Banking and Financial Services Update
On October 5, the Consumer Financial Protection Bureau (CFPB) issued its final rule to extend the consumer protections of Regulation E to most prepaid accounts and to extend certain other protections for “credit cards” under Regulation Z to prepaid accounts that are associated with certain lines of credit or overdraft credit plans (the Final Rule).1 The Final Rule comes nearly two years after the proposed rule, which was published in November 2014 (the Proposed Rule).2
The Final Rule would broadly cover, among other things, reloadable and nonreloadable plastic prepaid cards, certain mobile wallets and electronic accounts that hold prepaid value, and the financial institutions that issue such prepaid accounts (prepaid issuers). The Final Rule would 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 prepaid cards including the following:
- the preacquisition delivery of standardized short- and long-form disclosures by prepaid issuers describing the prepaid account’s terms and conditions
- accountholder access to extensive transaction history and related information (e.g., available balance)
- limited liability protection and error resolution protections for prepaid accounts
- submission of prepaid account agreements to the CFPB, as well as posting of prepaid account agreements by prepaid issuers on their own websites
- the extension of Regulation Z’s consumer credit card protections to prepaid 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 Prepaid Accounts Are Covered Under the Final Rule?
Regulation E. The Final Rule will amend Regulation E to apply to any “prepaid account,” which would be defined to include the following:
- A payroll account or government benefit account, each as defined in Regulation E.
- A reloadable or nonreloadable account3 that is marketed or labeled as “prepaid” and that is redeemable upon presentation at multiple, unaffiliated merchants for goods or services or usable at ATMs.
- A reloadable or nonreloadable account (i) that is issued on a prepaid basis in a specified amount or not issued on a prepaid basis but capable of being loaded with funds thereafter; (ii) the primary function of which is to conduct transactions with multiple, unaffiliated merchants for goods or services or at ATMs or to conduct person-to-person transfers;4 and (iii) that is not a checking account, share draft account or negotiable order of withdrawal account.
- 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 prepaid account definition.
Regulation Z. Under the Final Rule, if a prepaid account can access a separate line of credit offered by the same prepaid issuer, its affiliate or its business partner (a covered separate credit feature), the prepaid account is generally subject to Regulation Z. However, a prepaid account is not subject to Regulation Z with respect to a line of credit offered by an unrelated nonbusiness partner third party to which the prepaid account has access (a noncovered separate credit feature), although the noncovered separate credit feature may be subject to Regulation Z in its own right. This would allow, for example, a consumer to link to the prepaid account a credit card issued by a bank that is not the prepaid issuer, its affiliate or its business partner.
The Final Rule will modify Regulation E to establish industry-wide standard disclosure forms for prepaid accounts. Prepaid issuers will be required to provide both “short-form” and “long-form” disclosures before a consumer acquires a prepaid account, although there are exceptions for prepaid accounts that consumers acquire in retail stores or over the phone. (These disclosures are in addition to the initial disclosures in Section 1005.7 of Regulation E. However, for prepaid accounts, the Section 1005.7 initial disclosures must include the content of the long-form disclosure.)
The CFPB included as part of the Final Rule three model short-form disclosures and one model long-form disclosure. One of the short-form disclosures is for a prepaid 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. Of note, 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 prepaid account program or across prepaid account programs that share the same fee schedule (excluding the other fees that are specifically required to be disclosed, any fee types that generated less than five percent of the total revenue from consumers for the prepaid account program or across prepaid account programs that share the same fee schedule, and finance charges)
- a statement that overdraft/credit may be offered, the time period after which it may be offered and that fees would apply, or a statement that no overdraft/credit feature is offered
- a statement regarding whether the prepaid account is eligible for Federal Deposit Insurance Corporation or National Credit Union Administration insurance and directing the consumer to register the prepaid 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 (e.g., 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 either that he or she does not have to accept the payroll account or that he or she 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 of Short-Form. The Final Rule contains additional disclosure requirements outside of the short-form disclosure itself that must be provided at the time the prepaid issuer provides the short-form disclosure. These additional disclosures are: the name of the prepaid account program; the purchase price for the prepaid account, if any; and the fee for activating the prepaid 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 prepaid 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 prepaid issuer may include a statement that the fee is accurate as of or through a specific date and/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, consistent with the Proposed Rule, the prepaid 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 prepaid account.
In-Store Exception. If a prepaid access card is contained inside packaging material, a prepaid 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; the short-form disclosure contains both a telephone number and website address where the consumer can access the long-form disclosure; and the long-form disclosure is provided after the consumer acquires the prepaid account.
Telephone Purchase Exception. If a consumer acquires a prepaid account via telephone, a prepaid issuer may provide the short-form disclosure orally over the phone so long as the consumer is notified that the long-form disclosure is available both by telephone and on a website; the prepaid issuer makes the long-form disclosure available through both means; and the long-form disclosure is provided after the consumer acquires the prepaid account.
Providing the Long-Form Disclosure After Acquisition. In both exceptions, the long-form disclosure must be provided to the consumer after acquisition of the prepaid account. The CFPB contemplates that this typically would be done as part of the initial disclosures of Section 1005.7 that Regulation E requires be made to a consumer before the first use of a prepaid account.
Modified Initial Disclosures. For initial disclosures, a prepaid issuer must provide the standard information required under Section 1005.7 of Regulation E, but slightly modified as follows:
- as discussed below in Account Statements and Information, a telephone number to obtain the account balance, the means by which the consumer can obtain an electronic account history (e.g., 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
- as discussed below, the timing for a consumer to report an unauthorized transfer or error
Account Statements and Information
One of the CFPB’s concerns is that in contrast to checking account consumers, prepaid consumers do not necessarily receive periodic statements. Accordingly, consistent with the Proposed Rule, the Final Rule will extend to prepaid 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 prepaid issuer must provide either a monthly statement, as currently required under Regulation E, or (i) the account balance via telephone, (ii) an electronic transaction history (e.g., via the prepaid issuer’s website) covering the preceding 12 months (modified from 18 months in the Proposed Rule), and (iii) a written transaction history covering the preceding 24 months (modified from 18 months in the Proposed Rule) upon request.
Additionally, prepaid issuers will be required to disclose monthly and annual totals of all fees charged to the prepaid 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 prepaid accounts. For prepaid accounts (except payroll accounts and government benefit accounts), a prepaid issuer is not required to provide a written account history if the prepaid issuer has not completed its consumer identification and verification process.
Error Resolution and Limitation of Liability
The Final Rule generally would extend Regulation E’s provisions regarding dispute resolution and limitation of consumer liability for unauthorized transfers. These protections would apply to all prepaid accounts, registered or unregistered, subject to the limitation on provisionally crediting accounts discussed below in Error Resolution Timeline. However, if a consumer were to register the prepaid account with the prepaid issuer after the occurrence of an error, the error resolution procedures and liability limitation protections would still apply as long as the error satisfies the requirements discussed below in Timing.
Timing. The Final Rule would require a prepaid 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 (i) the consumer electronically accessing the account history or (ii) 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 prepaid issuer could instead investigate any error notice that it receives within 120 days after the erroneous transfer allegedly occurred.
Error Resolution Timeline. The Final Rule would require a prepaid 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 prepaid 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 prepaid account within 10 business days of receiving the consumer’s error notice. Prepaid issuers had argued that an investigation period of 10 business days is too short in connection with prepaid accounts, so the CFPB provided some relief in the Final Rule.
The Final Rule provides that a prepaid issuer does not have to issue a provisional credit in connection with error resolution for a prepaid account (except for a payroll account or government benefit account) if the prepaid 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 would extend Regulation E’s current liability protections to prepaid accounts.5
Prepaid Account Agreements Available on the Internet
To facilitate comparisons of prepaid accounts, the Final Rule would require prepaid issuers to post their prepaid account agreements offered to the general public, including terms and conditions, on their websites. Additionally, with limited exception, the prepaid issuers would 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 Nonusers of Credit Products. The Final Rule would amend Regulation E to stipulate that a prepaid issuer must offer the same terms and conditions in connection with a prepaid account, regardless of whether the account has a covered separate credit feature. However, a prepaid issuer is not prohibited from imposing a higher fee or charge on the asset feature (i.e., the prepaid funds feature) of a prepaid account with a separate credit feature than the amount of a comparable fee or charge that it imposes on any prepaid account in the same program that does not have such a credit feature.
Existing Credit Card Protections Extended to Prepaid Accounts With Credit Features.6 As noted above, the Final Rule would amend Regulation Z so that prepaid accounts with a covered separate credit feature are generally treated as credit cards, extending to prepaid account consumers the benefits of existing credit card protections, 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 a consumer’s 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 percent of the credit limit7
- restricting increases on interest rates on existing balances unless the cardholder has missed two consecutive payments
- 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 prepaid funds may have additional liability and error resolution protections compared with those offered to prepaid accounts under Regulation E. For example, Regulation Z limits consumer liability to US$50, while in certain cases Regulation E limits liability to US$500.
Certain Overdrafts Not Subject to Regulation Z. An overdraft on a prepaid account is not considered a separate credit feature, and is not subject to Regulation Z (nor the overdraft section of Regulation E, Section 1005.17), when (i) the overdraft is incidental to transactions that result in a negative balance on the prepaid account; (ii) the prepaid issuer does not charge fees related to the credit;8 and (iii) the prepaid issuer has an established policy and practice of either declining to authorize any transaction for which it reasonably believes the consumer has insufficient or unavailable funds at the time the transaction is authorized or declining to authorize any such transactions except for (a) “force pay” transactions where the amount of the transaction does not cause a negative balance of more than $10 or (b) transactions where the prepaid issuer has received an instruction or confirmation of a card load, or a direction from a 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 would amend both Regulation E and Regulation Z to provide that prepaid issuers must wait at least 30 days after a consumer has registered his or her prepaid account before (i) opening a covered separate credit account that could be accessible by the prepaid account; (ii) making a solicitation or providing an application to open a covered separate credit account that could be accessible by the prepaid account; or (iii) allowing an existing credit feature that was opened prior to the consumer’s obtaining the prepaid account to become a covered separate credit account accessible by the prepaid account.
Authorized Credit Repayments. For prepaid issuers to deduct amounts owed in connection with credit services, such as overdrafts, from a prepaid account, the Final Rule would require prepaid issuers to first obtain a consumer’s written preauthorization. Even if a consumer provides preauthorization, the Final Rule would limit such deductions to once per month. However, a prepaid issuer could offer an incentive to consumers to agree to repayment by recurring, preauthorized 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 program established under state or local law or administered by a state or local agency. Government agencies generally must provide the same disclosures as other prepaid issuers. However, government agencies must provide a statement that a consumer does not have to 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 generally goes into effect beginning on Oct. 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 prepaid cards or on, in or with prepaid account packaging materials that were manufactured, printed or otherwise produced in the normal course of business prior to Oct. 1, 2017.
The Final Rule also addresses other potential difficulties for prepaid issuers, including treatment of prepaid accounts acquired by consumers on or after Oct. 1, 2017, using old packaging and providing updated terms and conditions to consumers who acquired prepaid accounts prior to Oct. 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 prepaid issuers with respect to providing account histories and disclosing fee totals when prepaid issuers do not have readily accessible data on Oct. 1, 2017, to provide such information.
Finally, the requirement to submit accountholder agreements to the CFPB is effective Oct. 1, 2018.