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Consumer Banking and Payments Law: 7.2.9.2 Overdraft Fees

Although prepaid cards with overdraft fees may sound like an oxymoron, some prepaid cards have offered overdraft “protection,” allowing the card to overdraft and incur an overdraft fee. These features have been especially common on prepaid cards sold by payday lenders.688 Effective April 1, 2019, the CFPB’s prepaid rule brings most prepaid card overdraft fees within the scope of Regulation Z and imposes significant limits on those fees.689

Consumer Banking and Payments Law: 7.2.4.6.5 Application of the 25% cap on fees in the first year of the account

The TILA, as amended by the Credit CARD Act, contains an important restriction on the amount of fees that a card issuer may charge to a credit card account, limiting the total amount of most fees to 25% of the account’s credit limit during the first year.525 This 25% cap was adopted to curb the abusive nature of “fee-harvester” credit cards that imposed hundreds of dollars in fees while extending minimal available credit—sometimes as little as $50.526

Consumer Banking and Payments Law: 7.2.4.6.7 Application of the limitations on interest rate or fee increases

The TILA restricts the ability of creditors to increase any APRs, fees, or finance charges applicable to an existing or “protected” balance or during the first year of an account, with certain exceptions.544 These rules apply to hybrid prepaid-credit cards, including fees imposed on either the credit feature or the asset feature, to the extent that fees for the asset feature are “part of the plan.”545

Consumer Banking and Payments Law: 7.2.4.6.8 Special rules for offsets, voluntary automatic periodic deductions, and security interests

The TILA restricts the ability of a credit card issuer to “offset” or take the consumer’s funds held on deposit by the issuer to satisfy the issuer’s credit card claims.546 There are several exceptions to this prohibition against offsets, including for consensual security interests and voluntary payment plans using automatic periodic deductions from the deposit account.547 Both exceptions require the consumer to provide a written authorization.548

Consumer Banking and Payments Law: 7.2.4.6.10 Right to withhold payment for claims and defenses against a merchant

The TILA provides that a credit card issuer is subject to all claims (except tort claims) and defenses that a consumer has against a merchant when the consumer uses a credit card to pay for goods or services, subject to certain conditions.570 This right applies to purchases made with a hybrid prepaid-credit card, whether the funds are drawn directly to pay for the goods or services or the funds are first transferred to the asset feature before payment.571 However, if the purchase is only partial

Consumer Banking and Payments Law: 7.2.4.6.11 College student credit cards

The TILA, as amended by the Credit CARD Act, has a number of protections for college students,573 such as public disclosure of agreements between colleges and issuers and restrictions on an issuer providing inducements to students to apply for a credit card.574 These prohibitions not only apply to hybrid prepaid-credit cards but to prepaid accounts to which a covered separate credit feature that is a credit card account covered under the Credit CARD Act may be added in the future to the prepaid

Consumer Banking and Payments Law: 7.2.5.2.1 Overview

Separate from Regulation E, another regulation under the EFTA, Regulation II, has several provisions that impact the consumer fees and functionality of some prepaid cards. Those aspects of Regulation II are discussed in this section.

Consumer Banking and Payments Law: 7.2.11 Using the Prepaid Card and Accessing Funds

Prepaid cards work in virtually the same fashion as bank account debit cards. They can be used for purchases at merchants, online, over the telephone, and to withdraw cash at ATMs. Fees, however, may apply.

Consumers who wish to “cash” an entire payment deposited on their prepaid card may be frustrated by daily withdrawal limits on some ATMs and by fees for multiple ATM withdrawals. Two other methods of withdrawing cash may help with those limits and fees (though separate fees may apply, depending on the card).

Consumer Banking and Payments Law: 7.2.12 Account Holds and Inability to Access Funds

Under various circumstances, consumers may be temporarily or permanently unable to access their funds when the funds are frozen or the account is closed. The account agreements for some prepaid cards and mobile payment systems contain clauses in the account agreements that permit the provider to place a hold on funds under certain circumstances.

Consumer Banking and Payments Law: 7.2.13 Access to Statements and Account Information

Traditional bank accounts are required by Regulation E to provide periodic statements in any period in which an electronic fund transfer is made into or out of the account.757 The CFPB’s prepaid rule, effective April 1, 2019, extends this requirement to most types of prepaid cards but does offer an alternative that allows for statements to be provided orally when requested via the telephone and posted online for the consumer’s review.758

Consumer Banking and Payments Law: 7.2.15 Redemption of Unused Value; Card Expiration

Consumers often fail to use all of the funds on their prepaid cards. It can be particularly difficult to use the last few dollars. Amounts under $20 cannot be withdrawn from an ATM and might not be enough for a purchase.765 Some merchants permit consumers to do a “split tender,” paying part of a purchase with a prepaid card and the remainder in another manner. Some card networks, such as Visa, require all of their cards to support partial authorization.

Consumer Banking and Payments Law: 7.2.16.1 Overview

Consumer bank accounts are protected by FDIC insurance up to $250,000 if a bank becomes insolvent. The protection that a holder of a prepaid card has if the card provider becomes insolvent is more complicated.

Consumer Banking and Payments Law: 7.2.16.2 Deposit Insurance

For most general-use prepaid cards, the funds are held in an account at a bank.779 However, some prepaid accounts, such as PayPal, generally hold the funds on their own books without deposit insurance, though funds may be held at a bank under certain circumstances, such as for direct deposit of government benefits.

Consumer Banking and Payments Law: 7.2.17.1 Overview

Although credit on a prepaid card may sound like an oxymoron, some prepaid cards can be used to access various forms of credit. For example, a prepaid card may permit the consumer to complete a transaction, when the account lacks funds, by accessing linked credit or by permitting the card to be overdrawn.