The Consumer Financial Protection Bureau (CFPB) has filed a lawsuit against Comerica Bank, alleging that it systematically failed members of its Direct Express government benefits program.
A partnership between the U.S. Department of the Treasury, Comerica Bank, and Mastercard, Direct Express provides millions of U.S. individuals with prepaid cards to receive federal benefit payments, like Social Security and Medicare. Most participants in the program are unbanked, and many are elderly or disabled.
Social Security recipients typically have payments directly deposited into their bank account. However, a significant number of unbanked recipients still receive paper checks, often incurring fees to them. In 2008, the Social Security Administration partnered with Comerica to manage Direct Express, allowing recipients without a bank account to have their Social Security proceeds load into a prepaid Mastercard card.
In April, Comerica announced that it had lost the DirectExpress contract renewal, which ended up going to BNY. However, Comerica is still managing the program during a three-year transition period.
“They may have decided to cut costs on servicing since they lost the contract,” said Don Apgar, Director of the Merchant Payments Practice at Javelin Strategy & Research. “The CFPB has stepped in to take enforcement action and make Comerica fulfill their obligations to cardholders until the new provider takes over the program.”
Chargeback Issues
Among other claims, CFPB alleges that Comerica led its cardholders to waive their legal protections in the event of a chargeback. Comerica required users to contact merchants to stop pre-authorized payment transfers from their account.
“Since the cards are Mastercard-branded, standard chargeback rules apply,” said Apgar. “If you call your bank about your Mastercard account and tell them that a merchant is applying a recurring charge that you didn’t authorize, the bank—in this case Comerica—is supposed to reverse the charges and charge back the transactions to the merchant. The CFPB says that Comerica was instructing the cardholder to call the merchant. In most cases the cardholder has already tried to deal with the merchant and is relying on Comerica to intervene and reverse the charges.”
According to the CFPB, Comerica’s vendors required thousands of cardholders to close their accounts to prevent pre-authorized payments. Consumers then had to pay additional fees to receive replacement debit cards more quickly, enabling them to regain access to their government benefits.
For its part, Comerica said in a lawsuit filed against the CFPB that it has “generally acted with the oversight and knowledge or approval of the federal government.” The suit asks for “a judgment declaring that the CFPB’s investigation is unlawful because it exceeds the scope of the CFPB’s statutory authority.”
