Prepaid Cards

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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.

The CFPB released a report, “Tools for saving: Using prepaid accounts to set aside funds,” that presents the results of a research project involving a pilot program offering an incentive to prepaid card users to use a savings feature.

In December 2014, as part of its Project Catalyst, the CFPB’s initiative for facilitating innovation in consumer-friendly financial products and services, the CFPB announced a new research pilot program using insights from behavioral economics and an American Express pilot program to evaluate the effectiveness of certain practices to encourage prepaid card users to develop regular saving behavior.

From January to March 2015, American Express launched a pilot program to encourage prepaid card users to use a feature that allows users to set money aside dedicated for savings and keep it separate from funds in their main prepaid account. The trial program included about 540,000 prepaid card users, with certain of such users receiving various forms of encouragement to sign up for the savings feature. The company used four strategies consisting of emails highlighting the benefits of savings, direct mail sending a refrigerator magnet highlighting the benefits of savings, an offer of $10 if an individual saved $150 by March 31, and encouragement to use an automatic transfer feature they could sign up for.

The project findings included the following:

  • The  $10 incentive was highly effective in encouraging card users to enroll in the savings feature.
  • Usage of the savings feature was tracked for nine months after the three-month pilot program ended.  The study found that for customers still using the savings feature, savings balances generally did not decrease after the pilot ended.
  • Users who were offered the $10 incentive reported significantly less payday loan use than those who were not offered the incentive.

The CFPB has released its Spring 2016 rulemaking agenda.  The agenda sets the following timetables for key rulemaking initiatives: 

Arbitration.  The Spring 2016 agenda does not reflect the CFPB’s release of its proposed arbitration rule on May 5, 2016, stating only that the CFPB “is preparing to issue a Notice of Proposed Rulemaking this spring.”  The CFPB’s proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.  We do not expect to see a final rule until next year.

Payday and deposit advance loans.  The Spring 2016 agenda also does not reflect the CFPB’s announcement that it will hold a field hearing on small dollar lending in Kansas City, Missouri on June 2, 2016.  We anticipate the field hearing will coincide with the CFPB’s release of its proposed rule which is expected to cover single-payment payday and auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  The Spring 2016 agenda indicates only that the CFPB is “conducting a rulemaking to address consumer harms from practices related to payday loans and other similar credit products” and gives a June 2016 estimated date for issuance of a Notice of Proposed Rulemaking (NPRM).

Prepaid financial products.  In November 2014, the CFPB issued a proposed rule for prepaid financial products, including general-purpose reloadable prepaid cards and certain digital and mobile wallets.  The Spring 2016 agenda estimates the issuance of a final rule in July 2016.  The Fall 2015 agenda had estimated that a final rule would be issued in March 2016.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Fall 2015 agenda had estimated a January 2016 date for further prerule activities, the new agenda moves that date to August 2016.  In light of the fact that most of the banks subject to CFPB supervisory jurisdiction have changed the order in which they process electronic debits, we believe the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process such debits.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that “it is in the process of analyzing responses to a survey seeking information from consumers about their experiences with debt collectors and is engaged in qualitative testing to determine what information would be useful for consumers to have about debt collection and how that information should be provided to them.”  The agenda estimates that further prerule activities, which are expected to involve the convening of a SBREFA panel, will occur in June 2016.  The CFPB had estimated in its Fall 2015 agenda that further prerule activities would occur in February  2016.

Larger participants.  As it did in its Fall  2015 agenda, the CFPB states in the Spring 2016 agenda that it is considering  “larger participant” rules for “consumer installment loans and vehicle title loans.”  It also repeats the statement in the Fall 2015 agenda that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  While the prior agenda estimated a September 2016 date for prerule activities, the new agenda estimates a December 2016 date.

Small business lending data.  Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  The Spring 2016 agenda estimates a December 2016 date for prerule activities.  We recently reported that the CFPB had filled the position of Assistant Director for the Office of Small Business Lending Markets.  The CFPB’s job posting indicated that the Assistant Director would head the CFPB’s team involved in developing rules to implement Section 1071.  In the Spring 2016 agenda, the CFPB states that it “will focus on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and appropriate procedures, information safeguards, and privacy protections for information-gathering under this section.”

Mortgage rules.  In November 2014, the CFPB issued a proposal to amend various provisions of its mortgage servicing rules.  The Spring 2016 agenda estimates issuance of a final rule in July 2016.  The previous agenda had estimated a June 2016 date.  The new agenda also estimates a September 2016 date for issuance of a proposed interagency rule to implement Dodd-Frank amendments to FIRREA concerning appraisals.  The previous agenda had estimated an April 2016 date.  In April 2016, the CFPB announced its intention to reopen the rulemaking for the TILA/RESPA Integrated Disclosure rule.  At that time, the CFPB indicated that a NPRM would likely be issued in late July and, consistent with that timetable, the Spring 2016 agenda estimates a July 2016 date for a NPRM.

Student Loan Servicing and Consumer Reporting.  As they were in the Fall 2015 agenda, both of these topics continue to be listed as “long-term action” items in the Spring 2016 agenda.

 

Politico has reported that the CFPB is not expected to issue a final prepaid card rule until this May or June “according to two sources familiar with the talks.”

In November 2014, the CFPB issued a proposed rule for prepaid financial products, including general-purpose reloadable prepaid cards and certain digital and mobile wallets.  The CFPB’s Fall 2015 rulemaking agenda estimated the issuance of a final rule in March 2016.