On November 13, the Consumer Financial Protection Bureau ("CFPB") released a proposed rule (the "Proposal") that would provide significant consumer protections for prepaid accounts through substantial amendments to Regulation E (Electronic Fund Transfer Act) and Regulation Z (Truth in Lending Act). Prepaid products, which are becoming viewed as a bridge between the unbanked and traditional deposit products, are consumer accounts typically loaded with funds by a consumer or by a third party, such as an employer. According to the CFPB, prepaid products are amongst the fastest growing types of consumer financial products in the United States. The Proposal would afford consumers using these emerging products the protections currently provided to existing financial products.
Specifically, the CFPB proposes to define prepaid accounts under Regulation E and Regulation Z to cover a variety of prepaid financial products, including: traditional prepaid cards; mobile and other electronic prepaid accounts that can store funds; payroll cards; government benefit cards; child support; pension payments; student financial aid disbursement cards; tax refund cards; and peer-to-peer payment products.
The Proposal would extend certain existing consumer protections – such as those available to credit card holders, payroll card accounts and certain benefit accounts – to these covered prepaid accounts in an effort to provide (1) easy and free access to account information; (2) error investigation and resolution rights; (3) fraud and lost-card protection; (4) additional disclosures designed to inform consumers and allow them to better compare prepaid products; and (5) an extension of those protections afforded credit card consumers.
Notably, the Proposal would:
- Prohibit an institution from opening a credit card account or increasing a line of credit related to a prepaid account unless that institution considers the consumer's ability to make the required payments;
- Require that financial institutions provide consumers with at least 21 days to repay debt tied to a prepaid account before charging a late fee that is "reasonable and proportional" to the violation of the account terms;
- Generally require financial institutions to limit fees during the first year following the opening of a prepaid account to 25 percent of the credit limit and prohibit them from increasing the interest rate on existing balances unless two consecutive payments are missed; and
- Prohibit an institution from opening a credit card account or providing a solicitation or application to open a credit account to the prepaid account customer within 30 days of a consumer registering the prepaid account.
Comments on the Proposal must be submitted to the CFPB within 90 days from publication in the Federal Register.
The following is a link to the Proposal: http://www.consumerfinance.gov/f/201411_cfpb_regulations_prepaid-nprm.pdf.
The following is a link to the proposed disclosures: http://files.consumerfinance.gov/f/201411_cfpb_prepaid-model-sample-disclosure-forms.pdf.
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