CFPB Proposes New Rules for Prepaid Cards, Mobile Payments

Banks, retailers, online services, and others that issue prepaid cards to consumers will soon have some new rules to follow, including the need to conduct “ability to repay” assessments if they offer credit options. The rules, proposed by the Consumer Financial Protection Bureau, could also bring new regulations to mobile and peer-to-peer payment systems, such as Google Wallet and PayPal, and possibly to virtual currencies.

Earlier this month the CFPB proposed a long-awaited rule intended to expand protections for consumers who purchase and use prepaid cards. The 870-page document covers traditional prepaid cards, including those issued by retailers and reloadable credit cards, known as general purpose reloadable (GPR) cards. It also covers payroll cards, student financial aid disbursement cards, tax refund cards, and government benefit cards.

The prepaid card marketplace is booming, with nearly $100 billion expected to be loaded onto prepaid cards this year. The ability to load money onto GPR cards and use them for purchases and bill paying, makes them an increasingly popular alternative for those without checking accounts or other bank accounts. Some banks, taking advantage of that demand, are attaching optional lines of credit to their cards, a development addressed by the CFPB.

The CFPB proposes bringing the credit card protections established under the Truth in Lending Act and Credit Card Accountability Responsibility and Disclosure Act to prepaid cards. Among the requirements would be short-form, plain English disclosure requirements that give consumers a clear understanding of all costs and fees. A monthly statement would itemize the interest rate, monthly fee, fee-per-purchase, ATM withdrawal cost, reloading costs, and a tally of what was borrowed. 

“Most cards list major fees on the exterior packaging, but the fee information is not in any way standardized, making it difficult for consumers to comparison shop among prepaid products,” CFPB Director Richard Cordray said in a statement. “Some fees may be tucked away in the fine print inside the packaging or buried in some obscure place on a Website.”

Companies would be prohibited from transferring funds from a prepaid account to repay another debt unless the consumer gives permission to do so. A 21-day repayment grace period would precede any late fees and a fee cap of 25 percent of the credit limit would be imposed. A 30-day waiting period would be required before issuers could offer credit after opening prepaid accounts.

Prepaid card issuers would also have an obligation to investigate complaints and quickly resolve errors and cardholders would only be responsible for up to $50 of unauthorized charges if they promptly report a loss, theft, or breach.

“These rules are ambitious and bold,” says Brett Kitt of the law firm Greenberg Traurig, and a former senior counsel at the CFPB’s legal division. The Bureau wanted to get ahead of the trend and prevent issuers from seizing upon prepaid cards to offer sub-prime credit without having to comply with the rules applicable to credit cards, he says.

“There are aspects of the proposed rule that are going to cost money,” Eric Mogilnicki, who leads the law firm Wilmer Hale’s CFPB practice, says. The periodic statement requirement “will be very expensive if paper statements are provided, but will add substantial costs even if the statements are made available online.” Consumer liability limitations will also be a new cost for issuers and, overall, “smart financial institutions will supplement their monitoring and testing to make sure they are adhering to the new regime,” he says.

Expanded compliance monitoring will be vital if the CFPB makes good on a pitch to apply the “ability to repay” requirements it imposes on mortgage lenders to the prepaid industry. Under the proposal, companies cannot open or increase a credit line tied to a prepaid card unless they first ensure the consumer’s ability to make required payments.

“It is clear the Bureau is thinking about balancing the issue of transparency and fairness with innovation—and not just with products on the market now, but ones that could come to the marketplace over the next few years …”
Allyson Baker, Partner, Venable

Regulating Mobile Payments

In another surprising move, the CFPB may broaden the definition of prepaid products. “Prepaid products are more than just cards,” Cordray said in a recent speech. “As the prepaid card market has grown, so has the use of mobile or electronic prepaid accounts. Products like PayPal or Google Wallet can be loaded with and store funds from the consumer or from third parties, and they also can be used for a wide range of transactions, without reliance on a card.” The proposed rule lists virtual wallets, peer-to-peer transfers, and virtual currencies (such as the controversial Bitcoin) as products under consideration.

“It is certainly contemplated that a number of products in the mobile space are going to be within the scope of the rule,” Allyson Baker, a partner with the law firm Venable and a former CFPB enforcement attorney, says. “It is clear the Bureau is thinking about balancing the issue of transparency and fairness with innovation—and not just with products on the market now, but ones that could come to the marketplace over the next few years, or programs in pilot form that are likely to be refined as the market for them increases.”

The inclusion of alternative products under the umbrella of the rule shouldn’t come as a surprise, Kitt says. The Bureau’s recently announced no-action letter policy and “Project Catalyst” are both efforts to work with those behind cutting-edge, disruptive financial products. “They are trying to understand the innovation that is coming, so that they are both apprised of it and don’t step on it. It is always going to be a challenge for them, particularly in the payments area where there is a lot of innovation and a lot of change.”

NEW RULES FOR PREPAID PRODUCTS

The following is a selection from a rule proposed by the Consumer Financial Protection Bureau that pertains to prepaid cards and similar products.
The Bureau is proposing to establish a new definition of “prepaid account” within Regulation E and adopt comprehensive consumer protection rules for such accounts. The proposal would extend Regulation E protections to prepaid products that are cards, codes, or other devices capable of being loaded with funds, not otherwise accounts under Regulation E and redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or usable at either automated teller machines or for person-to-person (P2P) transfers; and are not gift cards (or certain other types of limited purpose cards), by bringing these products under the proposed definition of “prepaid account.”
The Bureau is also proposing to modify Regulation E, as it would pertain to prepaid accounts, in several key respects.
First, the Bureau proposes to require financial institutions to make certain disclosures available to consumers before a consumer agrees to acquire a prepaid account. These disclosures would take two forms, whether provided in oral, written, or electronic form. In addition, with certain modifications, the Bureau is proposing to extend to all prepaid accounts the existing Regulation E requirements regarding the provision of transaction information to accountholders that currently apply to payroll card accounts, federal government benefit accounts, and non-needs tested State and local government benefit accounts.
These provisions would allow financial institutions to either provide periodic statements or, alternatively, make available to the consumer: (1) the account balance, through a readily available telephone line; (2) an electronic history of account transactions that covers at least 18 months; and (3) a written history of account transactions that covers at least 18 months upon request.
Source: CFPB.

A 2013 Federal Reserve study found that, from 2009 to 2012, prepaid card payments were the fastest growing payment type, compared with credit, debit, and checking. Their use increased at a rate of 15.9 percent annually, reaching 9.2 billion transactions in 2012. Driving that increase is their use as a primary financial product by the “under-banked.”  Even prudent restrictions on the marketplace, or added compliance costs, could have the side-effect of shrinking the marketplace and limiting options for that financially vulnerable population. The very people the agency wants to protect, could ultimately be harmed, some fret.

“The CFPB’s rules on prepaid credit cards threaten to further limit credit options for struggling families, says John Berlau, senior fellow with the Competitive Enterprise Institute, a conservative think tank that has been critical of the Bureau.  “The reason why there are so many unbanked consumers in our economy using prepaid cards can be directly traced to Dodd-Frank provisions such as the Durbin Amendment that have decimated free checking.  We need to deregulate rather than add regulation to problems caused by regulation.”

“You could say that providing all of the protections that are available for credit cards and checking accounts to the prepaid market provides some security and insurance to people who need to rely on prepaid cards to do their banking,” Kitt says. “But is it protecting them if fees go up to the point where it is no longer a viable option for those people and they have nowhere to turn? These people need somewhere to park their money, or get loans, and maybe we have to accept some imperfections in the system.”

That balancing act, Kitt says, is something that the CFPB hasn’t fully confronted. “They sometimes take a very myopic view of protection and just choose fairness of access as the guiding principle for protection,” he says. “In the long term you may see, and are starting to see in some areas like mortgages, classes of people who get shut out of the financial system. They are going to have to confront that reality.”

Although the final rule will add costs and compliance challenges, it may ultimately benefit the prepaid card industry, Mogilnicki says. “The new disclosures are going to increase transparency and make people more comfortable in their buying decisions,” he says. “It will also level the playing field in terms of disclosure. The smaller issuers who may have been less transparent will have to pull up their efforts to what the big players are already doing.”