On November 13, 2014, the Consumer Financial Protection Bureau (CFPB) issued its far-reaching proposal (the “Proposed Rule”)1 to extend many of the consumer protections of Regulation E to most prepaid cards and accounts. The Proposed Rule would also extend Regulation Z protections for “credit cards” to prepaid cards and accounts that are associated with lines of credit or overdraft credit plans. The Proposed Rule would broadly cover, among other things, reloadable and non-reloadable plastic and virtual prepaid cards, some mobile wallets and electronic accounts that hold prepaid value, and the financial institutions that issue such prepaid products (“prepaid issuers"). The Proposed Rule would amend Regulation E (which implements the Electronic Fund Transfer Act) and Regulation Z (which implements that Truth in Lending Act) to require the following:
- Standardized short- and long-form initial disclosures by prepaid issuers describing the prepaid product’s terms and conditions.
- Access to extensive transaction history and related information (e.g., available balance), including 18 months of account history instead of the 60 days currently required for payroll cards.
- Limited liability protection and error resolution protections, as long as a consumer registers the prepaid product with the prepaid issuer.
- Provision of account agreements to the CFPB for posting to a CFPB website, as well as posting by prepaid issuers on their own websites.
- The extension of Regulation Z’s consumer credit card protections to prepaid products that have linked credit features, such as overdraft services (in contrast to existing Regulation Z provisions which largely exempt credit features, such as overdraft services applicable to traditional deposit accounts). The CFPB’s release states that they believe most prepaid cardholders do not want linked credit products and, thus, these provisions would make it difficult to offer such products to cardholders.2
The Proposed Rule follows the CFPB’s Advance Notice of Proposed Rulemaking (the “ANPR”) and request for comment, which the CFPB released in May 2012,3 and the CFPB’s “Study on prepaid account agreements,” which the CFPB released in November 2014.4 Comments on the Proposed Rule will be due 90 days after publication in the Federal Register.
What Prepaid Products Are Covered Under the Proposed Rule?
Regulation E. The scope of the Proposed Rule is broad – significantly broader than was anticipated by the ANPR. The Proposed Rule would amend Regulation E to apply to any “prepaid account,” which would be defined to include any prepaid product that satisfies the following criteria:
- A card, code or other device capable of being loaded with funds and that is not otherwise already covered as an “account” under Regulation E;
- Used primarily for personal, family or household purposes;
- Redeemable at multiple, unaffiliated merchants for goods or services, usable at automated teller machines (“ATMs”), or usable for “person-to-person transfers”;
- Issued on a prepaid basis in a specified amount or, if not issued on a prepaid basis, capable of being loaded with funds by the consumer; and
- Not a gift card or certificate; loyalty, award or promotional gift card; or general-use prepaid card that is both marketed and labeled as a gift card or certificate.5
Additionally, “prepaid accounts” under Regulation E would include “government benefit accounts” and “payroll card accounts” on which employees receive direct deposits on a recurring basis. Indeed, the Proposed Rule would largely replace the existing Regulation E provisions that already apply to those types of accounts. However, prepaid accounts would not include health savings accounts, flexible spending accounts, medical savings account and health reimbursement arrangements.
In addition to traditional plastic prepaid cards, the Proposed Rule would cover certain mobile and electronic prepaid products, although the CFPB noted in the Proposed Rule’s preamble that the CFPB’s analysis of the applicability of the Proposed Rule to such mobile products is “ongoing.” As proposed, the Proposed Rule would apply to mobile wallets that permit consumers to store funds before the consumer designates a destination for the funds but would not apply to mobile wallets that act as pass-through vehicles holding only payment credentials for other accounts.
Under the Proposed Rule, all of the provisions of Regulation E would become applicable to prepaid accounts. However, as described further below, there would be some new requirements applicable only to prepaid accounts and there would be some alternatives that prepaid issuers could follow instead of the traditional Regulation E requirements.
Regulation Z. The Proposed Rule would modify Regulation Z so that a prepaid product would be treated as a credit card if the prepaid product both (i) offers credit features, such as overdraft services or other credit services, and (ii) charges a fee for such credit service (such as interest, transaction fees, annual fees or other participation fees). In this context, credit features generally include any service that permits consumers to spend more than the available balance in their prepaid accounts.6 Accordingly, issuers that provide credit services in connection with their prepaid accounts would be required to provide the same protections as apply to credit cards. This treatment is very different from the treatment of overdraft services that apply to traditional debit cards, which are regulated by Regulation E and are largely or entirely exempt from Regulation Z.
“Know Before You Owe” Required Disclosures. The Proposed Rule would modify Regulation E to establish industry-wide standard disclosure forms for prepaid products. Prepaid issuers would 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.
The CFPB proposed seven model short-form and long-form disclosures, which are available here. The Proposed Rule includes separate model short-form disclosures for government benefit accounts, payroll card accounts, prepaid accounts with and without overdraft services and other credit features, and prepaid accounts with multiple service plans. Likewise, the Proposed Rule includes separate model long-form disclosures for general prepaid accounts and prepaid accounts with multiple service plans. Both disclosures must be provided in a foreign language if a foreign language is primarily used by the prepaid issuer in making the card available to the consumer.
Short-Form Disclosures. The proposed model short-form disclosures highlight the fees and terms that the CFPB believes are the most important for consumers to be aware of prior to purchase:
- Periodic fees, such as monthly or annual fees.
- Per purchase transaction fees.
- ATM withdrawal fees, including in connection with both “in-network” and “out-of-network” ATMs.
- Cash reload fees.
- ATM balance inquiry fees, including in connection with both “in-network” and “out-of-network” ATMs.
- Customer service fees for calling the prepaid issuer or its service provider.
- Inactivity fees, along with the duration of inactivity that triggers the fee.
- Up to three “incidence-based fees,” which include fees that consumers of the same prepaid product incurred most frequently in the prior 12-month period, if such fees are not otherwise included in the short-form disclosure.
- A statement regarding whether credit services, such as overdraft services, and related fees may apply if, at any point, a credit service may be offered in connection with the prepaid product. If no credit service could apply, then a statement that no such fees will apply.
- A statement regarding the number of other fees listed in the long-form disclosure that apply.
- The phone number and website address where the consumer can access the long-form disclosure (if the long-form disclosure is not provided pursuant to the “in-store” exception discussed below).
- A statement that the consumer must register the prepaid account in order for the funds loaded into the account to be protected.
- If applicable, a statement that the prepaid product is not eligible for Federal Deposit Insurance Corporation (FDIC) deposit or National Credit Union Share Insurance Fund (NCUSIF) insurance.
- The CFPB’s website address for prepaid cards.
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.
Long-Form Disclosures. The proposed model long-form disclosures would include all fees that may be imposed in connection with the prepaid product. Issuers must explain the conditions, if any, under which a fee may be imposed, waived or reduced, and, to the extent known, any third-party fee amounts that will apply (or, if such third-party fees may apply but are not known, a statement that third-party fees may apply without specifying the amount).7 No symbols may be used in explaining the conditions. In addition, the long-form disclosure must contain:
- If, at any point, a credit service would be offered in connection with the prepaid product, the standard credit card disclosures due at the time of application, including information on applicable rates and fees, in the “Schumer Box” disclosures.
- A phone number, website address and mailing address of the person or office that a consumer may contact to learn about the terms and conditions of the prepaid account, to obtain account balance information, to request a statement, or to notify of an unauthorized transaction.
- The same statement about FDIC or NCUSIF insurance as in the short-form disclosure.
- The website address for the CFPB.
On-Card Disclosures. If the issuer provides a physical access device (like a plastic card), the name, website and phone number of the issuer must be provided on the card. If no physical device is issued, then the same information must be included on the website or other entry point where the consumer can access the service.
In-Store Exception. If a prepaid card is sold at a retail location and 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 (i) the short-form disclosure is visible on or through the packaging material and (ii) the short-form disclosure contains both a phone number and website address where the consumer can access the long-form disclosure.
Phone Purchase Exception. If a consumer acquires a prepaid product via phone, a prepaid issuer may provide the short-form disclosure orally over the phone as long as the issuer explains that the consumer may access the long-form disclosure by either phone or the issuer’s website before purchasing the prepaid product.
Modified Initial Disclosures. For initial disclosures, a prepaid issuer must provide the standard information required under Regulation E, but slightly modified as follows:
- As discussed below, a phone 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 Proposed Rule’s model form.
- The error resolution notice and the notice of the time frames to report errors and unauthorized transfers must follow the Proposed Rule’s model form, in order to account for the special provisions applicable to prepaid cards (discussed below).
- Any fee charged in connection with the prepaid account must be disclosed and, to the extent known, whether any third-party fees may apply.
Account Statements and Information. The Proposed Rule would extend to prepaid products Regulation E’s existing requirements regarding the provision of account information that currently apply to payroll card accounts. Under the Proposed Rule, a prepaid issuer must provide either:
- A monthly statement, as currently required under Regulation E, or
- (i) The account balance via phone, (ii) an electronic transaction history (e.g., via the prepaid issuer’s website) covering the preceding 18 months, and (iii) a written transaction history covering the preceding 18 months upon request.
Additionally, prepaid issuers would 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.
Error Resolution and Limitation of Liability. The Proposed Rule generally would extend Regulation E’s provisions regarding dispute resolution and limitation of consumer liability for unauthorized transfers. These protections would apply only to a prepaid product that is registered with the prepaid issuer, and unregistered prepaid products would not receive such protections. However, if a consumer were to register the prepaid product with the 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 timing requirements discussed immediately below. Prepaid issuers had argued that an investigation period of 10 business days is too short in connection with prepaid products and that the CFPB should consider a longer period.
Timing. The Proposed 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 after either (i) the consumer electronically accessed the account history or (ii) the issuer otherwise provided the consumer with a written transaction history in which the error appeared. Alternatively, the Proposed 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 Proposed 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 (i.e., whether the transfer was unauthorized) within 10 business days after 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.
Limitation of Liability. The Proposed Rule would extend Regulation E’s current liability protections to prepaid products. A cardholder’s liability for unauthorized transfers would be, under most circumstances, limited to $50 or $500, depending on the timing of the customer’s notice.
Prepaid Product Agreements Available on the Internet. In order to facilitate comparisons of prepaid products, the Proposed Rule would require prepaid issuers to post their product agreements, including terms and conditions, on their websites. Additionally, the prepaid issuers would be required to submit these agreements each quarter to the CFPB, which would post these agreements on a public, CFPB-maintained website. This is similar to the requirement for credit card agreements that was added to Regulation Z as a result of the CARD Act.
Overdraft Fees and Other Credit Products and Services.
No Distinctions Between Users and Non-Users of Credit Products. The Proposed Rule would amend Regulation E to stipulate that a prepaid issuer must offer the same terms and conditions in connection with a prepaid product, regardless of whether the consumer elects to link a credit feature to the prepaid product.
Existing Credit Card Protections Extended to Prepaid Products with Credit Features. The Proposed Rule would amend Regulation Z so that prepaid products with credit features are generally treated as credit cards, extending to prepaid product 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 fees (as opposed to periodic interest rates) during the first year after the consumer opens the credit card account to 25% of the credit limit. This limitation is particularly significant for overdraft plans that charge fees per overdraft (which would be subject to the limit) instead of period interest (which is not subject to the limit).
- 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.
The Proposed Rule would also provide guidance on when the unauthorized use liability and error resolution provisions of Regulations E and Z would each apply to transfers on prepaid cards that have credit features. Notably, the Proposed Rule does not follow the existing structure that applies to debit cards that are linked to overdraft lines of credit, and generally would provide prepaid cardholders stricter protection.
Thirty-Day Waiting Period. The Proposed 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 product before offering any credit product. The CFPB explained in its press release accompanying the Proposed Rule that this waiting period “would allow consumers to get experience with the basic prepaid account before deciding whether they want to apply for a credit product.”
Authorized Credit Repayments. In order for a prepaid issuer to deduct amounts owed in connection with credit services, such as overdrafts, from a prepaid account, the Proposed Rule would require prepaid issuers to first obtain a consumer’s written preauthorization. Even if a consumer provides preauthorization, the Proposed 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.
Together with this change to Regulation Z, the Proposed Rule would amend the compulsory use provision of Regulation E. That section of Regulation E generally prohibits a creditor from requiring a consumer to agree to repay credit by means of preauthorized transfers; however, there is an exception for overdraft protection plans on deposit accounts. The Proposed Rule would not extend the existing exception to prepaid accounts. As a result, where overdraft credit is extended on a prepaid account, the creditor would need to provide the consumer with another option to pay the credit extended as an alternative to automatic deductions from the prepaid account.
Government Benefits. The Proposed 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. In addition, the Proposed Rule prohibits agencies from requiring that consumers agree to receive benefits through a prepaid account, and requires agencies to provide a statement about their ability to request benefits in an alternative manner, in a form substantially similar to the Proposed Rule’s model form.
Effective Date. The Proposed Rule would take effect 9 months after its publication in the Federal Register, which has not occurred as of the publication of this client alert. However, the Proposed Rule would permit the continued sale of prepaid products that do not comply with the Proposed Rule’s disclosure requirements for 12 months after the Proposed Rule’s publication in the Federal Register, as long as the prepaid product and its packaging material were printed prior to the Proposed Rule’s effective date.
If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work or
David E. Teitelbaum
Joel D. Feinberg
1 The Proposed Rule has not yet been published in the Federal Register. The Proposed Rule is available on the CFPB’s website at http://www.consumerfinance.gov/f/201411_cfpb_regulations_prepaid-nprm.pdf.
2 The press release is available on the CFPB’s website at http://www.consumerfinance.gov/newsroom/cfpb-proposes-strong-federal-protections-for-prepaid-products/.
3 Available at http://www.consumerfinance.gov/f/201205_cfpb_GPRcards_ANPR.pdf.
4 Available at http://files.consumerfinance.gov/f/201411_cfpb_study-of-prepaid-account-agreements.pdf.
5 Based on this provision, some general purpose cards could be covered by both the existing gift card rules and the new Proposed Rule.
6 In addition to overdraft services, the Proposed Rule’s preamble identifies other types of credit services, such as a linked line of credit, access to a deposit advance product, or products where consumers with a credit account access that account and “push” the credit into their prepaid accounts where it can be spent.
7 An example of a third-party fee provided by the CFPB includes the possible existence of mobile phone carrier data charges or text messaging fees if a consumer receives balance updates from a prepaid issuer via mobile phone.
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