CFPB Issues Prepaid Account NPRM: Converging Prepaid into Bank Regulation Mainstream
At long last the CFPB’s Notice of Proposed Rulemaking for prepaid accounts is out, amending Regulations E and Z and bringing prepaid products into the bank regulation mainstream. The 870 pages that comprise the NPRM suggest why it took the CFPB extra time to create and why it will take industry time to understand everything the NPRM covers and, of course, the implications of the proposed rules. The 90-day comment period will begin following the NPRM’s publication in the Federal Register.
My original intent, based on attending the field hearing in Wilmington, Del., this morning, was to summarize the key elements for publication today. But, that won’t happen. The proposal is too long and the issues are too complex for a quick summary. Reality hit at the conclusion of the hearing, standing with several very experienced and very smart payments attorneys who couldn’t conclusively agree on which prepaid products are covered under the proposal and which prepaid products aren’t. A lengthy and thoughtful review, which includes focusing on new definitions introduced in the proposal, is needed. At this point, the best summary of the proposal is provided in the CFPB’s press release, issued in the wee hours this morning.
But I can give you some insights, beyond the basics, based on what I’ve learned during the hearing and from discussions with members of the NBPCA who are using The Bancorp’s facilities in Wilmington as a meeting point.
- Effective date. Comments on the NPRM will be due sometime in February 2015 (90 days after the NPRM is published in the Federal Register). After that, it will take the CFPB about a year to finalize the rules, which likely will become effective about a year later. So, we’re looking at a 2016 implementation date.
- Convergence. The proposal amends both Regulations E and Z, clearly bringing prepaid into the “regulated-as- a-bank-product” category. Convergence is the word that, I believe, best describes this evolution. After the final rule become effective, it will be hard to categorize prepaid as “unregulated” or the “Wild West,” which, hopefully, puts the squabbling over federal regulation behind us.
- What’s covered. This isn’t entirely clear, although understanding which prepaid products are covered and which aren’t is fundamental. What we know the proposal covers is the following: traditional plastic prepaid cards, many of which are GPR cards, including payroll cards; certain federal, state and local government benefit cards, such as those used to distribute unemployment insurance, child support, pension payments; student financial aid disbursement cards; tax refund cards; and peer-to-peer payment products. Also, mobile and other electronic prepaid accounts that can store funds.
This gets tricky because consumer protections appear to be related to a “registration process.” It’s not yet clear what “after registering their accounts” means in practice, so, while we assume prepaid products such as non-reloadable gift cards and rewards cards aren’t covered, no one yet seems to be certain about what’s in and what’s out. Language at the beginning of the proposed rule explains that covered prepaid accounts “are not gift cards (or certain other related types of cards),” but industry will need clarification on what other related types of cards are.
Credit/overdraft. CFPB split the baby on the issue of credit/overdraft products associated with prepaid accounts—but consumer advocates, who clearly detest any form of prepaid-related credit/overdraft, got the bigger half. Although the CFPB didn’t outright prohibit credit/overdraft facilities associated with prepaid accounts, the proposal may have made doing so impractical. And, consumer advocates don’t think the CFPB has gone far enough. You can count on them to continue suggesting a complete ban on prepaid-related credit/overdraft products.
Disclosure. Required disclosure boxes were expected, and the CFPB didn’t disappoint, creating long and short model versions for different prepaid products. This should be an area of scrutiny for issuers, as some of the language in the proposed models is problematical—almost like the cancer warning on cigarettes—and, as a practical matter, working with the disclosure boxes may prove a challenge. And, some of the requirements may not fairly reflect what a cardholder is likely to pay. Pay attention to this one.
- Error resolution. Again, bringing prepaid products under Reg E error resolution requirements was expected and, again, the CFPB didn’t disappoint. The requirements include provisional crediting of disputed funds when error allegations cannot be resolved within, generally, 10 business days. In a long value chain, it can be difficult or impossible to resolve many error allegations within 10 business days. Interestingly, the CFPB chose to apply Reg Z consumer liability maximums to prepaid products rather than conforming the maximums to Reg E’s tiered structure, which currently applies to debit cards. With Zero Liability, this could be a moot point, or it could be a foreshadowing of more changes.
- Deposit insurance. To the disappointment of consumer advocates, the proposal does not require deposit insurance (where none was required before), but for covered prepaid accounts that don’t offer deposit insurance, the proposal requires disclosure, as part of the short form, indicating that the funds in the prepaid account are not protected by deposit insurance.
At Paybefore, we’ll keep reading the proposal and stay engaged with industry members to understand its implications. And, of course, we’ll share additional insights with you. And, be sure to let us know what you’re thinking, too.
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