On November 13 2014 the Consumer Financial Protection Bureau (CFPB) issued a far-reaching proposal to extend many of the consumer protections of Regulation E (which implements the Electronic Fund Transfer Act) to most pre-paid cards and accounts.(1) The proposed rule would also extend Regulation Z (which implements the Truth in Lending Act) protections for credit cards to pre-paid cards and accounts that are associated with lines of credit or overdraft credit plans. The proposed rule would broadly cover, among other things:
reloadable and non-reloadable plastic and virtual pre-paid cards;
- some mobile wallets and electronic accounts that hold pre-paid value; and
- the financial institutions that issue such pre-paid products.
The proposed rule would amend Regulation E and Regulation Z to require the following:
- standardised short- and long-form initial disclosures by pre-paid issuers describing the pre-paid product's terms and conditions;
- access to extensive transaction history and related information (eg, available balance), including 18 months of account history instead of the 60 days currently required for payroll cards;
- limited liability protection and error resolution protections, as long as a consumer registers the pre-paid product with the pre-paid issuer;
- provision of account agreements to the CFPB for posting to a CFPB website, as well as posting by pre-paid issuers on their own websites;
- the extension of Regulation Z's consumer credit card protections to pre-paid products that have linked credit features, such as overdraft services (in contrast to existing Regulation Z provisions, which largely exempt credit features, such as overdraft services applicable to traditional deposit accounts).
The CFPB's release states that it believes most pre-paid cardholders do not want linked credit products and thus these provisions would make it difficult to offer such products to cardholders.(2)
The proposed rule follows the CFPB's advance notice of proposed rulemaking and request for comment, which it released in May 2012,(3) and its Study on Pre-paid Account Agreements, which it released in November 2014.(4) Comments on the proposed rule will be due 90 days after publication in the Federal Register.
Pre-paid products covered under proposed rule
The scope of the proposed rule is broad – significantly broader than was anticipated by the advance notice of proposed rulemaking. The proposed rule would amend Regulation E to apply to any 'pre-paid account', which would be defined to include any pre-paid product that is:
- a card, code or other device capable of being loaded with funds and that is not otherwise already covered as an account under Regulation E;
- used primarily for personal, family or household purposes;.
- redeemable at multiple, unaffiliated merchants for goods or services, usable at automated teller machines (ATMs) or usable for person-to-person transfers;.
- issued on a pre-paid basis in a specified amount or, if not issued on a pre-paid basis, capable of being loaded with funds by the consumer; and
- not a gift card or certificate; loyalty, award or promotional gift card; or general-use pre-paid card that is both marketed and labelled as a gift card or certificate.(5)
Additionally, 'pre-paid accounts' under Regulation E would include government benefit accounts and payroll card accounts on which employees receive direct deposits on a recurring basis. The proposed rule would largely replace the existing Regulation E provisions that already apply to those types of account. However, pre-paid accounts would not include health savings accounts, flexible spending accounts, medical savings accounts or health reimbursement arrangements.
In addition to traditional plastic pre-paid cards, the proposed rule would cover certain mobile and electronic pre-paid products, although the CFPB noted in the proposed rule's preamble that its analysis of the applicability of the proposed rule to such mobile products is ongoing. As proposed, the rule would apply to mobile wallets that permit consumers to store funds before the consumer designates a destination for the funds, but would not apply to mobile wallets that act as pass-through vehicles holding only payment credentials for other accounts.
Under the proposed rule, all of Regulation E's provisions would become applicable to pre-paid accounts. However, some new requirements would apply only to pre-paid accounts and there would be some alternatives that pre-paid issuers could follow instead of the traditional Regulation E requirements.
The proposed rule would modify Regulation Z so that a pre-paid product would be treated as a credit card if it:
- offered credit features, such as overdraft services or other credit services; and
- charged a fee for such credit service (eg, interest, transaction fees, annual fees or other participation fees).
In this context, credit features generally include any service that permits consumers to spend more than the available balance in their pre-paid accounts.(6) Accordingly, issuers that provide credit services in connection with their pre-paid accounts would be required to provide the same protections as apply to credit cards. This treatment is very different from the treatment of overdraft services that apply to traditional debit cards, which are regulated by Regulation E and are largely or entirely exempt from Regulation Z.
Know-before-you-owe required disclosures
The proposed rule would modify Regulation E to establish industry-wide standard disclosure forms for pre-paid products. Pre-paid issuers would be required to provide both short-form and long-form disclosures before a consumer acquired a pre-paid account, although there are exceptions for pre-paid accounts that consumers acquire in retail stores or over the phone.
The CFPB proposed seven model short-form and long-form disclosures.(7) The proposed rule includes:
- separate model short-form disclosures for government benefit accounts;
- payroll card accounts;
- pre-paid accounts with and without overdraft services and other credit features; and
- pre-paid accounts with multiple service plans.
Likewise, the proposed rule includes separate model long-form disclosures for general pre-paid accounts and pre-paid accounts with multiple service plans. Both short-form and long-form disclosures must be provided in a foreign language if the pre-paid issuer primarily uses a foreign language in making the card available to the consumer.
The proposed model short-form disclosures highlight the following fees and terms that the CFPB believes are the most important for consumers to be aware of prior to purchase:
- periodic fees, such as monthly or annual fees;
- per purchase transaction fees;
- ATM withdrawal fees, including in connection with both in-network and out-of-network ATMs;
- cash reload fees;
- ATM balance inquiry fees, including in connection with both in-network and out-of-network ATMs;
- customer service fees for calling the pre-paid issuer or its service provider;
- inactivity fees, along with the duration of inactivity that triggers the fee;
- up to three incidence-based fees, which include fees that consumers of the same pre-paid product incurred most frequently in the prior 12-month period, if such fees are not otherwise included in the short-form disclosure;
- a statement regarding whether credit services, such as overdraft services, and related fees may apply if, at any point, a credit service may be offered in connection with the pre-paid product;
- if no credit service could apply, then a statement that no such fees will apply;
- a statement regarding the number of other fees listed in the long-form disclosure that apply;
- the phone number and website address where the consumer can access the long-form disclosure (if the long-form disclosure is not provided pursuant to the in-store exception);
- a statement that the consumer must register the pre-paid account in order for the funds loaded into it to be protected;
- if applicable, a statement that the pre-paid product is not eligible for Federal Deposit Insurance Corporation (FDIC) deposit or National Credit Union Share Insurance Fund (NCUSIF) insurance; and
- the CFPB's website address for pre-paid cards.
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.
The proposed model long-form disclosures would include all fees that may be imposed in connection with the pre-paid product. Issuers must explain the conditions, if any, under which a fee may be imposed, waived or reduced and, to the extent known, any third-party fee amounts that will apply (or, if such third-party fees may apply but are not known, a statement that third-party fees may apply without specifying the amount).(8) No symbols may be used in explaining the conditions. In addition, the long-form disclosure must contain the following information:
- if, at any point, a credit service will be offered in connection with the pre-paid product, the standard credit card disclosures due at the time of application, including information on applicable rates and fees, in the Schumer Box disclosures;
- a phone number, website address and mailing address of the person or office that a consumer may contact to learn about the terms and conditions of the pre-paid account, to obtain account balance information, to request a statement or to notify of an unauthorised transaction;
- the same statement about FDIC or NCUSIF insurance as contained in the short-form disclosure; and
- the website address for the CFPB.
If the issuer provides a physical access device (eg, a plastic card), the name, website and phone number of the issuer must be provided on the card. If no physical device is issued, then the same information must be included on the website or other entry point where the consumer can access the service.
If a pre-paid card is sold at a retail location and contained inside packaging material, a pre-paid issuer is not required to 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; and
- the short-form disclosure contains both a phone number and website address where the consumer can access the long-form disclosure.
Phone purchase exception
If a consumer acquires a pre-paid product via phone, a pre-paid issuer may provide the short-form disclosure orally over the phone as long as the issuer explains that the consumer may access the long-form disclosure by either phone or the issuer's website before purchasing the pre-paid product.
Modified initial disclosures
For initial disclosures, a pre-paid issuer must provide the standard information required under Regulation E, but slightly modified as follows:
- A phone 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 must be provided, all in a form substantially similar to the proposed rule's model form.
- The error resolution notice and the notice of the timeframes to report errors and unauthorised transfers must follow the proposed rule's model form, in order to account for the special provisions applicable to pre-paid cards.
- Any fee charged in connection with the pre-paid account must be disclosed and, to the extent known, whether any third-party fees may apply.
Account statements and information
The proposed rule would extend Regulation E's existing requirements regarding the provision of account information that currently apply to payroll card accounts to pre-paid products. Under the proposed rule, a pre-paid issuer must provide:
- either a monthly statement, as currently required under Regulation E; or
- the account balance via phone, an electronic transaction history (eg, via the pre-paid issuer's website) covering the preceding 18 months and a written transaction history covering the preceding 18 months upon request.
Additionally, pre-paid issuers would 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.
Error resolution and limitation of liability
The proposed rule generally would extend Regulation E's provisions regarding dispute resolution and limitation of consumer liability for unauthorised transfers. These protections would apply only to a pre-paid product that is registered with the pre-paid issuer; unregistered pre-paid products would not receive such protections. However, if a consumer were to register the pre-paid product with the 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 timing requirements. Pre-paid issuers had argued that an investigation period of 10 business days is too short in connection with pre-paid products and that the CFPB should consider a longer period.
The proposed rule would require a pre-paid issuer to comply with Regulation E's error resolution requirements if the consumer provided oral or written notice of an error within 60 days of:
- 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 proposed rule provides that in lieu of following the preceding 60-day requirement, a pre-paid issuer could instead investigate any error notice that it received within 120 days of the erroneous transfer.
Error resolution timeline
The proposed rule would 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 (ie, whether the transfer was unauthorised) within 10 business days of receiving a consumer's oral or written notice. If the pre-paid issuer is unable to 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.
Limitation of liability
The proposed rule would extend Regulation E's current liability protections to pre-paid products. A cardholder's liability for unauthorised transfers would, under most circumstances, be limited to $50 or $500, depending on the timing of the customer's notice.
Pre-paid product agreements available online
In order to facilitate comparisons of pre-paid products, the proposed rule would require pre-paid issuers to post their product agreements, including terms and conditions, on their websites. Additionally, pre-paid issuers would be required to submit these agreements each quarter to the CFPB, which would post them on a public, CFPB-maintained website. This is similar to the requirement for credit card agreements that was added to Regulation Z as a result of the CARD Act.
Overdraft fees and other credit products and services
No distinctions between users and non-users of credit products
The proposed rule would amend Regulation E to stipulate that a pre-paid issuer must offer the same terms and conditions in connection with a pre-paid product, regardless of whether the consumer elects to link a credit feature to the pre-paid product.
Credit card protections extended to pre-paid products with credit features
The proposed rule would amend Regulation Z so that pre-paid products with credit features are generally treated as credit cards, extending to pre-paid product consumers the benefits of existing credit card protections, including the following:
- Issuers would be required 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.
- Issuers would be required to provide the same monthly statements that credit card consumers receive.
- Issuers would be required to provide at least 21 days for payment of 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.
- Issuers would be required to limit 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. This limitation is particularly significant for overdraft plans that charge fees per overdraft (which would be subject to the limit) instead of period interest (which is not subject to the limit).
- Issuers would be required to restrict increases on interest rates on existing balances, unless the cardholder has missed two consecutive payments.
- Issuers would be required to provide at least a 45-day advance notice of interest rate increases.
The proposed rule would also provide guidance on when the unauthorised use liability and error resolution provisions of Regulations E and Z would each apply to transfers on pre-paid cards with credit features. Notably, the proposed rule does not follow the existing structure that applies to debit cards that are linked to overdraft lines of credit, and generally would provide pre-paid cardholders with stricter protection.
Thirty-day waiting period
The proposed rule would 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 product before offering any credit product. The CFPB explained in its press release accompanying the proposed rule that this waiting period "would allow consumers to get experience with the basic pre-paid account before deciding whether they want to apply for a credit product".
Authorised credit repayments
In order for a pre-paid issuer to deduct amounts owed in connection with credit services, such as overdrafts, from a pre-paid account, the proposed rule would require pre-paid issuers first to obtain a consumer's written pre-authorisation. Even if a consumer provided pre-authorisation, the proposed rule would limit such deductions to once per month. However, a pre-paid issuer could offer an incentive to consumers to agree to repayment by recurring, pre-authorised electronic transfers.
Together with this change to Regulation Z, the proposed rule would amend the compulsory use provision of Regulation E. That section of Regulation E generally prohibits a creditor from requiring a consumer to agree to repay credit by means of pre-authorised transfers. However, there is an exception for overdraft protection plans on deposit accounts. The proposed rule would not extend the existing exception to pre-paid accounts. As a result, where overdraft credit is extended on a pre-paid account, the creditor would need to provide the consumer with another option to pay the credit extended as an alternative to automatic deductions from the pre-paid account.
The proposed rule covers government agencies if they 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. Government agencies generally must provide the same disclosures as other pre-paid issuers. In addition, the proposed rule prohibits agencies from requiring that consumers agree to receive benefits through a pre-paid account and requires agencies to provide a statement about their ability to request benefits in an alternative manner, in a form substantially similar to the proposed rule's model form.
The proposed rule would take effect nine months after publication in the Federal Register. However, the rule would permit the continued sale of pre-paid products that do not comply with its disclosure requirements for 12 months after publication, as long as the pre-paid product and its packaging material were printed prior to the proposed rule's effective date.
David E Teitelbaum or Joel D Feinberg
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