Menendez Applauds CFPB for Action To Protect Consumers from Hidden Fees, Risks with Pre-Paid Cards

Menendez Applauds CFPB for Action To Protect Consumers from Hidden Fees, Risks with Pre-Paid Cards

Washington - U.S. Senator Robert Menendez (D-NJ), author of the first and only bill in Congress to comprehensively protect consumers from hidden fees and risks associated with pre-paid cards, applauded the Consumer Financial Protection Bureau (CFPB) for taking the first step forward to create rules for this exploding industry and recommended they adopt the common sense standards laid out in his legislation.

"When it comes to protecting consumers, we can't wait," said Menendez. "For too long, prepaid cards have escaped regulations that would protect consumers from hidden costs and deceptive fine print. That's why I am incredibly pleased that the CFPB is moving forward to put some common sense rules into the exploding prepaid card market.This is exactly why the bureau was created."

This morning, the CFPB announced it is creating rules to address prepaid cards and would be soliciting feedback and insight in that process. In a letter today to CFPB Director Richard Cordray, Menendez urged the consumer watchdog to adopt the standards outlined in his bill, the Prepaid Card Consumer Protection Act[kw1].

Menendez wrote: "For many years prepaid cards have been marketed by industry and used by consumers just like debit cards or checking accounts, but prepaid cards do not have any of the guaranteed federal consumer protections of those products and remain almost completely unregulated."

To address these issues, Menendez urged the CFPB to adopt four main standards outlined in his legislation:

· Full disclosure of all fees before the consumer buys the card, including a wallet-sized summary of all fees and a toll-free telephone number for customer service.

· Limits on the types of fees that can be charged, including a ban on overdraft fees, balance inquiry fees, customer service fees, fees for inactivity, account closure fees, and other types of fees.

· Assurance that the consumer will get their money back in the case of loss or theft (Regulation E protections).

· Assurance that the consumer will get their money back if the card company goes bankrupt (FDIC insurance).

Full text of Menendez letter to CFBP:

May 23, 2012

Director Richard Cordray

Bureau of Consumer Financial Protection

1700 G Street, NW

Washington, DC 20552

RE: Docket No. CFPB-20120019, RIN 3170-AA22

Dear Director Cordray:

I write to you regarding the Advance Notice of Proposed Rulemaking on prepaid cards that was announced by the CFPB in May 2012.

As the author of the first bill introduced in the United States Congress to regulate the prepaid card market (the Prepaid Card Consumer Protection Act, S. 2030), I urge you to adopt the model standards set forth in my bill. As you may know, I introduced slightly different versions of the Prepaid Card Consumer Protection Act during both the 111th and 112th Congresses. I commend you for undertaking this important rulemaking, which is made even more urgent by the explosive growth in this market and by the facts that many of the customers are young and lack access to traditional banking services.

For many years prepaid cards have been marketed by industry and used by consumers just like debit cards or checking accounts, but prepaid cards do not have any of the guaranteed federal consumer protections of those products and remain almost completely unregulated.

While prepaid cards can be useful products for consumers and give them additional options if regulated properly, some of the cards come with a mountain of fees and very poor disclosure of those fees. Some of the fees are unfair in that they penalize customers for doing responsible things like checking their card balance before making a purchase or calling customer service because they are having problems with the card. Prepaid cards also do not guarantee that consumers will get their money back if their card is lost or stolen, or if the card company goes bankrupt. Debit cards already have these protections, but prepaid cards do not.

To address these issues, my bill includes four key elements:

  • Full disclosure of all fees before the consumer buys the card, including a wallet-sized summary of all fees and a toll-free telephone number for customer service.
  • Limits on the types of fees that can be charged, including a ban on overdraft fees, balance inquiry fees, customer service fees, fees for inactivity, account closure fees, and other types of fees.
  • Assurance that the consumer will get their money back in the case of loss or theft (Regulation E protections).
  • Assurance that the consumer will get their money back if the card company goes bankrupt (FDIC insurance).

First, we need clear and prominent fee disclosures to consumers prior to purchase. While the fee structures of many prepaid cards have improved in recent years, there are still many egregious examples of price-gouging for nothing more than increasing the bottom line. The Kardashian Kard with its extraordinarily high fees is a prime example of this, and while I was pleased to see it taken off the market after a consumer uproar, other similar cards are still being marketed to young consumers based on celebrity and glitz rather than on what's in the best interest of the consumer. I strongly urge the CFPB to require disclosures of fees before the consumer buys the cards because the disclosures will be meaningless otherwise. I also urge the CFPB to adopt my bill's provisions for a toll-free telephone number for customer service and to require a wallet-sized summary of all fees for consumers, including a monthly estimate of fees for a "typical user," profiles for which the CFPB can develop based on data.

Second, we should eliminate several of the most egregious fees including: balance inquiry fees, customer service fees, account closure fees, inactivity fees, overdraft fees, and others. Eliminating these fees would help consumers because otherwise they are penalized for doing things that are responsible (such as checking their balance or calling customer service), for exercising their right to opt out of a product that may be bad for them (account closure fees), or for doing things that have virtually no marginal cost to the card company (such as inactivity fees, or overdraft fees when the transaction could be declined instead). Additionally, prepaid cards should not carry any credit features because otherwise the card is not "prepaid" and is not a safe alternative to those who may have had trouble managing bank accounts. My bill bans a "finance charge or other fee imposed in connection with an extension of credit" and is intended to eliminate credit features.

It would also be beneficial to consumers to limit the fees allowed on prepaid cards to a finite list so that consumers can more easily compare cards and disclosure requirements can be simplified. My research into the prepaid market showed that there are literally dozens of fees on these cards, some of which may be called different names by different companies. It is far more difficult for companies to disclose and for consumers to compare dozens of fees on a small package than for companies to disclose and consumers to compare a more limited list of fees. These reasonable fee restrictions would not prevent prepaid companies from operating, but would only modify the fee structures so that consumers get a fair shake.

Third, prepaid card users deserve the same consumer protections that debit card users enjoy under Regulation E with respect to loss or theft of the card so that potential consumer losses can be limited. This is particularly important with the spread of fraud and identity theft.

Fourth, prepaid card users deserve the same consumer protections that debit card or checking account users enjoy with FDIC insurance to protect them against losing their money if the prepaid card company goes bankrupt. While it's not clear whether the CFPB has the authority to require FDIC insurance of prepaid cards, it should at a minimum require clear disclosure of whether the card is covered by insurance and what could happen to consumers if that insurance is not provided.

Finally, I urge the CFPB to conduct a study to determine the benefits to consumers of prepaid cards versus traditional bank accounts or other substitutes. Consumers clearly need more objective information to rely on to determine which types of financial products best meet their own needs, whether that is prepaid cards, bank accounts, or some other products.

I thank you for the opportunity to comment on this important matter and appreciate your work on it. Please do not hesitate to contact me or my staff in the future regarding regulating the important and growing prepaid card market.

Sincerely,

Robert Menendez

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