Why it matters

A recent technical glitch for a major prepaid card could result in greater oversight for the industry as a whole. In October, consumers using prepaid RushCards were suddenly unable to access their funds. The company blamed technical problems due to a processor switch. But as the problem continued—and consumers complained of late fees as a result of being unable to pay their bills—the Consumer Financial Protection Bureau (CFPB) stepped in. Expressing concern about "cascading financial effects," director Richard Cordray released a statement that the Bureau is prepared "to use all appropriate tools" to provide relief to affected consumers. "We have stressed that RushCard and its relevant business partner must ensure that no other consumers will be denied access to their funds," Cordray said, adding that he also spoke with fellow regulators "to ensure a comprehensive response." Specifics about potential enforcement actions were not mentioned. The incident has already yielded a putative class action lawsuit as well as calls from consumer groups to heighten supervision of the growing market of prepaid card providers. Also, just about a year ago the CFPB proposed extensive new regulation of prepaid accounts. The proposed rules would not have prevented the problems that arose with the RushCard. Nevertheless, the proposal received much industry comment, and the RushCard situation will strengthen the CFPB's position regarding its proposed rules.

Detailed discussion

A recent incident has drawn attention to the burgeoning prepaid card market, leading consumer protection advocates to call for greater oversight of the industry. Consumers—particularly young and low-income individuals without bank accounts—are increasingly using the cards for services traditionally undertaken by banks. More employers are using the cards to pay workers, who in turn use the account to pay bills and make daily purchases. One of the most popular prepaid products on the market: UniRush's RushCard, backed by hip-hop legend Russell Simmons.

But beginning October 12, RushCard users faced serious problems: some balances had dropped to zero despite having money in the account; in some cases, direct deposits made to their accounts were returned, and other users were locked out of their accounts even though funds were available. Technical problems were to blame, the company said, due to a switch in payment processors. Card issuer MetaBank said it was working with RushCard to help consumers by overnighting money in order to avoid late fees or fines.

RushCard released a statement promising to waive its fees for the next four months, from November 1 to February 29. During the "fee-free holiday," both old and new customers will not incur charges from the company's fee schedule, out-of-network ATM fees, or card-to-card transfer fees.

"Very soon, RushCard will be making a significant announcement on how we plan to make this right with our customers who were severely inconvenienced and in some cases suffered hardships," UniRush CEO Rick Savard said in a statement. "We have worked extremely hard in the past few years to build a product that is safe, secure and cost-effective for our customers. We are going to do everything we can for our customers and for the communities in which they live to restore their trust and faith in us."

But the company's efforts may not be enough.

The next day, Consumer Financial Protection Bureau (CFPB) director Richard Cordray released a statement expressing concern about the "cascading financial effects" of consumers being locked out of their accounts, such as late fees due from unpaid bills. "The CFPB is taking direct action to get to the bottom of this situation that may have harmed thousands of innocent consumers already," Cordray said. "We have stressed that RushCard and its relevant business partners must ensure that no other consumers will be denied access to their funds."

The Bureau also vowed that it "is prepared to use all appropriate tools at our disposal to help ensure that consumers obtain the relief that they deserve," Cordray added, noting that he has discussed the situation with his counterparts at the Office of the Comptroller of the Currency (OCC) as well as the Federal Trade Commission "to ensure a comprehensive response that addresses the situation quickly and holds accountable all of the parties involved to make consumers whole."

Cordray did not get specific about potential enforcement actions or other regulator efforts. If the problem was really the result of a technical glitch—and not a consumer protection misstep—then the Bureau (and other regulators) may have limited options on taking action against UniRush or RushCard.

The Bureau released proposed regulations for the prepaid card market in November 2014, but they have yet to be finalized. And even if the rules were in place, they are geared toward consumer protection issues (broader fee disclosures and easier access to account information, for example), not technical errors. However, the RushCard situation did show the extent of prepaid card use and the problems that may arise for consumers when a popular card experiences disruptions. Accordingly, the RushCard experience has likely strengthened the CFPB's position regarding its proposed rules in the face of strong industry comment.

One consumer took matters into her own hands, filing a putative class action in New York federal court against UniRush. Stephanie Fuentes charged UniRush with negligence and unfair and deceptive practices, among other claims, going on the offensive against a ban on class actions found in the company's terms of service. "The terms of RushCard's arbitration provision, waiver of class action rights and right to trial by jury are unconscionable and Plaintiffs and Class Members would not have agreed to those terms or deposited any money with RushCard had they known about the fraudulent, unlawful and unfair activity and misrepresentations as described in this Complaint," Fuentes alleged.

Consumer groups also took action, sending a letter to the CFPB, OCC, and Board of Governors of the Federal Reserve System suggesting "the occurrence raises important questions about the extent to which prepaid cardholders are adequately protected." The National Consumer Law Center, Americans for Financial Reform, the Center for Responsible Lending, and Consumer Action—joined by seven other organizations—also encouraged the Bureau to move forward on its proposal to limit arbitration agreements in consumer contracts.

"To the extent that any laws were violated in this incident, courts should be able to address any violations and order relief for all impacted consumers," the groups wrote. "If the rights of hundreds of thousands of consumers were violated, they should not have to file hundreds of thousands of individual claims before private arbitrators in a process that is closed to the public."

To read CFPB director Cordray's statement, click here.

To read the complaint in Fuentes v. UniRush, click here.

To read the letter from the consumer groups, click here.