On Thursday, the CFPB issued a request for public comment on its proposed rule to regulate prepaid financial products. The rule would amend Regulation E, which implements the Electronic Funds Transfer Act (EFTA), and Regulation Z, which implements the Truth In Lending Act (TILA).
SCOPE
The CFPB’s proposed rule would cover “those prepaid accounts that are cards, codes, or other devices capable of being loaded with funds and usable at unaffiliated merchants or for person-to-person transfers, and are not gift cards”.
SUMMARY OF RULES
The main provisions of the new rules would:
- Cap a consumer’s liability for unauthorized transactions on stolen or misused cards to $50 – as long as the consumer promptly reports the loss, theft or misuse of a “registered” prepaid account;
- Require that consumers have free access to both annual and monthly statements – and the statements would be required to show account balances, fees charged, and a transaction summary;
- Require that consumers be allowed to “opt in” to overdraft protection before customers can charge more on their cards than their existing balance and be charged overdraft fees;
- Require companies to promptly investigate errors and, if problems cannot be resolved, to refund the disputed amount to the customer’s card while an investigation is completed;
- Require that any lenders who extend credit through prepaid accounts first consider the borrower’s ability to repay the loan.
- Require that such lenders obtain a borrower’s consent to debit loan payments from the borrower’s next card deposit, and limit the number of times per month that the lender may debit the card account for loan repayments;
- Put limits on total fees charged in the first year for those cards that include credit lines.
- Require disclosure forms that show consumers in advance how much they would be charged for certain transactions (e.g., reloading cards, using ATMs for cash withdrawals, or making purchases). NOTE: Use of the CFPB’s proposed sample disclosure forms would be a safe harbor for card issuers.
SOME ISSUES WE’RE WATCHING
- The new rules are not limited to card accounts, but cover all cards, codes or devices capable of being loaded with funds. Given the number of payment systems out there (everything from the well-known PayPal to the shiny new Apple Pay, and lots of other creative ventures in-between), plus the many different types of prepaid accounts (including payroll and benefit card accounts), and even the existence of alternative currencies (like bitcoin) the scope of these rules could be very broad. We will be watching to see whether and how the rules are narrowed after industry comments identify concerns.
- The rules’ restrictions on credit features embedded in some card products now require an ability-to-repay analysis, which may limit the utility of those cards with credit lines for the under- and un-banked populations that use prepaid cards in larger numbers. We will be watching to see what effects the rules may have on the number and kind of cards available to users.
The proposed rule was driven by the CFPB’s study of the prepaid market, which can be viewed here.