worth of prepaid debit cards. By 2013 that number is expected to rise to $90 billion.

Big banks, who are looking for new customers, are joining the prepaid debit card market. In March, Wells Fargo introduced a reloadable prepaid card. Regions Financial also unvailed a prepaid card targeted at borrowers who typically do not have a traditional bank account. JP Morgan also announced earlier this month that it would start offering prepaid cards. The card is called "Liquid" and carries a $4.95 monthly maintenance fee but does not charge consumers to add money to the card.

The banks have recently become drawn to prepaid debit cards because they were not included in the Dodd-Frank regulatory law and other recent crackdowns on debit and credit card fees. The Dodd-Frank law exempted prepaid cards, allowing banks to impose high fees on merchants when consumers make a purchase with a prepaid card.

Advocacy groups have also questioned if card issuers clearly explain to cardholders the fees associated with the prepaid cards, including activation charges, and charges for loading money onto the card, checking the card balance at ATMs and for calling customer service. For example, Wells Fargo charges $3 for customers to withdraw money using a bank teller and $5 to replace a lost card.

A study conducted also concluded that some customers were unaware that their prepaid cards are not necessarily protected by the FDIC (Federal Deposit Insurance Corporation). The Bureau's new proposal does not address this issue. However, the Bureau is seeking to apply Federal Regulation E, which applies to debit and gift cards, to prepaid cards. Regluation E requires companies to reimburse customers for unauthorized transactions that occur when a prepaid card is lost or stolen.

As a reminder, you may discharge credit card debt in bankruptcy. I look forward to your questions and comments.