WASHINGTON – The consumer financial watchdog is taking aim at reloadable prepaid cards, moving to regulate a fast-growing product that has become a popular alternative to checking accounts for lower-income Americans and a new source of fees for some banks.

Consumer advocates have been pushing for regulation of the cards, which look like conventional credit cards or debit cards tied to bank accounts. But the prepaid cards are not required to offer the same consumer protections, such as clear disclosure of fees and caps on losses if stolen.

Reloadable prepaid cards, which allow customers to add money to the accounts, were pioneered by alternative financial services companies such as Green Dot Corp. in Monrovia, Calif. Recently some large banks have started offering similar products.

Consumers are expected to load $82 billion onto prepaid cards this year, an amount projected to more than double to $167 billion by 2014, according to the Consumer Financial Protection Bureau.

At a hearing Wednesday in Durham, N.C., the agency will begin seeking public input for new regulations “to ensure that consumers’ funds on prepaid cards are safe and that card terms and fees are transparent.” The consumer bureau intends to use the comments to draft proposed rules.

“The people who use prepaid cards are, in many instances, the most vulnerable among us,” said Richard Cordray, the agency’s director.

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New regulations would cover only reloadable prepaid cards, which allow people to use them like a credit card or debit card through a payment network such as Visa or MasterCard.

Gift cards, which have a set value and can be used only at a specific merchant or group of merchants, would not be covered by any new regulations, the agency said. Gift cards were regulated under the 2009 Credit Card Accountability Responsibility and Disclosure Act, with restrictions on service and other fees.

Payroll cards, which allow people to access money from their paychecks, as well as electronic cards used to issue government benefits also are covered by other federal regulations.

But reloadable prepaid cards are not regulated, which makes it difficult for people to understand the fees and compare cards, the consumer bureau said.

For example, many cards are sold at market checkout counters or other retail locations. But the disclosures are inside the packaging and can be read only after the card is purchased.

“Today, it is up to card issuers to decide what information is disclosed and how,” Cordray said in remarks prepared for the hearing.

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But he noted one of the challenges of greater disclosure is the limited space at retail locations.

It’s also often unclear whether money loaded onto a prepaid card is covered by federal deposit insurance, Cordray said.

Some banks issue the cards in a way that the money is covered if the bank were to fail, he said. But others do not.

The consumer bureau said it would consider how to make risks to the money on the cards clearer.

Many card issuers voluntarily offer some protections, such as limiting a consumer’s liability if the card is used without authorization, the agency said. But there are no industry standards.

To help educate consumers, the agency unveiled a searchable feature Wednesday on its website, www.consumerfinance.gov, with answers to more than 80 questions about prepaid cards.

Analysts have said banks have turned to reloadable prepaid cards to make up for fees lost through new regulations on credit cards and other consumer products.

 


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