CFPB‌ ‌Takes‌ ‌Aim‌ ‌At‌ ‌Prepaid‌ ‌Card‌s Used For Welfare Benefits

February 17, 2022
Latest in the line of recent regulatory announcements, the Consumer Financial Protection Bureau (CFPB) is now looking at fees and conditions of prepaid cards used to distribute U.S. government payments.

Latest in the line of recent regulatory announcements, the Consumer Financial Protection Bureau (CFPB) is now looking at fees and conditions of prepaid cards used to distribute U.S. government payments.

In a compliance bulletin published on February 15, the CFPB says the agency is taking action against prepaid card providers that do not comply with the provisions of the Electronic Fund Transfer Act (EFTA) when distributing government benefits.

The agency stresses that EFTA prohibits any person from requiring a consumer “to establish an account for receipt of [electronic payment] with a particular financial institution as a condition of receipt of a government benefit."

U.S. government benefits are typically distributed either in the form of direct deposit, prepaid card, or check.

The prohibition on setting a compulsory method for these payments is aimed at ensuring people have choices and there are no exclusive deals that undermine competition and fair market prices.

“When companies act as gatekeepers for government benefits, they often abuse that power to extract unavoidable fees,” said CFPB director Rohit Chopra.

“Barriers to choice kill competition and can harm families who need every dollar to make ends meet.”

Chopra was approved by the Senate to serve as the director of the CFPB on the last day of September with a tight 50-48 vote.

His supporters hoped he would give the teeth back to the consumer body, set up by the Obama administration following the financial crisis, while his critics feared he would stretch his regulatory power to the limit, overstepping the authority given by Congress to the director of the CFPB.

Chopra has so far appeared to live up to many of these expectations.

Since the start of his tenure, he has sent a formal information request to bigtech payment platforms to understand their consumer data collection practices, opened an inquiry into buy now, pay later (BNPL), and launched a broad review into what he calls “junk fees.” This category could effectively mean any kind of fees charged for financial services that are deemed excessive.

The bulletin now confirms that EFTA’s consumer protections apply to government benefit accounts, and financial institutions may be held liable for violations of this requirement.

In 1996, Congress amended EFTA to exempt “needs-tested” state and local electronic benefit transfer programs.

The bulletin clarifies that unemployment insurance, child support, certain prison and jail “gate money” benefits, and pension plan payments administered by state or local agencies are not needs-tested benefits and are subject to the compulsory use prohibition.

Similarly, all accounts used to distribute funds under federally administered benefits programs, even if those benefits are needs-tested, are subject to the prohibition.

The bulletin also confirms that it is a violation of the law when people are not provided a choice on where to receive their first payment, even if they can redirect subsequent payments to an account of their choice.

The bulletin closes with a cautionary reminder to prepaid card firms that the CFPB has the authority to enforce both EFTA and the Consumer Financial Protection Act 2010.

Direct line with the public

In a separate post on Wednesday (February 16), the CFPB announced that it has reformed the way the public can engage with the agency and request regulatory changes.

From now on, people can submit petitions for rulemaking directly to the CFPB, which will be posted on public dockets for review and comment.

”Americans should be able to easily exercise their Constitutional rights without hiring a high-priced lawyer or lobbyist,” Chopra said commenting on the announcement.

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