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Consumer Bureau Offers Rules to Improve Prepaid Card Protections … But a Critical Safeguard Is Needed

Nov. 13, 2014

Consumer Bureau Offers Rules to Improve Prepaid Card Protections … But a Critical Safeguard Is Needed

Statement by Christine Hines, Consumer and Civil Justice Counsel, Public Citizen

The Consumer Financial Protection Bureau (CFPB) today (Nov. 13) announced some new and improved rules of the road that will make the use and costs of prepaid card accounts more transparent for users. The proposal brings to mind another fundamental flaw of most prepaid cards: that they deny consumers their right to go to court.

Prepaid cards increasingly have become a convenient tool for consumers. A shopper can simply add value to a card that can be used later to buy a product or service at a cash register or online. Because of their ease of use, the market for prepaid cards has grown dramatically over the years, outpacing debit and credit card use.

In his remarks today, CFPB Director Richard Cordray announced that the new protections in the proposed rule would bring prepaid card accounts under the Electronic Fund Transfer Act (EFTA) – a federal law that safeguards consumers engaging in electronic financial transactions.

Along with its protections, the EFTA contains language that grants consumers private remedies for violations of its provisions. The law even sets forth guidance for consumers to join together in class actions to seek accountability.

Yet, most contracts for prepaid cards restrict these consumer rights.

Specifically, most prepaid card terms deprive users’ ability to sue financial institutions that violate the law and harm users in the process. Instead of court, prepaid card terms force users to settle disputes in private arbitration. Overwhelmingly, forced arbitration in prepaid cards also prohibits users from banding together in class actions. Class actions allow consumers to seek remedies not only for themselves but for others similarly victimized by the same bad practices.

The CFPB is well aware that the problem of forced arbitration stretches across the financial services sector, touching prepaid cards, checking accounts, credit cards and more. In its important ongoing arbitration study, the agency reported the prevalence of arbitration clauses and class-action bans in numerous financial products. In prepaid card terms, it found that:

  • 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 its arbitration study is completed, and so it must release the study as soon as possible. Agency action is critical to banish the pervasive practice of forced arbitration from prepaid cards and all other consumer financial products and services.