Today (11/13/2014), the Consumer Financial Protection Bureau (CFPB) issued a proposal designed to establish comprehensive consumer protections for prepaid financial products. The CFPB proposed substantial amendments to Regulation E, which implements the Electronic Funds Transfer Act (EFTA); Regulation Z, which implements the Truth in Lending Act (TILA); and the official commentary to each of those regulations. The announcement, which was made by CFPB Director Richard Cordray at a field hearing in Wilmington, Delaware, comes almost two-and-a-half years after the CFPB issued an Advance Notice of Proposed Rulemaking on prepaid cards in May 2012. At the field hearing, Director Cordray explained that users of prepaid products are often "some of the most economically vulnerable among us, and most of them have no idea that the prepaid cards they choose to purchase are largely unregulated at the federal level and carry few, if any, protections under federal consumer financial law." The new rules proposed by the CFPB today are designed to "fill key gaps for consumers" and represent the "first-ever comprehensive federal protections in this market."
The proposal will be open for public comment for a period of 90 days starting on the date it is published in the Federal Register. Looking even further down the road, prepaid account issuers should expect a nine-month implementation period before the final rule becomes effective, with certain limited exceptions. This period will begin to run once the CFPB receives comments on the proposal, makes any required changes, and ultimately publishes the final rule in the Federal Register.
Summary of CFPB Proposal
First, the CFPB also proposed to revise the existing definition of a "prepaid account" in Regulation E so that it would broadly cover the prepaid financial products market. This would include, but is not limited to, traditional plastic prepaid cards, mobile and other electronic prepaid accounts, payroll cards, government benefit cards, student financial aid disbursement cards, tax refund cards, and peer-to-peer payment products. In addition to expanding the scope of the existing "prepaid account" definition, the CFPB is also proposing to extend to all prepaid accounts the existing protections that are currently only available to payroll card accounts, federal government benefit accounts, and non-needs tested state and local government benefit accounts. This includes the ability to either receive a periodic account statement or receive account information upon request. When providing a statement or account information, institutions would be required to disclose the monthly and annual totals of all fees imposed on the account and the total of all deposits to, and debits from, the prepaid account.
Furthermore, the proposal would expand upon the existing error resolution and limited liability provisions in Regulation E by creating requirements specific to registered prepaid accounts. This would include fraud and lost-card protections that are similar to what is currently required for credit and debit cards. To promote transparency and to facilitate comparison shopping, Regulation E would also be amended so that consumers receive various disclosures regarding potential fees, overdraft services, and credit features that could be linked to a prepaid account prior to acquiring a prepaid financial product. The CFPB's proposal includes both short- and long-form model disclosures developed using feedback from the public. Similarly, the proposal would require account agreements to be posted on the institution's website and provided to the CFPB for posting on a public website.
Finally, the proposal includes a variety of amendments designed to increase credit protections afforded to consumers of prepaid financial products. Specifically, the CFPB proposes amending Regulation Z so that existing credit card rules and disclosure requirements would apply to prepaid account issuers that offer credit features (e.g. overdraft services) in connection with the account and charge a fee for that service. Before adding these types of features on to a prepaid account, the issuer would be required to wait 30 days after the account is registered, and the issuer must obtain the consumer's consent. Furthermore, Regulation Z would be amended to limit the frequency of periodic statements (e.g. not more than one per month) for these types of services, and consumers would be afforded at least 21 days to repay a debt incurred in connection with a credit feature or overdraft service. The issuer, on the other hand, would be prohibited from automatically taking incoming payments to a prepaid account in order to repay the credit line, unless the consumer's consent is obtained. Lastly, the CFPB proposed amending Regulation E so that issuers would be restricted from applying different terms to a prepaid account depending on whether the consumer links the account to an overdraft service or credit feature.
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