On November 13, 2014, the CFPB proposed expansive federal regulations establishing requirements for prepaid financial products. The proposed regulations cover “traditional” prepaid cards that can be loaded with money and used to store funds, make payments, withdraw cash, receive direct deposits, and send funds to others. According to the CFPB , consumers are expected to load nearly $100 billion onto general purpose reloadable cards in 2014. In addition, the proposed new regulations also cover payroll cards; certain federal, state, and local government benefit cards; student financial aid disbursement cards; tax refund cards; peer-to-peer payment products; and even mobile and electronic accounts that store funds.
The proposed regulations come as no surprise, as the CFPB has made its intentions to regulate prepaid financial products clear since May 2012. CFPB Director Richard Cordray characterized the regulations as “clos[ing] the loopholes in this market and ensur[ing] prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”
Based on the proposal’s broad scope, however, it appears to do much more than simply close loopholes. The summary below discusses key provisions of the proposed regulations.
The CFPB proposal seeks to standardize disclosures by requiring that prepaid card issuers adopt two model disclosure forms: a short form and a long form. These forms are available here . The short form highlights basic account information, including disclosures about monthly fees, purchase fees, ATM fees, and fees to reload cash. The long form contains all the fees of the short form, plus any other fees that could be imposed.
Prepaid card issuers also would be required to post their account agreements on their websites and submit their account agreements to the CFPB. In turn, the CFPB would create and maintain a public website housing all submitted account agreements.
Access to Account Information
Under the proposed regulations, prepaid card issuers must provide consumers with free access to account information. That information can be disclosed online or through sending periodic statements. When providing a statement or account information, the prepaid card issuer would need to disclose monthly and annual totals of all fees imposed on the account and the total of all deposits to, and debits from, the prepaid account.
The proposed regulations also impose a variety of limitations on extensions of credit, triggered when prepaid products “allow consumers to pay to spend more money than they have deposited in the account.” For example, the proposed regulations treat overdraft coverage as an extension of credit. This means that if prepaid card issuers provide overdraft coverage and charge for it, consumers receive the same protections as credit card holders.
In addition, the proposed regulations would require providers of prepaid products to assess the consumer’s ability to repay the debt. The proposed regulations also place limits on when prepaid card issuers can offer credit products and when they can move funds, requiring them to wait 30 days after a card is registered to offer a credit product. Prepaid card issuers also would be prohibited from automatically moving funds to pay a debt unless a consumer affirmatively opts in. Even if the consumer opts in, the prepaid card issuer cannot take funds more than once per month. Prepaid card issuers also must give each consumer 21 days to repay a debt before charging a late fee that is “reasonable and proportional” to the violation of the account terms in question.
Error Resolution and Fraud Protection
The CFPB’s proposed regulations also enhance consumer protections in cases of error or fraud. If there is a dispute - for example, where a consumer is double-charged - the prepaid card issuer has 10 days to investigate. If an investigation cannot be timely resolved, the issuer has up to 45 days to resolve the dispute but must deposit the disputed funds back into the consumer’s account in the interim. The proposed regulations also limit consumers’ liability for fraudulent activity. If a consumer timely reports that a prepaid card was lost or stolen, the consumer is only responsible for up to $50 in unauthorized charges.
The proposed regulations will be open for comment for 90 days, and prepaid card issuers also should expect a nine-month implementation period before the final rule becomes effective. If the proposed rule becomes final, it would mark the first set of comprehensive federal regulations over the prepaid financial product industry.