On November 13, 2014, the Consumer Financial Protection Bureau (CFPB) released a notice of proposed rulemaking (Proposed Rule) amending Regulation E, which implements the Electronic Fund Transfer Act1 (ETF Act), and Regulation Z, which implements the Truth in Lending Act2 (TILA), to apply to prepaid accounts. The Proposed Rule redefines "account" to include prepaid accounts; adopts short and long form disclosure requirements for prepaid account fees, overdraft services, and credit features; requires the provision of periodic statements, or periodic statement alternatives, to prepaid account holders; adopts error resolution and limited liability protections, including fraud and lost-card protections; and applies existing credit card rules and consumer protections of Regulation Z to prepaid accounts with credit features.3 Responses to the Proposed Rule's request for public comment must be received within 90 days from the date of publication of the Proposed Rule in theFederal Register.4 The proposed effective date for compliance with the proposed amendments is nine months after the date the final rule is published in the Federal Register.5
Scope of the Proposed Rule
The Proposed Rule's amendments to Regulation E would apply to any account that meets the definition of "prepaid account,"6 and would generally include prepaid account issuers who work with third parties to market, establish, and maintain such accounts.7 A "prepaid account" is any "card, code, or other device" which is: (i) either issued on a prepaid basis in a specified amount or loaded with funds thereafter; (ii) usable to purchase goods and services, at automated teller machines, or for person-to-person transfers; and (iii) is not a gift certificate, store card, loyalty, award, or promotional card, or a general-use prepaid card marketed and labeled as a gift card or gift certificate.8 The definition of "prepaid account" includes accounts established by an employer to receive a consumer's employee compensation,9 (i.e., payroll cards) or by a government agency to distribute government benefits.10
The Proposed Rule's amendments to Regulation Z regarding overdraft services and credit features offered in connection with prepaid accounts apply to persons providing those services, even if those persons are distinct from the prepaid account issuer or account program manager.11 The Proposed Rule revises the definition of "overdraft service" to exclude credit plans for prepaid accounts that are accessed by credit cards regulated under Regulation Z.12
Analysis of the Proposed Rule
Proposed Amendments to Regulation E
The Proposed Rule modification of the definition of "account" would extend the current provisions of Regulation E to prepaid accounts.13 The Proposed Rule also adds additional provisions to Regulation E that apply specifically to prepaid accounts. Most notable of the new provisions are those that establish increased disclosure requirements, which must be provided in writing unless the prepaid account is purchased electronically or by telephone.14
Under the Proposed Rule, financial institutions are required to provide two sets of disclosures to consumers, described as "short form" and "long form" disclosure statements, before a consumer acquires a prepaid account.15 Financial institutions may, however, provide the long form disclosure after a consumer acquires a prepaid account if: (i) the account access device is inside packaging material, (ii) short form disclosures are viewable without opening the packaging, and (iii) the long form disclosures are available to the consumer by telephone number or through accessing a website displayed on the packaging.16 Financial institutions must also disclose the financial institution's name and contact information on the prepaid account access device.17
Generally, the short form disclosure includes, where applicable, a payroll card account notice; and information on certain identified fees, overdraft services and credit features; the number of additional fees not identified; where to obtain the long form disclosure; product registration; Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF) insurance; and a link to the CFPB website.18 If the amount of the fee that the financial institution charges for each of the fee types included in the short-form disclosure could vary, the institution must also disclose the highest fee it could impose for utilizing the service associated with the fee, along with an explanation that the fee could be lower.19
The long-form disclosure includes: more detailed information regarding all fees a financial institution may impose on a prepaid account; Regulation Z disclosure information, to the extent a credit feature may be offered; the financial institution's telephone number, website, and mailing address; a statement regarding FDIC or NCUSIF insurance; and the CFPB's telephone number and website address.20 Information on applicable fees must include the amount of the fee, and the conditions for imposing, waiving, or modifying the fee.21
Compulsory Use Provision: The EFT Act's compulsory use provision generally prohibits conditioning the extension of credit on repayment by preauthorized electronic fund transfers, except when credit is extended under an overdraft credit plan. Though this provision would generally apply to prepaid accounts under the Proposed Rule, the applicability of this exception to prepaid accounts with an overdraft credit plan would be expressly denied.22
Periodic Statement Provision: The Proposed Rule permits periodic statement alternative options, whereby financial institutions could discharge the periodic statement requirement of Regulation E by providing consumers: (i) with their prepaid account balance by telephone, (ii) 18 months of transaction history either electronically or online, or (iii) upon request, 18 months of transaction history in writing.23 Whether furnishing a periodic statement or a transaction history, the financial institution must include, in summary form, all fees assessed against the account.24 Financial institutions would also be required to comply with Regulation E's error resolution procedures and limited liability provisions for an unauthorized electronic fund transfer arising from the loss or theft of an access device.25 While the Proposed Rule extends to prepaid accounts Regulation E's initial disclosure requirements regarding access to account information, liability, and error resolution notification, it would modify applicable timing requirements to accommodate for the ways in which information would be delivered through a periodic statement alternative.
Credit Feature Timing Provision: Under the Proposed Rule, financial institutions are prohibited from opening a credit plan under Regulation Z that is linked to a prepaid account until 30 calendar days after registration of the prepaid account. Additionally, financial institutions must apply the same terms and conditions to credit features regardless of whether a consumer elects to link a credit card to a prepaid account.26
Provisions Related to Government Benefit Accounts:27 The Proposed Rule establishes that a government agency may not require consumers to receive government benefits by direct deposit to any particular institution.28 Additionally, the Proposed Rule imposes the above mentioned short and long form disclosure requirements on government benefit accounts, permits access to account transactions by electronic means in lieu of periodic statements, and requires notices regarding account access and error resolution.29 Prepaid Account Agreement Submission Provision: Under the Proposed Rule, prepaid card issuers must submit to the CFPB, on a quarterly basis, prepaid account agreements for public posting on the CFPB's website.30
Proposed Amendments to Regulation Z
The Proposed Rule redefines a "credit card account" to include credit features associated with prepaid accounts.31 Additionally, the Proposed Rule redefines "finance charges" to include overdraft charges and credit fees associated with prepaid accounts.32 The revised definitions serve to extend coverage of Regulation Z to issuers of credit plans accessed by prepaid cards and apply the requirements of Regulation Z to prepaid accounts when fees are charged for overdraft services. In particular, under the Proposed Rule, prepaid accounts with credit features will be subject to the ability to pay33 and 25% fee limitation34 provisions of Regulation Z.
Additionally, the Proposed Rule revises Regulation Z35 to include the following provisions applying to prepaid accounts:
- Financial institutions may not offset credit debt with deposits to prepaid accounts associated with the credit debt more than once per calendar month, and only if authorized in writing by the account holder.36
- Similar to the Credit Feature Timing Provision under Regulation E, financial institutions cannot open or solicit a consumer to open a credit plan accessed by a prepaid account until 30 days after the consumer registers the prepaid account.37
- Financial institutions must comply with the billing error resolution provisions of Regulation E instead of Regulation Z with respect to a credit plan linked to a prepaid account.38
The Proposed Rule extends a number of consumer financial protection provisions currently available to credit card holders to prepaid account holders. These include, for example, limitations on fees, penalty charges, and interest rates; limited liability for unauthorized use; and restrictions on the provision of overdraft services and the addition of credit features. Additionally, the Proposed Rule would increase the amount of information that is required to be disclosed to prepaid account holders both prior to acquisition and during the life of the account. These new disclosure requirements may require financial institutions to revise their disclosure statements, marketing materials, packaging, and access devices associated with prepaid accounts.