The Consumer Financial Protection Bureau's ("CFPB") recently issued Advance Notice of Proposed Rulemaking ("ANPR") announced its intention to extend Regulation E ("Reg E") protections to certain general purpose reloadable prepaid cards ("GPR cards"), which protections do not currently apply to GPR cards. CFPB's stated goals are to (1) insure consistent minimum standards across similar financial products, (2) allow consumers to easily compare products by insuring disclosure transparency and (3) appropriately allocate fraud and loss risks. CFPB is soliciting public comments on this topic until July 23, 2012.
Although the ANPR refers to cards, the scope of the proposed rulemaking is not limited to physical cards and expressly references other mechanisms, such as key fobs and cell phone apps. The type of cards covered are open-loop reloadable prepaid cards, that is, cards having the following attributes: (1) cards that may be used anywhere that accepts payment from a retail electronic payments network; (2) cards that allow the consumer to add value to the card; and (3) cards that reflect the value that a consumer has paid for the card. The proposed rulemaking does not apply to closed-loop cards (i.e., cards, like gift cards, whose use is limited to a specific merchant or group of merchants), debit cards linked to a traditional checking account, payroll cards, electronic benefit cards issued by a governmental agency or nonreloadable cards.
Reasons for Proposed Regulation
CFPB cites three reasons for proposing regulations. First is the dramatic growth in the number of active GPR cards (from 3.4 million in Q1 2009 to over 7.0 million by Q1 2012 with $167 billion expected to be loaded on GPR cards by 2014, compared to $12 billion in 2007). Second is the consumer perception of GPR cards as a substitute for traditional checking accounts, without an equivalent understanding of the lack of similar regulatory protections (e.g., lack of FDIC insurance coverage in some instances). Third is concern about market distortions, misaligned incentives and consumer confusion resulting from the absence of a comprehensive federal regulatory regime similar to that currently in place for credit cards, debit cards and gift cards.
Summary of Reg E Protections
Reg E was initially issued by the Federal Reserve to implement provisions of the 1978 Electronic Fund Transfer Act ("EFTA"). The Dodd-Frank Wall Street Reform and Consumer Protection Act now gives the CFPB authority to interpret and revise Reg E. Reg E generally applies to electronic fund transfers authorizing a financial institution to debit or credit a consumer's account. For example, it applies to debit cards, ATM transactions, ACH transactions, telephone bill payments and point-of-sale terminal transactions. Coverage has also been extended, in part, to include government electronic benefit transfers (e.g., electronic cards issued to food stamp recipients) and payroll card accounts. Among the consumer protections required by Reg E, and that the CFPB is contemplating applying to GPR cards, are: (1) liability limitation for unauthorized transactions; (2) required disclosure of terms such as (a) limitations on frequency and dollar amount of transactions, (b) fees and (c) error resolution procedures; (3) certain notice requirements regarding changes in terms, error resolution and preauthorized transactions; (4) provision of terminal receipts and periodic written statements; and (5) procedures for resolving errors.
Further, the ANPR mentions additional protections applicable to gift cards that were created when the 2009 CARD Act modified the EFTA to include limitations on the imposition of dormancy fees, service fees and expiration dates. It is unclear whether the CFPB is considering expanding these additional protections to GPR cards. Although the subject matter of the ANPR, and the breadth of CFPB's authority, are consistent with such an expansion, the thrust of the CFPB's interest, as expressed in the ANPR and its companion press release, is disclosure and transparency, rather than CARD Act-type substantive limitations.
Topics on which CFPB Is soliciting comments. CFPB is soliciting comments on the following topics:
- Regulatory Coverage of Products For example, should some products be excluded from regulation (e.g., university cards or health spending cards) and should some aspects of Reg E not apply (e.g., requirement to provide periodic paper statements)?
- Product Fees and Disclosures CFPB is concerned about transparency, especially fee disclosures before a consumer purchases a GPR card, and providing consumers with information facilitating meaningful comparisons among various GPR cards. It is also focused on disclosure of fundamental terms, such as the presence or absence of FDIC insurance.
- Product Features CFPB seeks comments on costs, benefits and consumer protection issues related to features that may be offered on GPR cards, such as overdraft protection, a savings account feature or the efficacy of credit report features enabling consumers to use GPR cards to improve or build credit.
- Other The fourth topic is simply an open-ended solicitation for other suggestions. For example, how might changes in contract terms and other fundamental information best be conveyed to cardholders?
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