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Consumer Banking and Payments Law: 7.2.17.3 Federal Regulator Actions Involving Credit on Prepaid Cards

In 2012, the OCC took a supervisory action that resulted in the elimination of two different credit features on Insight prepaid cards issued by Urban Trust Bank. The cards were being used by the payday lender CheckSmart to evade the payday loan laws of Arizona, Ohio, and other states. In one version, the consumer could opt in to overdraft coverage, resulting in “negative balance” fees on the prepaid card that effectively amounted to a $15 per $100 payday loan.

Consumer Banking and Payments Law: 7.2.18 Credit Reporting and Prepaid Cards

Prepaid card issuers may claim or imply that using a prepaid card will help build consumer credit history or credit reports. Prepaid card issuers typically do not report routine transactions to credit reporting agencies (CRAs). Thus, the cards do not lead to or impact credit reports any more than bank accounts do.

Consumer Banking and Payments Law: 7.3.1 Description; No Mandatory Use

Payroll cards are a type of prepaid card account809 used by employers to pay their employees. Although many employers pay most of their workers through direct deposit to bank accounts, not all employees have bank accounts or are willing to provide their employer with the information necessary to enroll in direct deposit. Payroll cards provide employers with an alternative to cash or paper checks for those employees.

Consumer Banking and Payments Law: 7.3.4 OCC Advisory Letter

In a 2005 Advisory Letter, the OCC has identified the risks to consumers posed by payroll cards.832 The advisory letter was written before Regulation E was amended to include payroll cards,833 and before the FDIC issued an opinion permitting pass-through deposit insurance for payroll cardholders.834 Thus, some of the issues in the letter may no longer be relevant, but some may still be.

Consumer Banking and Payments Law: 7.4.1 Overview

Government agencies have largely replaced paper checks with cards to distribute government benefits and other types of payments traditionally made by check. Electronic Benefit Transaction (EBT) cards, an older type of payment card, are discussed in Chapter 8, infra.

Consumer Banking and Payments Law: 7.4.2.2 Regulation E’s Ban on Compulsory Use of Specific Accounts for Government Benefits

One provision of the EFTA and Regulation E that has particular application to government benefit prepaid cards is the rule providing that “[n]o financial institution or other person may require a consumer to establish an account for receipt of electronic fund transfers with a particular institution as a condition of employment or receipt of a government benefit.”905 This provision is a parallel to the provision prohibiting compulsory use of preauthorized electronic fund transfers as a condition of credit.

Consumer Banking and Payments Law: 7.4.4 Other Federal Laws Governing Government Prepaid Cards

Regulation II, which generally caps merchant interchange fees on debit cards, has provisions that impact government prepaid cards.932 If the card is issued by a financial institution with over $10 billion in assets, it is exempt from the interchange fee cap only if the card does not have overdraft fees, permits one free ATM transaction per month, and does not accept deposit of funds other than government payments.933 Many government prepaid cards are issued by larger banks that are covered by Re

Consumer Banking and Payments Law: 7.4.6 Pro-Consumer Card Terms That Governments Can Negotiate

When a government agency selects a prepaid card provider, it can negotiate the contract to provide consumer protections beyond those required by law. For example, the federal government negotiated important consumer protections for its Direct Express card, used to pay Social Security and SSI benefits.944 State governments can also negotiate for consumer protections when they contract with prepaid card providers.

Consumer Banking and Payments Law: 7.5.1.1 Overview, Scope, and Requirements for Student Choice

Many colleges and universities use prepaid, debit, or other stored value cards to distribute financial aid and other funds or to pay for certain items on campus. The cards are often combined with the student identification card and may access more than one type of account.

Schools also may have arrangements with financial institutions that can include co-branding, joint marketing, campus access, and branches on campus.

Consumer Banking and Payments Law: 7.5.1.3 Rules for T2 Student Accounts

The Department of Education rules are less stringent for T2 accounts (accounts offered to college students by financial institutions or other entities that are not involved in the financial aid disbursement process).979 The T2 rules apply if, pursuant to a contract with the school, accounts are offered and marketed directly to students enrolled at the school.980 The mere use of a school name, logo, mascot, or other school affiliation in connection with the account does not bring the account with

Consumer Banking and Payments Law: 7.6 Other Types of Prepaid Cards

The number of additional uses for prepaid cards is almost endless. Just a few are mentioned here.

Transit cards. While transit systems have used stored value cards for quite a while, some local governments have linked their transit cards to a more broadly usable prepaid card with an identification card feature. Some of these cards have raised concerns about onerous fees and steering of consumers into substandard accounts.1008

Consumer Banking and Payments Law: 7.7.1 What Is a Gift Card?

This section describes the rules that generally apply to gift cards and gift certificates. Many of the laws discussed in this section may also apply to prepaid cards or other one-time payment devices even if they are not marketed or used as gift cards. For example, the gift card provisions under Regulation E apply to most nonreloadable general-use prepaid cards.1024 The rules also apply to reloadable cards that are marketed or labeled as a gift card or gift certificate.