CFPB’s NPR Proposes Detailed Requirements for Prepaid Providers
On November 13, 2014, the Consumer Financial Protection Bureau (“CFPB”) issued a Notice of Proposed Rulemaking (“NPR”) proposing new federal rules for prepaid accounts. The NPR contains extremely detailed requirements regarding required disclosures, consumer protections, and credit features. Moreover, the products covered by these requirements are extremely broad, encompassing not only many current prepaid products, but also products that heretofore were not considered to be subject to prepaid regulations. The detailed nature of these requirements, along with their breadth of application, may result in a decrease in the innovation that has been a hallmark of the prepaid industry. Below is a summary of the major requirements proposed in the NPR and analysis of their likely impact on prepaid providers.
The NPR covers a broad range of products. These products include traditional prepaid accounts not otherwise covered under the Credit Card Accountability Responsibility and Disclosure Act (“CARD Act”) and accounts that allow for person-to-person transfers of funds, such as PayPal. The coverage of accounts providing person-to-person transfers is notable because there was no indication that such accounts would be covered in the Advanced Notice of Proposed Rulemaking issued by the CFPB two years ago. Providers of such services will therefore have to scramble to assess the impact of the NPR on their operations and determine how best to comply.
Such compliance will include adherence to detailed disclosure requirements. Specifically, the NPR requires providers of prepaid accounts to provide short-form and long-form disclosures prior to a consumer opening a prepaid account. Notably, if the prepaid account is acquired in a retail store or over the telephone, only the short-form disclosure needs to be provided, so long as the long-form is available via telephone or online. Both the short-form and long-form disclosures require a detailed listing of the fees charged, and in many cases not charged, for the prepaid account. Moreover, on top of the detailed listings of what type and how many fees the provider must disclose, the NPR contains detailed disclosure obligations regarding the font size, wording and placement of such disclosures. In complying with the NPR, providers of prepaid products will likely need to develop and design new product packaging that can comply fully with the CFPB’s obligations and fit onto retail shelves. Given the complexity of the required disclosures, it is unlikely that such packaging would change significantly, or from product to product, once in the marketplace.
In addition to its detailed disclosure requirements, the NPR extends several protections applicable under the EFTA and Regulation E explicitly apply to prepaid products. Such protections include: (i) providing consumers with account information through periodic statements or by making such information easily available online for free; (ii) error resolution rights for consumers who encounter errors with their accounts; and (iii) limited liability for consumers when their prepaid cards are lost or stolen. While the vast majority of prepaid programs already offered these protections, it is unclear what the impact of these requirements will be on products that did not consider themselves to be “prepaid” prior to the release of the NPR. Moreover, it is notable that the CFPB is not proposing any change to the provisional crediting requirements of Regulation E in order to prevent incidences of first-party fraud, to which prepaid products are particularly susceptible.
Finally, the NPR applies Regulation Z, the Truth in Lending Act, and CARD Act requirements applicable to credit cards to any prepaid account that offers credit features. Such credit features include any advances accessed by a prepaid card, such as overdraft services that charge a fee. While the NPR’s discussion of this topic is quite detailed, the end-result is very simple, prepaid products will no longer offer these products and services. This result is notable not only for eliminating these products and services from the marketplace, but also for the message it sends to industry participants. Specifically, that innovative product features and services may be stamped out through regulation.
The NPR has not been published in the Federal Register. Once it is published, there will be a 90 day open comment period. Prepaid providers are encouraged to examine their current products to analyze the impact of the proposed rules and to review additional products not previously covered by prepaid regulations to determine if the NPR’s obligations may apply.
1 Consumer Finance.gov, Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), available at: http://files.consumerfinance.gov/f/201411_cfpb_regulations_prepaid-nprm.pdf (last visited December 1, 2014).