By Eliott C. Ponte, Regulatory Compliance Counsel
It was no secret that the CFPB wanted to crack down on prepaid debit cards. After conducting studies, issuing advance notices of proposed rulemaking, and testing various disclosures regimes, at midnight last Thursday, the CFPB dropped a bomb on the prepaid community: a nine hundred page proposed rule on prepaid cards. In this blog post, I hope to capture the high points of the prepaid rule issued by the CFPB on November 13, 2014.
As I type this blog post, know that NAFCU’s Regulatory Affairs attorneys are working on summarizing the prepaid rule in a NAFCU Regulatory Alert. Once the Regulatory Alert is completed, NAFCU will publish it on our website (unfortunately, this is a member’s only publication).
Prepaid Expanded: The proposed rule defines “prepaid account” as a card, code, or other device that is capable of being loaded with funds, which is not otherwise an account under 12 C.F.R. 1005.2(b)(1), established primarily for personal, family, or household purposes, and is redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or useable at either ATMs or for P2P transfers. The definition would specifically exclude gift certificate as defined in § 1005.20(a)(1) and (b); a store gift card as defined in § 1005.20(a)(2) and (b); a loyalty, award, or promotional gift card as defined in § 1005.20(a)(4) and (b); and a general-use prepaid card as defined in § 1005.20(a)(3) and (b) that is both marketed and labeled as a gift card or gift certificate.
Prepaid is the New Credit Card: The proposed rule imposes many credit card protections on to prepaid cards that allow users to spend more money than is deposited on the prepaid account. These protections include ascertaining the consumer’s ability to repay before credit is extended, monthly periodic statements (including the requirement to give users at least 21 days to repay their debt before charging interest or a late fee), limits on first-year total fees, late fee limits, and 45-day advance notice for interest rate increases. In addition to the protections listed above, the rule prohibits the extension of credit within the first 30-days of the consumer registering the prepaid card, and prevents lenders from offsetting a person’s account to pay their prepaid account. Even if consumers affirmatively opted-in to allow such a repayment, lenders are still subject to additional requirements: For instance, the lender cannot take funds more frequently than once per calendar month, and must wait 21 days after the mailing of the periodic statement.
Know Before You Owe: The proposed rule requires prepaid issuers to provide standard easy-to-understand disclosures. The CFPB envisions purchasers will first receive the short form (prior to purchase) and then the long form (after purchase). The proposed rule includes two model forms (safe harbor) that prepaid issuers can use, which discloses information like the monthly fee, fee per purchase, ATM withdrawal cost, and fee to reload cash onto the account. Too boot, the CFPB will be requiring that prepaid issuers post the long form on its website, and give the CFPB a copy of the long form so that the disclosures can be posted on the bureau’s website.
In addition, the proposed rule expands the existing Regulation E account opening disclosures for prepaid accounts by proposing that the new disclosures includes the listing of all fees (not just electronic fund transfer fees).
Liability and Error Resolution: Under the proposed rule, Regulation E liability and error resolution requirements are extended to prepaid accounts registered with the issue. The proposed rule does not apply to unregistered prepaid accounts if the risk of non-registration has been disclosed.
For those of you who are brave enough to read the entire prepaid proposed rule, you can be taken to all 900 pages of the proposed rule by clicking here. In addition to publishing the proposed rule, the CFPB issued a press release, which can be found here, and published comments by Director Cordray, which can be found here. Comments to the proposed rule are due 90 days from the date of publication in the Federal Register.