CFPB issues warning on use of prepaid cards to pay government benefits

The Consumer Financial Protection Bureau warned financial services companies Tuesday about a longstanding prohibition on using prepaid debit cards as the sole method for distributing government benefits.

Companies that get hired by government agencies to distribute payments to consumers may be extracting illegal fees that would be considered an abuse of their exclusive contracts, the agency said.

In a 10-page compliance bulletin, the CFPB described how beneficiaries of certain state and federal benefits programs are entitled to protections and disclosures under Regulation E, which implements the Electronic Fund Transfer Act. The bulletin also included clarifications about the obligations of banks and prepaid card companies.

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“When companies act as gatekeepers for government benefits, they often abuse that power to extract unavoidable fees,” CFPB Director Rohit Chopra said in a press release. “Barriers to choice kill competition and can harm families who need every dollar to make ends meet.”

Specifically, the CFPB said that consumers are not given a choice if they must receive the first payment of government benefits on a prepaid card, or at a particular financial institution — even if the consumer can later redirect the payment to another account of their choice.

Under Regulation E's “compulsory use prohibition,” people receiving government benefits must be given a choice regarding how they receive their funds.

In an interview with the Washington Post last week, Chopra said that consumers should have similar levels of protection regardless of how benefits are delivered.

“One of the things the CFPB did many years ago was enhance some of the protections between prepaid cards, which varied somewhat from other transactions,” he said. “That’s what I think about a lot, making sure that consumers have the same level of protection especially when there's errors or fraud.”

In October, the CFPB ordered JPay, a Florida-based provider of financial services to prisoners, to pay $6 million in fines and restitution for charging inmates fees to access their own money on prepaid debit cards.

The CFPB's compliance bulletin clarified that “EFTA’s consumer protections apply to government benefit accounts, and financial institutions may be held liable for violations of this requirement.”

In 1994, Congress amended EFTA to exempt so-called “needs-tested” state and local benefit programs. The CFPB clarified in its bulletin Tuesday that accounts used to distribute unemployment insurance, child support, certain prison benefits and pension plan payments are not needs-tested and therefore do fall under EFTA.

In one recent high-profile example of a bank that entered into an exclusive contract to distribute government benefits on prepaid cards, Bank of America has found itself in a mess in California, facing multiple lawsuits and state lawmakers’ ire in the wake of rampant pandemic-era fraud.

The prepaid cards distributed by BofA for California unemployment, disability and pandemic benefits do not have mandatory fees. California’s Employment Development Department, the state agency that enrolls beneficiaries, does not offer a direct deposit option at this time, though it does allow beneficiaries to request payments by check.

The CFPB also reiterated Tuesday that consumers are entitled under Regulation E to three types of disclosures for government benefit accounts, including initial disclosures.

The bureau said that initial disclosures must be made when an account is first opened and must contain “comprehensive fee information.”

The initial disclosures are also required to include: a consumer’s liability for unauthorized electronic fund transfers; an error resolution notice; contact information for the financial institution providing the account; the types of transfers a consumer may make; and any limitations and fees that apply to the frequency and dollar amount of transfers.