The Consumer Financial Protection Bureau (CFPB) has requested comment on proposed changes to its prepaid rule, including the potential for another extension of the effective date of the rule. The proposed rule changes are being made as a result of industry feedback of unanticipated complexities in complying with the rule based on industry practices and business models.
Initially proposed in November 2014, the prepaid rule was finalized in October 2016, imposing significant new requirements for prepaid accounts under Regulation E issued under the Electronic Funds Transfer Act as well as Regulation Z, implementing the Truth in Lending Act. The rule was meant to “fill key gaps” for consumers with regard to prepaid products, the CFPB said.
Pursuant to the rule, providers of prepaid products—broadly defined to include payroll card accounts, government benefit accounts, student financial aid disbursement cards and tax refund cards, among others—must protect consumers against fraud and theft, with liability limited to $50 when a consumer promptly notifies the institution of theft.
In addition, providers must give consumers free and easy access to product information (by phone, online or in writing upon request), work with consumers to investigate any errors on covered products (with provisional credit for the dispute during the course of the investigation), and add “Know Before You Owe” prepaid disclosures to highlight key costs associated with the product prior to use, including periodic fees, balance inquiry fees or inactivity fees.
Prepaid cards must also adopt certain protections provided to credit cards—such as monthly account statements, consideration of whether a consumer has the ability to repay the debt before offering credit, and limits on late fees—to achieve compliance with the rule.
While the rule was originally set to take effect on Oct. 1, 2017, in April the CFPB formally delayed implementation of the rule for six months, making the new effective date April 1, 2018. That action was taken after discussions with industry stakeholders revealed potential difficulties in meeting the Oct. 1 compliance date—in particular, constrained production capacity of the manufacturers of the prepaid card packaging due to the increased demand from the industry, as well as concerns about legal exposure.
Also in its effort to support industry implementation of the rule, the CFPB noted that industry participants revealed they have become aware of unanticipated complexities in compliance with the rule based on the current industry business models and practices.Because the industry did not discuss these concerns in previous comment letters, the CFPB indicated it would use the extension period to consider the need for and desirability of amendments to the rule.
On June 15, the CFPB announced that it was seeking public comment on proposed updates to the prepaid rule in light of the industry feedback it received. Two primary changes to the rule have been proposed.
The first applies to the requirement that financial institutions and issuers provide fraud protection and error resolution rights to customers whose cards are unregistered or whose identities could not be or have not been verified. Under the proposal, the error resolution obligations applicable to the issuer, and the limitation on consumers’ liability, would not apply to unregistered prepaid cards or to prepaid cards where the consumer’s identity was not or could not be verified. These protections would apply, however, if the consumer’s identity was later verified.
The second proposed amendment applies to digital wallets that are linked to credit cards and that are prepaid cards because they are capable of storing funds. The proposed changes would provide a limited exception to the credit-related provisions of Regulation Z for certain business arrangements between digital wallet issuers and issuers of the linked credit cards if certain conditions are met. To qualify, the consumer would have to have authorized the linkage of the accounts, and the linkage could not be a condition imposed on the consumer or subject to varying terms.
In addition to other minor amendments, the CFPB is also seeking comment on whether an additional delay in the effective date of the rule is necessary and whether a safe harbor for early compliance should be added.
To read the CFPB’s proposal with request for comment, click here.
Why it matters
CFPB Director Richard Cordray remains bullish on the rule. “We know that effective implementation helps our rules deliver their intended value to consumers,” Cordray said in a statement. “Today’s request for comment shows we are listening closely to feedback on our rules to decide whether certain adjustments will help achieve that goal.”
CFPB and Stakeholders Weigh In on the Credit Card Market
As required by law, the Consumer Financial Protection Bureau (CFPB) has once again asked for public comment on a variety of topics related to the credit card market. The comment period has ended for the most recent request for information (RFI), with 32 entities, ranging from financial services organizations to consumer groups, weighing in.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires the CFPB to conduct a review of the consumer credit card market every two years. Following reviews in October 2013 and December 2015, the CFPB submitted an RFI in March 2017 requesting public feedback on 13 topics that are indicative of how the credit card market is functioning. The topics include credit card terms, disclosures and issuer practices, consumer protections, the cost of credit, deferred interest products, innovation, secured cards, and rewards products, among others.
Dozens of stakeholders took the opportunity to share their thoughts. For example, the comments from the American Bankers Association (ABA) focused on the increase in cost and the decline in the availability of credit since the CARD Act was implemented, writing that issuers are “more inclined to deny credit to applicants seen as potentially high-risk” because of the legislation, and to impose “higher interest rates at the outset of the lending relationship than they would otherwise in an effort to manage risk.” Consumers, particularly lower-income individuals, have been hit hard by the statute’s ability-to-pay requirement, the ABA told the CFPB, with many turning to other short-term lending options (such as payday loans) as a result.
Responding to some of the CFPB’s questions, the group said rewards products are priced competitively and are well understood by consumers, demonstrated by the growing volume of rewards accounts. The ABA urged the CFPB to facilitate a process for companies to obtain reliable advisory opinions to spur innovation in the market, which would “provide a means for innovators to engage in a dialogue with the Bureau and other regulators before a product reaches consumers to avoid potential violation of consumer protection laws.”
The group also took the position that deferred interest products “are popular and beneficial to consumers and retailers,” and there is “little evidence” that users do not understand how the products function. Small and midsize retailers find the products useful, the ABA noted, and “merchants do not stay in business by alienating their customers with defective products, financial or otherwise.”
Similarly, the Consumer Bankers Association (CBA) and the Financial Services Roundtable (FSR) jointly authored a letter that praised rewards products as “an example of effective self-regulation that negates the need for regulatory intervention” and deferred interest products as “valuable to consumers and small businesses alike.” Specifically, the groups said no additional action by the CFPB in connection with deferred interest promotional offers was necessary. Consumers appear to understand deferred interest offers and continue to benefit from them, they wrote, with no CFPB action needed.
Turning to rewards products, the groups described them as “a key driver for consumer product selection, continued engagement with their credit cards, and overall product satisfaction.” Credit card issuers have enhanced their disclosures to inform consumers of key terms at the right time, the CBA and FSR told the CFPB, with the members of their groups making real progress in simplifying the terms governing how rewards are earned and may be redeemed, making any limitations “readily apparent” to consumers.
“Such effective self-regulation and focus on positive consumer experiences with reward programs negates the need for regulatory intervention from the Bureau,” the groups wrote. “Introducing regulations to govern reward programs will make these programs more difficult to operate and stifle further innovation.”
Commenting from the perspective of retail merchants, the National Retail Federation (NRF), the world’s largest retail trade organization, devoted its comment letter exclusively to deferred interest products—programs that are “a longstanding practice within the retail industry.”
“A significant number of NRF members have long offered deferred interest purchase plans for their customers,” according to the group’s comment. “The plans are valued by consumers, and by the retailers who offer them. For retailers, they meet customer needs and are a valuable competitive tool. For many consumers, they are a money-saving option for large ticket purchases.”
The NRF noted that while there are risks inherent in deferred interest products, the CFPB’s own statistics demonstrate that the majority of consumers follow the terms and pay no interest. Significantly, however, the NRF commented that in some cases, the CARD Act has made it difficult for consumers to avoid paying a finance charge because it requires “creditors to apply the maximum amount of a customer’s payment to the highest interest open account immediately due.” This denies the consumer the ability to control his or her payment allocations. The NRF suggested that the CFPB encourage Congress to address this concern.
On the other end of the spectrum, Consumer Action (CA) wrote that “retailers and cards that offer deferred interest not be allowed to apply interest until the end of the deferral period,” a proposal similar to that of letters recently sent by the CFPB itself.
The group also noted an overall improvement in card disclosures, sharing examples from credit card offers it found clear as well as those that it declared vague and misleading, or that used “vast” rate ranges, which it said are not helpful when consumers are comparison shopping for a card.
Transfer fees for using a credit card for overdraft protection are in need of scrutiny, the CA told the CFPB, while some new marketing approaches concern the group, which suggested the CFPB conduct a review for signs of disparate impact. The comment closed with support for the planned prohibition on class action bans in arbitration clauses, hoping to see a final rule on arbitration from the CFPB in the near future.
Why it matters
Credit cards are the most commonly used form of consumer credit. Reflecting their constituents, the industry groups that provided comments presented a variety of perspectives on the consumer credit market to enable the CFPB to access whether, and to what degree, the CARD Act is effective.