A recent article on HispanicBusiness.com, “Prepaid Card Fees Can Blindside Consumers” (Thomas Olson, July 12, 2013) highlights a number of troubling issues around prepaid cards, including high fees. The article cites research findings that growth in this industry is skyrocketing: “According to data from Mercator Advisory Group, Boston, prepaid cards were loaded with about $19.5 billion in 2008. That jumped roughly fourfold to an estimated $76.7 billion last year and is expected to exceed $168 billion in two years.”
The California Reinvestment Coalition, along with the New Economy Project (New York), Reinvestment Partners (North Carolina), and the Woostock Institute (Illinois) work to promote fair, affordable financial services for low-income communities. Earlier this month, the groups sent a letter to the Consumer Financial Protection Bureau about general purpose reloadable and other prepaid cards that highlighted our concerns about the potential for companies to offer these cards with extra fees, unhelpful credit features (like a line of credit or overdraft feature), or short-term loans.
July 11, 2013
Director Richard Cordray
Consumer Financial Protection Bureau
Dear Director Cordray:
California Reinvestment Coalition, New Economy Project, Reinvestment Partners, and Woodstock Institute appreciate the opportunity to share with you our position regarding inclusion of credit options, including overdraft features and deposit advance products, on general purpose reloadable and other prepaid cards. We have discussed this issue with CFPB staff on several occasions and wish to reiterate that any and all forms of credit must be prohibited on prepaid debit cards for the reasons described below.
Prepaid card companies often target low- and moderate-income people and “unbanked” or “underbanked” people. At best, prepaid cards can offer people access to certain features of traditional checking accounts including, for example, payment networks, a secure alternative to cash, and the ability to see a record of transactions. At worst, prepaid cards are temporary cash substitutes riddled with hidden fees and debt traps.
The addition of a line of credit or overdraft feature undermines the ostensible value proposition of the product—to avoid overdraft costs associated with traditional checking accounts or to prevent spending more than consumers have in their accounts. Although most prepaid cards do not currently offer an overdraft feature, there is no existing regulation that prevents them from doing so. The ability to avoid overspending is likely the most valuable feature of a true “prepaid” card. People who elect to use prepaid cards may qualify for credit, but it should be accessed through a separate product.
We are opposed to prepaid cards that offer access to high-cost credit options such as short-term loans. These loans often include annual percentage rates (APR) comparable to predatory payday loans and can lead to harmful cycles of debt for consumers. These high APR loans potentially violate many state usury laws put in place to protect consumers from predatory lending practices. Although two federal banking regulators have issued proposed rules relating to bank deposit advance products, the proposed rules would not cover all prepaid products on the market, and we encourage the CFPB to prohibit outright any credit, overdraft or loan option on all prepaid cards.
We look forward to discussing this issue with you further. Feel free to contact Dory Rand with any questions or comments.
Alan Fisher, Executive Director, California Reinvestment Coalition
Sarah Ludwig, Co-Director, The New Economy Project
Peter Skillern, Executive Director, Reinvestment Partners
Dory Rand, President, Woodstock Institute