On November 13, 2014, the Consumer Financial Protection Bureau (“CFPB”) proposed new rules for prepaid accounts, to be effectuated through amendments to the regulations implementing the Electronic Fund Transfer Act and the Truth in Lending Act (Regulation E and Regulation Z, respectively). The proposed rules can be accessed here. The CFPB’s press release regarding the proposed rules can be accessed here. Comments to the proposed rules must be submitted within 90 days of the date the proposed rules are published in the Federal Register. The proposed rules are a follow-up to the advanced notice of proposed rulemaking regarding prepaid cards issued by the CFPB in May 2012.
The CFPB estimates the total dollar value loaded onto general purpose reloadable cards will continue to grow to nearly $100 billion through 2014. CFPB Director Richard Cordray noted that “[c]onsumers are increasingly relying on prepaid products to make purchases and access funds,” though “they are not guaranteed the same protections or disclosures as traditional bank accounts.” Director Cordray stated that the proposed rules are intended “to give consumers the basic protections, including safety of the funds, they have come to expect when they pull a debit card out of their wallet or shop online with it” and to close loopholes in the prepaid product market while ensuring that “prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”
According to Director Cordray, prepaid products “are more than just cards” and that “[a]s the prepaid card market has grown, so has the use of mobile or electronic prepaid accounts,” with products such as PayPal and Google Wallet capable of being loaded with and storing funds and of being “used for a wide range of transactions, without reliance on a card.” The proposed rules would apply to certain mobile wallets and could apply to virtual currency and related products and services. The proposed rules would generally cover “prepaid accounts,” defined as “a card, code, or other device” which is: (i) either issued on a prepaid basis in a specified amount or is capable of later being loaded with funds (this would not include products that cannot store funds, such as digital wallets that only hold payment credentials for other accounts); and (ii) redeemable upon presentation at multiple, unaffiliated merchants, usable at automated teller machines or usable for person-to-person transfers. Prepaid accounts need not be reloadable to be covered. The proposed rules also would cover payroll card accounts, certain types of government benefit accounts, student financial aid disbursement cards and tax refund cards. The definition excludes gift certificates, store gift cards, loyalty/award/promotional gift cards and general-use prepaid cards that are both marketed and labeled as a gift card or gift certificate; as well as health savings accounts, flexible spending accounts, medical savings accounts and health reimbursement arrangements.
The proposed rules fall into four general categories:
- Prepaid Protections: rules providing prepaid account customers with protections similar to those checking account consumers receive, including requirements for providing free and easy access to account information access, error resolution rights and fraud and lost-card protection.
- Prepaid Fee Disclosures: rules requiring standardized upfront disclosures and requiring that card agreements be made publicly available.
- Credit Protections: rules relating to credit products related to prepaid accounts, including requiring an ability to repay determination, monthly credit billing statements, allowance of reasonable time to pay debts and limits on late fees and limitations on fee and interest charges.
- Prepaid/Credit Distinction: rules designed to ensure the distinction between credit products and prepaid accounts, including requiring a thirty-day waiting period for offering credit and a wall between prepaid funds and credit repayment.
The proposed rules attempt to promote access to account information such as account balances, transactions and fees in several ways. Perhaps most significantly, companies would be required to either provide periodic statements or provide “easy and free” access to account information by making it accessible for free online. The CFPB noted that in contrast to checking account customers, “prepaid users typically do not automatically receive periodic statements” and the proposed rules would ensure that consumers have the ability to see their account balances and a history of their transactions and fees.
The proposed rules would provide error resolution rights to prepaid account customers. The CFPB noted that currently, “prepaid customers who are double-charged for a transaction or charged an incorrect amount may not be guaranteed a practical way to fix the problem.” Under the proposed rules, companies would be required to investigate errors reported by consumers and to resolve errors in a timely manner. In addition, if an error cannot be resolved within a certain period of time, consumers must be provided a temporary credit of the disputed amount which the consumer could use until the investigation was finished.
The proposed rules would also provide fraud and lost-card protection to consumers. The CFPB noted that consumers of prepaid products are not currently guaranteed protection from “unauthorized, erroneous, or fraudulent withdrawals or purchases.” The proposed rules would limit a consumer’s responsibility for unauthorized transactions for situations where a consumer loses a prepaid card or discovers erroneous or fraudulent transactions. Provided a consumer provides prompt notice of such unauthorized transactions, the consumer’s responsibility would be limited to $50.
Prepaid Fee Disclosures
The CFPB stated that "[t]he current lack of an industry-wide standard on prepaid-card fee disclosures can make it difficult for consumers to comparison shop and make well-informed decisions,” noting that fee disclosures are often “inside the packaging or hard to find online.” The CFPB revealed model forms of prepaid card packaging disclosures for consumer testing in March 2014. The proposed rules include new “Know Before You Owe” disclosures that would provide prepaid product consumers “with standard, easy-to-understand information about the prepaid account.” A short form disclosure would “concisely and clearly highlight key prepaid account information” such as monthly fees, per-purchase fees, and fees for ATM withdrawals and reloads. A long form disclosure would contain all the fees on the short form “plus any other potential fees that could be imposed in connection with the account.” Multiple versions of the proposed disclosures can be found here. The proposed rules would also require prepaid account issuers to post account agreements on their websites “[t]o facilitate comparison shopping” and to submit agreements to the CFPB for posting on the CFPB’s public website.
Under the proposed rules, prepaid account issuers would be required to adhere to many existing credit card protections if credit is offered in connection with a prepaid account. Notably, prepaid account issuers would be required to make an “ability to repay” determination before offering credit to consumers, with companies prohibited from opening a credit card account or increasing any credit line associated with a prepaid card unless a consumer’s ability to make required payments is verified. If a consumer is under 21, that consumer’s independent ability to repay must be assessed. The proposed rules would also require prepaid credit issuers to provide the same type of detailed monthly periodic statement that credit card consumers receive. Such statements “would detail consumers’ fees, and if applicable, interest rate, what they have borrowed, how much they owe, and other key information about repaying the debt.”
Once credit is provided, prepaid account issuers would be required to provide at least 21 days for consumers to repay debts before charging a late fee, and any late fees charged must be “reasonable and proportional” to violations of account terms. In addition, during the first year a credit account is opened, there is a cap on total fees for prepaid credit products of 25% of the credit limit. The proposed rules also place limits on interest rates associated with prepaid card products, prohibited prepaid account issuers that offer credit from increasing the interest rate on an existing balance unless the cardholder has missed two consecutive payments, and requiring the consumers be provided 45 days advance notice before increasing the interest rate prospectively on new purchases (during which time the consumer may cancel the credit account).
The proposed rules would impose a 30-day waiting period for offering credit, meaning that companies would be required to wait 30 days after a prepaid account is registered by a consumer before credit products are offered to the consumer. The CFPB stated this requirement is meant to “allow consumers to get experience with the basic prepaid account before deciding whether they want to apply for a credit product.” The proposed rules would also prohibit companies from automatically demanding or taking credit repayment whenever a prepaid account is next loaded with funds, and require that consumers affirmatively opt in to allowing companies to take funds loaded into a prepaid account to repay credit when the bill is due. Even if a consumer does affirmatively opt in to such repayment, funds cannot be taken more frequently than once per calendar month and payment cannot be required sooner than 21 days after the mailing of the periodic statement.