California Prohibits Overdraft Fees on Certain Prepaid Accounts

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Troutman Pepper

[co-author: Jennifer Ciccarelli]

On October 5, California Governor Gavin Newsom signed SB 497, legislation that restricts the types of prepaid accounts that can be used to receive certain government assistance payments. According to the National Consumer Law Center (NCLA), an advocacy organization that sponsored the legislation, the now-enacted law will “close a loophole that allows nonbank prepaid card companies to evade California laws that prohibit overdraft fees on prepaid cards used to receive public assistance, unemployment compensation, and state-distributed child support payments.”

Under existing California law, certain government assistance payments may only be directly deposited into a “qualifying account.” SB 497 revises existing law to create only two types of qualifying accounts: (1) demand deposit or savings accounts “offered directly” by banks and (2) prepaid accounts, demand deposit, and savings accounts “offered by, or through,” nonbank financial institutions.

Moreover, accounts offered by, or through, nonbank financial institutions now may only offer a credit or overdraft feature that is automatically repaid from the account if the feature has no fee, charge, or cost or if it complies with the requirements for credit offered in connection with a prepaid account under the Truth in Lending Act (TILA) and its implementing regulations.

According to the NCLA, these changes to the definition of “qualifying account” will prevent nonbank prepaid card companies “from evading the laws restricting overdraft fees on qualifying prepaid cards by relabeling their prepaid cards as ‘debit cards’ or ‘bank accounts.'”

Our Take. Prepaid accounts are a popular alternative to more traditional financial products. But legislators, regulators, and consumer advocates remain concerned about hidden fees and charges and about inadequate disclosures.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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