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New York Attorney General Letitia James said most cases involved...

New York Attorney General Letitia James said most cases involved New Yorkers who relied on repeated paycheck advances from Netspend. Credit: AP/Richard Drew

Netspend, a major issuer of prepaid debit and payroll cards, will pay more than $1 million to settle an accusation by New York’s attorney general that the company froze customers’ bank accounts and charged "illegal" fees and “outrageous” interest rates to customers, who included low-income New Yorkers.

Austin, Texas-based Netspend “took advantage of tens of thousands of consumers and even deprived, vulnerable New Yorkers of their hard-earned benefits like Social Security,” Attorney General Letitia James said in a Thursday release. “This settlement will return hundreds of thousands of dollars to New Yorkers and ensure that Netspend ends its illegal practices.”

According to the release, those practices included a paycheck advance program that charged customers an effective annual interest rate of more than 300%. New York law limits annual interest rates to 16% for unlicensed lenders such as Netspend and 25% for licensed lenders. The attorney general’s investigation found more than 4,000 such cases, mostly involving New Yorkers who relied on repeated paycheck advances from the company. Much of Netspend's paycheck advance program revenues came from just 230 customers who used the program heavily, paying a median $2.99 fee each time they took pay advances that amounted to about $50 per transaction, according to the settlement agreement. 

In other cases, according to the release, Netspend froze its own customers’ funds, including Social Security and veterans benefits, allowing debt collectors to seize the money. The state’s Exempt Income Protection Act protects state and federal benefits from collection up to $3,840 for Long Island, New York City and Westchester residents, and up to $3,600 for residents in other parts of the state.

In one of those cases, according to the release, Netspend froze a New York customer’s account that contained just $1,008.52. When the customer complained the company was violating the law, Netspend claimed — falsely — the account had to be blocked for a year “per the court order.” The customer had to pay more than $600 to unblock the account.

Netspend also misled customers about fees, according to the release, using marketing materials that led customers to believe they could avoid ATM fees by using in-network ATMs. In fact, the company charged fees on all ATM transactions, earning Netspend millions of dollars. Netspend also illegally charged its payroll card customers fees for inquiring about an account balance at ATMs, attempting transactions at ATMs that were declined and foreign exchange fees.

Netspend and parent company Ouro did not respond to an emailed request for comment Thursday morning. Netspend did not admit or deny the attorney general's findings, according to the settlement. 

The settlement requires Netspend to reimburse $735,000 to New York customers who were charged illegal fees or had funds illegally turned over to debt collectors. The company is also required to pay a penalty of more than $350,000 to the state and change its policies to comply with state law.

In 2017, Netspend agreed to pay $53 million to settle Federal Trade Commission allegations it deceived people about access to funds deposited on Netspend debit cards, according to the FTC.

In 2023, consumers loaded $234 billion on general purpose prepaid cards like Netspend's, according to Javelin Strategy and Research, which described the cards as an "important entry point for consumers who are shut out of traditional credit and debit card programs and also serve as a source of additional account access for those looking to budget their regular spending."

Netspend says it has more than 200 million accounts and 130,000 distribution locations. 

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