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Can the Government Demystify Prepaid Cards?

This week the Consumer Financial Protection Bureau took aim at prepaid debit cards. Called general purpose reloadable cards (GPR for short), or more commonly prepaid debit cards, GPRs work very much like more traditional bank debit cards. But as the CFPB described, there are some important differences.

These differences have led the CFPB to begin considering new regulations for the prepaid card industry. These regulations could have a significant impact on consumers, particularly given the growth in the prepaid market. According to the CFPB, in 2007 consumers loaded $12 billion onto prepaid cards. Last year the number had grown to more than $57 billion.

For those that have an interest in prepaid cards, the CFPB wants your opinion. In a release this week the CFPB is asking consumers a series of questions that ultimately may help shape future regulations. In short, it's your opportunity to be heard.

The CFPB has asked for responses to questions that fall into one of three categories:

Consumer Protection

Currently, there are certain federal consumer protections that apply to credit cards or bank debit cards, but not to prepaid cards. The CFPB intends to extend federal protection to prepaid cards. But it is asking consumers whether these protections should be the same that currently apply to debit cards linked to banking accounts.

Such restrictions might include limiting dormancy fees and services fees that a prepaid card provider could charge. Protections might also include the requirement that prepaid card providers issue periodic statements. Today, many providers charge card holders if they request a paper statement.

Product Fees and Disclosures

Prepaid card fees are incredibly difficult to understand. Some cards charge an activation fee, while others don't. Some cards waive a monthly fee, but only if direct deposit is set up or the card is used for a certain number of transactions. And some cards charge for PIN (debit) transactions, but not signature (credit) transactions.

To address these issues, the CFPB has asked for suggestions on how it can ensure the transparency and disclosure of fees. It also is looking for suggestions on how fee disclosures can aid comparison-shopping, which would go a long way in helping consumers make informed choices. Finally, the CFPB is looking at how and when consumers should be told that the funds loaded on a prepaid card are FDIC insured.

Product Features

With respect to card features, the CFPB asks whether consumers benefit from credit features on prepaid cards. Until recently, many prepaid cards marketed credit builder features as way to improve credit. The cards claimed to improve credit by reporting certain payments, such as rent and utilities, to a credit bureau. One problem with these prepaid cards that build credit, however, was that they did not affect a consumer's FICO credit score.

The CFPB is also looking at whether high yield savings accounts linked to prepaid cards are beneficial to consumers. Several prepaid cards offer this feature with savings accounts that pay as much as 5 percent interest or more. These offers typically cap the amount that can earn the high interest rate to $5,000 or less.

DR is the founder of the popular personal finance blog The Dough Roller, and the credit card review site Credit Card Offers IQ.

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