On November 13, 2014, the Consumer Financial Protection Bureau (CFPB) released a proposed rule regulating prepaid products. The proposed rule would amend parts of Regulation E, implementing the Electronic Fund Transfer Act (EFTA) and Regulation Z, implementing the Truth in Lending Act (TILA). The CFPB's proposed rule is accompanied by a study on prepaid account agreements.
In prepared remarks, at a CFPB Fielding Hearing on November 13, 2014, Director Richard Cordray explained that: "We are proposing to give consumers the basic protections, including safety of the funds, they have come to expect when they pull a debit card out of their wallet or shop online with it," and that the proposed rule "would close the loopholes in [the prepaid products] market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment." Director Cordray was joined at the Field Hearing by a panel of government, consumer, and industry stakeholders, who discussed the CFPB's proposals.
Scope of the Rule
The proposal will cover traditional plastic prepaid cards, general purpose reloadable cards, payroll cards, government benefits cards (distributing benefits such as child support and pension payments), mobile and other electronic prepaid accounts, tax refund cards, campus prepaid cards for students, peer-to-peer payment products, and new products that store virtual currencies.
The proposal includes "Know Before You Owe" prepaid disclosures that require disclosure of certain information to consumers. The proposal also includes a model disclosure form.
- Access to Account Information: Financial institutions would be required to provide either periodic statements or make account information easily accessible online and for free. Further, prepaid card issuers would be required to post their account agreements on their website and submit it to the CFPB for posting on an agency-maintained website.
- Error Resolution: Financial institutions would be required to investigate errors on registered cards that consumers report to them and work to resolve those errors in a timely manner.
- Fraud Protection: Consumers would be responsible for no more than $50 of the unauthorized charges, provided that the consumers quickly report the activity to the financial institution.
- Disclosures: The disclosures would take two forms: (1) a short form that would highlight key information about the account's fees and (2) a long form that would list all of the account's fees.
- Ability to Pay: As to cards that allow consumers to pay to spend more money than they deposit to the card, companies must ensure the consumer can repay the debt, and companies would not be permitted to take automatic repayments without consumer authorization. For consumers under 21 years of age, companies would be required to assess these consumers' independent abilities to repay the credit.
- Time to Repay: Prepaid companies would be required to give consumers at least 21 days to repay debt tied to a prepaid card before charging a late fee that must be "reasonable and proportional" to the violation of the account terms.
- Limited Fee and Interest Charges: The total fees for a prepaid credit product cannot exceed 25% of the credit limit during the first year an account is open. The interest rate on new purchases could be increased, but companies would be required to give consumers 45 days advance notice during which the consumer can cancel the account.
- Limited Credit Options: Companies would not be able to offer a credit product until the consumer has first registered the prepaid account for 30 days.
- No Automatic Withdrawal: Prepaid companies would be restricted from automatically moving funds from a prepaid account to repay another debt unless the consumer has affirmatively allowed such withdrawals. Companies would be prevented from withdrawing funds more than once per month.
The public and industry stakeholders will have 90 days after publication in the Federal Register to comment on the proposal.
For further information about this proposed rule or other CFPB-related issues, contact the authors or other members of Venable's CFPB Task Force.