Comment Letter CFPB Prepaid Card AARP 07-23-12

There are, of course, many older people who are accustomed to and successful at usingelectronic payments systems. Indeed, as of 2010, approximately forty-eight million Americansreceived federal benefits via direct deposit to either a bank account or the Direct Express card."But there nevertheless remain millions of older people who currently receive federal benefits viaa paper check and who are unbanked." They will soon have no choice but to receive theirbenefits via electronic disbursement, prepared or not." Unbanked beneficiaries are likely to beparticularly vulnerable to hidden fees, confusing terms, and high costs of GPR prepaid cards.AARP urges the Bureau to take timely steps to ensure that the GPR environment will notthreaten the financial security and overall well-being of millions of older Americans as theytransition to paperless benefits.Lack of familiarity with new payment systems, discomfort navigating new systems, andfinancial decision-making capacity challenges compound the reality that many older Americanssurvive primarily on very limited income. Federal retirement benefits, averaging only about 1,200 per month," constitute a large share of, or are the only source of, income sustainingmillions of older people in their retirement."Despite the fact that Social Security keeps thirtypercent of older Americans out of poverty," approximately six million older individuals suffer13Notice of Proposed Rulemaking, Managementof Federal Agency Disbursements,75 Fed. Reg. 34394(June 17, 2010).See id. Efforts to encourage recipients of paper checks to switch voluntarily have been unsuccessfulfor approximately 2.1 million who receive Social Security benefits and 1.8 million who receiveSupplemental Security Income benefits via paper check and are unbanked.1415 Final Rule, Managementof Federal Agency Disbursements, 75 Fed. Reg. 80315 (Dec. 22, 2010) (to becodified at 31 C.F.R. pt. 208) (Current recipients of federal benefits who receive a paper check will berequired to choose an electronic disbursement option before March 1, 2013. Those who began receivingfederal benefits on or after March 1, 2011, are already required to receive their benefit fundselectronically.).Joint Center for Political and Economic Studies, AFRICANAMERICANSANDSOCIALSECURITY:A f(African American men received an average 1,109 monthly benefit compared with 1,334 on averagefor white men in 2008. Black women averaged 946, less than the 1,015 average for white women that16vear.).17Joint Notice of Proposed Rulemaking, Garnishment of Accounts Containing Federal Benefit Payments,75 Fed. Reg. 20299, 20300 (Apr. 19,2010) (noting "Recent statistics show that 32 percent of SocialSecurity beneficiary married couples or nonmarried persons age 65 or older reported receiving 90percent or more of their income from Social Security. In addition, Social Security benefits are theprimary source of income (representing 50 percent or more of total income) for 64 percent ofbeneficiary married couples or nonmarried persons age 65 or older.") (citing Annual StatisticalSupplement to the Social Security Bulletin, 2008 Social Security Administration Office of Retirement andDisability Policy Office of Research, Evaluation, and Statistics SSA Publication No. 13-11700. Released:Mar. 2009).18 Carole Fleck, Social Security a Barrier to Poverty for Many: Benefits crucial for minorities and women,AARP says, AARP Bulletin (Nov. 1, 2010t 010jsocial securitLbarrier to poverty.html.

from hunger, and thirteen million cannot afford adequate housinq." As many as one in fourAfrican Americans, one in five Hispanics, one in six women, one in eight white adults, and onein ten Asian Americans relied exclusively on Social Security for their retirement income in2008.20High fees and hidden costs should not deplete an older or low-income person's limitedincome. With so many people depending on Social Security as their sole source of income, it isespecially important to protect these benefits from high costs and hidden fees. Indeed, in interimrules issued by the Treasury Department to protect exempt funds from garnishment,21 theDepartment expressly recognized the importance of protecting a beneficiary's access to thislimited income. Equally important is the zealous protection of funds deposited onto prepaidcards. In addition to extending greater consumer protections to GPR prepaid oards generally,the Bureau should work with other federal agencies, states, and employers to further improveprotection available to such beneficiaries.B. Permitting providers of unregulated prepaid debit cards to offer inferior, moreexpensive products to older, lower income, and minority recipients of federalbenefits perpetuates an unfair, two-tiered financial services system.AARP urges the Bureau to take all appropriate actions to prevent providers ofunregulated prepaid debit cards from offering inferior, expensive products to older, lowerincome, and minority consumers, thereby perpetuating an unfair, two-tiered financial servicessystem." Consumers who either are unbanked or underbanked will benefit the most fromstrong consumer protections. As African American and Hispanic households are more likely tobe unbanked or underbanked than the population as a whole, these groups are also more likelyto be harmed by hidden fees and high costs of unregulated prepaid cards." Based uponhistorical evidence of significant disparities in the financial services available to suchpopulations," it is clear that an unregulated financial services industry does not adequatelyprotect consumers.Unregulated alternative financial service providers specifically target the working poor,minorities, and people who depend on Social Security benefits or who have blemished credithistories. This population faces numerous systemic barriers to accessing mainstream bankinginstitutions." The Treasury Department has acknowledged that bank accounts generally haveIndividual State Fact Sheets, AARP Foundation, ationfact sheets.htmL1920Carole Fleck, Social Security a Barrier ta Poverty for Many, supra note 9.21Interim Final Rule, Garnishmentof Accounts Containing Federal Benefit Payments, 76 Fed. Reg. 9939(Feb. 23, 2011).22See Hermanson et al., supra note 5.232009Fed. Dep. Ins. Corp., FDIC ,http://www.fdic.gov/householdsurvey/full report.pdf(hereinafter "FDIC Survey").24See Walters, supra note 3; Hermanson et al., supra note 5.25MadhubalanViswanathan, Jose Antonio Rosa, & Julie A. Ruth, Emerging Lessons: For MultinationalCompanies, Understandingthe Needs of Poorer Consumers Can Be Prafitable and Sacially Responsible,

not met the banking needs of many Americans, including federal benefit recipients."Additionally, consumers may have limited or no access to bank facilities of any type in eitherurban or rural areas." The FDIC has found that among previously banked households whoclosed their accounts, 5.2 percent did so because there was no bank near work or horne." Inaddition, significant non-pecuniary costs in time, transportation, and safety may be associatedwith accessing a mainstream financial institution that is not convenient for a person to use. Incomparison, most lower-income and minority neighborhoods contain high numbers ofalternative financial services providers, including payday lenders, check cashers, auto titlelenders, pawn shops, and rent-to-own services, strategically located near shopping centers,Social Security offices, and other businesses frequented by low-income people."The inadequate provision of banking services to low-income and minority and ruralcommunities, and corresponding proliferation of such fringe banking alternatives has resulted ina two-tiered economy in which middle-income and affluent consumers are served by federallyinsured and regulated banks and other lenders, and the poor and near-poor are relegated toexpensive and, in many cases, poorly regulated alternatives."Such banking services actually worsen the financial situation of low- and moderateincome consumers." In particular, AARP has found:Frequent refinancing of debt, such as rollovers and flipping, often results in theaccumulation of debt far beyond the consumer's ability to pay and, in some cases,foreclosure. Geographic isolation and a lack of alternative services, income volatility, alack of savings, and a lack of consumer information reduce the ability of many lowincome consumers to be price-driven. [Alternative financial services (AFS)] businessesare acutely aware of these factors and structure their products and advertisingaccordingly. The results can be misleading in some cases. For example, the terms"fees or charges" may be used rather than "interest." As a result of the factors citedWall St. J. Online, Oct. 20, 2008 (noting that low-income individuals, who often need more protection,often lack the analytical skills to make cost calculations); FDIC SURVEY,supra note 24 (finding that theunbanked are more likely to have lower levels of education).26 Joint Notice of Proposed Rulemaking, Garnishment of Accounts Containing Federal Benefit Payments,75 Fed. Reg. 20299, 20300 (Apr. 19, 2010).27See Celent, LLC, Where the Banks Aren't: Nontraditional/NonbankAdvances in Branded Prepaid Cards24 (2007).28FDIC Survey, supra note 24.Hermanson et al., supra note 5, at 5 (finding low-income and minority households are significantlymore likely to have AFS located within one mile of their homes than higher-income and nonminorityhouseholds).2930 See Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Financial Services Marketplace:TheFringe Banking System and its Challenge to Current Thinking About the Role of Usury Laws in Today'sSociety, 51 S.c. L. Rev. 589, 591 (2000).31Hermanson et al., supra note 5, at 5.

previously, low- and moderate-income persons often rely on the more expensive andless-regulated AFS industry for financial services."AARP believes it is as unacceptable to charge poor and minority consumers of financialservices more than their wealthier counterparts as it is for insurance companies and lenders toredline communities of color or target them for marketing of more expensive products.Permitting inferior and unregulated products to be peddled to low-income and minority personsis simply unfair. AARP urges the Bureau not to permit, in effect, a government-sanctioned formof red lining by permitting lesser protection over payment systems used disproportionately bylower income or unbanked consumers. The Bureau should ensure that older people and otherconsumers who do not have sufficient choice or experience with electronic payment systemsare fully protected.II.Specific Recommendationsto Protect Consumers of GPR Prepaid CardsA. Full Regulation E protection should be extended to GPR prepaid cards.AARP strongly supports extending full Regulation E protection to GPR prepaid cards.DOing so will help eliminate the disparities in payments systems, and will help eliminate thesignificant confusion consumers have regarding their rights, thereby significantly simplifying thedisclosures necessary to protect consumers. It will also help prevent evasion of consumerprotections by unscrupulous providers.Although some GPR prepaid card providers voluntarily comply with standards similar tothose required by Regulation E, voluntary compliance is insufficient to protect consumers. Notall providers comply voluntarily or in all respects. This results in spotty protection and increasedconsumer confusion. Moreover, the consumers who are most likely to use GPR prepaid cardsare the ones least likely to be able to advocate for themselves if there is a problem and theprovider refuses to live up to its promises."Many GPR prepaid cards already claim to comply voluntarily with numerous RegulationE standards as best practices." AARP believes that it will not be difficult for providers tocomply fully with Regulation E protections. Indeed, it will permit those providers who alreadyvoluntarily offer protections similar to those required by Regulation E to compete more fairlybecause it will eliminate unscrupulous competition in the marketplace. If it turns out that it wouldbe difficult to comply with the provisions many providers claim to follow voluntarily, the Bureau32Hermanson et al., supra note 5, at 11 (citations omitted).See Gail Hillebrand, Before the Grand Re-thinking: Five Things to Do Today With Payments Law andTen Principles to Guide New Payments Products and New Payments Law, 83 Chi.-Kent L. Rev. 769, 790(2008) (noting itA voluntary policy is subject to the risk of uneven application and to the discretion ofemployees about how and when to apply the policy, which may disadvantage consumers whose primarylanguage is not English, who are less able to spend time on the phone with customer service due to thenature of their jobs, or who are less able to write a persuasive letter describing the problems-inmanycases, the very consumers to whom prepaid debit cards are being marketed as account substitutes.").34 See Cons. Rept., supra note 4, at 13 (detailing the significant differences between marketing claims33and actual policies regarding voluntary compliance with Regulation E).

should investigate their advertising and claims resolutions practices to determine whether theyare engaged in deceptive business and marketing practices.B. Consumers of GPR prepaid cards must be protected against loss of their funds inthe event of failure of a financial institution.AARP urges the Bureau to require that funds stored on GPR prepaid cards be held in aninsured depository institution in individual accounts that meet the requirements for pass-throughinsurance under 12 C.F.R. part 330, such that the cardholder's balance is FDIC- or NationalCredit Union Share Insurance Fund-insured to the extent permitted by law. The TreasuryDepartment has already proposed requiring pass-through insurance as a prerequisite topermitting the deposit of federal benefits onto a GPR prepaid card." All users of such cardsdeserve the same protection regardless of the source of their funds.C. Paper statements must be made available.AARP strongly urges the Bureau to require paper statements be made available to usersof GPR prepaid cards. Most bank accounts provide free written statements. This is importantfor many reasons, not the least of which is that time limits to claim Regulation E protections aretriggered by the receipt of notice of an unauthorized transaction. In contrast, if only theprotection applicable to payroll cards is available, a person will have only two days to report anunauthorized transaction after it is transmitted before they are forced to bear the loss. Whileeliminating paper statements may help eliminate certain costs for vendors of prepaid cards,there are wide ranging implications to eliminating such statements.Notice of transactions only by voice mail or text message is inadequate, particularlyunauthorized user also has access to the person's voice mail or text messages and is ableerase the messages. It is also insufficient to provide only electronic access to a statement.person who has access to a computer printer may be able routinely to print transactions into save such records, but many low-income and older Americans may be unable to do so.ability to receive a written statement is therefore an important safeguard.if antoAorderTheAdditionally, written statements must be made available for free. If a person is requiredto pay high costs for such statements, they may forego receiving important notice ofunauthorized transactions and ultimately be forced to bear the burden of the loss. Moreover,consumers may not fully appreciate the importance of having access to paper statements."Forexample, a myriad of regulations, laws, and court procedures, among other examples,necessitate the continuing availability of paper statements. Written account statements areimportant to substantiate account details and to protect consumers from financial fraud andabuse." They are also needed in the event that a police report must be filed to substantiateFinal Rule, Management of Federal Agency Disbursements, 75 Fed. Reg. 80315 (Dec. 22, 2010).See Key Focus Group Findings on Prepaid Cards, Pew Health Group, Ap. 11, 2012, available athttp://www .pewhea Ith.o rgJ re po rts-a na Iysis/issue-briefs/focus-gro u p-f nd ings-o n-pre pa id-cred it -ca rd s85899380984 (finding most participants check their balances over the phone or online).3536Experts predict lI[t]he growing popularity of prepaid cards presents ample opportunities for fraudstersand likely will lead to the next wave of card fraud." Fair Isaac: Prepaid Cards Spread Fraud, Am. Banker,37July 15, 2009.

unauthorized use, to submit records to lenders, vendors, merchants, or courts, or to apply forpublic benefits or verify eligibility for income or asset restricted programs, including SSI. Writtenaccount statements are also necessary to dispute whether a debt is owed or a report on a creditreport is accurate. While it may one day be possible to dispense with paper statements, it ispremature to do so at this time.Paper statements should remain available for an adequate period of time, even if notautomatically delivered, because the need for a paper statement may not be known until muchlater. Especially for those with limited capacity to manage their funds or who are victims offinancial fraud and abuse, it may take months for an unauthorized transaction to be recognized,and months or years longer to complete a fraud investigation or resolve the problem. Moreover,people who assist or seek to protect persons with limited capacity will better be able to do so if awritten statement is available.The advent of paperless statements, electronic delivery of transactions, and othertechnology-enabled efficiencies is relatively new. AARP believes it is important to consider notmerely the cost to vendors of prepaid cards in providing a paper statement (or at a minimumretaining data for seven years so a statement can be provided if needed), but more importantlythe ripple effect that the rapid transition to electronic transmission of transactions will haveoverall. Many public and private institutions that have long relied upon written statements anddocuments have not yet transitioned to electronic-only transactions. Before abandoning deeplyengrained procedures, AARP believes it is necessary to ensure that consumers will not bedisadvantaged by a shift to electronic-only transaction records.D. Credit products linked to GPR prepaid cards should be prohibited.AARP strongly urges the Bureau to prohibit lines of credit or account advances, such asto cover transactions when insufficient funds are available, or to "build credit" on GPR prepaidcards. It is understandable that consumers and advocates alike would like to improve access tocredit for vulnerable populations and to assist them to build better credit. But GPR prepaidcards are an inappropriate vehicle to do so and may in fact drive consumers further into a twotiered financial services system." First, there is no clear indication that use of prepaid cardspredicts creditworthiness as a credit score is intended to do. Second, a consumermay pay afee to a provider of a prepaid card in exchange for the reporting of the use of the card, but suchreporting may not actually impact a person's credit score." Finally, a wide variety of creditrepair scams already cause consumers significant harm. AARP believes that prohibiting creditproducts linked to GPR prepaid cards will prevent their use to falsely promise to be able torepair credit.Additionally, like overdraft fees, the credit that typically is associated with GPR prepaidcards is very expensive, and consumers are ill equipped to understand the cost of credit theyaccess via prepaid card advances. Permitting a person to "overdraw" a GPR prepaid card forJames McGrath, Fed. Res Bank of Phil., The Cost Effectiveness of Stored-Value Products forUnbanked Consumers (May 2005), available at http://papers.ssrn.com/soI3/papers.cfm?abstract id 927073 (concluding "[s]imply put .they [stored-value cards] will necessarily be an imperfectvehicle for building a credit history."]

Jul 23, 2012 · prepaid cards; 5. Prohibit offset of exempt federal benefits deposited to GPR prepaid cards; 6. Prohibit terms and conditions in a prepaid card contract that waive jury trials and participation in class actions, require challenges to be brought in inconvenient venues, truncate remedies or