In mid-November, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule that would amend Regulations E and Z to provide comprehensive protections for a wide range of prepaid financial products. These include general purpose reloadable cards; mobile and other electronic prepaid accounts; payroll cards; certain federal, state, and local government benefit cards; student financial aid disbursement cards; tax refund cards; and peer-to-peer payment products.
Prepaid cards generally are covered under Reg E. The proposed rule, however, would require that prepaid cards that access overdraft services or credit features for a fee would be considered credit cards subject to Reg Z and its credit card rules.
Issuers that offer overdraft services or other credit features (including a separate line of credit linked to the prepaid card) in connection with prepaid cards and that charge a fee (including interest, transaction fees, annual fees, or other participation fees) generally would be subject to Reg Z’s open-end credit card rules and disclosure requirements.
The proposed rule would require prepaid card issuers to obtain a consumer’s consent before adding overdraft services and credit features to a prepaid card, and would prohibit the issuer from adding these features for at least 30 calendar days after the consumer registers the prepaid account or card.
Ability to pay
Similar to the requirements for credit card issuers, prepaid card issuers would be required to make sure consumers have the ability to repay the debt before offering credit in connection with the prepaid card.
The proposal would prohibit prepaid card issuers from opening a credit card account or increasing a credit limit related to a prepaid card unless they consider the consumer’s ability to make the required payments. For consumers younger than age 21, the rule would require the card issuers to determine that those consumers have the independent ability to repay the credit offered.
Monthly periodic statement
The proposed rule would require prepaid card issuers to provide the same monthly periodic statement that credit card consumers receive. The periodic statement would provide details concerning fees charged and, if applicable, the interest rate on the account, the account balance, and other key information about repaying the debt. In addition, payments may not be required any sooner than 21 days after the mailing of the periodic statement.
Issuers would be required to give consumers at least 21 days to repay the debt before charging a late fee. In addition, late fees must be reasonable and proportional to the violation of the account terms.
Fee and interest charges
During the first year after a credit account is opened, the total fees for prepaid credit products may not exceed 25% of the credit limit. The proposal generally will prohibit prepaid card issuers from increasing the interest rate on an existing balance unless the account is delinquent and the consumer has failed to make two consecutive payments.
Furthermore, as is the case with credit card accounts, prepaid card issuers may only increase the interest rate on new purchases if the consumer is given a 45-day advance notice of the change. During that time, the consumer will be permitted to cancel the credit account.
The proposed rule would prohibit card issuers from demanding and taking payments whenever a prepaid account is loaded with funds.
Issuers also may not take funds loaded into the prepaid card or account to repay the debt when the payment is due unless the consumer has opted in to allow this. Plus, issuers may not take funds for payments more frequently than once per calendar month.
The proposed rule indicated that comments would be due within 90 days from the date of publication in the Federal Register. This hadn’t happened as of press time. But it’s likely that comments will be due sometime around mid-March.
MICHAEL MCLAINis CUNA’s assistant general counsel for compliance. Contact him at 608-231-4185.