Introduction
What pre-paid accounts are covered under the final rule?
Initial disclosures
Account statements and information
Error resolution and limitation of liability
Pre-paid account agreements available online
Overdraft fees and other credit products and services
Government benefits
Effective date
On October 5 the Consumer Financial Protection Bureau (CFPB) issued its final rule to extend the consumer protections of Regulation E to most pre-paid accounts and to extend certain other protections for credit cards under Regulation Z to pre-paid accounts that are associated with certain lines of credit or overdraft credit plans.(1) The final rule comes nearly two years after the proposed rule, which was published in November 2014.(2)
The final rule will broadly cover, among other things, reloadable and non-reloadable plastic pre-paid cards, certain mobile wallets and electronic accounts that hold pre-paid value and the financial institutions that issue such pre-paid accounts ('pre-paid issuers'). The final rule will amend Regulation E (which implements the Electronic Fund Transfer Act) and Regulation Z (which implements the Truth in Lending Act) to require consumer protections for pre-paid cards including the following:
- the pre-acquisition delivery of standardised short-form (and long-form) disclosures by pre-paid issuers describing the pre-paid account's terms and conditions;
- accountholder access to extensive transaction history and related information (eg, available balance);
- limited liability protection and error resolution protections for pre-paid accounts;
- submission of pre-paid account agreements to the CFPB, as well as posting of pre-paid account agreements by pre-paid issuers on their own websites; and
- the extension of Regulation Z's consumer credit card protections to pre-paid accounts that have certain linked credit features such as overdraft services (in contrast to existing rules for deposit products that do not subject overdraft services to Regulation Z's credit card protections).
What pre-paid accounts are covered under the final rule?
Regulation E
The final rule will amend Regulation E to apply to any 'pre-paid account', which is defined to include the following:
- a payroll account or government benefit account, each as defined in Regulation E;
- a reloadable or non-reloadable account(3) that is marketed or labelled as pre-paid and that is redeemable upon presentation at multiple unaffiliated merchants for goods or services or usable at automated teller machines (ATM)s.
- a reloadable or non-reloadable account:
- that is issued on a pre-paid basis with a specified amount or not issued on a pre-paid basis but capable of being loaded with funds thereafter;
- whose primary function is to conduct transactions with multiple unaffiliated merchants for goods or services or at ATMs or to conduct person-to-person transfers;(4) and
- that is not a chequing account, share draft account or negotiable order of withdrawal account; and
- a digital or mobile wallet that holds a consumer's funds, even temporarily, rather than merely holding a consumer's account credentials and that otherwise meets the 'pre-paid account' definition.
Regulation Z
Under the final rule, if a pre-paid account can access a separate line of credit offered by the same pre-paid issuer, its affiliate or its business partner (a covered separate credit feature), the pre-paid account is generally subject to Regulation Z. However, a pre-paid account is not subject to Regulation Z with respect to a line of credit offered by an unrelated non-business partner third party to which the pre-paid account has access (a non-covered separate credit feature), although the non-covered separate credit feature may be subject to Regulation Z in its own right. This would allow, for example, a consumer to link to the pre-paid account a credit card issued by a bank that is not the pre-paid issuer, its affiliate or its business partner.
The final rule will modify Regulation E to establish industry-wide standard disclosure forms for pre-paid accounts. Pre-paid issuers will be required to provide both short-form and long-form disclosures before a consumer acquires a pre-paid account, although there are exceptions for pre-paid accounts that consumers acquire in retail stores or over the telephone. These disclosures are in addition to the initial disclosures in Section 1005.7 of Regulation E. However, for pre-paid accounts, the Section 1005.7 initial disclosures must include the content of the long-form disclosure.
As part of the final rule, the CFPB included three model short-form disclosures and one model long-form disclosure. One of the short-form disclosures is for a pre-paid account with multiple service levels. The final rule also includes separate model short-form disclosures for government benefit accounts and payroll card accounts.
Short-form disclosures
The short-form disclosure highlights the fees and terms that the CFPB believes are the most important for consumers to be aware of prior to purchase. These include:
- several specific fee disclosures;
- a statement disclosing the number of additional fee types that may be charged (excluding fees required to be disclosed above and any finance charges for credit features);
- up to two additional fees that generate the highest revenue from consumers for the pre-paid account programme or across pre-paid account programmes that share the same fee schedule (excluding the other fees that are specifically required to be disclosed, any fee types that generated less than 5% of the total revenue from consumers for the pre-paid account programme or across pre-paid account programmes that share the same fee schedule and finance charges);
- a statement that overdraft or credit may be offered, the period after which it may be offered and that fees will apply, or a statement that no overdraft or credit feature is offered; and
- a statement regarding whether the pre-paid account is eligible for Federal Deposit Insurance Corporation or National Credit Union Administration insurance and directing the consumer to register the pre-paid account for insurance and other protections, where applicable.
Generally, if any fee has a variable rate, the disclosure must include the highest possible fee that the consumer could incur, along with a symbol (eg, an asterisk) to indicate that a lower fee might apply, together with an explanation.
For payroll accounts, the disclosure must also contain a statement at the top informing the consumer that he or she either need not accept the payroll account or can ask about other ways to receive wages together with a list of the options available, consistent with the form in the final rule.
Additional disclosure requirements outside short form
The final rule contains additional disclosure requirements outside of the short-form disclosure itself that must be provided at the time the pre-paid issuer provides the short-form disclosure. These additional disclosures are:
- the name of the pre-paid account programme;
- the purchase price for the pre-paid account, if any; and
- the fee for activating the pre-paid account, if any.
In a setting other than a retail location, this information must be disclosed in close proximity to the short-form disclosure. In a retail location, this information must be disclosed on the exterior of the packaging material, except for the purchase price, which must be either on the exterior of or in close proximity to the packaging material.
Long-form disclosures
The long-form disclosures must include all fees that may be imposed in connection with the pre-paid account, including the conditions, if any, under which a fee may be imposed, waived or reduced, including, to the extent known, any third-party fee amounts that will apply. The pre-paid issuer may include a statement that the fee is accurate as of or through a specific date or a statement that the third-party fee is subject to change. If third-party fee amounts may apply, but the amounts are not known, then to be consistent with the proposed rule, the pre-paid issuer must include a statement indicating that a third-party fee may apply without specifying the fee amount. No symbols may be used in explaining the conditions. In addition, the long-form disclosure must contain various disclosures, some of which are duplicative of the short form and required disclosures under Regulation Z, relating to credit if at any point a credit feature may be offered in connection with the pre-paid account.
In-store exception
If a pre-paid access card is contained inside packaging material, a pre-paid issuer need not provide a consumer with a long-form disclosure prior to purchase, as long as:
- the short-form disclosure is visible on or through the packaging material;
- the short-form disclosure contains both a telephone number and a website address where the consumer can access the long-form disclosure; and
- the long-form disclosure is provided after the consumer acquires the pre-paid account.
Telephone purchase exception
If a consumer acquires a pre-paid account via telephone, a pre-paid issuer may provide the short-form disclosure orally over the telephone, as long as:
- the consumer is notified that the long-form disclosure is available both by telephone and on a website;
- the pre-paid issuer makes the long-form disclosure available through both means; and
- the long-form disclosure is provided after the consumer acquires the pre-paid account.
Providing long-form disclosure after acquisition
In both exceptions, the long-form disclosure must be provided to the consumer after acquisition of the pre-paid account. The CFPB contemplates that this typically will be done as part of the initial disclosures of Section 1005.7, which Regulation E requires be made to a consumer before the first use of a pre-paid account.
Modified initial disclosures
For initial disclosures, a pre-paid issuer must provide the standard information required under Section 1005.7 of Regulation E, but slightly modified as follows:
- as discussed below, a telephone number to obtain the account balance, the means by which the consumer can obtain an electronic account history (eg, a website address) and a summary of the consumer's right to receive a written account history, all in a form substantially similar to the final rule's model form;
- the error resolution notice, which must follow the final rule's model form;
- the annual error resolution notice, which must follow the final rule's model form; and
- as discussed below, the timing for a consumer to report an unauthorised transfer or error.
Account statements and information
One of the CFPB's concerns is that, in contrast to chequing account consumers, pre-paid consumers do not necessarily receive periodic statements. Accordingly, consistent with the proposed rule, the final rule will extend to pre-paid accounts Regulation E's existing requirements regarding the provision of account information that currently apply to payroll card accounts, federal government benefit accounts and non-needs-tested state and local government benefit accounts. Under the final rule, a pre-paid issuer must provide either a monthly statement, as currently required under Regulation E, or:
- the account balance via telephone;
- an electronic transaction history (eg, via the pre-paid issuer's website) covering the preceding 12 months (modified from 18 months in the proposed rule); and
- a written transaction history covering the preceding 24 months (modified from 18 months in the proposed rule) upon request.
Additionally, pre-paid issuers will be required to disclose monthly and annual totals of all fees charged to the pre-paid account and all deposits to and debits from the account in any monthly statement or account history.
The final rule also added a carve-out to the account history requirement for some pre-paid accounts. For pre-paid accounts (except payroll accounts and government benefit accounts), a pre-paid issuer need not provide a written account history if it has not completed its consumer identification and verification process.
Error resolution and limitation of liability
The final rule will extend Regulation E's provisions regarding dispute resolution and limitation of consumer liability for unauthorised transfers. These protections will apply to all pre-paid accounts, registered or unregistered, subject to the limitation on provisionally crediting accounts. However, if a consumer were to register the pre-paid account with the pre-paid issuer after the occurrence of an error, the error resolution procedures and liability limitation protections would still apply as long as the error satisfied the requirements discussed below.
Timing
The final rule will require a pre-paid issuer to comply with Regulation E's error resolution requirements if the consumer provides oral or written notice of an error within 60 days of either:
- the consumer electronically accessing the account history; or
- the issuer otherwise providing the consumer with a written transaction history in which the error appeared.
Alternatively, the final rule provides that in lieu of following the preceding 60-day requirement, a pre-paid issuer can instead investigate any error notice that it receives within 120 days after the erroneous transfer allegedly occurred.
Error resolution timeline
The final rule will require a pre-paid issuer to comply with Regulation E's current error resolution timeline, which requires an issuer to investigate promptly and determine whether an error occurred within 10 business days of receiving a consumer's oral or written notice. If the pre-paid issuer cannot complete its investigation within 10 business days, the issuer may take an additional 45 days, as long as it provisionally credits the amount of the alleged error to the pre-paid account within 10 business days of receiving the consumer's error notice. Pre-paid issuers had argued that an investigation period of 10 business days was too short in connection with pre-paid accounts and as a result the CFPB provided some relief in the final rule.
The final rule provides that a pre-paid issuer need not issue a provisional credit in connection with error resolution for a pre-paid account (except for a payroll account or government benefit account) if the pre-paid issuer has not completed its consumer identification and verification process when it receives an error notice from an accountholder.
Limitation of liability
The final rule will extend Regulation E's current liability protections to pre-paid accounts.(5)
Pre-paid account agreements available online
To facilitate comparisons of pre-paid accounts, the final rule will require pre-paid issuers to post their pre-paid account agreements offered to the general public, including terms and conditions, on their websites. Additionally, with limited exception, pre-paid issuers will be required to submit these agreements on a rolling basis to the CFPB. The CFPB still intends to publish the account agreements it receives.
Overdraft fees and other credit products and services
No distinctions between users and non-users of credit products
The final rule will amend Regulation E to stipulate that a pre-paid issuer must offer the same terms and conditions in connection with a pre-paid account, regardless of whether the account has a covered separate credit feature. However, a pre-paid issuer is not prohibited from imposing a higher fee or charge on the asset feature (ie, the pre-paid funds feature) of a pre-paid account with a separate credit feature than the amount of a comparable fee or charge that it imposes on any pre-paid account in the same programme that does not have such a credit feature.
Existing credit card protections extended to pre-paid accounts with credit features(6)
As noted above, the final rule will amend Regulation Z so that pre-paid accounts with a covered separate credit feature are generally treated as credit cards. This will extend the benefits of existing credit card protections to pre-paid account consumers, including the following:
- requiring issuers to conduct ability-to-pay analyses before offering credit to ensure that a consumer would be able to repay the debt based on his or her income, assets and current obligations;
- requiring issuers to provide the same monthly statements that credit card consumers receive;
- providing at least 21 days to pay amounts owed in connection with a credit service before charging a late fee; under the Truth in Lending Act, any late fees must be reasonable and proportional to the violation of the account terms;
- limiting non-exempt fees (as opposed to periodic interest rates) during the first year after the consumer opens the credit card account to 25% of the credit limit;(7)
- restricting increases on interest rates on existing balances unless the cardholder has missed two consecutive payments; and
- requiring at least a 45-day advance notice of interest rate increases.
Transactions involving only a credit line established in connection with an overdraft or similar credit service and no pre-paid funds may have additional liability and error resolution protections compared with those offered to pre-paid accounts under Regulation E. For example, Regulation Z limits consumer liability to $50, while in certain cases Regulation E limits liability to $500.
Certain overdrafts not subject to Regulation Z
An overdraft on a pre-paid account is not considered a separate credit feature and is not subject to Regulation Z (or the overdraft section of Regulation E, Section 1005.17) when:
- the overdraft is incidental to transactions that result in a negative balance on the pre-paid account;
- the pre-paid issuer does not charge fees related to the credit;(8) and
- the pre-paid issuer has an established policy and practice of either declining to authorise any transaction for which it reasonably believes the consumer has insufficient or unavailable funds at the time the transaction is authorised or declining to authorise any such transactions, except for:
- 'force pay' transactions where the amount of the transaction does not cause a negative balance of more than $10; or
- transactions where the pre-paid issuer has received an instruction or confirmation of a card load, or a direction from an accountholder for an account load and the funds for the load have not yet settled.
Thirty-day waiting period
Consistent with the proposed rule, the final rule will amend both Regulation E and Regulation Z to provide that pre-paid issuers must wait at least 30 days after a consumer has registered his or her pre-paid account before:
- opening a covered separate credit account that could be accessible by the pre-paid account;
- making a solicitation or providing an application to open a covered separate credit account that could be accessible by the pre-paid account; or
- allowing an existing credit feature that was opened prior to the consumer's obtaining the pre-paid account to become a covered separate credit account accessible by the pre-paid account.
Authorised credit repayments
For pre-paid issuers to deduct amounts owed in connection with credit services, such as overdrafts, from a pre-paid account, the final rule will require pre-paid issuers first to obtain a consumer's written pre-authorisation. Even if a consumer provides pre-authorisation, the final rule will limit such deductions to one per month. However, a pre-paid issuer could offer an incentive to consumers to agree to repayment through recurring, pre-authorised electronic transfers.
The final rule covers government agencies if the agencies issue access devices to consumers for use in initiating an electronic fund transfer of government benefits from an account, other than needs-tested benefits in a programme established under state or local law or administered by a state or local agency. Generally, government agencies must provide the same disclosures as other pre-paid issuers. However, government agencies must provide a statement that a consumer need not accept the government benefit account or that the consumer can ask about other ways to receive his or her benefits together with a list of the options available, similar to the disclosure for payroll accounts and consistent with the form in the final rule.
The final rule comes into effect on October 1 2017. However, the disclosure requirements do not apply to any disclosures that are provided, or that would otherwise be required to be provided, on pre-paid cards or on, in, or with, pre-paid account packaging materials that were manufactured, printed or otherwise produced in the normal course of business prior to October 1 2017.
The final rule also addresses other potential difficulties for pre-paid issuers, including the treatment of pre-paid accounts acquired by consumers on or after October 1 2017, using old packaging and providing updated terms and conditions to consumers who acquired pre-paid accounts prior to October 1 2017, when the terms and conditions will have subsequently been updated to comply with the final rule.
The final rule also provides relief to pre-paid issuers with respect to providing account histories and disclosing fee totals when pre-paid issuers do not have readily accessible data on October 1 2017, to provide such information.
Finally, the requirement to submit accountholder agreements to the CFPB is effective as of October 1 2018.
For further information on this topic please contact Joel D Feinberg, James A Huizinga, David E Teitelbaum or John K Van De Weert at Sidley Austin LLP by telephone (+1 202 736 8000) or email ([email protected], [email protected], [email protected] or [email protected]). The Sidley Austin website can be accessed at www.sidley.com.
Endnotes
(1) The final rule has not yet been published in the Federal Register. It is available on the CFPB's website at http://files.consumerfinance.gov/f/documents/20161005_cfpb_Final_Rule_Prepaid_Accounts.pdf.
(2) The proposed rule was published in the Federal Register in December 2014. See 79 Fed Reg 77, 102 (December 23 2014).
(3) An 'account' under Regulation E is a "consumer asset account (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes".
(4) In this context, 'person to person' refers to a consumer sending funds by electronic fund transfer to another consumer or a business.
(5) This means that if a consumer provides timely notice to a pre-paid issuer within two business days of learning of the loss or theft of its pre-paid card, the consumer's liability is limited to the lesser of $50 or the amount of unauthorised transfers made before giving notice. If the consumer fails to provide timely notice, liability is limited to the lesser of $500 or the sum of:
- the lesser of $50 or the amount of unauthorised transfers occurring within two business days of learning of the loss or theft; and
- the amount of unauthorised transfers occurring after two business days but before the consumer provides notice, provided that the pre-paid issuer establishes that these transfers would not have occurred had the consumer notified the pre-paid issuer within the two-business-day period.
(6) Covered separate credit accounts regulated under Regulation Z are not subject to the overdraft services requirements under Regulation E.
(7) If a consumer opens a pre-paid account on January 1 and subsequently opens a covered separate credit account accessed by the pre-paid account on March 1, the 25% limit would apply for one year after March 1 rather than January 1.
(8) A fee is not charged in relation to the credit if the fee is:
- for opening, issuing or holding the pre-paid account where the amount of the fee is not higher based on whether credit might be offered or has been accepted, whether or how much credit the consumer has accessed, or the amount of credit available;
- for the actual cost of collecting the overdraft; or
- imposed for a reason other than the overdraft (eg, a transaction fee).