The Consumer Financial Protection Bureau (CFPB) recently released rules that impose specific requirements applicable to prepaid accounts, including prepaid cards. This edition of Morgan Lewis Retail Did You Know? describes the new requirements and what retailers need to do to comply.
Given the rise in consumers' use of prepaid cards, the CFPB has spent nearly two years developing a final rule to regulate this type of account. According to the CFPB, the amount of money that consumers put on "general purpose reloadable" prepaid cards grew from less than $1 billion in 2003 to almost $65 billion in 2012 and is expected to reach $121 billion by 2018. Effective October 1, 2017, the final rule requires (1) protections for prepaid accounts under the Electronic Fund Transfer Act, (2) mandatory consumer disclosures, and (3) credit protections that arise out of the Truth in Lending Act and the Credit Card Accountability Responsibility and Disclosure Act.
The New CFPB Framework
The final rule covers far more than prepaid cards. Although denominated the "prepaid rule," the CFPB adopted a broad definition of a covered "prepaid account" that brings within its scope, with a few specified exceptions, nearly any general-purpose stored-value payment mechanism that is not a bank account. This applies as long as the card or mechanism (1) is redeemable with multiple, unaffiliated merchants for goods and services; (2) can be used at ATMs; or (3) can be used to conduct person-to-person transfers. Thus, mobile wallets, internet-based person-to-person payment accounts, payroll cards, general purpose reloadable cards (like cards with a Visa, MasterCard, or Amex logo),
Of particular relevance for retailers, the final rule specifically excludes the following:
- Gift cards, if "marketed and labeled as a gift card"
- Gift certificates and store cards redeemable at a specific merchant
- Cards given as loyalty or promotional rewards
- Payment cards associated with IRS-regulated tax savings accounts (health savings accounts and flexible spending accounts)
- Payment cards used to distribute means-tested benefits under state or local law or administered by a state or local government
- Federal government store cards for making purchases at military installations, even if capable of person-to-person transfers
The account protections that the final rule requires are similar to protections that checking account consumers receive, and include (1) free and easy access to account information, (2) resolution rights for unauthorized or fraudulent charges or errors, and (3) protections against withdrawals, purchases, or other unauthorized transactions if a prepaid card is lost or stolen.
Similar to the CFPB's Know Before You Owe disclosure forms for mortgages and student financial aid offers, the final rule now requires Know Before You Owe prepaid disclosures to provide customers with standard information about prepaid accounts. These disclosures must appear on two forms, one short and one long, and must be written in easy-to-understand language. The short form must highlight fee information, including periodic fees, per-purchase fees, ATM withdrawal and balance inquiry fees, cash reload fees, customer service fees, and inactivity fees. Before acquiring a prepaid account, consumers must receive or be able to access a comprehensive long-form disclosure that contains the complete list of fees and other key information.
In addition, to make comparison shopping easier for consumers, the CFPB is requiring prepaid account issuers to post on their websites the prepaid account agreements they offer to the general public. With few exceptions, issuers must also submit all agreements to the CFPB, which will, at a later date, post the agreements on its publicly available CFPB website.
Examples of the Know Before You Owe prepaid disclosures are available on CFPB's website.
Finally, the final rule requires certain protections for consumers who use prepaid accounts that allow them to spend more money than they have deposited in the prepaid account. These protections include (1) a requirement that the issuer confirm that consumers have the ability to repay before offering credit, (2) mandatory monthly credit billing statements, (3) at least 21 days for a consumer to repay debt before incurring a late fee, and (4) limited fees, including a 25% ceiling on fees for the first year a credit account is open.
Retailers that offer prepaid cards for sale should be aware of these various requirements but may continue to require card issuers to satisfy all compliance obligations announced in the final rule. To that end, retailers should review and update any contracts with prepaid card issuers to confirm that issuers are the party responsible for complying with the CFPB's prepaid account rules. Finally, retailers should confirm that, as of October 1, 2017, issuers have made their prepaid account agreements available on the their websites.
How We Can Help
Morgan Lewis advises retailers on prepaid card compliance and regularly represents retailers in card-related litigation. We can apply our experience to help efficiently analyze compliance with the CFPB's prepaid account rules.
This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.