The Consumer Financial Protection Bureau’s final rule on prepaid cards will improve fraud protection and provide greater transparency of costs for such products, but is already drawing fire from credit unions and consumer advocates.
The rule, which was released Wednesday, effectively grants many protections of credit cards to prepaid products, requiring firms to disclose fees and cooperate with consumers who discover unauthorized charges or errors.
But it also extends overdraft rules that are part of the credit card industry to prepaid products – a move that industry representatives are already warning could limit their availability.
Carrie Hunt, executive vice president of government affairs and general counsel at National Association of Federal Credit Unions (NAFCU), commented that NAFCU and its members are "greatly disappointed" that the CFPB is "systematically eliminating" the ability of credit unions to offer consumer-friendly products to their members.
"Consumer protections are important, but protecting members is built into a credit union's DNA," she said. "Not only has the Bureau ignored the industry's recommendations but they have also given credit unions just one year to come into compliance with a 1,700-page rule."
Hunt further noted that in 2017 credit union compliance departments will be required to implement regulations related to pre-paid accounts, mortgage servicing, HMDA and the credit card component of the MLA, among others. "It is undeniable, even by the Bureau, that regulatory burden continues to increase exponentially and suffocate community-based financial institutions," she said.
Elizabeth Eurgubian, deputy chief advocacy officer at the Credit Union National Association, said that while the trade group supports safe and transparent disclosures and providing protections on prepaid accounts – which are often utilized by underbanked consumers – the CFPB’s rule must not impede the ability of credit unions to offer similar types of consumer-friendly accounts.
CUNA is continuing to assess the final rule and the impact it would have on credit unions’ compliance costs.
Ban Overdrafts Entirely?
Under the final rule, the CFPB would treat prepaid cards with overdraft features as “open-ended credit,” which triggers additional restrictions under Regulation Z, the same rule credit cards must follow. For example, firms would have to conduct an assessment to ensure borrowers have the “ability to repay” any overdraft, a move that makes compliance more expensive.
Prepaid card issuers are “concerned that imposing Regulation Z requirements on overdraft products could lead to their elimination from the marketplace at a time when income variability is increasing consumer demand for these types of products and customer satisfaction remains at high levels,” said Brad Fauss, president and chief executive officer of the Network Branded Prepaid Card Association, in a press release.
At the same time, consumer groups are also displeased, arguing that the CFPB should have gone further with regard to overdraft features.
“The CFPB should ban overdraft fees entirely,” said Lauren Saunders, an associate director of the National Consumer Law Center.
The number of prepaid cards with such features remains small for now. Roughly 2% of prepaid cards have optional overdraft protection, according to NCLC. But their usage is expected to expand, rising to $112 billion in 2018, up from $65 billion in 2012.
That helps explain why NetSpend and other card issuers who offer such features from fiercely lobbying Congress on the issue. In an interview earlier this year, Chuck Harris, president of NetSpend, said it would be difficult to offer a prepaid card with an overdraft protection feature if the CFPB kept its Reg Z provision in the final rule.
"At the end of the day, we built the feature for a very important need of our customer … that really fits in a market or segment where there is a gap,” he said.
To be sure, the 1,689-page final rule covers would affect far more than cards with overdraft features. It would apply specific federal consumer protections to the prepaid market for the first time, covering a swath of products including traditional prepaid cards, mobile wallets, person-to-person payment products and other electronic accounts that can store funds.
“Many consumers rely on prepaid cards to make purchases and access funds, but until now they were not guaranteed strong consumer protections under federal law,” CFPB Director Richard Cordray said in a press release. “This rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone. And it backs up those protections with important new disclosures to let consumers know before they owe.”
The rule would also cover payroll cards, student financial aid disbursement cards, tax refund cards and certain federal, state, and local government benefit cards.
Among the rule’s requirements:
•Card issuers must either provide periodic statements for a prepaid account or make information available by free via the internet or telephone.
•If a prepaid card is lost or stolen, the consumers’ liability for unauthorized charges is limited to $50 and financial institutions must provisionally credit a disputed amount while finishing an investigation.
•Financial institutions are required to cooperate with consumers who discover fraudulent charges or other errors, and to investigate and resolve incidents “in a timely way.”
•Consumers must be given two forms, one short and one long, with easy-to-understand disclosures. That form must highlight key information, including all relevant fees. All prepaid account agreements must be submitted to the CFPB by October 2018 and posted on a card issuer’s website.
•If the card has overdraft features, companies must give consumers regular monthly statements detailing fees and interest rates, as well as information on how much they have borrowed and now owe.
•Prepaid companies will be required to give consumers at least 21 days to repay a debt on the card before they are charged a late fee. Late fees must also be “reasonable and proportional” to the violation of the account terms in question, the CFPB said.
•The rule places limits on fees and interest charges for cards that allow consumers to overdraw the account. During the first year a credit account is open, total fees for credit features cannot exceed 25% of the credit limit. Issuers cannot hike the interest rate on an existing balance unless the cardholder has missed back-to-back payments.
•Card issuers may raise the interest rate in advance of new purchases, but generally must give the consumer 45 days advance notice, during which time the consumer may cancel the credit account.
•On overdraft, prepaid companies cannot automatically seize a credit repayment the next time a prepaid account is loaded with funds, and they must get a consumer’s consent to automatically take funds from a prepaid account to repay credit when a bill is due.
•The rule restricts companies from automatically taking funds more than once a month. Companies cannot require payment until 21 days after a statement is mailed to the consumer.
The rule goes into effect on Oct. 1, 2017.
