In an effort to defend prepaid product consumers, the Consumer Financial Protection Bureau is proposing what it sees as strong, new federal protections. The intent is to provide protections to consumers whether they are sending a payment, swiping a card, or scanning their smartphone. As comments are due 3/23/2015, let’s take a closer look at what the CFPB is proposing.
The centerpiece of the proposed rule is a new “Know Before You Owe” disclosure that would provide consumers with information about costs and risks before they purchase the prepaid product. In addition, the proposed rules would limit consumers’ losses when funds are stolen or cards are lost, require issuers to investigate and resolve errors, provide easy access to account information, and impose credit card protections if credit is offered in conjunction with the prepaid account. For financial institutions, this means an expansion of Reg. Z and Reg. E consumer protections to devices and products not previously covered by these regulations.
What’s a Prepaid Product?
It’s important to begin by looking at the scope of what the CFPB considers a prepaid product. Under the proposed changes, prepaid products include prepaid accounts that are cards, codes, or other devices capable of being loaded with funds by either the consumer or a third party; usable at unaffiliated merchants or for person-to-person transfers; and are not gift cards (or certain other related types of cards). This would include, for example, mobile prepaid accounts that can store funds, as well as payroll cards; certain federal, state, and local government benefit cards; student and financial aid disbursement cards; tax refund cards; and peer-to-peer products. In other words, prepaid products that can be used to make payments, store funds, withdraw cash at ATMs, receive direct deposits, and send funds to other consumers.
Proposed Operational Changes
Here’s a summary of the proposed changes that financial institutions would have to make if they offer products that meet the definition of a prepaid product:
Know Before You Owe Disclosure: The proposal actually requires two separate disclosures. Generally, the first (or “short”) version of the disclosure would have to be provided before the consumer agrees to acquire a prepaid account. The short disclosure would highlight key prepaid account information including common costs (monthly fees, per-purchase fees, ATM withdrawals costs, and fees to reload cash into the account). The financial institution would then have to provide a second disclosure (the “long” disclosure) when the account is opened or initiated. This disclosure would, again, include the fees disclosed on the first disclosure, plus any other potential fees that could be imposed in connection with the account and the conditions under which those fees could be imposed. These disclosures could be provided orally, in writing, or electronically. The CFPB is providing model and sample forms.
Easy and Free Access to Account Information: Financial institutions would be required to either provide periodic statements or provide account information in an online or telephonic format that is free and easily accessible. The consumer would have to be able to see his/her account balance and an 18-month history of transactions and fees.
Error Resolution Rights: The proposed rule would expand the Reg. E error resolution requirements (including the provisional credit requirement) and limited liability requirements, with some modifications, to registered prepaid accounts. These Reg. E requirements would not apply to unregistered prepaid accounts.
Publicly Available Card Agreements: Financial institutions would generally be required to post their account agreements on their website and to submit copies of their agreements to the CFPB for posting on a public, CFPB-maintained website.
Credit Protections: The proposed rule also contains strong protections for consumers when credit products are offered in conjunction with prepaid accounts that allow consumers to overdraw their accounts up to preapproved limits. Specifically, these additional protections include:
- A requirement that financial institutions first determine that the consumer has the ability to repay the debt before offering the overdraft option. If the consumer is under 21, the financial institution would be required to determine that the applicant has the independent ability to repay the credit;
- A requirement that financial institutions provide the same type of monthly periodic statement that credit card users receive;
- A requirement that the consumer be given at least 21 days to repay the debt before a late fee could be assessed; and
- A limitation on the amount of fees that could be assessed during the first year the credit account is open (not to exceed 25% of the credit limit) along with other limitations regarding interest rate increases.
30-Day Waiting Period: Financial institutions would be required to wait at least 30 days after a consumer registers his/her prepaid account before the institution could offer a credit product tied to the prepaid account.
Wall Between Prepaid Funds and Credit Repayment: Financial institutions would not be permitted to automatically demand and take credit payments whenever a prepaid account is loaded with new funds. In addition, funds loaded into the account could not be taken when payment is due, unless the consumer has affirmatively agreed to allow such payment. Even if the consumer opts in for this type of repayment, funds can only be taken once a month and not sooner than 21 days after the periodic statement is sent.
Every financial institution should expect continual changes to existing regulations (and, of course, the addition of new regulations) from the CFPB. These amendments and introductions are designed to protect consumers. Understanding what these proposed changes could mean to your financial institution is the best way to ensure it is likewise protected.
Jane Pannier is senior vice president and in-house counsel for AffirmX LLC, a developer of an innovative remote compliance review solution. Ms. Pannier is also SVP of AdvisX, a CUSO that specializes in using technology to more effectively deliver consulting services to financial institutions.
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