WASHINGTON–The Consumer Financial Protection Bureau said it is taking action to halt prepaid card providers illegally siphoning money away from Americans through exclusive government benefit contracts.
In its compliance bulletin, the CFPB outlined existing prohibitions against prepaid cards being the sole method for distributing government benefits. The Bureau added the bulletin underscores rules intended to protect market competition and to protect people’s right to have a choice in how they receive their money under the Electronic Fund Transfer Act (EFTA).
“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.”
Noting the federal government administers benefits like Social Security payments and veterans’ benefits, while state and local governments distribute other benefits, including unemployment insurance, child support, and pension plan payments, the CFPB pointed out that typically, people receive their money through direct deposit into their bank account, by prepaid card, or by check.
“Existing laws, specifically EFTA and its implementing Regulation E, say that people cannot be forced to receive government benefits at a specific financial institution as a condition of receiving government benefits,” the CFPB said. “The rule ensures people have choices and prohibits exclusive deals that undermine competition and fair market prices.”
Abuse Is Punished
According to the Bureau, companies hired to distribute government payments can abuse their exclusive contracts to extract illegal fees. In October, the CFPB fined the prison financial services company JPay $6 million for charging consumers fees to access their own money on prepaid debit cards that they were forced to use.
The CFPB said its newest bulletin confirms that EFTA’s consumer protections apply to government benefit accounts, and financial institutions may be held liable for violations of this requirement. The bulletin also confirms that it is a violation of 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.
Read the compliance bulletin here.