I. INTRODUCTION
The Consumer Financial Protection Bureau (CFPB) has issued a final rule establishing new consumer compliance requirements for prepaid accounts pursuant to Regulations E and Z. These requirements govern disclosures, limited liability and error resolution protections, credit features, and making account agreement information publicly available for prepaid accounts, among other provisions. Prepaid card issuers are also required to submit to the CFPB and to post to their websites any new and revised prepaid card account agreements.
The prepaid account rule’s effective date has been extended to April 1, 2019.
II. REGULATION E AMENDMENTS
The final rule amends Regulation E, among other things, by:
A. Expanding coverage to prepaid accounts
Under the final rule, Regulation E requirements generally apply to prepaid accounts, which are defined as:
o payroll card accounts;
o government benefit accounts;
o accounts marketed or labeled as “prepaid”; and
o redeemable upon presentation at multiple, unaffiliated merchants for goods and services or usable at automated teller machines (ATMs).
o accounts whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, to conduct transactions at automated teller machines, or to conduct person-to-person transfers.
o an account that is issued on a prepaid basis in a specified amount or is capable of being loaded with funds after issuance, whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services or to conduct transactions at automated teller machines and is not a checking account, share draft account or a negotiable order of withdrawal account.
Since Regulation E only applies to transactions that are for consumer, family, or household purposes, prepaid cards issued for non-consumer purposes are not covered by Regulation E. In addition, the Rule expressly excludes certain other accounts from its coverage. The exclusions include the following:
o an account that is loaded by a third party with qualified disaster relief payments.
o gift certificates, store gift cards, loyalty, award or promotional gift cards.
o cards that are marketed and labeled as gift cards or gift certificates, even if they are general-use prepaid cards.
o benefit cards such as those that are loaded with funds from a health or medical savings account, flexible spending or health reimbursement arrangements, and transit reimbursement arrangements.
o an account established for distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency.
B. Establishing disclosure standards for prepaid accounts
The final rule requires pre-acquisition "short form" and "long form" disclosures that must be substantially similar to the CFPB's Model Forms. Collectively, these disclosures must include all fees that may be imposed, conditions under which fees may be imposed, waived, or reduced, and language describing the account's eligibility for deposit insurance. (Model Forms may be accessed at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/102016_cfpb_PrepaidDisclosures.pdf )
Whether the long form disclosures must be provided before acquisition depends on how the account is acquired. For example, for an account acquired at a retail store or by phone, the financial institution need not provide the long form disclosure before acquisition so long as the short form explains how the consumer may access the long form disclosure via telephone and on a website, and certain other requirements are met. For prepaid accounts acquired online or through a mobile device, the financial institution must provide the pre-acquisition disclosures (both short and long form) electronically and may do so without E-Sign consent.
1. Contents of the short form
The short form disclosure must include certain fees and other information about the prepaid account. Regarding fees, the short form requires disclosure of “static fees,” “revenue-based fees,” and other information as follows:
Static fees, which are fees that all prepaid accounts must list on the short form, even if the fee amount is zero and/or even if the fee is for a feature that is not offered for that specific prepaid account program:
The short form must also include the number of fee types that may be imposed under the particular program, in addition to the static fees (excluding any purchase price, any activation fee, and any finance charges related to credit).
Revenue-based fees are fees that generate the most revenue in the previous 24 months. With limited exceptions, the short form must include the two additional fee types that generated the highest revenue from consumers during the previous 24 months for the specific prepaid account program, or across programs with the same fees schedule. In identifying these fees, the financial institution must not include any of the static fees, any purchase price, activation fee, finance charges related to credit, and fee types that generated less than 5 percent of the total revenue from consumers. Financial institutions will need to review fee revenue periodically and may need to update the short form disclosure every 24 months.
Other information that must be on the short form: Statements regarding linked overdraft credit features, registration and FDIC insurance, the URL for the CFPB’s website information about prepaid accounts (cfpb.gov/prepaid), and where the consumer can find the long form disclosure.
2. Disclosures “outside” the short form disclosure
Except when a card is acquired in a retail store, the financial institution must make certain information available “outside” and “in close proximity to” the short form disclosure. If the card is acquired in a retail store, the information must be provided on the outside of the packaging material. The information that must be provided includes the financial institution’s name, the name of the prepaid account program, any purchase price for the prepaid account (except when the card is acquired in a retail store), and any fee for activating the prepaid account. It is not entirely clear what the “name of the prepaid account program” is. A single issuer may want to brand programs with different names even when the underlying program is the same.
3. The long form disclosure
The long form disclosure must be provided before acquisition except in the phone and retail circumstances discussed above. The long form must include:
4. Foreign language requirements for pre-acquisition prepaid account disclosures
The final rule requires financial institutions to provide pre-acquisition disclosures in the language the financial institution used in connection with the consumer’s acquisition of the account. For example, if the prepaid card is packaged in material that includes Spanish advertising, the solicitation for the account is in Spanish, or the institution provides the means for a consumer to acquire the account by telephone or online using Spanish, then the pre-acquisition disclosures must be provided in Spanish. However, the final rule does not require the pre-acquisition disclosures to be provided in a foreign language “if the financial institution principally uses that foreign language in person.”
5. New disclosures on devices or entry points are required
If a consumer may access the prepaid account using a card or another physical access device, the final rule requires financial institutions to make certain disclosures on the device. If there is no physical access device, then the financial institution must include the disclosures on the website, mobile application, or other entry point the consumer uses to electronically access the prepaid account. The disclosures include the name of the financial institution, website, and telephone number.
C. Applying error resolution and limited liability protections to prepaid accounts
According to the final rule, prepaid accounts are covered by the same error resolution requirements and limitations on liability as checking accounts, with the potential exception of provisional credit. Under Regulation E, when consumers report disputes within established timeframes, financial institutions are required to provide provisional credit to consumers when investigations last longer than 10 days. Prepaid accounts that have not been registered and verified do not qualify for provisional credit. However, if an unverified account is subsequently verified, provisional credit applies retroactively.
D. Periodic statements
The final rule requires financial institutions to provide periodic statements for prepaid accounts for each monthly billing cycle in which an electronic funds transfer (EFT) has occurred and in any case at least quarterly. Periodic statements must provide detailed information about each EFT, as well as account balance and fee information. However, the Rule permits an alternative to the periodic statement. The alternative is to provide the consumer with account balance information (by phone), as well as electronic account transaction histories covering at least the 12 months preceding the date on which the consumer electronically accesses the prepaid account; and written account transaction histories (upon request), covering at least the 24 months preceding the consumer’s request. The alternative account transaction histories also are required to have a summary of all fees assessed by the bank against the account for the prior calendar month and for the calendar year-to-date, among other things.
E. Posting prepaid account agreements available to the general public
The final rule requires issuers to post their account agreements on their websites. If a prepaid account agreement is not posted on the issuer’s website, the issuer must provide a consumer with a copy of the consumer’s prepaid account agreement no later than five business days after the issuer receives the consumer’s request for the agreement. The consumer must be able to request the agreement by phone.
Additionally, issuers are required to submit account agreements to the CFPB for posting on a public, CFPB-maintained website no later than 30 days after the issuer offers, amends, or ceases to offer the agreement. Exceptions can be made for issuers with fewer than 3,000 open prepaid accounts. An issuer must make these submissions to the CFPB no later than October 31, 2018, for all prepaid account agreements it offers as of October 1, 2018.
III. REGULATION Z AMENDMENTS
The final rule amends Regulation Z, among other things, by:
A. Defining hybrid prepaid-credit cards
With limited exceptions, the final rule classifies prepaid accounts that offer covered credit features as hybrid prepaid-credit cards. Credit features may be offered by the prepaid account issuer, its affiliate, or its business partner, and may provide access to a separate credit account or to a credit sub-account to the asset account. According to the final rule, hybrid prepaid-credit cards are covered by Regulation Z and related credit card rules. Certain fees charged to a hybrid prepaid-credit card are considered finance charges. The final rule prohibits a card issuer from opening, soliciting, or providing an application for credit until 30 days after the prepaid account has been registered. Furthermore, the final rule also prohibits linking an existing credit feature until 30 days after the prepaid account has been registered.
A prepaid card is a hybrid prepaid-credit card if:
In addition, a prepaid card is a hybrid prepaid-credit card if it is a single device that can be used from time to time to access credit through a negative balance on the prepaid account’s asset feature, except in force pay transactions and other situations where incidental credit is extended as a negative balance on the prepaid account’s asset feature. To qualify for this exception, the following requirements must be met:
B. Protections that apply to hybrid prepaid-credit cards
Hybrid prepaid credit cards are subject to several protections under Regulation Z. First, issuers must observe a 30 day cooling off period after the prepaid account is registered before soliciting a consumer to link a covered separate credit feature to a prepaid account. Even then, the issuer must obtain the consumer’s consent to link such a credit feature to the prepaid account. Second, issuers must assess the card holder’s ability to repay the credit. Third, issuers may not deduct all or part of the cardholder’s debt on a covered separate credit feature automatically from the prepaid account or other deposit account held by the card issuer more than once a month. The cardholder must provide a signed written authorization before any automatic deduction can be made. Fourth, the issuer must give consumers at least 21 days to repay the debt incurred in connection with the use of the covered separate credit features. Finally, issuers are prohibited from requiring consumers to set up preauthorized electronic fund transfers to repay credit extended through covered separate credit features.
Under the final rule, a covered separate credit feature accessible by a hybrid prepaid-credit card is not an “overdraft service” for purposes of Regulation E. Therefore, financial institutions will not provide opt-in notices under Regulation E for covered separate credit features accessible by hybrid prepaid-credit cards, but will need to comply with Regulation Z.
Generally, a financial institution that provides a prepaid account with a covered separate credit feature must provide the same account terms, conditions, and features to prepaid accounts without a covered credit feature in the same prepaid account program. However, the financial institution may impose higher fees or charges on a prepaid account with a covered separate credit feature.
C. Prohibiting offsets
The final rule prohibits a card issuer from automatically deducting all or part of the cardholder's hybrid prepaid-credit card debt from a deposit account held with the card issuer more frequently than once per calendar month. Such periodic deductions must be authorized in writing.
D. Prohibiting declined transaction fees
According to the final rule, card issuers must not impose a fee when there is no dollar amount associated with the violation, such as for transactions that the card issuer declines to authorize.