United States: CFPB Issues Prepaid Cards Rule

On October 5, 2016, the Consumer Financial Protection Bureau (CFPB) released its long-awaited rule covering prepaid cards (the Rule). The Rule requires prepaid card providers to give consumers enhanced disclosures and other protections similar to traditional checking accounts, and requires those that offer associated overdraft and other credit features to provide protections similar to credit cards. Against the strong opposition of providers of mobile-payment apps, the CFPB also sweeps digital wallets and person-to-person payment products under the scope of the Rule. Digital wallets that store payment credentials (e.g., credit card or bank account information) but do not store funds are excluded. The Rule encompasses payroll cards, government benefits cards and other cards that store funds. The prepaid Rule also is a harbinger for future CFPB rulemaking on overdraft products.

The Rule largely adheres to the rulemaking proposal issued by the CFPB nearly two years ago on November 13, 2014. The main concession from the CFPB is the extension of the effective date, originally proposed to be nine months from publication of the rule. Most requirements of the Rule will go into effect on October 1, 2017, with the rest coming into effect one year later.

The rule requires all providers of prepaid cards and digital wallets to:

  • Provide enhanced disclosures, including both a short form that immediately discloses the fees most important for consumers to comparison shop and a long form that discloses all the fees that could be charged on the prepaid account;
  • Post prepaid account agreements online to facilitate comparison shopping and, with few exceptions, submit them to the CFPB for future posting on a Bureau-maintained website;
  • Make account information, such as account balances, transaction histories and fees charged, available by phone, online or in writing on request;
  • Establish error resolution processes to investigate and resolve consumer claims of unauthorized or fraudulent charges or other errors, and provisionally credit the disputed amount if resolution is not reached within specified periods; and
  • Provide protections against unauthorized, erroneous or fraudulent withdrawals, limiting consumers' responsibility to $50 if they notify the provider promptly.

Providers that offer overdraft and other credit features linked with prepaid cards or digital wallets are subject to additional requirements to:

  • Wait 30 days after the consumer registers the prepaid account, and perform an ability-to-repay analysis similar to credit card accounts, before providing a credit product;
  • Provide monthly account statements similar to credit card accounts, and give consumers 21 days to make payments before the imposition of late fees (which must be "reasonable and proportional to the infraction");
  • Limit total fees for credit features to 25% of the credit limit during the first year a credit account is open; refrain from increasing the interest rate unless the consumer has missed back-to-back payments; and generally give 45 days' notice of rate hikes to allow the consumer to cancel the account; and
  • Maintain separation for funds loaded to prepaid accounts, and refrain from using such funds for credit repayment without consumer consent.

As part of the CFPB's continuing theme of "leveling the playing the field," the prepaid Rule is designed to put a broad range of financial products under the same or similar sets of regulatory requirements. Providers of new products such as digital wallets and person-to-person payment products – accustomed to rapid innovation, and unused to regulation – will require the most dramatic adjustment to a regulatory framework foreign to their business models. That adjustment will be especially painful because the industry previously had some hope of being excluded in whole or in part from the various requirements of the Rule. Requirements related to error resolution, payment protection, billing and particularly ability-to-repay analysis will require the addition of whole new processes to providers' operational infrastructure. The CFPB's increased enforcement focus on online activities (reflected in recent enforcement actions alleging online misrepresentations by LendUp as well as various auto title and other online lenders) further raises the risks for these providers.

In contrast, providers of more traditional prepaid cards often also provide, or are linked to providers of, deposit account and credit card products. As such, they are better equipped to comply with the regulatory framework imported from checking accounts and credit cards. Nevertheless, together with more recent entrants to the financial services market, these providers will suffer significant economic impact from the Rule – particularly the requirements applicable to credit features linked with prepaid cards.

Even more concerning for the industry, the CFPB is likely to incorporate key principles of the prepaid Rule, including, specifically, disclosures and fee limitations, into a rulemaking on overdraft products in the near future. The economic impact from the CFPB's rules may cause some providers to stop offering certain products, such as overdraft features linked to prepaid cards, and lead some (particularly smaller institutions) to impose fees for other products, such as checking accounts, to make up the revenue shortfall. Given its focus on providing transparency for consumers, the CFPB might consider it worthwhile to accept a reduction in the supply of credit or an increase in fees for other products, in exchange for a limit on, or disclosure of, overdraft fees. There is no doubt, however, that the CFPB will need to conduct a thorough cost-benefit analysis of such impacts to justify its rules and satisfy its statutory obligation to preserve consumer access to affordable credit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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