Amidst growing regulatory concern over the exponential growth in the use of prepaid cards and other forms of prepaid accounts, the Consumer Financial Protection Bureau (CFPB) recently issued a final rule (New Regulation) expanding the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) to cover a category of financial products that had not been subject to comprehensive regulation. Spanning nearly 1,700 pages, the New Regulation covers an array of products by defining a “prepaid account”—a term previously undefined in Regulation E—as including:
- General purpose reloadable cards, meaning prepaid cards available for purchase at various retailers and financial institutions, from which loaded funds can be accessed at point-of-sale terminals, ATMs and online (similar to a debit card, but with no checking account attached);
- Digital wallets, such as Google Wallet, capable of storing funds that can be used for purchases at multiple unaffiliated merchants;
- Electronic person-to-person payment products, such as PayPal and its cellphone app Venmo;
- Payroll cards used to transmit wages from employers to employees;
- Student financial aid disbursement cards; and
- Government benefit cards, such as those used to distribute unemployment insurance and child support.
Issuers of these products—and in some cases their affiliates or business partners—will have until October 1, 2017 to implement the consumer protections discussed below.
Expanded Account Accessibility, Fraud Protection and Initial Disclosures
Standards that have historically only applied to checking accounts and credit cards will now be imposed on prepaid accounts. Prepaid account customers will now be entitled to transaction history and other account information at no charge via telephone, online or upon written request. In addition, the New Regulation mandates that consumers who promptly notify the issuer of unauthorized transactions will be held responsible for no more than $50 in fraudulent charges.
The New Regulation also amends Regulation E to require that both short- and long-form “Know Before You Owe” fee disclosures be provided to consumers prior to prepaid account acquisition, with content and delivery requirements varying depending on the specific type of prepaid account and how it is marketed. The New Regulation also calls for issuers to make card user agreements publicly accessible to facilitate comparison shopping among different prepaid account products. Issuers have an extra year, until October 1, 2018 before they must submit prepaid account agreements to the CFPB, which intends to post them on a public, CFPB-maintained website.
Heightened Overdraft Rules
Among the New Regulation’s more controversial provisions is its expansion of Regulation Z’s credit card rules to cover any prepaid account products that allow users to overdraw or otherwise spend a greater amount than is actually in the account. Issuers offering these products, called “hybrid prepaid credit cards,” must implement special underwriting procedures, issue detailed periodic statements and comply with limitations on overdraft and late fees, as well as the timeframe within which such fees may be charged. Moreover, the New Regulation prohibits issuers from taking funds loaded onto a prepaid account to repay any outstanding debt to the issuer without the customer’s written consent.
Particularly challenging are the New Regulation’s provisions requiring issuers offering overdraft services on prepaid accounts to conduct an ability-to-repay analysis (along with the observance of a 30-day waiting period) before activating the credit feature of new prepaid accounts. Essentially, issuers must assess consumers’ creditworthiness as if they were issuing credit cards, and because of this treatment, they must comply with Regulation Z disclosure requirements applicable to credit card issuers.
What the Future Holds
Industry groups have expressed concern over the burdensome compliance measures that lie ahead, particularly in light of the increase in demand for prepaid account products in recent years. The amount of funds put on prepaid cards is projected to exceed $117 billion by 2019. Much of the customer base for prepaid account products is comprised of unbanked consumers, giving rise to concern that, by burdening the offering of prepaid accounts, the CFPB will significantly impede the product offerings available to unbanked consumers by insured depository institutions.
Experienced counsel can help issuers navigate this new regulatory environment in designing their prepaid account products and services to comply both with the specifics of the New Regulation and related dictates of the CFPB.