CFPB Proposes Rule and Model Forms for Prepaid Cards | Practical Law

CFPB Proposes Rule and Model Forms for Prepaid Cards | Practical Law

On November 13, 2014 the Consumer Financial Protection Bureau (CFPB) proposed a rule that would require prepaid credit card issuers to follow many of the existing protections established under the Truth in Lending Act and the Credit Card Accountability Responsibility and Disclosure Act.

CFPB Proposes Rule and Model Forms for Prepaid Cards

Practical Law Legal Update 1-588-5805 (Approx. 4 pages)

CFPB Proposes Rule and Model Forms for Prepaid Cards

by Practical Law Finance
Published on 21 Nov 2014 • USA (National/Federal)
On November 13, 2014 the Consumer Financial Protection Bureau (CFPB) proposed a rule that would require prepaid credit card issuers to follow many of the existing protections established under the Truth in Lending Act and the Credit Card Accountability Responsibility and Disclosure Act.
On November 13, 2014 the Consumer Financial Protection Bureau (CFPB) proposed a rule that would require prepaid credit card issuers to follow many of the existing protections established under the Truth in Lending Act (TILA) and the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), which amended TILA as required by the Dodd-Frank Act. For a discussion of the CARD Act, see Practice Note, Key Provisions of the Credit Card Act. For a discussion of the consumer regulations that currently apply to prepaid cards, see Practice Note, Consumer Regulations Governing Prepaid Cards.
The proposed rule would adopt a new definition of "prepaid account" within the Electronic Fund Transfer Act (EFTA) and its implementing Regulation E, as well as adopt comprehensive consumer protection rules for those accounts. For a discussion of the EFTA, see Practice Note, Electronic Fund Transfer Act: Key Provisions.
Under the proposed rule, Regulation E protections would cover prepaid accounts that are cards, codes or other devices established primarily for personal, family or household purposes, and are:
  • Either issued on a prepaid basis to a consumer in a specified amount, or not issued on a prepaid basis but capable of being loaded with funds thereafter.
  • Usable at multiple, unaffiliated merchants, at automated teller machines or for person-to-person transfers.
  • Not gift certificates, loyalties, awards, promotional gift cards or general use prepaid cards that are both marketed and labeled as gift cards or gift certificates.
The term prepaid account would include payroll card accounts and government benefit accounts.
The proposed rule would modify the disclosure requirements of Regulation E, as they pertain to prepaid cards, by:
  • Requiring financial institutions to make certain disclosures available to consumers before a consumer agrees to acquire a prepaid account. These proposed disclosures would take two forms, and may be provided in oral, written or electronic form:
    • a short form highlighting key fees that the CFPB believes are most important for consumers to know about prior to acquisition; and
    • a long form setting forth all of the prepaid account's fees and the conditions under which those fees may be imposed.
  • Extending to all prepaid accounts the existing Regulation E requirements regarding the provision of transaction information to account-holders. These provisions would allow financial institutions to either provide periodic statements or, alternatively, make available to the consumer:
    • the account balance, through a readily-available telephone line;
    • an electronic history of account transactions that covers at least eighteen months; and
    • a written history of account transactions that covers at least eighteen months upon request.
  • Requiring financial institutions to disclose monthly and annual summary totals of all fees imposed on a prepaid account, as well as the total amount of all deposits to and debits from a prepaid account when providing a periodic statement or electronic or written account history.
  • Adopting error resolution and limited liability provisions specific to prepaid accounts.
  • Prohibiting the requirement that a consumer establish an account for receipt of government benefits.
To facilitate compliance, the CFPB is proposing model forms and sample forms, as well as revisions to existing Regulation E model forms and model clauses to provide model language.
The proposed rule would also modify Regulation E and TILA's implementing Regulation Z to address the treatment of overdraft services and other credit features organized in connection with prepaid accounts. Regulation Z would be modified so that:
  • Prepaid account issuers that offer overdraft services or other credit features in connection with those accounts and charge a fee for the service generally would be subject to Regulation Z's credit card rules and disclosure requirements for open-end consumer credit plans.
  • The credit card rules in Regulation Z would apply to separate lines of credit linked to prepaid accounts.
  • A consumer would receive a periodic statement not more often than once per month and then have at least 21 days to repay the debt the consumer incurred in connection with using the overdraft service or credit feature.
  • An issuer would be prohibited from requiring, as terms of the credit feature, that it could immediately take incoming payments to a prepaid account, such as cash loads or direct deposits, to repay and replenish the credit line.
The overdraft provisions of Regulation E would be modified so that prepaid account issuers would be:
  • Prohibited from requiring consumers to set up preauthorized electronic fund transfers to repay credit extended through an overdraft service or credit feature.
  • Restricted from applying to a consumer's prepaid account different terms and conditions such as charging different fees for accessing funds in a prepaid account, depending on whether the consumer elects to link the prepaid account to an overdraft service or account feature.
With regard to unauthorized charges on prepaid accounts, the proposed rule would provide that, if a consumer provides timely notice to the financial institution within two business days after learning of the loss or theft of the prepaid account's access device, the consumer's liability would be the lesser of:
  • $50.
  • The amount of unauthorized transfers made before giving notice.
If the consumer does not provide timely notice of unauthorized charges on the prepaid account, the proposed rule would provide that the consumer's liability would be the lesser of:
  • $500.
  • The sum of:
    • the lesser of $50 or the amount of unauthorized transfers occurring within two business days of learning of the loss/theft; and
    • the amount of unauthorized transfers that occur after two business days but before notice is given to the financial institution.
The proposed rule also would limit the total amount of fees a consumer may be required to pay with respect to a credit card account under an open-end consumer credit plan during the first year after account opening to 25% of the credit limit in effect when the account was opened. The following would not be subject to the 25% restriction:
  • Late payment fees.
  • Over-the-limit fees.
  • Returned-payment fees.
  • Fees that the consumer is not required to pay with respect to the account.
Under the proposed rule, a financial institution may not condition an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance on the consumer's account. It would also prohibit issuers from extending credit in relation to a prepaid account to a consumer without assessing the consumer's ability to pay. The proposed rule includes special regulations for the extension of credit to consumers below the age of 21.
The proposed rule will be open for comment for 90 days after publication in the Federal Register.