Why it matters

The Consumer Financial Protection Bureau (CFPB) released a proposed rule that Director Richard Cordray said would “fill key gaps” for consumers regarding prepaid products. The 870-page proposal would add protections like a requirement that financial institutions work with consumers to investigate any errors on covered products, protect consumers against fraud and theft, provide consumers with free and easy access to product information, and add “Know Before You Owe” prepaid disclosures that would highlight the key costs associated with the product prior to use. Certain protections provided to credit cards would be adopted for prepaid cards as well, including monthly account statements and limits on late fees and first-year fees. The scope of covered products is broad, and may pick up emerging technologies like value stored on mobile devices, and not just traditional prepaid cards. As a result, the proposal could have a significant impact on the evolution of new payment systems. The proposal is currently open for public comment.

Detailed discussion

Seeking to increase the protections available for consumers with regard to prepaid products, the CFPB proposed a new rule.

“Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts,” Cordray said in a press release. “Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”

Among the fastest growing types of consumer financial products in the United States, the total dollar value loaded onto general purpose reloadable cards is expected to reach almost $100 billion through 2014, the agency said, adding that unbanked and underbanked consumers are “disproportionately” likely to rely on prepaid cards.

The proposal – which would cover traditional plastic prepaid cards as well as mobile and other electronic prepaid accounts like payroll cards, tax refund cards, peer-to-peer payment products, and certain federal, state and local government benefit cards – would apply existing federal protections in place for other products to covered prepaid products.

Protections under the Electronic Fund Transfer Act (EFTA) would apply once a consumer registers the account, providing analogous benefits to checking accounts, the CFPB said. For example, financial institutions would be required to provide either periodic statements to consumers or make account information easily accessible online at no cost.

The proposed rule would also provide error resolution rights for consumers, requiring financial institutions to investigate and resolve mistakes “in a timely manner.” If the institution cannot resolve the alleged error within the given time frame, the consumer’s account must be credited for the disputed amount until the investigation is complete.

Provisions were included for unauthorized, erroneous, or fraudulent withdrawals or purchases, limiting the responsibility to consumers for a lost card or unauthorized charges to $50, as long as the consumer provides prompt notice of the transaction.

The CFPB expanded the use of “Know Before You Owe” disclosures to prepaid products in the proposed rule, providing two model disclosure forms. Financial institutions would need to complete a short form that would highlight key information for the prepaid account, including the monthly fee, fee per purchase, ATM withdrawal cost and the fee to reload cash on the account. The long form would include all of the information from the short form as well as any other fees that could possibly be imposed on the account.

Consumers would have to receive or have access to a full set of the fees and account information prior to acquiring the account, the Bureau added. Prepaid account issuers must post account agreements on their websites and provide them to the CFPB for an agency site.

To bring the protections for prepaid products in line with other credit products, provisions from the Truth in Lending Act and the Credit Card Accountability Responsibility and Disclosure Act were incorporated into the proposal. Before offering credit, prepaid companies must ensure that consumers have the ability to repay the debt, provide a monthly credit billing statement, give consumers at least 21 days to repay a debt before charging a late fee (which must be “reasonable and proportional” to the account terms at issue), and restrict the total fees for prepaid credit products to 25 percent of the credit limit during the first year of the account.

To keep prepaid account and credit products distinct, the CFPB added other requirements like a 30-day waiting period and establishing a clear separation between prepaid funds and credit repayment, banning the use of funds loaded to the prepaid account to repay the credit unless a consumer has affirmatively opted in.

To read the CFPB’s proposed rule, click here.