CFPB extends its reach to prepaid products

The Consumer Financial Protection Bureau has finalized new rules for prepaid accounts—including innovative online and mobile offerings from PayPal, Google, Square, Dwolla, and Apple—and will require enhanced customer protections and "know your customer" requirements. Financial institutions will be required to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, and give consumers free and concise access to account information.

The Bureau, on Oct. 5, also finalized new “know before you owe” disclosures demands for prepaid accounts to “give consumers clear, upfront information about fees and other key details.” Prepaid companies will also be required to offer protections, similar to those for credit cards, when customers are allowed to use credit on their accounts to pay for transactions that exceed their available funds.

“This rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone,” CFPB Director Richard Cordray said in a statement.

Prepaid accounts may be loaded with funds by a consumer or by a third party, including employers. They can be used to make payments, store funds, withdraw cash at ATMs, receive direct deposits, or send money to others. The amount consumers put on “general purpose reloadable” prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012, according to the CFPB. The total dollar value loaded onto these prepaid cards is expected to nearly double to $112 billion by 2018. L

For many consumers, prepaid accounts are an alternative to traditional checking accounts, but have had limited federal protections, notably under the under the Electronic Fund Transfer Act. The new rule “applies specific federal consumer protections to broad swaths of the prepaid market for the first time,” the CFPB says. The requirements cover traditional prepaid cards, including general purpose reloadable cards, as well as mobile wallets, person-to-person payment products, and other electronic prepaid accounts that can store funds. Prepaid accounts covered by the new rule include: payroll cards; student financial aid disbursement cards; tax refund cards; and certain federal, state, and local government benefit cards, including those used to distribute unemployment insurance and child support.

Highlights of the CFPB rule:

Financial institutions must make account information available for free by telephone, online, and in writing upon request, unless they provide periodic statements.

Financial institutions must cooperate with consumers who uncover unauthorized or fraudulent charges, or other errors, on their accounts to investigate and resolve these incidents in a timely way and, where appropriate, restore missing funds.

If a financial institution cannot respond to erroneous, unauthorized, or fraudulent charges within a reasonable period of time, it will be required to provisionally credit the disputed amount to the consumer while it finishes its investigation.

As long as a consumer promptly notifies their financial institution of unauthorized charges, their responsibility for unauthorized charges will be limited to $50.

Issuers are required post the prepaid account agreements they offer to the general public online and must also submit all agreements to the CFPB, which intends to post them on a public, Bureau-maintained website at a future date.

Issuers must also give consumers protections that are similar to those on credit cards if they are allowed to use linked credit products to pay transactions their prepaid funds would not fully cover. They must wait 30 days after a customer registers the prepaid account before offering credit features and, once they do, provide regular statements that detail fees, the interest rate, what was borrowed, what is owed, and other key information about repaying the debt.

Prepaid companies, like credit card issuers, will be required to give consumers at least 21 days to repay their debt before they are charged a late fee, and those fees must be “reasonable and proportional.” During the first year a credit account is open, total fees for credit features cannot exceed 25 percent of the credit limit and issuers cannot hike the interest rate on an existing balance unless the cardholder has missed back-to-back payments.

Issuers may raise their interest rate in advance of new purchases, but generally must give consumers at least 45 days advance notice and an option to cancel the credit account. Under the new rule, they cannot automatically seize a credit repayment the next time an account is loaded with funds, cannot automatically take funds from an account to repay the credit when the bill is due unless the consumer consents, and cannot automatically take funds more than once per month.  Payments cannot be required until 21 days after the monthly statement is mailed.

New “know before you owe” prepaid disclosures will provide consumers with “standard, easy-to-understand, upfront information” about prepaid accounts, the CFPB says. It will require two forms, one short and one long, with easy-to-understand disclosures. The short form should “concisely and clearly” highlight key prepaid account information, including periodic fees, per purchase fees, ATM withdrawal and balance inquiry fees, cash reload fees, customer service fees, and inactivity fees. Consumers will also get or be able to access the comprehensive long form disclosure containing a complete list of fees and other key information before acquiring the account.

Examples of the CFPB’s required disclosures can be found online.

The new rule will generally apply to prepaid accounts starting Oct. 1, 2017, though the requirement for submitting agreements to the Bureau takes effect in October 2018.

Among those expressing concerns about the requirements in their final form is the National Association of Federal Credit Union. Executive Vice President of Government Affairs and General Counsel Carrie Hunt said her members are “greatly disappointed that the CFPB is systematically eliminating the ability of credit unions—not-for-profit, member-focused financial cooperatives—to offer consumer-friendly products to their members.”

 “Not only has the Bureau ignored the industry’s recommendations, but they have also given credit unions just one year to come into compliance with a 1,700-page rule,” she added. “In 2017, credit union compliance departments are going to be required to implement regulations related to prepaid accounts, mortgage servicing, the Home Mortgage Disclosure Act, and the credit card component of the Military Lending Act, just to name a few. It is undeniable, even by the Bureau, that regulatory burden continues to increase exponentially and suffocate community-based financial institutions.”

While still analyzing the lengthy rule to determine its full impact, “it is already clear that the CFPB has dismissed many of our serious concerns and moved forward with a rule that will harm the very consumers it aims to protect,” says Brad Fauss, president and CEO of the Network Branded Prepaid Card Association. “Instead of fostering financial innovation and inclusion, the CFPB’s rule will ultimately limit access to an essential mainstream consumer product.”

NBPCA’s specific concerns include an “overly broad” definition of prepaid accounts, one that “encompasses many of the more than 15 different types of prepaid cards in market, some of which likely will not withstand the increased costs of compliance,” Fauss says. Also, while his association “strongly supports clear, consumer-friendly pre-acquisition disclosures,” the final rule maintains a requirement “to provide multiple similar, but not quite identical, fee disclosures which will likely serve to only further confuse consumers.” Another concern is that imposing Regulation Z requirements [the Truth in Lending Act] on overdraft products could lead to their elimination from the marketplace.

“Based on the substantial operational and systems changes that will be required, the industry will be hard pressed to implement the required changes from a broad-sweeping new regulation within the time provided in the final rule,” Fauss says.

Cordray, as expected, sees things differently. “These important new protections fill gaps in the law for consumers,” he said during a press conference. “The rapidly growing ranks of prepaid users deserve a safe place to store their money and a practical way to carry out their financial transactions.”