It has been well-known in banking compliance law that the Consumer Financial Protection Bureau (“CFPB”) has been planning to issue substantial consumer protection rules with respect to prepaid products. That time has now arrived, and the Proposed Rule
from the CFPB is extensive and detailed. On November 13, 2014, the CFPB issued a Proposed Rule for prepaid cards, as well as proposed “Know Before You Owe” disclosures, which will be subject to public comment before they are officially issued as a final rule during 2015.
Prepaid products have become a major component of our banking system over the last decade. Prepaid products are consumer accounts typically loaded with funds by a consumer or by a third party, such as an employer. Consumers can use these products to make payments, store funds, get cash at ATMs, and receive direct deposits. The increased regulatory interest for prepaid products is largely attributable to their growing popularity, particularly among the 30 percent of United States households that are “unbanked” or “underbanked.” The CFPB has explained that the amount of money consumers loaded onto “general purpose reloadable” prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. The total dollar value loaded onto general purpose reloadable cards is expected to continue to grow to nearly $100 billion through 2014.
Many community banks offer prepaid products either directly to consumers or to business customers to issue payroll or other types of payments to employees. This growing area of the market will now require institutions that issue prepaid cards to comply with the Proposed Rule. Also, to the extent that community banks use vendors for certain card issuing functions, institutions must still address the Proposed Rule to ensure proper management and oversight of their vendors.
The succinct summary of what bankers should know about the Proposed Rule (which is 900 pages) is that it extends established credit card protections to prepaid cards and accounts. More specifically, the Proposed Rule extends to prepaid accounts the requirements of Regulation E (implementing the Electronic Funds Transfer Act) and Regulation Z (which implements the Truth in Lending Act). The balance of this article will discuss several of the key features of the Proposed Rule and challenges that community banks must address.
First, it is important to understand the scope and reach of the Proposed Rule. “Prepaid product” is defined as follows: a “card, code, or other device . . . which is established primarily for personal, family, or household purposes and which: (A) is either issued on a prepaid basis to a consumer in a specified amount or not issued on a prepaid basis but capable of being loaded with funds thereafter; [and] (B) is redeemable upon presentation at multiple, unaffiliated merchants for goods or services, useable at automated teller machines, or usable for person-to-person transfers.” Proposed Rule at § 1005.2. The Proposed Rule specifically excludes gift certificates, store gift cards, and other promotional gift cards. Id. The Proposed Rule includes “payroll card accounts,” which are defined to include accounts that are “directly or indirectly established through an employer and to which electronic fund transfers of the consumer’s wages, salary, or other employee compensation . . . are made on a recurring basis . . . .” Id.
Next, the Proposed Rule extends a number of account features to prepaid products, including account information and periodic statements, error resolution procedures, and truth-in-lending disclosures and overdraft features. Most of these features are presently available to holders of credit cards and/or checking accounts, but the Proposed Rule would push such features into the prepaid card arena.
With respect to account information and periodic statements, the Proposed Rule requires financial institutions to either provide statements to consumers or make account information easily accessible online for free. Additionally, prepaid cardholders would have access to the error resolution and liability limits of Regulation E. This feature would give consumers the ability to contest erroneous and/or fraudulent charges if their cards are lost or stolen.
The Proposed Rule also establishes certain disclosures that institutions must make available to consumers before they establish or purchase prepaid products. The CFPB calls such disclosures “Know Before You Owe,” and the agency has implemented similar disclosures in mortgage and credit card areas. The Proposed Rule contains a model form (short and long) that financial institutions can utilize in their compliance efforts. (The model form is also available for public comment.) Financial institutions that issue prepaid accounts will have to post the disclosures on their Internet sites and present the forms to the CFPB for inclusion in a new website that it will establish.
Finally, the Proposed Rule will extend protections related to disclosures and overdraft fees to prepaid products that include a line of credit (i.e., spend more money than they have deposited into the prepaid account). Many of the specific features of the Proposed Rule stem from the Truth in Lending Act and the Credit CARD Act of 2009. These protections include:
- ability to pay standards that must be applied before offering the line of credit features;
- monthly periodic statements similar to those provided to credit card consumers;
- at least 21 days to repay the line of credit before they are charged a late fee, and such late fees must be “reasonable and proportional”; and
- limits on the fees and interest charged to consumers in connection with such products.
The CFPB also proposes that institutions must wait 30 days after an account is registered before they can offer credit to the consumer.
With respect to the impact of the regulation of prepaid products, institutions that offer consumers these types of cards and accounts will need to formulate a plan to implement the rule across their businesses and update compliance manuals and training resources. Because of the necessary issuance of periodic statements (or online account access), as well as the two mandatory disclosures, the Proposed Rule will likely increase compliance expenses for institutions. Notwithstanding these burdens, the Proposed Rule will allow financial institutions to understand the expectations of regulators and the appropriate compliance steps for prepaid products and accounts.
Please contact our Community Banking Practice Group
with any questions you may have. Please understand that the Proposed Rule will likely generate significant input and comment, and therefore, certain aspects may change. We will keep you updated on developments related to prepaid products.