The CFPB issued its long awaited notice of proposed rulemaking (NPRM) concerning new federal consumer protections for the vast majority of network branded prepaid products, including GPR cards, certain non-reloadable general-use cards, mobile and other electronic prepaid accounts, payroll cards, government benefit cards, student cards, tax refund cards and peer-to-peer prepaid products.  Excluded from the scope of the proposed rulemaking are gift cards (but, with respect to general-use prepaid cards, only those that are both marketed and labeled as a gift card); loyalty, award and promotional card programs; HSA, FSA and similar card programs and needs-tested state or local electronic benefit transfer (EBT) card programs.

The lengthy (870 page) proposal extends the same Regulation E protections that currently apply to payroll cards to most prepaid accounts once the account holders have registered their accounts and provided personal identification information.  The NPRM also proposes standardized and upfront “Know Before You Owe” disclosures regarding the costs and risks associated with prepaid accounts. The proposal also requires certain credit card protections stemming from the Truth in Lending Act and the CARD Act if a credit product, including overdraft protection, is offered in connection with a prepaid account.  As was noted previously, the NPRM was issued on the same date that the CFPB held field hearings on prepaid accounts.

Specifically, the NPRM proposes the following:

Regulation E Protections

  • Access to Account Information.  Financial institutions would be required to either provide periodic statements or make account information easily accessible online and for free in order to allow customers to access their account balances and 18 months of transaction history.
  • Error Resolution.  Financial institutions would be required to investigate errors that consumers report on registered accounts and resolve those errors in a timely manner, generally within 10 business days, or provide provisional credit for the disputed amount until the investigation is complete.
  • Fraud and Lost-Card Protection.  Consumers would be protected against unauthorized, erroneous or fraudulent withdrawals or purchases, including the loss or theft of registered cards.  Liability for unauthorized charges would be limited to $50 if the consumer promptly notifies the bank issuer.

Standardized Disclosures

  • Short and Long Form Fee Disclosures.  Two upfront disclosures, in both long and short form, would generally be required before a consumer obtains any covered prepaid account, except for those accounts obtained through a retail store outlet, in which case only the short form is required (provided the full terms also are available online).  The short form would require the clear disclosure of key prepaid account information, including common costs (e.g., monthly fees, fees per purchase, ATM withdrawal costs, fees to reload cash onto the account, ATM balance inquiry fees, customer service fees, inactivity fees, and up to three “incidence-based fees” (i.e., those incurred most frequently in the prior 12-month period that aren’t otherwise required to be disclosed and which must be assessed and updated as necessary annually).  For payroll and government benefit cards, the disclosures also must include a prominent statement that consumers are not required to accept the  government benefit account or payroll account, as applicable.  The long form would additionally provide information on all other potential fees.
  • Other Disclosures. Other disclosures, such as those regarding access to account information, error resolution, a statement that credit-related features may apply or, alternatively, that no overdraft or credit-related fees will be charged, a statement regarding the number of other fees assessed, telephone and website information, a statement regarding registration, a statement regarding FDIC or NCUSIF insurance, the CFPB’s website, variable fees, and specific disclosures for prepaid account products offering multiple service plans with different fee schedules.
  • Publicly Available Card Agreements.  Prepaid account issuers would be required to post their account agreements on their websites.  Issuers also would be required to submit card agreements to the CFPB for posting on a CFPB-managed website.

Credit Protections

Under the NPRM, traditional “overdraft” programs would no longer be permitted. Instead, any access to a credit line or credit product would require the full gamut of Regulation Z protections, including:

  • Ability to Pay.  Prepaid issuers would be required to confirm that consumers have the ability to repay the debt prior to offering credit.
  • Monthly Credit Billing Statement.  Prepaid issuers would be required to give consumers monthly periodic statements detailing the consumers’ fees, and, if applicable, interest rate, what they have borrowed, how much they owe and other key information about repaying the debt.
  • Reasonable Time to Pay and Limits on Late Fees.  Prepaid issuers would be required to give consumers at least 21 days to repay their debt before they are charged a late fee, and late fees must be “reasonable and proportional” to the violation of the account terms in question.
  • Limited Fee and Interest Charges.  During the first year a credit account is open, the total fees for prepaid credit products would not be allowed to exceed 25 percent of the credit limit.  Additionally, prepaid issuers would generally be prohibited from increasing the interest rate on an existing balance unless the cardholder missed two consecutive payments.  Prepaid issuers may increase the interest rate prospectively on new purchases, but generally must give the consumer 45 days advance notice provided the consumer is permitted to cancel the credit account.
  • Thirty Day Waiting Period.  Prepaid companies would be required to wait 30 days after a consumer registers the prepaid account before they could formally offer credit to the consumer.
  • Wall between Prepaid Funds and Credit Repayment.  Prepaid issuers would be prohibited from automatically demanding and taking credit repayment whenever a prepaid account is loaded with funds.  Prepaid issuers would only be permitted to take funds loaded into the prepaid account to repay due credit when the consumer affirmatively opts in to allow such a repayment, and such opt-in repayments cannot happen more frequently than once per calendar month.  Payment also cannot be required sooner than 21 days after mailing the periodic statement.

The NPRM was drafted following a CFPB-conducted study of 325 publicly available Prepaid Account Agreements to assess current industry practices in areas including error resolution protections (including provisional credit); limited liability protections; access to account information; overdraft services and negative balance fees; FDIC or NCUSIF pass-through deposit or share insurance; and general disclosure of fee information.

Comments on the proposal are due 90 days after publication in the Federal Register.

There’s no question that this is the biggest legal and regulatory development to hit the network branded payments card industry since FinCEN’s prepaid access rules of 2011.  These CFPB consumer protection regulations constitute the “final piece” in the federal regulatory landscape for prepaid and will no doubt have a profound impact on prepaid’s future.

More information may be found here:

  • A copy of the proposed rule, which includes information on how to submit comments, is available here.
  • The proposed disclosures are available here.
  • The CFPB’s study of the payments market can be found here.

As first published in the NBPCA Government Update.