An In-Depth Analysis of the CFPB’s Proposed New Rules on Pre-Paid Cards

CFPB  •  Regulation  •  Small Dollar Lending/Lenders  •  TILA  •  Virtual Currency

Thumbnail for 1330On Monday, November 17, we briefly discussed the CFPB’s newly proposed prepaid card rules.  Today we elaborate on these newly proposed rules, and their effect on issuers if these new rules are implemented by the CFPB.

Scope: The CFPB explained what it considers to be a prepaid card for purposes of the new regulations. And, it explained what different kinds of accounts will fall under the proposed new rules. Prepaid cards come in many varieties and can be either reloadable (add cash at ATM, telephone, online, or at merchant), or single use (rebate card); virtual (PayPal or Apple Pay) or physical (VISA, MasterCard, or American Express); and “open-loop” (usable anywhere) or “closed-loop” (usable only at specific merchants or groups of merchants). The CFPB regulations apply only to those prepaid cards that are reloadable, virtual or physical, and open loop. Cards that are marketed as gift cards or labeled as gift cards would not be subject to the new rules unless in practice the cards are reloadable and open-loop.

The Newly Proposed Regulations:

  • Cap a consumer’s liability for unauthorized transactions on stolen or misused cards to $50 – as long as the consumer promptly reports the loss, theft or misuse of a “registered” prepaid account

This new regulation would make existing regulations applicable to electronic fund transfers under EFTA section 908 and 909 applicable to prepaid cards. The regulation limits consumer liability to the “lesser of $50 or the amount of unauthorized transfers made before giving notice” if notice is given within two business days of learning of the loss or theft.”  However, even if timely notice is not given, consumer liability is still limited to the “lesser of $500 or the sum of (1) the lesser of $50 or the amount of unauthorized transfers occurring within two business days of learning of the loss/theft and (2) the amount of unauthorized transfers that occur after two business days but before notice is given.”  However, the CFPB noted that a majority of programs it reviewed as part of its prepaid card study already limit liability for consumers in accordance with the above Regulation E provisions such that making Regulation E applicable to prepaid cards would not have a large impact on issuers.

Where customers are provided with periodic statements, an unauthorized EFT on a statement must be reported within 60 days of receipt of the statement to obtain any relief for subsequent transfers.

  •  Require that consumers have free access to both annual and monthly statements – and the statements would be required to show account balances, fees charged, and a transaction summary

The CFPB adopted this new provision as a balanced approach to “providing consumers the transactional history they need without unnecessarily burdening financial institutions.”  Its proposed rules would make Payroll Card rules regarding periodic statements applicable to prepaid cards, and would slightly modify the rules as applicable to both types of accounts.  As such, financial institutions could comply with proposed new rules by providing consumers access to their account balance through a telephone free of charge, on a local or toll-free line available during standard business hours, but the CFPB noted that it preferred 24 hour automated availability of such account information.

The CFPB is also considering a requirement that would permit consumers to be able to access account information at terminals like ATMs, which is currently available for government benefit accounts.  Alternatively, the CFPB is open to comments suggesting that it remove the requirement for balance information at terminals entirely.

Finally, the CFPB proposes to require financial institutions to provide prepaid account holders (and Payroll account holders) with free electronic access to 18 months’ worth of transactions, increasing the amount of time from 60 days for payroll account holders.  The CFPB explained these changes by stating that increased access to account information would be useful to consumers trying to show “on-time bill payment or to compile year-end data for tax preparation purposes,” and extending the time for maintaining such records is of minimal cost to financial institutions.

  • Require that consumers be allowed to “opt in” to overdraft protection before customers can charge more on their cards than their existing balance and be charged overdraft fees

The CFPB is also proposing “opt in” requirements for overdraft protection for prepaid cards that would require consumers to affirmatively consent to financial institutions’ overdraft services for ATM and one-time debit card transactions, and also consent to any fees or charges that would be assessed if the financial institution paid such overdrafts.

  • Require companies to promptly investigate errors and, if problems cannot be resolved, to refund the disputed amount to the customer’s card while an investigation is completed

The CFPB also proposes modifying Regulation E to have error resolution and limited liability provisions apply specifically to prepaid accounts.  Of note is that the new rules would apply equally to registered and not registered prepaid accounts, but would exempt financial institutions from such new rules if they have disclosed to consumers the risks of not registering a prepaid account.

Financial institutions would be required to investigate the error within 10-20 business days (or 45 if the financial institution refunds the amount at issue while it investigates the transaction), and the burden would be on the financial institution to show that the transaction was in fact, authorized. 

  • Require that any lenders who extend credit through prepaid accounts first consider the borrower’s ability to repay the loan

The CFPB has proposed regulating prepaid cards with credit lines under Regulation Z’s open-end rules and credit card rules in subparts B and G.  Rules related to ability to pay are addressed by subpart G.  The CFPB acknowledged in its proposed regulations that oftentimes, consumers using prepaid accounts do so because they have had issues with overdraft services and credit features in the past such that their credit was impacted because they were unable to repay the fees charged.  In addition, it also acknowledged that many prepaid issuers already limit overdraft and credit card services to prepaid account users who have evidence of recurring deposits over a certain dollar amount.

Prepaid cards with credit plans will have to apply special rules to extension of credit to people under the age of 21.  And, creditors must consider a consumer’s ability to make minimum payments on a credit plan for a prepaid card. One of the ways the CFPB seeks to incentivize financial institutions to consider a borrower’s ability to repay loans on credit lines is to prohibit them from requiring consent to automatically debit funds in the prepaid account or a linked bank account to pay for the credit extended.

  • Require that such lenders obtain a borrower’s consent to debit loan payments from the borrower’s next card deposit, and limit the number of times per month that the lender may debit the card account for loan repayments

The CFPB proposed these rules to ensure that the purpose of prepaid cards is not undermined by financial institutions using next card deposits to avoid the TILA offset prohibition.  Under the proposed rule, prepaid card issuers could not automatically debit from the prepaid card balance, the amount owed under the account’s credit plan without consent from the consumer in writing, and no more than once per calendar month.  Issuers could not require consumers to authorize such automatic transactions.  Finally, the exemption of overdraft credit plans from required consent is proposed not to apply to prepaid plans such that overdraft offsets could not be done without prior consent.

  • Put limits on total fees charged in the first year for those cards that include credit lines

Credit CARD Act rules related to fees in the first year and addressed by subpart G of Regulation Z were previously only applicable to credit cards, but would now be broadened to prepaid cards linked to credit plans.  The CFPB has proposed limiting fees to 25 percent of the credit limit of prepaid accounts during the first year.  The fee limit would apply to “any per-transaction fees—such as the prototypical ‘overdraft fee’ –that issuers might assess each time they authorize a prepaid transaction that accesses the credit account.”  However, fees not subject to the 25 percent limit are late fees, over-the-limit fees, returned payment fees, and fees that the consumer is not required to pay regarding the account.

  • Require disclosure forms that show consumers in advance how much they would be charged for certain transactions (e.g., reloading cards, using ATMs for cash withdrawals, or making purchases). NOTE: Use of the CFPB’s proposed sample disclosure forms would be a safe harbor for card issuers

Initial disclosures of any and all fees that could be charged to a consumer for use of prepaid cards would become much more in depth than the current electronic fund transfer disclosures under newly proposed CFPB rules for prepaid cards.  New initial disclosures would be required to “list all fees that may be imposed in connection with the prepaid account” because consumers would reference these disclosures during the entire time they kept the prepaid account.  As a result, the CFPB is proposing to require financial institutions to disclose “all relevant fee information, not just those fees related to electronic fund transfers….For each fee, a financial institution must disclose the amount of the fee, the conditions, if any, under which the fee may be imposed, waived, or reduced, and, to the extent known, whether any third party fees may apply.”

The CFPB has created short and long form sample disclosures to aid prepaid card issuers in providing relevant information to consumers prior to purchase of prepaid cards.  These disclosures are typically required to be disclosed in writing, but the CFPB is proposing to require disclosures of fees to be posted on product websites in a standard format to permit consumers to effectively shop for the best product.

Whether and what effects the new regulations will have on the very populations they are seeking to help are currently unknown.  These new rules may make it more difficult for under-banked and un-banked populations to access credit from prepaid cards, but it will also provide increased protections to consumers to prevent fees and interest rates from overtaking the utility of prepaid cards.  We will continue to monitor further developments of these proposed rules as they are commented on in the next 90 days and implemented in the next nine months.

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