The Consumer Financial Protection Bureau has issued an 870-page proposal for prepaid cards (including 156 pages of actual proposed rules) that mandates new disclosures, error resolution procedures, consumer liability limits for unauthorized transactions, fee limits, and added requirements for cards with overdraft or credit features. Comments on the proposal will be due no later than 90 days after its publication in the Federal Register.

While our speed-readers have not yet completed an exhaustive review of the proposal, key components identified to date include:

  • Coverage. A “prepaid account” covered by the proposal is defined as a card, code, or other device that is capable of being loaded with funds, is not otherwise an account under Regulation E (such as a deposit account), and is redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or useable at either ATMs or for person-to person (P2P) transfers. The definition includes mobile and other electronic products that can store funds. Electronic gift certificates, store gift cards, and general-use prepaid cards marketed and labeled as gift cards are excluded. (A proposed comment states that incidental or occasional marketing would not implicate this exemption and would not affect the account's status as a "prepaid account" subject to the proposed rule.)

  • Disclosures. A short-form and long-form disclosure of fees and other information must generally be given before a consumer acquires a prepaid account. However, if the consumer acquires the account in person in a retail store, short-form disclosures are visible through the card's packaging, and certain other conditions are met, the long-form disclosure can be given post-acquisition. Also, the long-form disclosure can be given post-acquisition when an account is acquired by telephone. The proposal includes model and sample forms and revises certain existing Regulation E disclosures. The proposal also expands the existing Regulation E account opening disclosure for prepaid accounts to require the disclosure of all fees, not just fees for electronic fund transfers.

    For prepaid accounts, the proposal would require issuers to deliver periodic Regulation E statements that include specified information about fees, deposits, and debits or, alternatively, make the account balance available to the consumer through a readily available telephone line and provide electronically at least an 18-month account history and a similar written history upon request. 

    Prepaid account issuers are generally required to post their prepaid account agreements on their websites and submit such agreements (which must satisfy the proposal’s form and content requirements) to the CFPB for posting on a website maintained by the CFPB.

  • Liability Limits and Error Resolution.  Regulation E liability limits and error resolution requirements (including the provisional credit requirements) are extended to prepaid accounts registered with the issuer, with technical modifications for financial institutions using the proposal’s periodic statement alternative. These Regulation E requirements would not apply to unregistered prepaid accounts provided the risk of non-registration has been disclosed.

  • Overdraft and Credit Features. The proposal generally treats advances accessed by a prepaid card, or by an account number where extensions of credit are permitted to be directly deposited only into particular prepaid accounts specified by the creditor, as “open-end credit” under Regulation Z. This includes both a credit feature in which only participation fees are charged and an overdraft feature in which fees are imposed for overdrafts (whether in the form of discretionary overdraft payments or an overdraft line of credit.) As a result, the proposal applies various CARD Act credit card requirements to prepaid accounts with such features. These include requirements dealing with consideration of the consumer’s ability to repay, monthly periodic statements (including the requirement to mail or deliver statements at least 21 days prior to the payment due date disclosed on the statement), limits on first-year total fees, late fee limits, and advance notice for interest increases. Treating a prepaid card as open-end credit in these circumstances then also allows the CFPB to sweep these cards, as well as prepaid cards to which credit features may subsequently be added, within the reporting and marketing rules for college student credit cards and other extensions of open-end credit, including the requirements for public disclosure by the school of any credit card marketing contract or agreement.

    Two additional requirements deserve special notice. First, a financial institution must wait 30 days after a consumer registers a prepaid account to solicit the consumer for a linked overdraft or credit feature or to allow access to such a feature. Second, creditors cannot require consumers to repay amounts advanced on a prepaid account through automatic payments. The consumer must affirmatively opt in for a creditor to use funds loaded on a prepaid account to repay advances, and the creditor cannot deduct funds more frequently than once per calendar month. These latter requirements respond to concerns by consumer advocacy organizations about the basic concept of linking credit features to prepaid cards. If adopted in their present form, they foreseeably will curtail the universe of consumers able to take advantage of prepaid card-linked credit and increase the cost of such credit.

On December 12, 2014, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Proposed Prepaid Cards Rule.” A link to register is available here.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance. The Group’s attorneys regularly assist clients in structuring and documenting prepaid card programs and in preparing and submitting comments in pending rulemakings.

If you have questions, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, Glen P. Trudel at 302.252.4464 or trudelg@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com, or Keith R. Fisher at 202.661.2284 or fisherk@ballardspahr.com


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