Prepaid Cards

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After several years of rulemaking, amendments, and delays, the CFPB’s Prepaid Rule (the “Rule”) is finally set to take effect on April 1, 2019.  This rapidly approaching effective date means that prepaid issuers have only two months left to confirm that their prepaid programs and materials are fully compliant with the Rules’ complex and specific new requirements.

Ballard Spahr attorneys will hold a webinar, “The Prepaid Rule Takes Effect: Considerations for Properly Implementing the CFPB’s Prepaid Accounts Rule” to discuss key compliance considerations ahead of the Prepaid Rule’s effective date. The webinar will take place on February 27, 2019, from 12:00 p.m. to 1:00 p.m. ET and a registration form is available here.

The Rule brings most prepaid accounts within the consumer protection regime of Reg. E. The Rule also applies certain Reg. Z requirements to prepaid products involving credit features.  On top of the existing complexity of those regulations, the Rule adds provisions unique to prepaid accounts, including rigorous and specific requirements for pre-acquisition short and long form disclosures and disclosures on the prepaid access device itself. Because much of the Rule applies uniformly across the spectrum of prepaid products, many of the Rule’s real-world applications to actual products will require significant analysis beyond the language of the Rule itself, the CFPB’s samples and illustrations, and currently available guidance. This compliance challenge will require deep familiarity with the existing Reg. E and Reg. Z frameworks, the Rule itself and its rulemaking background, the Rule’s commentary in its current form, and the practical and legal implications of prepaid products.

Some of the complicated applications of the Rule include:

  • Proper formatting and wording of the pre-acquisition short and long form disclosure documents. Both formatting and wording require deep analysis where a prepaid product differs from the CFPB’s samples and illustrations.
  • Determining how many and which additional fees and fee types to disclose on the pre-acquisition short form disclosure.
  • Adequately describing each and every fee on the long form disclosure, including appropriate categorization and grouping of fee types.
  • Navigating the provisions and exceptions applicable to retail and telephone acquisition contexts.
  • Understanding other specific requirements and exceptions, including the tests and thresholds applicable to the posting and submission of cardholder agreements and the re-printing of existing consumer disclosure materials.
  • Applying Reg. Z requirements to hybrid prepaid accounts with credit features, including both disclosures and substantive provisions.
  • Determining where changes to the specific provisions for payroll or government benefit cards are required.
  • Harmonizing new terms and references across all existing product materials without jeopardizing compliance with Reg. E and Reg. Z, as amended by the Rule.

Prepaid issuers and other entities involved with the provision of prepaid products should take advantage of the remaining two months to confirm that their prepaid programs and documentation are fully compliant with the Rule. Compliance risks are particularly significant for prepaid programs in which a third-party program manager or similar entity with more limited compliance resources is responsible for preparing disclosures and consumer-facing materials.  It is even more important in such programs to bring adequate expertise into the review process early enough to work through necessary changes.

Confirming complete compliance with the Rule will require more analysis and diligence than many entities are accustomed to performing in the existing and relatively well-defined worlds of Reg. E and Reg. Z. The universe of prepaid products involves countless unusual or unique features that will not fit neatly within the CFPB’s new framework or model forms. In addition, because the Rule is new and interpretive guidance is limited, the compliance challenge it presents will be particularly difficult.  Ballard Spahr’s Consumer Financial Services group possesses the deep experience with prepaid and other consumer financial products necessary to help navigate the Rule’s complexity, its highly nuanced relationship with existing regulatory regimes, and its implications for specific prepaid account characteristics.

Webinar. On February 27, 2019, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The Prepaid Rule Takes Effect: Considerations for Properly Implementing the CFPB’s Prepaid Accounts Rule,” to discuss key compliance considerations ahead of the Prepaid Rule’s effective date. The webinar registration form is available here.

On January 25, the CFPB finalized certain changes to the original Final Prepaid Rule (the “Rule”) proposed last summer.  The amended Rule still contains onerous restrictions on credit features and complicated disclosure requirements, but the changes are generally positive for prepaid providers and incorporate feedback from industry representatives.  Importantly, due to concerns about implementation difficulties, the effective date of the Rule, which was originally October 1, 2017 and delayed to April 1, 2018, is now further delayed to April 1, 2019.

The changes reverse two controversial aspects of the original Rule, and make several other changes:

  • Error Resolution and Limitation of Liability. One of the original Rule’s most controversial mandates required error resolution and limited liability protections for unregistered accounts (e., accounts that have not concluded the verification process, accounts where the process is concluded but the consumer’s identity could not be verified, and accounts in programs for which there is no such verification process).  Acknowledging “financial institutions’ fear of fraud losses,” the CFPB changed the Rule to no longer require financial institutions to resolve errors or limit consumers’ liability for unregistered prepaid accounts until after a financial institution successfully completes its consumer identification and verification process.  Notably, the Rule differs from last year’s proposed changes by not requiring financial institutions to limit liability or resolve errors that occurred prior to verification on accounts that are later successfully verified.  If no verification process is available, financial institutions must disclose to consumers the absence of, or limitations on, such protections.
  • Digital Wallets. The amended Rule also narrows the definition of “business partner” under Regulation Z to clarify the Rule’s application to digital wallets and to alleviate burdens for digital wallet providers.  Under the amended Rule, business arrangements between prepaid account issuers and issuers of traditional credit cards are excluded from coverage under the Rule’s hybrid prepaid-credit card provisions as long as
  1. the prepaid card cannot access credit from the credit card account during a prepaid card transaction without written consent to link the two accounts,
  2. the acquisition or retention of either account is not conditioned on whether the consumer authorizes such a connection, and
  3. the parties do not vary certain terms and conditions based on whether the two accounts are linked.

Deviating from last year’s proposal, the Rule now permits digital wallet providers to run negative balances when a covered separate credit feature offered by a business partner is attached to the digital wallet as long as the following requirements are met:

  1. the digital wallet cannot access credit from the covered separate credit feature that is offered by its business partner;
  2. the digital wallet provider has a general policy and practice of declining transactions that will take the account negative (at least outside of the situations involving incidental credit); and
  3. the digital wallet provider generally does not charge credit-related fees.

These changes do not completely exclude digital wallets that can store funds, or person-to-person (“P2P”) payment products from the Rule, but it does ease compliance burdens on digital wallet providers that allow consumers to link their debit and credit cards and to store and access funds.

  • Loyalty, award, and promotional gift cards. The amended Rule clarifies that loyalty, award, or promotional gift cards that are not marketed to the general public are not covered by the Rule, regardless of whether they provide disclosures under the Gift Card Rule.
  • Unsolicited Issuance. Regulation E provides that a financial institution may only issue an access device for an account to a consumer on an unsolicited basis in accordance with certain requirements. The original Rule raised questions about how the unsolicited issuance rules applied where the consumer is given no other option but to receive the disbursement via a prepaid account, such as prison release cards, jury duty cards, and certain types of refund cards.  The amended Rule provides that, under such facts, the financial institution can comply with the unsolicited issuance rule by informing the consumer that there is no other way to access funds in the prepaid account if the consumer disposes of the access device.
  • Pre-Acquisition Disclosures. The CFPB finalized changes that provide additional flexibility regarding the pre-acquisition disclosures mandated by the Rule:
  1. If there are no alternative means for the consumer to receive funds from a prepaid account (other than a payroll card account or government benefit account), pre-acquisition disclosures may be provided at the time the consumer receives the prepaid account.
  2. The original Rule required financial institutions to provide a long form disclosure after a consumer acquires a prepaid account at a retail location. The amended Rule provides that financial institutions may deliver the long form disclosure after acquisition without E-Sign consent, as long as it is not provided inside the prepaid account packaging material, and the financial institution is not otherwise mailing or delivering to the consumer written account-related communications within 30 days of obtaining the consumer’s contact information. The amended Rule does not require a financial institution to provide the long form disclosure if it has not obtained the consumer’s contact information.
  3. Under the amended Rule, if a financial institution provides pre-acquisition disclosures in writing, and a consumer subsequently completes the acquisition process online or by telephone, the financial institution need not provide the disclosures again electronically or orally.
  4. Financial institutions disclosing additional fee types with three or more fee variations are now able to consolidate those variations into two categories and allow those two categories to be disclosed on the short form.
  5. The amended Rule clarifies that foreign language pre-acquisition disclosures for payroll card accounts and government benefit accounts are not required where the foreign language is offered by telephone only via a real-time language interpretation service provided by a third party.
  • Submission of Agreements. To reduce compliance burdens, the amended Rule makes several changes to the original Rule’s requirements requiring submission of prepaid account agreements to the CFPB:
  1. Issuers may delay submitting a change in the names of other relevant parties to a prepaid account agreement (such as employers for a payroll card agreement) until the earlier of: (a) the time the issuer submits an amended agreement or changes to other identifying information; or (b) May 1 of each year, for any updates to the list of names of other relevant parties that occurred between the issuer’s last submission of relevant party information for that agreement and April 1 of that year.
  2. Short form and long form disclosures may be provided as separate addenda to the agreement, rather than integrated into the agreement or provided as a single addendum.

With the announcement of these changes, the CFPB provided an Executive Summary of the amended Rule, and an unofficial redline of the changes.

The preamble to the amended Rule states that the CFPB will submit a report to Congress pursuant to the Congressional Review Act (“CRA”) containing the Rule and other required information, and also states that this is not a major rule under the CRA.  Because the Senate did not previously reject the Prepaid Final Rule under the CRA, and because the amended Rule contains a lot of concessions to industry participants, we think it’s unlikely there will be a significant push for the Rule’s rejection.

The CFPB announced last Thursday that it expects to issue a final rule amending its final prepaid accounts rule “soon after the new year.”  In June 2017, the CFPB issued proposed amendments to the rule.

In its announcement, the CFPB also stated that, as part of that process, it expects to further extend the rule’s effective date.  The CFPB previously extended the rule’s initial October 1, 2017 effective date to April 1, 2018.  In the proposal, the CFPB sought comments on whether the  proposed amendments would make a further extension of the rule’s effective date necessary or appropriate.

The proposal included changes to two of the rule’s particularly controversial aspects: its error resolution and limited liability protections for unregistered accounts and its application to digital wallets.  It also included changes or clarifications regarding: the rule’s coverage of loyalty, award, and promotional gift cards; application of the Regulation E unsolicited issuance rules to certain prepaid cards; delivery of the long form disclosure under the retail location exception; provision of pre-acquisition disclosures; and submission of prepaid account agreements to the CFPB.

The New Jersey Legislature is considering a law to restrict prepaid-account fees.  Assembly Bill 4965 ( the NJ Bill) seeks to impose fee constraints, disclosure mandates, and limits on consumer liability for unauthorized transfers, among other things.  While many aspects of the proposed law mirror the Consumer Financial Protection Bureau’s Final Prepaid Rule (the Bureau’s Prepaid Rule), the NJ Bill’s fee restrictions and disclosure mandates exceed federal requirements set to go into effect on April 1, 2018.  Proposed changes to the Bureau’s Prepaid Rule will likely delay this effective date, however.

Significantly, the NJ Bill regulates the types and amounts of prepaid account fees.  It permits only 13 categories of fees, and limits the amount or frequency of several categories.  For example, a fee for a replacement device may not exceed $5, and a periodic fee may not be charged more frequently than monthly.  The NJ Bill further states that financial institutions “shall not charge” annual fees, overdraft fees, activation fees, point-of-sale fees (including fees for declined transactions), or any other fee not specifically enumerated by the law.  The Bureau’s Prepaid Rule, in contrast, does not contain fee prohibitions, but rather emphasizes upfront disclosures about fees that may be charged.

The NJ Bill’s disclosure requirements also differ from the Bureau’s Prepaid Rule.  Under the NJ Bill, a financial institution that holds a consumer’s prepaid account must provide a consumer with “a table of any fees,” including the amount and description of each fee, that the financial institution may charge for using the prepaid account or making electronic fund transfers.  Significantly, this table of “any” fees must accompany “any application, offer, or solicitation for a prepaid account.”  The Bureau’s Prepaid Rule, in contrast, permits pre-acquisition disclosure of some—but not all—fees in its short-form disclosure, so long as the financial institution also provides information allowing a consumer to access its long form disclosure by telephone or website.

If enacted, the NJ Bill may force prepaid-account issuers to decide whether to offer prepaid products in New Jersey given the fee restrictions and the potential burden of offering special terms to New Jersey consumers.  Indeed, the proposed law authorizes a civil penalty of up to $1,000 per day for each day that a violation persists.

The NJ Bill was introduced on June 8, 2017, by New Jersey Assemblyman Troy Singleton (D) and is pending consideration by the New Jersey Assembly Financial Institutions and Insurance Committee.  It is Assemblyman Singleton’s second attempt to limit prepaid account fees.  In 2012, he co-sponsored a similar bill aimed at limiting prepaid account fees, but that bill died in committee.

The CFPB’s final prepaid card rule has survived Republican efforts to nullify the rule under the Congressional Review Act (CRA).  The CRA establishes a special set of procedures through which Congress can nullify final regulations issued by a federal agency.  While a CRA joint resolution of disapproval must be approved by both Houses of Congress, it cannot be filibustered in the Senate and can be passed with only a simple majority.  In February 2017, joint resolutions were introduced in both the Senate and the House to disapprove the final prepaid card rule under the CRA.

According to Politico, May 11th was the last day for the Senate to pass the Senate resolution with a simple majority.  It was also reported that the House is not expected to vote on the House CRA resolution.

Last month, the CFPB issued a final rule to delay the final prepaid card rule’s effective date by six months, from October 1, 2017 to April 1, 2018.  In the final rule delaying the effective date, the CFPB indicated that it intends to propose changes to the prepaid card rule’s provisions dealing with linking credit cards to digital wallets that are capable of storing funds and error resolution and limitations on liability for unregistered prepaid accounts.  It also indicated that it is continuing to evaluate other concerns raised by industry and other stakeholders, and might address other topics in its proposal.

 

 

 

The CFPB’s Final Rule on prepaid cards includes, in addition to the long form disclosure requirements discussed in our November 21st blog post, highly detailed requirements for providing “preacquisition” disclosures to consumers of the basic terms of the prepaid card account. These “Know Before You Owe” disclosures are set to go into force on October 1, 2017. For consumers who pick up a prepaid card at a retail storefront, these disclosures will appear on the packaging of the card itself, while for consumers who obtain their cards or accounts online, the disclosures will be provided to them electronically. Unlike the long form disclosures, there are no major exceptions to the requirement to provide the short form disclosures prior to opening a prepaid account. And whereas the long form disclosures are intended as a full accounting of the fee programs applicable to an account, the short form disclosures are carefully designed by regulation to highlight what the CFPB has deemed to be the most important fees for consumers in comparing prepaid products.

The short form disclosures can be roughly broken up into two groups: top line and below the line disclosures. The top line disclosures are presented in large text and represent the four key groups of fees that must be disclosed, regardless of whether any fee is being charged. These top line fee disclosures are the “periodic fees” or fees charged on a recurring basis, fees charged on purchases, any fees associated with making ATM withdrawals, and “cash reload” fees. The “cash reload” fee must include all charges imposed by both the financial institution and any third parties.

Below these disclosures are a listing of a few other fees that must also be disclosed, regardless of whether a fee is charged. These second grouping of fees are ATM balance inquiry fees, customer service fees, and inactivity fees.

Next, are a distinct class of “incidental fees.” The disclosure must include a statement of how many other fee types exist for the prepaid account. Although all the remaining fee types need not be listed, the two fee types not already disclosed that generate the highest revenue from the consumer must be, so long as they generate at least 5% of revenue for the prepaid account program.

Whenever the amount of a fee may vary, the rule generally requires that the highest price for that service be disclosed, but the disclosure may include a symbol, like an asterisk, to indicate that the fee may vary. That indication must consist of a statement substantially similar to the phrase “This fee can be lower depending on how and where the card is used.” Similarly, the “periodic fee” may separately include a different symbol indicating what may cause that fee to vary.

Underlying the “incidental fee” disclosure requirement is a 24-month “look-back” assessment period for determining the highest revenue-generating fees, over which the business must renew its calculations for all programs. The revenue calculations may group together types of fees that shared the same schedule. When a program has not been in effect for 24 months at the time the initial assessment must be performed, businesses are expected to make a reasonable projection of future fee generation.

The short form disclosure must also include FDIC insurance disclosure and registration statements. Although the rules go into effect October 1, 2017 with respect to both long and short form disclosures, for cards sold in retail stores, packaging produced “in the normal course of business” prior to that date need not be pulled and replaced, so long as consumers are provided with the disclosures within 30 days of obtaining their account information.

The final Prepaid Card Rule requires not only so-called “packaging” or short form disclosures prior to acquisition of the prepaid card account, but also that a long form disclosure be provided to the consumer. Whereas the short form disclosures are intended to aid in comparison-shopping, the long form disclosure provides the complete, unabridged itemization of fees and program information.

The long form disclosure is required to include: a title, with the name of the prepaid account program; information on fees that may be imposed and the conditions under which they may be imposed; a statement regarding registration and FDIC/NCUA insurance; a statement regarding linked overdraft credit features; a statement containing the financial institution’s contact information; a statement directing the consumer to the CFPB’s website for general information on prepaid accounts; and a statement directing the consumer to the CFPB to submit complaints related to prepaid accounts.

The rule allows some leeway on the requirement that the long form disclosure be provided “preacquisition.” “Preacquisition” occurs generally as when the account is opened, the card is sold to the consumer, or where the consumer agrees to accept payment to the account. For prepaid cards sold at retail locations where the short form disclosures are provided on the packaging, and where the packaging indicates how to access the long form disclosure by phone and through a website, it is permissible to provide the long form disclosure after the card is purchased. Similarly, for a prepaid card account obtained by phone, the business must tell the consumer prior to opening the prepaid account that the long form disclosure is available by phone and on the web. The long form disclosure must then be provided to the consumer after he or she opens the prepaid account and must be made available by phone and online.

Notably, when disclosures are provided electronically, there is no need to comply with the full requirements of E-Sign, and the company may provide the disclosures to the consumer without E-Sign consent, generally in a manner that is reasonable based on how the consumer opened the account and in a manner that the consumer may keep.

While the original draft rule required that the long form disclosure appear “substantially similar” to the CFPB’s sample disclosure, that requirement was dropped from the final rule due to the wide variety of different structures and account conditions that a financial institution may have in place. The sample now serves as a template for, but not a firm requirement, as to how the long form disclosure must be designed.

The CFPB has issued its October 2016 complaint report which highlights complaints about prepaid cards and complaints from consumers in North Carolina and the Charlotte metro area.  The CFPB began taking prepaid card complaints in July 2014.

Earlier this month, the CFPB issued its long-anticipated final rule for general purpose prepaid accounts.  On November 17, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Final Prepaid Cards Rule.”  A link to register is available here.

General findings include the following:

  • As of October 1, 2016, the CFPB handled approximately 1,008,500 complaints nationally, including approximately 26,400 complaints in September 2016.
  • Although debt collection continued to be the most-complained-about financial product or service in September 2016, representing about 28 percent of complaints submitted, the number of debt collection complaints received by the CFPB in September 2016 was 24% less than the number of complaints received in August 2016.  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 63 percent of the complaints submitted in September 2016.
  • Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 96 percent from the same time last year (July to September 2015 compared with July to September 2016).  In February 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.  As we have noted in blog posts about prior complaint reports issued beginning in April 2016, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects the change in where such complaints are sent.
  • Payday loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 21 percent from the same time last year (July to September 2015 compared with July to September 2016).  Complaints during those periods decreased from 458 complaints in 2015 to 363 complaints in 2016.  In the complaint reports for March through September 2016, payday loan complaints also showed the greatest percentage decrease based on a three-month average.
  • New Mexico, Colorado, and Wyoming experienced the greatest complaint volume increases from the same time last year (July to September 2015 compared with July to September 2016) with increases of, respectively, 28, 24, and 24 percent.
  • Maine, Idaho, and Rhode Island experienced the greatest complaint volume decreases from the same time last year (July to September 2015 compared with July to September 2016) with decreases of, respectively, 34, 25, and 21 percent.

Findings regarding prepaid card complaints include the following:

  • The CFPB has handled approximately 6,000 prepaid card complaints, representing about 0.6 percent of total complaints.
  • Consumers frequently complained about the posting of questionable transactions and the cancellation of cards without notice after submitting a dispute.  Consumers complained about requests for submission of validating documents when purchases were declined, claiming such documents were frequently not in the consumer’s possession and difficult to obtain.
  • Consumers complained about being unable to activate or access funds on cards received as a refund.
  • Consumers reported that companies sometimes issued cards without proper verification resulting in the theft of their funds and complained of delayed credits after notifying the company of fraudulent or unauthorized charge or after the return or cancellation of a purchase.
  • Consumers complained of balance discrepancies, particularly when they were unable to check balance and transaction histories online or when not provided with statements.

Findings regarding complaints from North Carolina consumers include the following:

  • As of October 1, 2016, approximately 27,600 complaints were submitted by North Carolina consumers of which approximately 29 percent (about 8,000) were from Charlotte consumers.
  • Mortgages were the most-complained-about product, representing 27 percent of all complaints submitted by North Carolina consumers and, on a national basis, 25 percent of all complaints submitted by consumers.
  • Average monthly complaints received from North Carolina consumers increased 13 percent from 2014 to 2015, higher than the increase of 8 percent nationally.

 

The CFPB has issued its long-anticipated final rule for general purpose prepaid accounts.  As expected, the new regulations expand the products covered by Regulation E, introduce significant new disclosure requirements, extend consumer liability protections to prepaid accounts and add onerous requirements for accounts with overdraft or credit features.  Many industry participants have already expressed disappointment with the CFPB’s decision to apply Regulation Z requirements to the overdraft features of prepaid accounts.  Digital wallet providers and others working on digital product innovations also have concerns.  The effective date for most requirements in the new regulations is October 1, 2017.

On November 17, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Final Prepaid Cards Rule.”  A link to register is available here.

We have prepared a legal alert that discusses key components of the final rule (which weighs in at 1689 pages) based on our initial review.  Once we complete our analysis of the rule, we will be publishing a series of posts focusing on key provisions, such as the rule’s treatment of overdraft and credit features and its coverage of digital wallets and P2P accounts.