6 minutes
In November, the Consumer Financial Protection Bureau followed up on its 2012 Advanced Notice of Public Rulemaking and issued proposed rules for the regulation of prepaid card products.
The proposal amends Regulation E and Regulation Z to create the proposed prepaid rules. While many of the proposal’s 870 pages are commentary that will continue to be analyzed and debated, credit unions should understand and compare the major components of the proposal with their current practices. Notably, while CFPB is the primary regulator for financial institutions over $10 billion in assets, the consumer protection regs (E and Z, here) apply to all financial institutions.
Covered Products
An important point to note is that the proposal applies to more than general-use prepaid cards. If this becomes rule, Regulation E will include a definition for “prepaid account” that will cover almost any means of accessing funds other than through traditional checking or savings. Payroll cards, tax refund cards, peer-to-peer products and, most importantly certain mobile banking services (such as paying with your phone when using technology that loads funds onto an account) will be subject to the new requirements.
CFPB Director Richard Cordray has remarked that “[t]echnology and innovation can be powerful forces to improve human life,” which makes it difficult to understand the agency’s choice to hinder advancements in mobile banking by applying decades-old regulations. Not included in the definition are gift cards, loyalty or promotional cards defined in Regulation E, health savings accounts, flexible spending accounts, or health reimbursement arrangements.
Disclosures and Account Details
If finalized, two standard sets of disclosures for all prepaid accounts will become the rule, a long form and a short form.
The proposal provides model forms to allow compliance with formatting requirements. Both disclosures must be provided to the consumer before purchasing a card or otherwise loading funds, with one exception. If a card is sold in a retail store (but not in branches) and the short-form disclosure is displayed so it can be read without opening the packaging, the credit union can satisfy the long-form requirement by posting that disclosure on its website or making its contents available by phone. For mobile banking, where there is no physical card, the member would be directed to a website displaying the disclosures prior to accessing the product. In branches, both disclosures would need to be provided.
The disclosures include nearly any fee the member could be charged. For the short-form disclosure, the credit union must also include (and annually update) up to three “incident-based fees.” What this means is that, every year, the credit union must review the prepaid product to determine the three most incurred fees (that are not already required) and list them in the disclosure. The long-form disclosure will need to include Regulation Z’s credit card disclosures if the product would offer a “credit feature” (meaning, it would offer overdraft protection or could be overdrawn).
Additional post-purchase disclosure and account access methods would be required. Quarterly submissions of the credit union’s current account agreements must be sent to CFPB (if large enough to be governed by the agency), as well as copies posted on its website. For information provided to existing prepaid account holders, existing Regulation E periodic statements can be skipped if the credit union makes the following account information available to the member:
- the account balance by telephone or at an ATM;
- online access to 18 months of account history;
- upon request, an 18-month written history of transactions; and
- included in any account information, all fees assessed against the account and a summary of the fees, debits and credits for the prior month and year-to-date (incorporating CARD Act).
Liability for Unauthorized Use
Under the proposal, existing limited liability procedures under Regulation E will be applicable to prepaid accounts. Once an account is registered with the CU (or “verified”), the credit union has two options: (1) give the member 60 days to report an unauthorized transfer, either from the date he/she electronically accesses account information showing the unauthorized transfer or from the date the credit union sends the account history following a member’s request; or (2) limit liability if the credit union is notified within 120 days from when the transaction occurred.
It is practically irrelevant that the proposal restricts limited liability protections to registered accounts, because the timeframes for reporting unauthorized transactions don’t relate to registration. For example, a member could see an unauthorized transfer on the online account information, register the card, and be protected if it is within the 60- or 120-day timeframe. Further, CFPB is not likely to accept a financial institution denying otherwise available liability protection because it failed to assist a customer with registering the prepaid account.
The error resolution requirements in the proposal, including provisional crediting (in which the credit union would have to make the alleged unauthorized amount available to the member) if the credit union takes more than 10 days to complete its investigation, track current law for traditional debit cards. The proposal also includes a model form to satisfy the existing error-resolution notice obligation.
Prepaid Cards as Credit Cards
The proposal’s provisions related to overdrafts on prepaid products have the largest potential to disrupt the prepaid industry. An important takeaway from the hundreds of pages on the issue is that Regulation Z’s definition of “credit” will be amended to include any overdraft through an overdraft protection plan or as caused from having insufficient funds to cover a purchase (a purchase at a fuel pump, for example) to a prepaid product.
CFPB has exempted products that access credit if the member “is not subject to any finance charge or any fee.” Because the proposal modifies the definition of “finance charge” to include prepaid account participation or transaction fees, the exemption has little meaning in the real world. The practical impact of the proposal, however, does activate the following Regulation Z protections for prepaid products:
- ability-to-repay pay analysis;
- allowing 21 days to repay overdrafts before assessing a fee;
- providing periodic monthly payments;
- requiring a 30-day period from account registration before a “credit feature” can be added; and
- limiting total first-year fees to 25 percent of the credit limit.
Compulsory use and offsets, automatic payments on/offsetting for overdrafts, for prepaid accounts will also be treated as credit. The proposal will prohibit a credit union from requiring automatic payments of overdrafts, an activity allowed for traditional debit card overdrafts. And Regulation Z’s prohibition on automatically offsetting funds the member has on deposit to satisfy overdrafts will apply to prepaid products.
Review, Analyze, Comment
Prepaid products currently being offered by credit unions are not all alike, and these differences will impact the specific compliance issues the proposal will create. Creating unanimity in disclosures may not largely affect the industry, but the restrictions on “credit features” could reduce profits from prepaid products
The proposal was published in the federal register on Dec. 23, so credit unions have until March 23 to provide comments to CFPB.
Brad R. Bergmooser is senior counsel with Freeborn & Peters LLP, Chicago.
