SACRAMENTO, Calif.—California Gov. Gavin Newsom has signed into law a bill that closes a loophole that prepaid card companies had been using to evade California and federal laws that limit overdraft fees
The legislation, led by Sen. Monique Limón and was sponsored by the National Consumer Law Center, passed both the California Assembly and Senate unanimously.
“Prepaid card companies like NetSpend should not be evading California and federal laws against overdraft fees by shifting their prepaid cards to fake bank accounts,” said Lauren Saunders, associate director of the National Consumer Law Center. “This new law will ensure that California funds used to support needy families are not drained off by overdraft fees on fake bank accounts.”
The new law extends California’s rules governing direct deposit of California government payments to so-called bank accounts offered through non-bank companies like NetSpend as well as to newer “fintech” accounts offered by non-banks like Chime, according to analysts.
Ban on ‘Voluntary’ Fees
The law prohibits accounts from charging fees for overdrafts, including purportedly voluntary fees like “tips,” unless the account complies with the CFPB’s prepaid account rules. Those rules generally prohibit overdrafts except through separate credit accounts that comply with the federal rules governing credit cards. The new law does not impact overdraft fees on traditional bank accounts, noted the NCLC.
The new law applies to accounts used to receive direct deposit of California unemployment compensation, state-collected child support and public assistance. (The law does not cover debit cards sponsored and used by the State of California to make payments, which have never had overdraft fees.) Under existing California law, prepaid cards, to be eligible to receive certain California government payments, must carry deposit insurance and cannot have overdraft or credit features.
Similarly, the CFPB enacted rules that went into effect in 2019 that effectively prohibit overdraft fees on prepaid cards, the NCLC reminded.
Evading the Law
“While most prepaid cards have never had overdraft fees, many prepaid cards sold at payday loan stores did have overdraft fees prior to the CFPB rule,” the NCLC said. “Some of those prepaid card companies, notably NetSpend, began to evade both California and federal law by launching so-called “bank accounts” that did not comply with the CFPB prepaid rules and the California overdraft fee prohibition.
The NCLC added that companies have been evading the law by using a bank identification number (BIN) associated with bank accounts and calling the accounts “bank accounts,” “debit cards” or similar names, rather than using a BIN number associated with prepaid cards.
“Simply changing the name on a card from ‘prepaid card’ to ‘bank account’ or changing the technical back-end way the account is set up does not convert these accounts offered by non-bank companies into bank accounts or give them permission to charge overdraft fees that are prohibited by the CFPB’s prepaid card rules,” Saunders explained.