The CFPB has proposed to delay the effective date of the final rule governing Prepaid Accounts from October 1, 2017 to April 1, 2018. The CFPB’s action is a direct response to ongoing dialogue between companies in the prepaid industry and the CFPB staff. The CFPB proposal to delay the effective date has a twenty-one (21) day comment period from publication of the proposal in the Federal Register.

The Prepaid Account Rule covers a broad range of products – from reloadable cards offered through retail locations to digital-only accounts. One of the specific industry concerns cited by the CFPB in their proposal is challenges with the “pull and replace” of non-compliant packaging of card product in retail locations. The CFPB also noted that industry participants have “raised concerns about what they describe as unanticipated complexities arising from the interaction of certain aspects of the rule with certain business models and practices.”

The Prepaid Account Rule is also facing numerous challenges from Congress. We wrote last month that Senator David Perdue (R-Ga) had introduced a joint resolution that could lead to nullification of the rule. In addition, Representatives Tom Graves (R-Ga) and Roger Williams (R-Tx) have introduced House Joint Resolution 62 and House Joint Resolution 73, respectively, disapproving of the final rule.

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.

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.

On December 2, 2015, the CFPB denied a petition for modification of a Civil Investigative Demand (CID) filed by UniRush, LLC.  In doing so, the CFPB reinforced its view that such petitions are disfavored.  However, in denying the petition, the CFPB actually gave UniRush the relief it sought – additional time to provide a proposed production schedule – by ordering UniRush to provide the requested production schedule within 10 days of the order denying the petition.

The CID UniRush sought to modify contained 56 requests.  The CFPB issued the CID on October 27, 2015, with a response date of November 10, 2015 – merely two weeks after service.  Based on our review of UniRush’s petition and the attached correspondence, UniRush appears to have made an effort to meet and confer with the CFPB regarding the scope of the CID and its need for additional time to respond.  However, according to the CFPB’s order denying the petition, the problem that led to the petition was that UniRush never outlined a plan for completing its production in response to the CID.

We know from our prior CID investigations that the CFPB expects a high degree of specificity in connection with requests to modify CIDs, routinely requesting information relating to when specific requests will be responded to, dates by which productions will begin and end, etc.  However, here, it was exactly that information that UniRush could not provide because it needed time to interview the custodians regarding the sources of responsive information and formulate a realistic production plan.  Therefore, UniRush was in a difficult position in that it simply could not provide the information it needed to the CFPB in order to obtain the requested relief.

Notably, even in denying the petition, the CFPB did provide UniRush some of what it originally requested – time to complete its investigation and an opportunity to further confer on the scope and timing of its response.  Hopefully, this is because the CFPB recognizes the position UniRush was put in as a result of the short response date.  At the end of the day, consumers and companies alike are best served by efficient, streamlined investigations that avoid formulaic, position-based responses from either side that can contribute to delay and confusion.

In its new report containing its findings from a survey of prepaid card users, The Pew Charitable Trusts urges the CFPB’s “speedy adoption” of its proposed prepaid card rule.  The CFPB’s proposal, which would mandate new disclosures, error resolution procedures, consumer liability limits for unauthorized transactions, fee limits, and added requirements for cards with overdraft or credit features, was issued in November 2014.  In its Spring 2015 agenda, the CFPB indicated that it expects to issue a final rule in January 2016.

The Pew report states that its findings are based on “a nationally representative telephone survey of [general purpose reloadable] prepaid cardholders—defined as adults who use these cards at least once a month.”  Among the report’s key findings are that:

  • Prepaid card use is becoming more common, with use jumping by more than 50 percent between 2012 and 2014
  • Unbanked prepaid cardholders use their prepaid cards more like traditional checking accounts and to manage their budgets, checking their balances more regularly, reloading more frequently, and registering their cards more often than banked cardholders do
  • Most prepaid card users do not want the option to overdraw their accounts
  • Most users do not know whether their liability for fraudulent use is limited, funds are FDIC-insured, or cards have arbitration clauses

According to Pew, its findings “demonstrate the need for the [CFPB] to finalize its proposed rules on prepaid cards.”  Pew “commends the CFPB for the proposed rule” and states that it “would promote clear disclosure and ensures protections that limit liability for unauthorized transactions and ban high-cost credit products.”

Among the issues highlighted in comments on the proposal submitted by industry are the difficulties industry members would face in implementing the proposal’s new disclosure requirements as well as the vagueness of other new requirements.  We are hopeful that the CFPB’s timetable is an indication that the CFPB is giving careful consideration to these comments.

 

The American Bankers Association has submitted a 46-page comment letter on the CFPB’s proposed prepaid card rule.

In the letter, the ABA makes the following key comments:

  • Additional clarity is needed in the definition of the term “prepaid account” to avoid banks being subject to second-guessing by examiners and plaintiffs’ attorneys.  The ABA recommends that the CFPB narrow the definition of prepaid account to cover an account whose underlying funds are only accessed through a card (or card number) that is processed through the card networks.
  • The proposed treatment of overdrafts linked to prepaid accounts as open-end credit under Regulation Z is contrary to law because TILA’s definition of “credit” clearly excludes overdrafts, which convey no “right to defer” payment, the essential characteristic of credit under TILA.
  • The proposal amounts to an effective ban on offering overdraft services or credit through a prepaid card because of the operational and compliance costs and risks.  As a result, it will harm consumers by limiting consumer access to overdraft services and credit.  The proposal also hobbles efforts of banks to offer small-dollar affordable credit as an alternative to nonbank small-dollar loans such as payday loans.
  • The proposal will even affect prepaid cards that do not offer overdraft services because it transforms prepaid cards into credit cards if any fee is charged when the account is in overdraft status—even if the overdraft is unavoidable, for example, when a deposited check is returned unpaid or the final card transaction exceeds the amount authorized.  Although ABA member banks that offer prepaid cards generally do not offer overdraft or credit services with their prepaid cards, the proposal exposes them to new operational and compliance risks associated with application of the proposed credit and overdraft rules to their current products.  The new regulatory risks and costs may cause these banks to withdraw from the market for prepaid products and the ABA anticipates that the proposal will make other banks, particularly community banks, reluctant to enter the market.
  • By significantly hindering banks’ ability to offer prepaid cards, the proposal will suppress the opportunity for prepaid cards to serve as a promising “bank account” alternative for low-income customers or those without bank accounts.
  • By allowing holders of prepaid accounts to overdraw an  account and avoid not only overdraft fees, but potentially any fee, including those regularly assessed on the account, the proposal will cause prepaid cards to lose their usefulness as a starting ramp to greater financial responsibility and increased access to banking services.  Instead of encouraging customers to improve their financial management skills, the prepaid account contemplated by the CFPB’s proposal would send a message that there are few adverse consequences to overspending or not managing finances.  Consumers, in the long term, will be ill-served by this message as it will lead to poor financial decisions with regard to bank accounts and other financial products.

The ABA also urges the CFPB to set an effective date that is no sooner than 18 months after adoption of a final rule rather than nine months after adoption as the CFPB has proposed.

Kelly Cochran, CFPB Assistant Director for Regulations, addressed the CFPB’s prepaid card rulemaking in a January 12 presentation to the American Bar Association Consumer Financial Services Committee in New Orleans.  She acknowledged the complexity of the CFPB’s proposal and difficult choices facing the CFPB and encouraged the submission of comments on the proposal.

We are largely supportive of the proposal.  However, the Q&A following the presentation gave us the opportunity to informally comment on two of our concerns:

  • Language and Terminology: The language of the proposed rule and commentary is opaque.  Thus, for example, there are repeated references to “credit cards under Regulation Z where extensions of credit are permitted to be deposited directly only into particular prepaid accounts specified by the creditor” (with minor variations).  Why not simply use a shorthand reference to “account number credit cards” or like language?  Such a change would dramatically improve readability.
  • Treatment of Linked Credit Plans:  Short of prohibiting entirely all extensions of credit in connection with prepaid cards, the CFPB’s proposal would seem to have done all it could to erect as many obstacles as possible to such credit extensions.  These restrictions threaten to deny consumers access to credit programs with manifest consumer benefits, such as a “hybrid” prepaid-credit card that would allow access, at a consumer’s request, to a low-rate overdraft credit line that might be far cheaper than other credit alternatives.

The CFPB’s rationale that most consumers have said that they want prepaid cards without credit features is unpersuasive.  The needs of these consumers are fully addressed by the CFPB’s proposed requirement that consumers must affirmatively opt-in if they want credit features in conjunction with prepaid cards.  Even if they are in the minority, the substantial numbers of consumers who want credit with prepaid cards should not be denied the opportunity.

Obviously, the CFPB and the consumer advocates who have so much influence over the CFPB are concerned about high-cost, short-term credit.  That concern should be addressed directly in the upcoming payday lending rulemaking and not through unnecessary and counter-productive restrictions in the prepaid card rule.

There is much of value in the proposed prepaid card rule.  Hopefully, the comment process will result in an even better final rule.

 

With the publication of the CFPB’s proposed prepaid card rule in today’s Federal Register, the clock is now running on filing comments.  Comments must be filed on or before March 23, 2015.  The CFPB had issued the proposal on November 13.  As published in the Federal Register, the proposal is reduced from its original length of 870 pages to a “mere” 234 pages.

For a summary of the proposal, see our legal alert.

Departing from its past practice, the CFPB has announced that it will hold a field hearing in Wilmington, Delaware on November 13 but has not yet disclosed what the hearing will be about.  Instead, the announcement says only that “[m]ore information about the event will follow.”  It also contains the standard statement that the event will feature remarks from Director Cordray, as well as testimony from consumer groups, industry representatives, and members of the public.

Since the CFPB typically uses field hearings as a backdrop for announcing new developments, we think the November 13 field hearing is likely to coincide with the CFPB’s release of a proposed rule for prepaid cards.  In his June 2014 appearance before the Senate Committee on Banking, Housing and Urban Affairs, Director Cordray stated that the proposal would likely be issued at the end of the summer.  However, a recent Bloomberg article by Carter Dougherty and Jesse Hamilton suggested a November release date for the proposal.