[Federal Register Volume 79, Number 246 (Tuesday, December 23, 2014)]
[Proposed Rules]
[Pages 77102-77335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-27286]
[[Page 77101]]
Vol. 79
Tuesday,
No. 246
December 23, 2014
Part II
Bureau of Consumer Financial Protection
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12 CFR Parts 1005 and 1026
Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E)
and the Truth in Lending Act (Regulation Z); Proposed Rule
Federal Register / Vol. 79 , No. 246 / Tuesday, December 23, 2014 /
Proposed Rules
[[Page 77102]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Parts 1005 and 1026
[Docket No. CFPB-2014-0031]
RIN 3170-AA22
Prepaid Accounts Under the Electronic Fund Transfer Act
(Regulation E) and the Truth in Lending Act (Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
proposing to amend Regulation E, which implements the Electronic Fund
Transfer Act (EFTA); Regulation Z, which implements the Truth in
Lending Act (TILA); and the official interpretations to the
regulations. The proposal would create comprehensive consumer
protections for prepaid financial products. The proposal would
expressly bring such products within the ambit of Regulation E as
prepaid accounts and create new provisions specific to such accounts.
The proposal would generally cover those prepaid accounts that are
cards, codes, or other devices capable of being loaded with funds and
usable at unaffiliated merchants or for person-to-person transfers, and
are not gift cards (or certain other related types of cards). The
proposal would modify Regulation E to establish disclosure requirements
specific to prepaid accounts that would require financial institutions
to provide certain disclosures to consumers prior to and after the
acquisition of a prepaid account. The proposal would also include an
option for an alternative to Regulation E's periodic statement
requirement that would permit prepaid product providers to make
available to consumers certain methods for access to account
information in lieu of sending periodic statements. Additionally, the
proposal would apply Regulation E's limited liability and error
resolution provisions to prepaid accounts, with certain modifications,
including applying these provisions after account registration.
Moreover, the proposal would require prepaid account issuers to provide
the Bureau with terms and conditions for prepaid accounts, which it
would post on a Web site maintained by the Bureau. Relatedly, issuers
would also be required to post the terms and conditions on their own
Web sites or make them available upon request. Finally, the proposal
would also contain amendments to Regulations Z and E to regulate
prepaid accounts with overdraft services or credit features. Among
other things, prepaid cards that access overdraft services or credit
features for a fee would generally be credit cards subject to
Regulation Z and its credit card rules. Moreover, the proposal would
require that consumers consent to overdraft services or credit features
and give them at least 21 days to repay the debt incurred in connection
with using such services or features. Further, Regulation E would be
amended to include disclosures about overdraft services or credit
features that could be linked to prepaid accounts. The compulsory use
provision under Regulation E would also be amended so that prepaid
account issuers would be prohibited from requiring consumers to set up
preauthorized electronic fund transfers to repay credit extended
through an overdraft service or credit feature.
DATES: Comments must be received on or before March 23, 2015.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2014-
0031 or RIN 3170-AA22, by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include Docket
No. CFPB-2014-0031 and/or RIN 3170-AA22 in the subject line of the
email.
Mail: Monica Jackson, Office of the Executive Secretary,
Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC
20552.
Hand Delivery/Courier: Monica Jackson, Office of the
Executive Secretary, Consumer Financial Protection Bureau, 1275 First
Street NE., Washington, DC 20002.
Instructions: All submissions should include the agency name and
docket number or Regulatory Information Number (RIN) for this
rulemaking. Because paper mail in the Washington, DC area and at the
Bureau is subject to delay, commenters are encouraged to submit
comments electronically. In general, all comments received will be
posted without change to http://www.regulations.gov. In addition,
comments will be available for public inspection and copying at 1275
First Street NE., Washington, DC 20002, on official business days
between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an
appointment to inspect the documents by telephoning (202) 435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Sensitive personal information, such as account numbers or social
security numbers, should not be included. Comments generally will not
be edited to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Kristine Andreassen, Morgan Harper,
and Jane Raso, Counsels; Krista Ayoub, Joseph Baressi, and Eric
Goldberg, Senior Counsels, Office of Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The Bureau of Consumer Financial Protection (Bureau) is issuing
this notice to propose comprehensive consumer protections for prepaid
financial products (or prepaid products). Such products are among the
fastest growing types of payment instruments in the United States.
However, with certain limited exceptions, prepaid products have not
been subject to the existing Federal consumer regulatory regimes that
provide consumer disclosures, error resolution and protection from
unauthorized transfers. See generally 12 CFR part 1005.
The Bureau is proposing to establish a new definition of ``prepaid
account'' within Regulation E and adopt comprehensive consumer
protection rules for such accounts. The proposal would extend
Regulation E protections to prepaid products that are cards, codes, or
other devices capable of being loaded with funds, not otherwise
accounts under Regulation E and redeemable upon presentation at
multiple, unaffiliated merchants for goods or services, or usable at
either automated teller machines or for person-to-person (P2P)
transfers; and are not gift cards (or certain other types of limited
purpose cards), by bringing these products under the proposed
definition of ``prepaid account.''
The Bureau is also proposing to modify Regulation E, as it would
pertain to prepaid accounts, in several key respects. First, the Bureau
proposes to require financial institutions to make certain disclosures
available to consumers before a consumer agrees to acquire a prepaid
account. These disclosures would take two forms, whether provided in
oral, written, or electronic form. The first would be a short form
highlighting key fees that the Bureau believes are most important for
consumers to know about prior to acquisition. The second would be a
long form that would set forth all of the prepaid account's fees and
the conditions under which those fees could be imposed. When certain
[[Page 77103]]
conditions are met, the proposed rule would provide an exception for
financial institutions that offer prepaid cards for sale over the phone
or in retail stores that would allow such institutions to provide
consumers with access to the long form disclosure by telephone or
internet, but otherwise not make the long form available until a
consumer has acquired the prepaid account. To facilitate compliance,
the Bureau is additionally proposing model forms and sample forms. The
use of the model forms would establish a safe harbor for compliance
with the short form disclosure requirement. The Bureau is also
proposing revisions to existing Regulation E model forms and model
clauses to provide model language.
In addition, with certain modifications, the Bureau is proposing to
extend to all prepaid accounts the existing Regulation E requirements
regarding the provision of transaction information to accountholders
that currently apply to payroll card accounts, Federal government
benefit accounts, and non-needs tested State and local government
benefit accounts. These provisions would allow financial institutions
to either provide periodic statements or, alternatively, make available
to the consumer: (1) The account balance, through a readily-available
telephone line; (2) an electronic history of account transactions that
covers at least 18 months; and (3) a written history of account
transactions that covers at least 18 months upon request. For all
prepaid accounts, the Bureau proposes to require financial institutions
to disclose monthly and annual summary totals of all fees imposed on a
prepaid account, as well as the total amount of all deposits to and
debits from a prepaid account when providing a periodic statement or
electronic or written account history.
Further, the Bureau is proposing to modify Regulation E to adopt
error resolution and limited liability provisions specific to prepaid
accounts. Currently, Regulation E limits consumers' liability for
unauthorized transfers, provided that the consumer gives timely notice
to the financial institution, and requires financial institutions to
resolve certain errors in covered accounts. The Bureau proposes to
extend this regime to prepaid accounts, with modification to the timing
requirements for reporting unauthorized transfers and errors when a
financial institution follows the periodic statement alternative
described above. The Bureau is also proposing not to apply the limited
liability and error resolution requirements of Regulation E to
unregistered prepaid accounts. Moreover, the proposed rule would
include provisions that would require prepaid account issuers to post
prepaid account agreements on the issuers' Web sites (or make them
available upon request in limited circumstances) and to submit those
agreements to the Bureau for posting on a Web site maintained by the
Bureau.
The Bureau is also proposing to revise various other provisions in
subparts A and B of Regulation E. With respect to subpart A, the
proposed amendments include a revision that would provide that, similar
to payroll card accounts, a consumer cannot be required to establish an
account for receipt of government benefit. Additionally, the Bureau
proposes to revise official interpretations to Regulation E to
incorporate a preemption determination the Bureau made regarding
certain State laws related to unclaimed gift cards. With respect to
subpart B, which applies to remittance transfers, the Bureau proposes a
conforming change to the official interpretations.
Overdraft Services and Credit Features
The Bureau is also proposing to modify Regulations Z and E to
address the treatment of overdraft services and other credit features
offered in connection with prepaid accounts.
Regulation Z. The Bureau is proposing changes to Regulation Z so
that prepaid account issuers that offer overdraft services or other
credit features in connection with such accounts and charge a fee for
the service (such as interest, transaction fees, annual fees, or other
participation fees) generally would be subject to Regulation Z's credit
card rules and disclosure requirements for open-end (not home-secured)
consumer credit plans. In addition, the Bureau proposes to revise
Regulation Z so that its credit card rules would apply to separate
lines of credit linked to prepaid accounts. The proposal would also
require an issuer to obtain a consumer's consent before adding
overdraft services and credit features to a prepaid account and would
prohibit the issuer from adding such features until at least 30
calendar days after a consumer registers the prepaid account. Moreover,
the proposal would amend Regulation Z as it pertains to credit on
prepaid accounts to provide that a consumer would receive a periodic
statement not more often than once per month and then have at least 21
days to repay the debt the consumer incurred in connection with using
the overdraft service or credit feature. The proposal would also
prevent an issuer from requiring, as terms of the credit feature, that
it could immediately take incoming payments to a prepaid account, such
as cash loads or direct deposits, to repay and replenish the credit
line.
Regulation E. The Bureau is proposing to revise Regulation E to
include disclosures about overdraft services or credit features that
could be linked to prepaid accounts in the short and long form
disclosures. The Bureau is also proposing to provide that the
compulsory use provision would apply to overdraft services or other
credit features linked to prepaid accounts. As proposed, prepaid
account issuers would be prohibited from requiring consumers to set up
preauthorized electronic fund transfers to repay credit extended
through an overdraft service or credit feature. Lastly, the Bureau
proposes to amend Regulation E to restrict issuers from applying to a
consumer's prepaid account different terms and conditions such as
charging different fees for accessing funds in a prepaid account,
depending on whether the consumer elects to link the prepaid account to
an overdraft service or credit feature.
Effective Date
The Bureau proposes that with certain exceptions, the effective
date for the requirements set forth in a final rule would be nine
months after the final rule is published in the Federal Register. The
exception proposed herein is that for a period of 12 months after the
final rule is published in the Federal Register, financial institutions
would be permitted to continue selling prepaid accounts that do not
comply with the final rule's pre-acquisition disclosure requirements,
if the account and its packaging material were printed prior to the
proposed effective date.
II. Background
A. Prepaid Financial Products
As noted above, prepaid products--in various forms--are among the
fastest growing types of payment instruments in the United States. A
2013 study by the Board of Governors of the Federal Reserve System (the
Board) reported that compared with noncash payments such as credit,
debit, automated clearing house (ACH), and check, prepaid card payments
increased at the fastest rate from 2009 to 2012.\1\ Among other
[[Page 77104]]
things, the report found that the number of prepaid card payments
reached 9.2 billion transactions in 2012 (up from 5.9 billion in
2009).\2\
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\1\ Fed. Reserve Sys., The 2013 Federal Reserve Payments Study,
Recent and Long-Term Payment Trends in the United States: 2003-2012,
Detailed Report and Updated Data Release (2014), available at
https://.frbservices.org/files/communications/pdf/general/
2013_fed_res_paymt_study_detailed_rpt.pdf.
\2\ Id. at 37.
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There is significant variation among prepaid products. For example,
some prepaid products are ``reloadable,'' meaning that a consumer or
other authorized party can add funds to the account after the account
is issued, while others are not. Additionally, some prepaid products,
such as certain gift cards, are ``closed-loop,'' meaning that a
consumer can only use the product at a specific merchant or group of
merchants. Regulation E currently regulates closed-loop gift cards and
similar products. See Sec. 1005.20. Other prepaid products are ``open-
loop.'' Like gift cards, these products are used to store funds.
However, unlike closed-loop prepaid products, they can be used on
payment and automated teller machine (ATM) networks.\3\
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\3\ Payment networks include Visa, MasterCard, American Express,
and Discover; ATM networks include NYCE, PULSE, STAR and Cirrus.
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Consumers may acquire prepaid products in a variety of ways.
Prepaid products may be sold directly to consumers in retail locations,
over the telephone, or online. They may also be provided at no charge
through an entity that uses the prepaid product to distribute funds to
a recipient, such as an employer that distributes wages to an employee
on a payroll card. Further, as discussed in greater detail below,
prepaid products may not be tied to a physical card or device, and
instead may be accessible and usable online or at a physical location
through a mobile device such as a smartphone.
Typically, consumers may not spend more than the total amount of
funds loaded onto a prepaid product, although some products permit
consumers to access additional funds for a fee in a manner similar to
overdraft services or credit features offered with checking accounts.
As discussed below, a ``general purpose reloadable'' (GPR) card is one
type of reloadable, open-loop prepaid product. Others include prepaid
products onto which third parties distribute funds, also as discussed
in greater detail below. These include payroll cards and cards for the
disbursement of student loan proceeds or insurance proceeds, and cards
used to disburse Federal and non-needs based State and local government
benefits.\4\
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\4\ As described in more detail below, payroll card accounts and
cards used to distribute certain government benefit payments are
currently regulated by Regulation E.
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GPR Cards
A GPR card is one of the most common and widely-available forms of
open-loop, reloadable prepaid products. A financial institution
generally issues a GPR card for an amount paid to load the card by a
consumer less the purchase price of the card, if any. A GPR card can be
reloaded by the consumer, meaning that once the card is registered, the
consumer can add funds to the card. Based on the Bureau's research, it
understands that currently, the top five GPR card programs (as measured
by load volume) identified by the Aite Group have maximum load amounts
generally ranging from approximately $2,500 to $15,000, with some
exceptions made for large tax refunds. The prevalence of GPR cards has
grown rapidly. According to projections by the Mercator Advisory Group,
the amount loaded onto GPR cards grew from less than $1 billion in 2003
to nearly $65 billion in 2012. This makes GPR cards among the fastest-
growing forms of prepaid products over that decade, growing from less
than 8 percent of prepaid load to over 36 percent during that same
period. The growth rate has continued. According to Mercator's
projections, the total dollar value loaded onto GPR cards is expected
to continue to grow to over $98 billion in 2014.\5\
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\5\ Mercator Advisory Grp., Eleventh Annual U.S. Prepaid Cards
Market Forecasts, 2014-2017 at 13 (Nov. 2014).
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Virtual GPR cards. As noted above, prepaid products may not be tied
to a physical card or device, and instead may be accessible and usable
online or at a physical location through a mobile device such as a
smartphone. The Bureau understands that the use of GPR prepaid products
not linked to a physical card or device to store and transfer funds via
the internet, text, or mobile phone application is growing. To use
these ``virtual GPR cards'' (``virtual'' because these accounts are not
linked to a physical card or device), consumers may receive account
information such as the account number that they can then use to make
purchases.
GPR Card Functionality
As noted above, consumers generally purchase GPR cards at retail
locations, over the telephone, or online. When buying a GPR card at a
retail location, consumers typically pay an upfront purchase fee.
Program managers may waive this fee for GPR cards that consumers
purchase online. A newly-purchased GPR card is usually loaded by the
retailer at the time of purchase with funds provided by the consumer.
However, in order to take advantage of all of the GPR card's features,
consumers are often required to contact the GPR card's program manager
and register the card, or at least to activate it. Indeed, the Bureau
understands that it is common that unless a consumer registers the
consumer's newly-purchased GPR card, the consumer only has a
``temporary card,'' because program managers do not send a ``permanent
card'' embossed with the consumer's name until the consumer registers
the card. Further, the Bureau understands that unless a GPR card is
registered, there is typically a cap on the amount of funds a consumer
can load onto the card and restrictions on the consumer's use of the
card (e.g., the consumer might not be able to use the card at ATMs or
reload funds onto the card).
Registration typically requires the consumer to provide specific
identifying information (i.e., full name, domestic residential address,
date of birth, and a Social Security Number or Taxpayer Identification
Number, or, in some instances, another government-issued identification
number). The information is used by the program manager or issuing bank
to verify the consumer's identity. If the consumer's identity cannot be
verified, the card is not considered registered. As noted above,
customers with unregistered GPR cards are generally able to spend their
initial load but will not be able to reload the card or use it at an
ATM. Activation may require a consumer to provide less identifying
information than registration.
GPR cards can generally be reloaded through direct deposit of
wages, pensions, or government benefits; a cash purchase of a reload
product; direct cash reload; transfer from another prepaid product or a
deposit account; or deposit of a check at a participating check-cashing
outlet or via remote deposit capture.\6\ Consumers can typically obtain
cash from their prepaid products via ATM withdrawals, bank teller
transactions, or by electing to obtain cash back on a personal
identification number (PIN) transaction at a merchant. Additionally,
consumers can typically make purchases with their GPR cards wherever
the payment network brand appearing on the card is accepted. A number
of programs also offer an online bill pay function, which sometimes has
a fee associated with it. Consumers can typically obtain updates
[[Page 77105]]
regarding their GPR card's account balance (and, for some programs,
recent transaction activity) via toll-free telephone calls, text
messages, email alerts, the card program's Web site, or written account
histories. Some GPR card providers charge consumers to speak to a
customer service agent or to receive a written copy of their account
history. Consumers may incur fees to obtain balance information at an
ATM.
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\6\ The Bureau understands that in limited circumstances, a
consumer can reload a GPR card via paper check.
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In fact, the Bureau understands that GPR cards can vary
substantially with respect to the fees and charges assessed to
consumers, both in terms of their total volume as well as in the number
and type of fees assessed. Based on its review of the 2012 FRB
Philadelphia Study, the Bureau believes average cardholder costs for
GPR and payroll cards range from approximately $7.00 to $11.00 per
month, depending on the type and distribution channel of the
account.\7\ In a 2014 paper, the Pew Charitable Trusts estimated that
the median consumer using one of the 66 major GPR cards it examined
would be charged approximately $10.00 to $30.00 every month for use of
the cards, on average, depending on the consumer's understanding of the
card's fee structure and ability to alter behavior to avoid fees.\8\
The 2012 FRB Philadelphia Study also found that in terms of total
value, maintenance and ATM withdrawal fees are among the most
significant fees incurred by users of open-loop prepaid products.\9\
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\7\ Stephanie Wilshusen et al., Fed. Reserve Bank of Phila.,
Consumers' Use of Prepaid Cards: A Transaction-Based Analysis, at 39
(2012) (2012 FRB Philadelphia Study), available at http://www.philadelphiafed.org/consumer-credit-and-payments/payment-cards-center/publications/discussion-papers/2012/D-2012-August-Prepaid.pdf. The authors of the report noted that the report's
primary focus is on GPR cards and payroll cards, which will be
discussed in greater detail below.
\8\ The Pew Charitable Trusts, Consumers Continue to Load Up on
Prepaid Cards, at 39 (Feb. 2014) (2014 Pew Study), available at
http://www.pewtrusts.org/en/research-and-analysis/reports/2014/02/06/consumers-continue-to-load-up-on-prepaid-cards.
\9\ 2012 FRB Philadelphia Study, at 6.
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Consumers' Use of GPR Cards
The 2012 FRB Philadelphia Study found that most of the prepaid
products in its study are used for both cash withdrawals and purchases
of goods and services. In particular, it found that depending on the
product, cash withdrawals account for about one-third to one-half of
the value taken off the product. The study also reported that it
believed that prepaid cards are used primarily to purchase nondurable
goods and noted that many of the products studied are also used to pay
bills.\10\
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\10\ Id.
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Further, as discussed in greater detail below, both the type of
consumers who use GPR cards and the reasons for which they use them
vary. Although it has been reported that the majority of users of open-
loop prepaid products have had checking accounts at some point and that
most users also have experience using credit cards,\11\ it also has
been observed that for some consumers, the lack of access to checking
accounts and other types of more established financial products and
services such as credit cards appear to be the key driver of their use
of GPR cards.\12\ The 2014 Pew Survey found that 58 percent of
consumers that use prepaid products are currently without checking
accounts, but indicated they want to have a checking account in the
future.\13\ The survey also found that 26 percent of prepaid product
users without checking accounts indicated that they use prepaid
products because, among other reasons, they would not be approved for a
checking account.\14\
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\11\ The Pew Charitable Trusts, Why Americans Use Prepaid Cards:
A Survey of Cardholders' Motivations and Views, at 7 (Feb. 2014)
(2014 Pew Survey). It appears that the prepaid products discussed in
the report included GPR cards, payroll cards, and government benefit
cards. The study excluded closed-loop prepaid products.
\12\ 2014 Pew Survey, at 7-8, 11.
\13\ Id. at 10-11.
\14\ Id. at 14.
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When consumers open a checking or savings account, they must
satisfy the depository institution or credit union's customer
identification program (CIP) obligations, which is part of the
institution's Bank Secrecy Act (BSA) and anti-money laundering
compliance program.\15\ In addition, banks and credit unions generally
review information about prospective customers obtained from
specialized reporting agencies that can reveal prior history of
involuntary account closure, unsatisfied balances, and other issues
with prior checking account use.
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\15\ See e.g., Federal Financial Institutions Examination
Council Bank Secrecy Act/Anti-Money Laundering InfoBase, http://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_011.htm.
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Customer identification and verification procedures (other than
those related to credit or similar inquiries) are largely identical
between checking and GPR accounts. First, the customer identification
and verification requirements for providers and sellers of prepaid
access issued by the Financial Crimes Enforcement Network (FinCEN), a
bureau of the U.S. Treasury Department (Treasury), are largely similar
to the CIP requirements for depository institutions and credit unions.
Second, the Bureau understands that for most prepaid products, the
issuer (i.e., the depository institution or credit union providing
access to the networks and holding the funds) sets the minimum
standards for the CIP.\16\ However, there are differences. The primary
difference is usually with respect to the method of customer
verification. Checking and savings accounts are more frequently opened
in person at a financial institution's branch location (and thus use
``documentary'' forms of identification, such as a driver's license or
passport, to verify identity). Prepaid products, however, even those
purchased at retail locations, are usually registered via telephone or
online (and thus use ``non-documentary'' forms of verification such as
using information obtained from consumer reporting agencies).
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\16\ Mercator Advisory Grp., Customer Identification Programs in
Prepaid: Best Practices, at 2 (July 2013).
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When consumers apply for credit cards, a card issuer will generally
rely on a rigorous process to determine whether an applicant is an
appropriate credit risk. In contrast, most GPR cards do not contain
similar requirements. The 2014 Pew Survey found that 33 percent of
monthly users of open-loop prepaid products have never had a credit
card.\17\ GPR cards may also be more accessible to consumers than debit
cards that require the cardholder to have opened a traditional
transactional account such as a checking account as a prerequisite. The
2014 Pew Survey found that 41 percent of monthly users of open-loop
prepaid products currently do not have a checking account.\18\
Similarly, a 2013 survey by the Federal Deposit Insurance Commission
(FDIC) found that of those people whom it surveyed, approximately 33
percent of those who reported using a prepaid card in the 30 days prior
to being surveyed were unbanked.\19\ Additionally, debit card issuers
may evaluate potential customers for credit risk more closely than
prepaid card issuers. The Bureau understands that debit card issuers
often provide faster fund availability than prepaid card issuers and
thus may bear
[[Page 77106]]
greater depositor credit risk such as the risk that a deposited check
never clears.
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\17\ See 2014 Pew Survey, at 7. The Bureau recognizes that this
figure may include consumers that have never tried opening a credit
card account, as well as those that tried to open a credit card
account, but had their application denied.
\18\ Id.
\19\ See also Fed. Deposit Ins. Corp., Appendix to 2013 FDIC
National Survey of Unbanked and Underbanked Households (Oct. 2014)
(2013 FDIC Survey), at 46, available at https://www.fdic.gov/householdsurvey/report.pdf.
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The 2013 FDIC Survey also suggests that unbanked and underbanked
consumers are more likely than the general population to use open-loop
prepaid products such as GPR cards. It found that there are
approximately 30 million unbanked and underbanked households in the
United States.\20\ It also found that these households tend to be
disproportionate users of GPR cards and payroll cards. It observed that
19.7 percent of underbanked and 27.1 percent of unbanked households, as
well as 33 percent of previously banked households, reported having
used such cards (compared with 12 percent reported use in the entire
population).\21\ The FDIC also found that while usage among all
households remained relatively stable since 2009, the proportion of
unbanked households that had used a prepaid card increased from 12.2
percent in 2009 to 17.8 percent in 2011 and 27.1% in 2013.\22\ In
addition to the lack of access to traditional financial products and
services as a shared characteristic of some of the consumers that use
GPR cards, the FDIC study shows that prepaid card users were more
likely than the general population to be young, single mothers,
disabled, or have sub-$50,000 incomes, and less likely to be
homeowners, white, have college degrees, or be employed.\23\
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\20\ 2013 FDIC Survey, at 4.
\21\ 2013 FDIC Survey, at 35-36.
\22\ 2013 FDIC Survey, at 29.
\23\ 2013 FDIC Survey appendix, at 46-47.
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Further, the 2014 Pew Survey noted that the desire to avoid fee-
based overdraft services associated with checking accounts appear to
motivate some consumers to choose open-loop prepaid products over
checking accounts. Indeed, the survey concluded that 41 percent of
users have closed or lost a checking account due to overdraft fees.\24\
Checking accounts can become costly. For instance, Bureau staff has
determined that the median checking account overdraft fee charged as of
July 2014 among the largest fifty U.S. depository institutions ranked
by consumer checking balances is $35 per item.\25\ By contrast, except
for a few exceptions discussed below, GPR cards are generally not
offered with an overdraft service nor other credit features.\26\
Moreover, GPR card providers that offer such services or features
charge lower fees than the fees depository institutions or credit
unions charge for checking account overdraft.\27\ Thus, for consumers
who do not want to, or cannot open a checking account, the Bureau
believes that a GPR card could be a viable substitute. Indeed, the
Bureau observes that many GPR cards are advertised as a ``safe'' or
``secure'' alternative to a checking account.\28\
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\24\ 2014 Pew Survey, at 8; see also id. at 13-14 (explaining
that 46 percent of respondents indicated that one of the major
reasons they use prepaid cards is to ``Avoid overdraft fees;'' 51
percent of respondents said one of their major reasons is ``Helping
you not spend more money than you actually have'').
\25\ Nearly all depository institutions the Bureau considered
assess overdraft fees on a per-item basis. Among those that do, both
the median and modal lowest-tier overdraft fee is $35. Some
depository institutions have higher overdraft fees that apply after
a certain number of overdraft occurrences. However, the Bureau's
analysis considers only the lowest-tier fees a consumer would
encounter if de minimis or other policies do not preclude a fee. For
depository institutions that charge different amounts in different
regions, Bureau staff considered pricing for the region where the
depository institution is headquartered.
\26\ See, e.g., 2014 Pew Study, at 4, 9-10.
\27\ Id.
\28\ See, e.g., NBCPA Web site, What are Prepaid Cards, http://www.nbpca.com/en/What-Are-Prepaid-Cards/Prepaid-Card-Benefits.aspx
(``[With prepaid cards] . . . [avoid] the risk of over-spending or
overdraft, thus avoiding the interest, fees and potential negative
credit score implications of traditional credit cards. [For
parents], prepaid cards [help] maintain control over [children's
spending].'')
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Consumers with access to traditional financial products and
services use GPR cards as well.\29\ The Bureau understands that one of
the ways in which many consumers use such cards is for a limited
purpose such as while traveling or making online purchases, because
they may believe that using prepaid cards is safer than using cash, a
credit card, or a debit card in those situations.\30\ These consumers
may not ever register and reload the card. Instead, they may let the
card become dormant or discard it after spending down the initial
balance, and then purchase another GPR card at a later date if new
needs arise. The Bureau understands that another popular way in which
consumers use GPR cards is as a budgeting tool. For example, a family
might budget a fixed amount each month for dining out and put that
money on a GPR card, or parents may provide a GPR card to a child at
college to control the child's spending.
---------------------------------------------------------------------------
\29\ 2014 Pew Survey, at 7 (59 percent of prepaid card users
also have a checking account.)
\30\ See, e.g., 2014 Pew Survey, at 1, 13.
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Further, based on the Bureau's market research and analysis, the
Bureau believes that additional consumers will continue to adopt GPR
cards. It also believes that consumers that currently use GPR cards may
increasingly find that they no longer want to have traditional
financial products and services such as a checking account or a credit
card in addition to their GPR card. The Bureau notes that GPR card
functionality has been expanding. For example, some GPR card programs
have started to offer checking account-like features such as check-
writing using pre-authorized checks, the ability to send direct
deposits via an ACH to the GPR card, and, in some limited cases, the
ability of third parties to debit and credit the GPR card account via
ACH (e.g., crediting the card account through direct deposit).
Additionally, many GPR card programs have offered consumers ways to
access their account online, including through mobile devices such as
smartphones. For example, oftentimes consumers can use mobile phone
applications to closely monitor their GPR card transactions, balances,
and fees; to load funds to their GPR cards; and to transfer funds
between accounts. Lastly, like credit and debit cards, GPR cards
provide access to payment networks. Consumers may find this to be an
important feature of GPR cards in that some merchants may only accept
payment through a card that provides access to one of these networks.
Marketing and Sale of GPR Cards
In recent years, the GPR card segment has grown increasingly
competitive, which has resulted in a decrease in prices, coupled with
an increase in transparency for many products.\31\ Nevertheless, GPR
card providers market the cards in ways that may negatively affect
consumers' ability to make meaningful comparisons.\32\ Card packaging
is often limited in size. Because many of them are designed to be sold
in retail stores, the card package, also known as a J-hook package, is
no larger than 4 inches by 5.25 inches.\33\ Thus, card packages have
limited space in which to explain their product and disclose key
features. It has also been reported that fee information for prepaid
products is sometimes hard to find and difficult to understand, thus
making comparison shopping challenging.\34\
[[Page 77107]]
However, the Bureau believes that consumers benefit from comparison
shopping. For example, the 2012 FRB Philadelphia Study found that total
cardholder costs vary by the type of open-loop prepaid product. \35\
---------------------------------------------------------------------------
\31\ See, e.g., Fed. Reserve Bank of St. Louis, Cards, Cards and
More Cards: The Evolution to Prepaid Cards, Inside the Vault, Fall
2011, at 1, 2, available at http://www.stlouisfed.org/publications/itv/articles/?id=2168 (``Competition among prepaid card issuers and
increased volume have helped lower card fees and simplify card
terms''); 2014 Pew Study, at 2 (``[O]ur research finds that the
providers are competing for business by lowering some fees and are
facing pressure from new entrants in the market'').
\32\ 2014 Pew Survey, at 5, 6.
\33\ A j-hook is a looped hook used by retailers to hang prepaid
cards (and other products). Retailers often sell prepaid cards on j-
hooks in a standalone display rack at the end of an aisle in a
store.
\34\ See, e.g., Consumer Reports, Prepaid Cards: How They Rate
on Value, Convenience, Safety and Fee Accessibility and Clarity,
(July 2013), at 24, available at http://www.consumerfinance.gov/blog/prepaid-cards-help-design-a-new-disclosure/.
\35\ 2012 FRB Study, at 6, 39, 72; Fumiko Hayashi & Emily Cuddy,
General Purpose Reloadable Prepaid Cards: Penetration, Use, Fees and
Fraud Risks, at 33-35 (Fed. Reserve Bank of Kansas City, Working
Paper No. RWP 14-01, 2014) (Kansas City Fed Study), available at
https://www.kansascityfed.org/publicat/reswkpap/pdf/rwp14-01.pdf.
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In addition to the size limitations to GPR card packaging related
to the fact that many GPR cards are sold through the retail channel on
J-hooks, certain aspects of purchasing GPR cards in retail settings may
pose additional issues. For instance, some retail locations may only
offer one or a handful of products. Retailers may not always have a
broad selection of GPR cards that consumers can compare while in a
particular store, because prepaid card providers can establish
exclusive marketing arrangements that may prevent competitors' cards
from being sold in the same store.\36\ The Bureau acknowledges that the
lack of choice is not necessarily unique to GPR cards sold in certain
retail locations. For example, any one bank or credit union may only
offer a limited range of transactional accounts. Further, in some
stores, prepaid products including GPR cards may be displayed behind a
register, requiring a consumer to ask to see each product packaging
individually. The Bureau believes that this process likely makes
comparison-shopping more time-consuming, even when choice among
products exists. Lastly, in a retail setting, GPR cards may be
displayed near closed-loop prepaid products such as gift cards. This
could contribute to consumer confusion. For the above reasons, the
Bureau believes that a consumer looking to comparison shop among
different GPR cards in a retail setting may incur high search costs.
---------------------------------------------------------------------------
\36\ For example, earlier this year Blackhawk Network Holdings,
Inc. extended its exclusive distribution arrangement with Safeway
Inc. through 2019. See Press Release, Blackhawk Network, Safeway and
Blackhawk extend exclusive prepaid card distribution agreement
through 2019 (Mar. 7, 2014), available at http://.com/blackhawk-
comments-on-parent-company-safeways-spin-off-announcement/.
---------------------------------------------------------------------------
Additionally, in a retail setting, consumers desiring to purchase
GPR cards may only allot limited time to consider their purchases. The
Bureau believes that consumers often purchase a GPR card while
purchasing groceries and convenience items, and may not take the time
to fully review and comprehend the terms of the card that they are
acquiring. Moreover, the selling of GPR cards in convenience and other
retail stores that do not otherwise sell financial products (as opposed
to, for example, at a bank) may not be conducive to helping a consumer
understand the terms and conditions of the GPR card or that the
consumer may be starting a long-term financial relationship that could
entail significant expense for the consumers. For example, the Bureau
believes that a salesperson at a convenience store where a GPR card is
sold may not be able to provide adequate information to a consumer
about the product. In contrast, the Bureau expects that an employee at
a bank or credit union would be better informed.
Further, once a consumer can review the full terms and conditions
of a GPR card, the consumer has typically already purchased the card
and loaded funds onto it, making returns difficult or impossible due to
the inability of the retail store to refund the cash loaded onto a
prepaid product including a GPR card. During outreach, several prepaid
product providers have informed the Bureau that they provide refunds
related to the purchase of a prepaid card, but the Bureau believes that
few consumers realize that this is an option. The Bureau acknowledges
that consumers who determine they do not want to establish a long term
relationship with the GPR prepaid card they purchased may also end the
relationship more easily (as compared to closing a checking or credit
card account). Such consumers could spend down the funds initially
loaded onto the card and then discard it. However, the Bureau believes
that the consumer could still incur fees such as monthly maintenance
fees for using the GPR card.
Structure of Typical GPR Card Programs
GPR card products are generally provided by combinations of
entities working together rather than by a single, vertically-
integrated entity operating all aspects of the program. In fact, the
Bureau understands that the typical GPR card supply chain involves more
parties than the supply chains for traditional checking or savings
accounts or for credit cards. Although a consumer may only interact
with a single entity or limited number of entities involved in the
supply chain such as those entities whose logos are displayed on the
GPR card or its packaging, the Bureau believes that the fact that many
different entities can be involved in the supply chain could expose
consumers as well as the entities themselves to greater risks such as
potential losses resulting from the insolvency or malfeasance of other
entities involved in the supply chain, when compared to the risks
associated with a traditional checking or savings account. The Bureau
discussed the various entities that may be involved in a typical GPR
card program below.
Entities involved in a typical GPR card program. First, entities
known in the industry as program managers may design, manage, market,
and generally operate GPR card programs. Program managers may include
depository institutions and credit unions, but are typically non-
depository entities. Program managers typically establish or negotiate
a GPR card program's terms and conditions, market the card, assume most
of the financial risks associated with the program, and reap the bulk
of the revenue from the program.\37\ The program manager is also, in
most cases, the primary consumer-facing party in connection with a GPR
card, because it is typically the program manager's brand on the card
as well as its packaging.\38\ While a handful of program managers
appear to have had a large majority of the market share as recently as
2012, the Bureau notes that the GPR card industry is fast-changing.
Indeed, it appears that new entrants--both start-ups and established
financial institutions--have led to both increased competition and
growth in the market over just the last few years.\39\
---------------------------------------------------------------------------
\37\ See Kansas City Fed Study, at 6.
\38\ See Aite Grp. LLC, Prepaid Debit Card Realities: Cardholder
Demographics and Revenue Models, at 17 (Nov. 2013).
\39\ Id.
---------------------------------------------------------------------------
Program managers typically contract with various third-party
service providers for various tasks. One of the most important entities
involved in GPR card program is the prepaid card issuer, which is
typically either a depository institution or credit union. Virtually
all GPR cards must be issued by depository institutions or credit
unions that are authorized by the retail electronic payment card
networks. Issuers may manage the accounts that hold funds loaded onto
the cards. Some depository institutions and credit unions are actively
involved in the GPR cards they issue by serving as both issuer and
program manager for their own programs. Other depository institutions
may only act as an issuer and provide sponsorship into specific payment
networks, but may work closely with the entity that is the program
manager for a specific GPR card program to design, market and
administer the
[[Page 77108]]
program. In sum, the particular services that issuers provide and their
degree of involvement in any GPR card program may vary.\40\ The Bureau
understands that variations can be due to the extent to which the
program manager performs particular services by itself, as well as due
to the particular features of a specific GPR card program.
---------------------------------------------------------------------------
\40\ In some cases, a white label model is used whereby banks
and credit unions rely upon another institution to issue prepaid
accounts, which may be branded with the bank or credit union's name.
There are a handful of such programs through which banks and credit
unions, including some that are small, offer prepaid accounts
(typically as a convenience to their customers or members).
---------------------------------------------------------------------------
To produce, market and sell GPR cards, program managers work with,
as applicable, manufacturers and distributors. The Bureau understands
that distributors arrange for GPR cards to be sold through various
channels including through retailers, money transfer agents, tax
preparers, check cashers, and payday lenders. Further, in many cases,
the Bureau understands that third-party processors may provide many of
the back-office processing functions associated with initial account
opening (including those related to transitioning from temporary to
permanent cards), transaction processing, and account reporting.
Lastly, the payment networks themselves also establish and enforce
their own rules and security standards related to payment cards
generally and prepaid products such as GPR cards specifically. The
networks also facilitate card acceptance, routing, processing, and
settling of transactions between merchants and card issuers.
How funds are held. In contrast to a traditional checking or
savings account, prepaid products including GPR cards are unique in
that the underlying funds are typically held in a pooled account at a
depository institution or credit union. This means that rather than
establish individual accounts for each cardholder, a program manager
may establish a single account at a depository institution or credit
union in its own name, but typically title the account to indicate that
it is held for the benefit of each individual underlying cardholder.
The Bureau understands that the program manager, sometimes in
conjunction with the issuing depository institution or credit union or
the depository institution or credit union holding the funds, will
typically establish policies and procedures and put in place systems to
demarcate each cardholder's funds within the pooled account. As
discussed in detail below, these pooled accounts may qualify for, as
applicable, FDIC pass-through deposit insurance or National Credit
Union Administration's (NCUA) Share Insurance Fund (NCUSIF) pass-
through share insurance. Whether the accounts in fact qualify depends
on how the account is structured and whether certain other conditions
are met. Also discussed in greater detail below, both the FDIC and NCUA
have special rules, regarding how pool accounts may qualify for, as
applicable, FDIC or NCUSIF pass-through insurance.
Revenue generation. The Bureau understands that GPR cards typically
generate revenue through an up-front purchase price paid by the
consumer, the assessment of various monthly maintenance and
transactional fees, and interchange fees collected from merchants by
the payment networks. The 2012 FRB Philadelphia Study found that
``while not as important as cardholder fees, interchange revenues (fees
paid by a merchant or acquiring bank for the purpose of compensating an
issuer for its involvement in an electronic prepaid, debit, or credit
card transaction) account for more than one-fifth of the issuer
revenues in the general-purpose programs and almost half of revenues in
the payroll programs.'' \41\ Revenue is shared among some or all of the
entities involved in the GPR card supply chain, although as also
discussed above, program managers generally reap the bulk of the
revenue from GPR card programs. Further, the Bureau notes that
publicly-available details of how revenue is distributed and expenses
are accounted for are sparse. Additionally, the Bureau believes that
the distribution of revenue and the sharing of expenses among the
entities involved the GPR card supply chain likely vary across
programs.
---------------------------------------------------------------------------
\41\ 2012 FRB Philadelphia Study, at 6.
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Prepaid Products Loaded by Third Parties
The Bureau understands that consumers also receive network-branded
open-loop prepaid products from third parties that disburse funds to
consumers by loading the funds onto such accounts. Previously, funds
may have been distributed to the consumer via paper check, direct
deposit into a traditional checking or saving account, or cash. Payroll
cards are the most common example of prepaid products used by third
parties to distribute funds to consumers. In 2013, over five million
payroll cards were issued, and $30.6 billion was loaded onto them.\42\
The Bureau understands that an employer may establish payroll cards for
its employees, directly or indirectly, for the express purpose of
delivering on an ongoing basis, recurring payments of an employee's
wages, salary, or other compensation, and an employee may choose having
his compensation distributed via a payroll card over other options for
receiving compensation.
---------------------------------------------------------------------------
\42\ Mercator Advisory Grp., Eleventh Annual U.S. Prepaid Cards
Market Forecasts, 2014-2017, at 32 (Nov. 2014).
---------------------------------------------------------------------------
If an employee chooses a payroll card, the Bureau understands that
the employer will provide the employee with a network-branded prepaid
card that accesses a subaccount assigned to the individual employee.
Moreover, on each payday, the employer will transfer the employee's
compensation to the payroll card account, instead of providing the
employee with a paper check or making a direct deposit of funds to the
employee's checking or savings account. The employee can use the
payroll card to withdraw funds at an ATM or over-the-counter via a bank
teller. The employee can also use the payroll card to make purchases
online and at physical retail locations. An employee may even be able
to obtain cash back at the point-of-sale (POS). Some payroll cards may
offer features such as convenience checks and electronic bill payment.
The Bureau understands that employers market payroll cards as an
effective means for employees who may lack a traditional banking
relationship to receive wages. Indeed, the Bureau believe that payroll
cards may provide some consumers a more suitable, cheaper, and safer
method of receiving their wages, as compared to other methods, such as
receiving a check and going to a check-cashing store, if the consumer
does not have a checking account.
Within the last ten years, however, there have been increasing
concerns raised about payroll cards, with specific focus on potentially
harmful fees and practices associated with payroll cards. As explained
in greater detail below, the Board extended a modified form of
Regulation E coverage to payroll cards in 2006, but did not extend
these rules to GPR cards and other prepaid products. Among the relevant
provisions of Regulation E that apply to payroll cards is the provision
on compulsory use. Pursuant to this provision, no financial institution
or other person can mandate that a consumer receive an electronic fund
transfer into an account at a particular institution as a condition of
employment. 12 CFR 1005.10(e)(2).
The Bureau issued a guidance bulletin in September 2013 to clarify
the application of Sec. 1005.10(e)(2) to payroll
[[Page 77109]]
card accounts.\43\ The bulletin reminded employers that they cannot
require their employees to receive wages on a payroll card. It also
explained some of the Regulation E protections that apply to payroll
card accounts, such as those pertaining to fee disclosure, access to
account history, limited liability for unauthorized use, and error
resolution rights. Since the Bureau issued the bulletin, it understands
that certain industry stakeholders have worked to develop industry
standards incorporating and building upon the guidance given in it.\44\
Nevertheless, the Bureau believes that concerns persist as to whether
and how employers and financial institutions are complying with the
compulsory use provision and other provisions of Regulation E, as well
as related State laws applicable to the distribution of wages.\45\ For
example, employees may not always be aware of the ways in which they
may receive their wages, because States may have differing and evolving
requirements.\46\
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\43\ CFPB Bulletin 2013-10, Payroll Card Accounts (Regulation E)
(Sept. 12, 2013), available at http://.consumerfinance.gov/f/
201309_cfpb_payroll-card-bulletin.pdf.
\44\ See, e.g., Press Release, MasterCard MasterCard Introduces
Payroll Card Standards (Dec. 13, 2013), available at http://newsroom.mastercard.com/press-releases/mastercard-introduces-payroll-card-standards/.
\45\ See, e.g., N.Y. State Attorney Gen., Labor Bureau, The
Impact of Payroll Cards on Low-Wage Workers, available at http://www.ag.ny.gov/pdfs/Pinched%20by%20Plastic.pdf.
\46\ See, e.g., http://paycard.americanpayroll.org/compliance-regulations (listing the various State regulations that apply to
payroll cards).
---------------------------------------------------------------------------
The Bureau additionally believes that payroll card accounts raise
disclosure issues beyond those addressed by its payroll card accounts
guidance bulletin, discussed above. Employers may offer a payroll card
account when an employee starts employment, and the issue of how the
employee is to be paid is likely to be one among the many and varied
human resource issues confronting the employee during orientation. An
employee may be provided with a stack of forms to complete and may not
have the time or opportunity to review them. It is also possible that
the employee may be unaware that receiving wages via a payroll card
account is optional, particularly if the employer does not present the
options clearly. These forms the employee may receive from the employer
may not always include all of the relevant information regarding the
terms and conditions of the payroll card account, such as fees
associated with the card and how cardholders can withdraw funds on the
card. Separately, some have raised concerns about the extent to which
payroll card providers share program revenue with employers and, if so,
whether that revenue sharing has negative consequences for cardholders.
Payroll cards are just one type of network-branded open-loop
prepaid products consumers may receive from third parties that disburse
funds to consumers by loading the funds onto such accounts. For
example, institutions of higher education may partner with certain
entities to disburse student financial aid proceeds into network-
branded open-loop prepaid products endorsed by those institutions. See
34 CFR 668.164(c)(2) (setting forth that certain Federal student aid
payments disbursed via ``an account that underlies a stored-value
card'' is considered a direct payment to a student or parent). Like
with payroll card accounts, some have raised concerns about revenue
sharing in connection with prepaid cards provided to students.
A 2014 Government Accountability Office (GAO) report found that of
the U.S. colleges and universities participating in Federal student aid
programs for the 2011-2012 school year that had agreements with
financial firms to provide debit and prepaid card services for
students, approximately 80 percent of such agreements were for debit
cards, with the remainder for prepaid cards.\47\ The report also stated
that more than 80 percent of the schools identified in the report with
card agreements indicated that students could use their cards to
receive financial aid and other funds from the school.\48\ Further, the
report found instances where certain third-party providers involved in
college card programs work with a bank partner.\49\
---------------------------------------------------------------------------
\47\ U.S. Gov't Accountability Office, GAO-14-91, College Debit
Cards Actions Needed to Address ATM Access, Student Choice and
Transparency, at 8 (Feb. 2014) (GAO 2014 College Card Report),
available at http://www.gao.gov/assets/670/660919.pdf.
\48\ GAO 2014 College Card Report, at 9.
\49\ Id. at 15.
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Among other things, the GAO noted concerns about the fees on
student debit and prepaid cards, as well as the lack of ATM access and
the lack of the schools' neutrality toward the card programs.\50\ It
found instances in which schools appeared to encourage students to
enroll in the school's specific prepaid card program, rather than
present neutral information about disbursement options for financial
aid.\51\ Relatedly, the Department of Education is in the process of a
negotiated rulemaking regarding the use of third-party entities to
disburse Federal student aid, including those that may distribute funds
via prepaid products.\52\
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\50\ U.S. Gov't Accountability Office, GAO Highlights:
Highlights of GAO-14-91, a Report to the Chairman, Committee on
Health, Education, Labor, and Pension, U.S. Senate (Feb. 2014),
available at http://www.gao.gov/assets/670/660920.pdf.
\51\ Id.
\52\ 78 FR 69612 (Nov. 20, 2013).
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Further, the Bureau understands that prepaid cards are also used by
some insurance providers to pay certain insurance claims such as claims
related to a property or casualty loss.\53\ During outreach, some
insurance providers informed the Bureau that, where permitted by State
law, it is faster and more economical to provide workers compensation
payments on prepaid cards relative to mailing paper checks.
Additionally, after a natural disaster, the disbursement of funds from
insurance claims onto prepaid cards may allow funds to be delivered to
consumers that may be unable to use or access traditional checking or
savings accounts.
---------------------------------------------------------------------------
\53\ Mercator Advisory Grp., Tenth Annual U.S. Prepaid Cards
Market Forecasts, 2013-2016, at 42-43 (Oct. 2013).
---------------------------------------------------------------------------
Similarly, taxpayers may direct tax refunds onto prepaid cards
provided by tax preparers or government entities. These prepaid cards
are typically open-loop cards. Other disbursements onto prepaid cards
include disbursement of mass transit or other commuting-related funds,
which are typically onto restricted closed loop cards. However, the
Bureau understands that new transit payment models are emerging, and
these models tend to involve open-loop prepaid cards.\54\ Aid
distributed by relief organizations or government agencies in response
to natural disasters is usually loaded onto open-loop cards. In some of
these cases, the cards may be reloaded by the entity that initially
disbursed funds onto the card.
---------------------------------------------------------------------------
\54\ See e.g., https://www.ventrachicago.com/ (The city of
Chicago's mass transit card has reloadable open-loop features). See
also http://www.septa.org/key/ (The city of Philadelphia announced
that its mass transit card will also have reloadable open-loop
features).
---------------------------------------------------------------------------
Finally, government entities also distribute various funds onto
prepaid products. In addition to distributing tax refunds onto such
products, the Federal government and various State governments may use
prepaid products to distribute government benefits such as Social
Security Payments,\55\ unemployment insurance benefits,\56\
[[Page 77110]]
child support payments, and other types of disbursements including
needs-tested benefits. Needs-tested benefits include funds related to
Temporary Assistance for Needy Families (TANF), Special Supplemental
Nutrition Program for Women, Infants and Children (WIC) and the
Supplemental Nutrition Assistance Program (SNAP). State and local
government programs for distributing needs-tested benefits are
typically referred to as electronic benefit (EBT) programs. Most States
offer a choice between at least direct deposit to a traditional
checking or savings account or a prepaid product for the receipt of
unemployment insurance benefits. However, the Bureau understands that
several States require the distribution of such benefits onto prepaid
products.\57\ With respect to other government benefits, as noted below
in the discussion of relevant law, Regulation E does not apply to EBT
programs.\58\ In addition, Treasury's Bureau of the Fiscal Service, on
behalf of the United States military, provides both closed-loop and
open-loop prepaid cards for use by servicemembers and contractors in
the various branches of the armed forces.\59\ The features of and fees
charged in connection with these cards may vary.
---------------------------------------------------------------------------
\55\ Treasury has established the Direct Express program for the
distribution of government benefits such as Social Security
payments.
\56\ See e.g., Nat'l Consumer Law Ctr., 2013 Survey of
Unemployment Compensation Prepaid Cards, at 7 (Jan. 2013), available
at http://www.nclc.org/issues/unemployment-compensation-prepaid-cards.html (noting that 42 States offer some form of prepaid card
for distribution of employment compensation payments).
\57\ Id. at 1.
\58\ See EFTA section 904(d)(2)(B); Regulation E Sec.
1005.15(a)(2).
\59\ See, e.g., Navy Cash/Marine Cash, http://fms.treas.gov/navycash/index.html and Eagle Cash, http://fms.treas.gov/eaglecash/index.html. As discussed further below, the Navy Cash and Marine
Cash products may have multiple ``purses'' such that one ``purse''
can only be used at a limited number of linked merchants (such as
various places on a Naval vessel) while the other ``purse'' can be
linked to a payment card network that provides global acceptance to
unaffiliated merchants.
---------------------------------------------------------------------------
The Bureau believes that as a general matter, prepaid products
loaded by third parties present some of the same consumer protection
issues as GPR cards such as the lack of clear disclosures about fees
and other important terms and conditions, and the lack of opportunity
for consumers to compare and evaluate different products before
acceptance. Consumers may use these products as their primary
transaction account, particularly when the product is loaded with all
of the consumer's incoming funds (e.g., wages, unemployment benefits,
student loan proceeds, etc.). In accepting the product, a consumer may
not fully grasp all of its fees and terms and how those fees and terms
might impact the consumer over time. In addition and as previously
noted, consumers may be offered these products in situations that make
comparison shopping difficult. However, the Bureau believes that many
prepaid accounts with funds loaded by third parties may present
distinct set of issues as well. The Bureau understands many types of
these accounts are distributed to very specific segments of consumers
such as college-age students or very low-income consumers, and
accordingly, there may be distinct consumer protection issues
associated with these prepaid products.
Digital Wallets
In recent years, there has been increasing industry interest in
developing ``digital wallets'' and ``mobile wallets.'' A consumer may
keep cash, debit and credit cards, GPR cards, and gift cards in a
physical wallet or purse. Digital wallets have been marketed as a
viable alternative to a physical wallet, because a number of digital
wallets currently available can store one or more of the consumer's
payment credentials electronically.\60\ For example, a digital wallet
may allow a consumer to store the consumer's bank account, debit card,
credit card, and/or prepaid card credentials in the wallet, which may
be accessed by the consumer through a Web site. Digital wallets that a
consumer could access using a mobile device such as a smartphone have
been described as mobile wallets.\61\ Further, some, but not all,
digital wallets currently available to consumers allow a consumer to
store funds in it directly or by funding a prepaid product, and draw
down the stored funds.\62\
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\60\ Aite Grp. LLC, Money Goes Mobile, (May 2014), available at
http://www.aitegroup.com/report/money-goes-mobile.
\61\ Id.
\62\ See e.g., http://www.google.com/wallet/index.html (last
accessed on Oct. 28, 2014) (``The Wallet Balance is the money in
your Google Wallet . . . [money will be stored in the wallet]. [Use]
your Wallet Balance to send money to friends [and shop], or transfer
money to your bank account. You can also add money to your Wallet
Balance . . . from a credit card, debit card or linked bank
account.''); see also, https://www.serve.com/ (last accessed on Oct.
28, 2014) (``Use the American Express Serve Mobile App to check your
balance and recent transactions, pay bills on the go, add checks,
and send money to family or friends who have a Serve Account.
Download the American Express Serve Mobile App for iOS or
Android.'').
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Digital wallets have been marketed as allowing consumers to
electronically transmit funds in multiple settings. Currently, digital
wallets can be used by a consumer for online purchases,\63\ payments at
brick-and-mortar retailers through, for example, contactless
communication at the point of sale,\64\ as well as person-to-business
(i.e. bill pay) and P2P transfers.\65\ The Bureau understands that
there may be significant variations in how funds are held in digital
wallets and how payments are processed by digital wallets and that
payment processing by digital wallets is evolving quickly. For
instance, some digital wallets provide methods for accessing the ACH
system to make a payment. In this case, a consumer might use a digital
wallet to pay for an online purchase, and the digital wallet
facilitates the transfer of funds from the consumer's checking account
to fund the transaction. In other cases, the consumer's funds are first
transferred to the digital wallet either by the consumer or by the
digital wallet provider, and then transferred to ultimate payee. For
example, it may be possible for a consumer to maintain a positive
balance in the wallet through transfers from sources such as a bank
account, a credit, debit, or prepaid card, or a P2P transfer. The
consumer's digital wallet balance may be held in the name of the
digital wallet provider in a pooled account that is not further divided
into subaccounts that are held in the name of any individual consumer.
---------------------------------------------------------------------------
\63\ See e.g., Visa Checkout Terms of Service, https://secure.checkout.visa.com/pages/terms?country=US&locale=en (last
accessed on Oct. 28, 2014).
\64\ See e.g., Google Wallet Terms of Service, https://wallet.google.com/termsOfService?type=BUYER&gl=US (last accessed on
Oct. 28, 2014).
\65\ See e.g., Boost Mobile Wallet Terms of Service, (https://boostmobile.wipit.me/legal/terms.aspx (last accessed on Oct. 28,
2014).
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A mobile wallet may act as a pass-through that enables consumers to
pay for goods at a store using payment credentials for other accounts,
such as credentials for a consumer's credit card, debit, or prepaid
card that the consumer has stored on the mobile wallet. For example, a
consumer could use a mobile wallet on a smartphone to select the
consumer's debit card to fund a payment for a good or service, and then
use near field communication to tap the phone at a point-of-sale
terminal to pay. The Bureau expects that variations of digital wallets
will continue to grow and observes that the methods described herein
are a few of the funding options available in the current market.
Credit Features, Overdraft Programs & Prepaid Products
As currently offered and marketed, most prepaid products do not
allow consumers to spend more money than is loaded onto the product.
Although there are a few exceptions, most providers of prepaid products
do not currently offer overdraft services,\66\ a linked line of
[[Page 77111]]
credit,\67\ access to a deposit advance product \68\ or other method of
accessing credit in connection with a prepaid product.\69\ Instead,
prepaid products, including many GPR cards, are actively marketed as
``safe'' alternatives to checking accounts with opt-in overdraft
services, credit cards, or other credit options.\70\
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\66\ As discussed further below, overdraft services evolved from
ad hoc, discretionary programs in which financial institutions would
sometimes cover particular transactions that would otherwise
overdraw an account as a courtesy to the consumer rather than return
the transaction and subject the consumer to a non-sufficient-funds
(NSF) fee, merchant fees, and other negative consequences from
bounced checks. Overdraft services fees are imposed on a per
transaction basis, and the financial institution takes the balance
owed as soon as additional funds are deposited into the account.
Further, as explained below, the Board exempted overdraft services
from regulation under TILA and Regulation Z, as long as they are
provided pursuant to an agreement that does not obligate the
financial institution to cover any particular transaction. In
addition, these programs are not typically subject to traditional
underwriting processes used for other credit products. Under
Regulation E, financial institutions must obtain an opt-in by the
consumer before imposing overdraft fees on ATM and one-time point of
sale transactions by debit card. See Regulation E, Sec. 1005.17(b).
\67\ A linked line of credit is a separate line of credit that a
financial institution ``links'' to a deposit account or prepaid
product to draw funds automatically where transaction made using
funds from the account or product would otherwise take the balance
on the account or product negative. Such a credit feature is
generally subject to interest rates, traditional credit
underwriting, and the Truth in Lending Act and Regulation Z.
Similarly, some financial institutions offer consumers an option to
link their credit card to a deposit account to provide automatic
``pulls'' to cover transactions that would otherwise exceed the
balance in the account.
\68\ A deposit advance product (DAP) is a small-dollar, short-
term loan or line of credit that a financial institution makes
available to a customer whose deposit account reflects recurring
direct deposits. The customer obtains a loan, which is to be repaid
from the proceeds of the next direct deposit. DAPs typically do not
assess interest and are fee-based products. Repayments are typically
collected from ensuing deposits, often in advance of the customer's
other bills. (See CFPB Whitepaper on Payday and Deposit Advance
Products: Initial Data Findings, Apr. 30, 2013, see also OCC and
FDIC Final Guidance on Supervisory Concerns and Expectations
Regarding Deposit Advance Products, 78 FR 70552, 70624 (Nov. 26,
2013). Publication of the Bureau's White Paper and the guidance
issued by the FDIC and OCC has caused many financial institutions to
reevaluate their DAP programs.
\69\ For example, a financial institution could offer a product
whereby consumers with a credit account access that account and
``push'' the credit into their prepaid accounts where it can be
spent.
\70\ See, e.g., NBCPA, What are Prepaid Cards?, http://www.nbpca.com/en/What-Are-Prepaid-Cards/Prepaid-Card-Benefits.aspx
(last visited Oct. 28, 2014) (``For many Americans, prepaid cards
serve as a tool with which to more effectively budget their
spending. With a prepaid card, consumers avoid the risk of over-
spending or overdraft, thus avoiding the interest, fees and
potential negative credit score implications of traditional credit
cards. And for parents, prepaid cards provide tools to maintain
control over their teens' or college students' spending.''); see
also Examining Issues in the Prepaid Card Market: Hearing before the
Subcomm. On Fin. Inst. and Consumer Prot., S. Comm. on Banking,
Housing and Urban Affairs, 112th Cong. 2 (2012) (Remarks of Dan
Henry, Chief Executive Officer, NetSpend Holdings, Inc.) (``Our
customers are typically working Americans who want control. . .
.'').
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As the Bureau observed above, it appears that a desire to avoid
fee-based overdraft services motivates a sizeable portion of consumers
to choose prepaid products, such as GPR cards, over checking
accounts.\71\ Further, a slight majority of consumers that participated
in the 2014 Pew Survey stated that one of the major reasons that they
use prepaid products is that they help those consumers control their
spending.\72\ Similarly, the Bureau's own focus groups also found that
many consumers choose prepaid products because they help them control
their spending.\73\ Unlike deposit accounts with an overdraft feature
or linked lines of credit, credit cards, and other credit products,
consumers that use prepaid products without credit features (i.e., most
prepaid consumers) cannot spend funds that have not been loaded into
the account.
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\71\ 2014 Pew Survey, at 14 ex.12 (noting that the top two
reasons consumers claim to use prepaid cards related to avoiding
credit card debt (67 percent) and helping them not spend more money
than they actually have (66 percent).
\72\ 2014 Pew Survey, at 13-14.
\73\ ICF Report, at 5.
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It also appears that many consumers specifically seek to acquire
prepaid products that do not offer overdraft services or credit
features because they have had negative experiences with credit
products, including checking accounts with overdraft features or want
to avoid fees related to such products. For example, the 2014 Pew
Survey found that many prepaid consumers previously had a checking
account and either lost that account (due to failure to repay
overdrafts or related issues) or gave up the checking account due to
overdraft or bounced check fees.\74\ Relatedly, prepaid products are
often used by consumers who cannot obtain a checking account due to bad
credit or other issues.\75\ GPR cards--which are sometimes marketed as
involving ``no credit check''--provide consumers with access to
electronic payment networks, the ability to make online purchases, and
increased security and convenience over alternatives such as cash.\76\
Prepaid consumers often are unable to open credit card accounts and
cannot get a traditional checking account with a debit card due to
negative reports with credit reporting agencies focusing on checking-
account related credit issues.
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\74\ 2014 Pew Survey, at 7-8 (noting both that ``Most prepaid
card users who have had a checking account in the past have paid
associated overdraft fees for debit card usage'' and that ``Among
those prepaid card users who have ever had a bank account, 41
percent of them say they have closed or lost a checking account
because of overdraft or bounced check fees'').
\75\ Id. at 8 (noting that one-third of prepaid consumers who
have ever had a checking account say they have closed a bank
checking account themselves because of overdraft or bounced check
fees and 21 percent who say they have had a financial institution
close their account because of overdraft or bounced check fees).
\76\ See ICF Report, at 5; 2014 Pew Survey, at 14 ex.12 (noting
that 72 percent of prepaid consumers say that a reason they have a
prepaid card is to make purchases online and other places that do
not accept cash).
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Apart from consumers' reasons for favoring prepaid products,
regulatory factors may also have discouraged prepaid product providers
from offering overdraft services or credit features in connection with
their products. The Bureau understands that some prepaid product
issuers have received guidance from their prudential regulators that
has deterred those financial institutions from allowing prepaid
products they issue to offer overdraft services or credit features.
Relatedly, the Bureau believes that a 2011 Office of Thrift Supervision
enforcement action regarding a linked deposit advance feature may also
have had a chilling effect on the growth of DAPs.\77\ Finally, while a
number of industry commenters to the Bureau's Advance Notice of
Proposed Rulemaking (Prepaid ANPR) expressed interest in offering
overdraft services or credit features in connection with prepaid
products, some industry commenters also expressed their reluctance to
proceed until there is greater certainty as to whether this rulemaking
would alter the permissible bounds of such a program.
---------------------------------------------------------------------------
\77\ See In the Matter of MetaBank, Office of Thrift
Supervision, Order No. CN 11-25 (July 15, 2011), available at http://www.occ.gov/static/ots/enforcement/97744.pdf.
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The Bureau understands that the only credit features being offered
on prepaid accounts currently are structured as overdraft services.\78\
To date, overdraft services on prepaid accounts have been generally
structured similar to overdraft services offered by financial
institutions on checking accounts, but in some ways, are more consumer-
friendly. For example, the programs charge a per-transaction fee each
time the consumer incurs an overdraft (e.g., one program
[[Page 77112]]
charges $15) although the fee tends to be lower than fees typically
charged for checking accounts (median fee as of July 2014 is $35).\79\
In addition, issuers of certain prepaid products with overdraft
services will waive the overdraft fee if the consumer repays the
overdraft quickly (e.g., within 24 hours) or if the overdraft is only
for a nominal amount (e.g., $5 or $10). Further, these terms and
conditions also limit the number of overdrafts that will be permitted
in a given month and the amount by which the account balance can go
negative, and contain ``cooling off'' periods after a consumer has
incurred more than a certain number of overdrafts. During the cooling
off period, the consumer is typically prohibited from using the
overdraft service.
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\78\ See CFSI Prepaid Industry Scorecard (noting that only two
in a survey of 18 GPR programs representing 25% of the market
currently offers an opt-in overdraft service); CFPB Overdraft
Whitepaper, at 14 (summarizing data showing that most banks and
credit unions offer opt-in overdraft programs). Apart from actual
overdraft programs, some prepaid programs, according to their terms
and conditions, reserve the right to impose a fee for a negative
balance on a prepaid account. (These programs' agreements typically
state that the cardholder is not permitted to spend beyond the
balance in the prepaid account, but if circumstances were to occur
that cause the balance to go negative, a fee will or may be imposed.
Some agreements state that repeated attempts to spend beyond the
card balance will or may result in the prepaid account being
closed). Roughly 10 percent of reviewed agreements noted such a
charge.
\79\ Bureau staff determined the median figure for checking
account overdraft fees through an analysis of the overdraft fees
charged by the largest 50 U.S. banks ranked by consumer checking
balances.
---------------------------------------------------------------------------
With respect to the issue of fees, revenue from overdraft services
does not appear to have significantly influenced the pricing structure
of prepaid products in the same way that overdraft services have
influenced traditional checking accounts. Indeed, as discussed above,
overdraft services offered in connection with prepaid products are
relatively rare, and fees are relatively modest compared to similar
fees associated with checking account overdraft programs. As discussed
in greater detail in the section-by-section analysis below, as a result
of several regulatory exemptions discussed below, the Bureau believes
that checking account overdraft programs have evolved from courtesy
programs under which financial institutions would decide on a manual,
ad hoc basis to cover particular transactions and help consumers avoid
negative consequences to automated programs that are the source of as
much as two-thirds of financial institutions' deposit account
revenue.\80\ As a result, depository institutions and credit unions
have developed checking accounts to have low (or sometimes no) up-front
costs, to add services such as online bill pay (including not only
electronic payments through the ACH network but also manual generation
of checks authorized through the bank or credit union's on-line bill
pay portal) at no additional cost, and to rely on ``back end'' fees
such as per-transaction overdraft fees and NSF fees to maintain
profitability. While some prepaid products may also have low or no
upfront fees associated with them, the Bureau believes that this is
largely due to the fact that as a general matter, fixed costs for
prepaid products are substantially lower than similar costs for many
checking accounts.\81\ Moreover, financial institutions that issue
prepaid accounts typically do not earn their revenue from ``back-end''
overdraft fees or NSF fees. Instead, they earn revenue from other types
of fees, such as ATM fees, and interchange fees collected from use of a
prepaid account on a payment network.\82\
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\80\ According to information supplied to the Bureau as part of
its large bank overdraft study and reported in its Overdraft White
Paper, overdraft and NSF-related fees from consumer checking
accounts constituted 61 percent of consumer and 37 percent of total
deposit account service charges earned by study banks in 2011. If
aggregate study bank fee revenue ratios could be extrapolated to all
FDIC-insured institutions, this would imply the banking industry
earned roughly $12.6 billion in consumer NSF and overdraft fees in
2011. See CFPB Overdraft White Paper, at 14-15.
\81\ See Cathy Corby Parker, Is ``What's Old New Again'' for
Financial Institutions in Prepaid? (Aug. 2012), available at https://www.aba.com/Tools/Offers/Documents/What's%20Old%20Is%20New%20Again%20White%20Paper.pdf.
\82\ For example, in 2013 one major program manager derived
approximately 32 percent of its operating revenue from cash-reload
fees and 30 percent from interchange fees. See Green Dot Corp., 2013
Annual Report, at 30 (2014) available at http://phx.corporate-ir.net/phoenix.zhtml?c=235286&p=irol-reportsAnnual.
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As discussed in greater detail below, certain prepaid products,
such as payroll card accounts and prepaid accounts that receive Federal
payments, must comply with Regulation E's overdraft provisions.
However, because many prepaid products are not now currently subject to
Regulation E, they may not be required to comply with its provisions
specific to overdraft services. Nonetheless, the Bureau understands
that program managers of prepaid products with overdraft services or
credit features have structured their products to comply with
Regulation E's rules regarding overdraft services. Specifically, the
Bureau understands that overdraft programs on GPR cards and payroll
card accounts typically provide a disclosure similar to Model Form A-9
in appendix A to Regulation E.\83\ This model form contains disclosures
that require a consumer to opt-in to the overdraft service before a
financial institution may charge the consumer a fee for a point-of-sale
debit or ATM transaction that results in an overdraft of a consumer's
account.\84\
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\83\ The Bureau understands that prepaid product providers that
offer overdraft services typically do so with respect to both their
GPR cards and payroll card accounts, to the extent they offer both
products.
\84\ The Bureau found in its Study of Prepaid Account Agreements
that some programs' agreements state that while they do not offer
formal overdraft services, they will impose negative balance or
other similar fees for transactions that may take an account
negative despite generally not permitting such activity. See Study
of Prepaid Account Agreements, at 24-25. The Bureau does not believe
such fees are typically charged.
---------------------------------------------------------------------------
The Bureau understands that prepaid products that are associated
with overdraft services or credit features generally offer such
services only to those consumers that meet specified criteria, such as
evidence of recurring deposits over a certain dollar amount. These
recurring deposits presumably allow the financial institution to have
some confidence that there will be incoming funds of adequate amounts
to repay the debt. Further, the Bureau understands that the terms and
conditions of prepaid product overdraft programs typically require that
the next deposit of funds into the prepaid product--through either
recurring deposits or cash reloads--be used to repay the overdraft, or
they will claim such funds for the purpose of repaying the overdraft.
B. Existing Regulation of Prepaid Products
There are several Federal regulatory regimes, including those
regarding consumer protection; receipt of Federal payments;
interchange; and international money laundering, terrorist financing,
and other financial crimes that apply to some or all types of prepaid
products. In addition to EFTA, its implementing regulation, Regulation
E, and related guidance, other relevant regulations include Treasury's
Financial Management Service's rule on the receipt of Federal payments
on prepaid cards; \85\ the Board's Regulation II on debit card
interchange and routing (12 CFR part 235); and FinCEN's prepaid access
rule.\86\
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\85\ 75 FR 80335 (Dec. 22, 2010).
\86\ 76 FR 45403 (July 29, 2011).
---------------------------------------------------------------------------
Prudential regulators have also issued guidance about the
application of their regulations to prepaid products, program managers,
and financial institutions that issue prepaid products. For example,
the FDIC has issued guidance regarding pass-through deposit insurance
for prepaid accounts.\87\ The Office of the Comptroller of the Currency
(OCC) has published a guidance bulletin to provide guidance to national
banks for assessing and managing the risks associated with prepaid
access programs.\88\ However, as
[[Page 77113]]
discussed below, the Bureau believes that there are gaps in the
existing Federal regulatory regimes that cause certain prepaid products
not to receive full consumer protections, in particular under
Regulation E. In addition to Federal regulations that apply to prepaid
products, the Bureau also discusses below some State consumer
protection laws and other regulations specific to prepaid products.
---------------------------------------------------------------------------
\87\ FDIC General Counsel Opinion No. 8, Insurability of Funds
Underlying Stored Value Cards and Other Nontraditional Access
Mechanisms, 73 FR 67155, 67157 (Nov. 13, 2008) (FDIC 2008 General
Counsel Opinion).
\88\ Office of the Comptroller of Currency, OCC Bulletin 2011-
27, Prepaid Access Programs, Risk Management Guidance and Sound
Practices (June 28, 2011), available at http://www.occ.gov/news-issuances/bulletins/2011/bulletin-2011-27.html.
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1. The Electronic Fund Transfer Act and Related Provisions in
Regulation E Core Provisions of EFTA and Regulation E
Congress enacted EFTA in 1978 with the purpose of ``provid[ing] a
basic framework establishing the rights, liabilities, and
responsibilities of participants in electronic fund transfer systems.''
However, EFTA's primary objective is ``the provision of individual
consumer rights.'' \89\ Congress also empowered the Board to promulgate
regulations implementing EFTA. EFTA section 904(a). With the adoption
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), authority to implement most of EFTA transferred to the
Bureau.\90\ See Dodd-Frank Act sections 1061(b) and 1084; 12 U.S.C.
5581(b); 15 U.S.C. 1693a et seq.
---------------------------------------------------------------------------
\89\ See Public Law 95-630; 92 Stat. 3728 (1978).
\90\ Public Law 111-203, section 1084, 124 Stat. 2081 (2010)
(codified at 12 U.S.C. 1693).
---------------------------------------------------------------------------
The regulations first promulgated by the Board to implement EFTA
now reside in subpart A of Regulation E, 12 CFR part 1005.\91\ These
rules provide a broad suite of protections to consumers who make
electronic fund transfers (EFTs). An EFT is any transfer of funds
initiated through an electronic terminal, telephone, computer, or
magnetic tape for the purpose of ordering, instructing, or authorizing
a financial institution to debit or credit a consumer's account. Sec.
1005.3(b)(1). Regulation E also provides protections for accounts from
which consumers can make EFTs. In its initial rulemaking to implement
EFTA, the Board developed a broad definition of ``account,'' which
closely mirrored the definition of ``account'' in EFTA.\92\ The
definition provides that, subject to certain specific exceptions, an
account is a demand deposit (checking), savings, or other consumer
asset account (other than an occasional or incidental credit balance in
a credit plan) held directly or indirectly by a financial institution
and established primarily for personal, family, or household purposes.
Sec. 1005.2(b)(1).
---------------------------------------------------------------------------
\91\ These provisions were originally adopted as 12 CFR part 205
but, upon transfer of authority in the Dodd-Frank Act to implement
Regulation E to the Bureau were renumbered as 12 CFR part 1005. 76
FR 81020 (Dec. 27, 2011). Unless otherwise noted, historical
provisions noted described as residing in 12 CFR part 1005
originally were contained in 12 CFR part 205.
\92\ 44 FR 18468, 18480 (Mar. 28, 1979).
---------------------------------------------------------------------------
For covered accounts, Regulation E mandates that consumers receive
certain initial disclosures, in writing and in a form that the consumer
can keep. Sec. 1005.4(a)(1). As applicable, the initial disclosures
must include, among other things, disclosures regarding a consumer's
liability for unauthorized EFTs, an error resolution notice, contact
information for the financial institution providing the account, the
types of transfers a consumer may make and any limitations on the
frequency and dollar amount of transfers, and the fees associated with
making EFTs. See generally Sec. 1005.7(b). Regulation E also sets
forth substantive provisions on error resolution and impose limits on a
consumer's liability for unauthorized EFTs. See Sec. Sec. 1005.6 and
1005.11. Moreover, Regulation E contains, among other things,
provisions specific to periodic statements that generally must be
provided in writing (Sec. 1005.9(b)), the issuance of access devices
(Sec. 1005.5),\93\ preauthorized EFTs and compulsory use (Sec.
1005.10), requirements for overdraft services (Sec. 1005.17), and ATM
disclosures (Sec. 1005.16).
---------------------------------------------------------------------------
\93\ An access device is a card, code, or other means of access
to a consumer's account, or any combination thereof, that may be
used by the consumer to initiate EFTs. Sec. 1005.2(a)(1).
---------------------------------------------------------------------------
As discussed above, the Dodd-Frank Act transferred authority to
implement most of EFTA from the Board to the Bureau. Since assuming the
transferred authority, the Bureau has amended Regulation E in two
substantive respects. First, as discussed in more detail in the
section-by-section analysis below, the Bureau added consumer
protections to Regulation E for certain international fund transfers.
12 CFR 1005.30 et seq. Additionally, the Bureau amended Regulation E
with respect to certain rules pertaining to ATM fee notices.\94\
However, before authority transferred from the Board to the Bureau, the
Board had revised Regulation E on multiple occasions to add, among
other things, protections for products used for the electronic
distribution of government benefits, payroll card accounts, gift cards,
and gift certificates. The Board's amendments to Regulation E to expand
coverage to these additional account types are discussed below.
---------------------------------------------------------------------------
\94\ 78 FR 18221 (Mar. 26, 2013).
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Amendments to Regulation E Regarding Additional Account Types
In 1994, the Board amended Regulation E to extend Regulation E's
protections to accounts used for the electronic distribution of
government benefits in what was then 12 CFR 205.15 (1994 EBT Rule).\95\
After the Board finalized the 1994 EBT Rule, Congress limited the
application of EFTA and Regulation E with respect to State and local
electronic benefit transfer programs to only those programs that are
``non-needs tested,'' when it enacted the Personal Responsibility and
Work Opportunity Reconciliation Act of 1996, a comprehensive welfare
reform law.\96\
---------------------------------------------------------------------------
\95\ 59 FR 10678 (Mar. 7, 1994).
\96\ Public Law 104-193, 110 Stat. 2105 (1996).
---------------------------------------------------------------------------
The enactment of the statute necessitated a change to the 1994 EBT
Rule to exempt needs-tested government benefit programs established or
administered under State or local law (e.g., benefits such as those
provided under SNAP and the Aid to Families with Dependent Children
program). As the Board explained at the time, the revision to EFTA was
``enacted by the Congress at the urging of State officials, who
expressed concern about the costs of compliance with EFTA and
Regulation E. In particular, the States believed that EFTA provisions
limiting a recipient's liability for unauthorized transfers could raise
serious budgetary problems at the [S]tate level.'' \97\ As a result,
the Board ultimately adopted a rule exempting EBT programs established
or administered by State or local government agencies from Regulation
E. However, all accounts used to distribute benefits for Federally-
administered programs (including Federal needs-tested programs) and
non-needs tested State and local government benefit programs, such as
employment-related ones, remained covered by Regulation E.\98\
---------------------------------------------------------------------------
\97\ 62 FR 3242, 3243 (Jan. 22, 1997).
\98\ 62 FR 43467 (Aug. 14, 1997).
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When the Board resumed rulemaking after enactment of the welfare
reform legislation, it also took notice that prepaid cards (at the time
referred to as stored-value cards) were beginning to be used by more
consumers. The Board sought comment on whether to adopt rules specific
to prepaid financial products (other than government benefit accounts)
pursuant to its authority under EFTA (1996 Stored-Value Proposal).\99\
The Board explained that the facts, as it understood them, supported a
determination to include stored-value accounts as accounts under
Regulation E. Among the provisions considered in the 1996 Stored-Value
Proposal, the Board proposed to extend Regulation E's error resolution
[[Page 77114]]
provisions to stored-value accounts and provide a periodic statement
alternative for such accounts similar to what was adopted for
government benefit cards in the 1994 EBT Rule. In the proposal, the
Board noted pending legislation in Congress that would address stored-
value cards. H.R. 2520, 104th Cong., Sec. 443; S. 650, 104th Cong.,
Sec. 601 (1995).
---------------------------------------------------------------------------
\99\ 61 FR 19696 (May 2, 1996).
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Ultimately, Congress directed the Board to conduct a study to
evaluate whether provisions of EFTA could be applied to stored-value
products without adversely affecting the cost, development, and
operation of such products.\100\ The Board concluded in a March 1997
report that:
---------------------------------------------------------------------------
\100\ Public Law 104-208, 110 Stat. 3009 (1996).
[G]iven the limited experience [at that time] with electronic
stored-value products to date, it is difficult to predict whether
the benefits to consumers from any particular Regulation E provision
would outweigh the corresponding costs of compliance. . . . [F]ull
application of Regulation E would likely impose substantial
operating and opportunity costs of compliance. Partial application
of Regulation E would be less burdensome than full application but,
depending on the details, could still impose significant operating
and opportunity costs for some electronic stored-value
---------------------------------------------------------------------------
products.\101\
\101\ Bd. of Governors of the Fed. Reserve Sys., Report to
Congress on the Application of the Electronic Fund Transfer Act to
Electronic Stored-Value Products, at 75 (Mar. 1997), available at
http://www.Federalreserve.gov/boarddocs/rptcongress/efta_rpt.pdf.
Notably, the products examined by the Board in this report differ
from most prepaid products in use today.
---------------------------------------------------------------------------
The Board ultimately did not finalize the 1996 Stored-Value
Proposal. In the report, it concluded that the market was evolving
rapidly and was not yet ripe for regulation.\102\
---------------------------------------------------------------------------
\102\ Id.
---------------------------------------------------------------------------
The Board next considered changes to Regulation E with respect to
prepaid products in 2004, when it proposed amendments to Regulation E
to extend it to payroll card accounts established by an employer for
providing an employee's compensation on a regular basis.\103\ The Board
concluded that extending a modified form of Regulation E protections
was warranted for payroll card accounts because they are often used as
account substitutes. However, as discussed in greater detail below, yet
again, the Board decided not to extend such protections to other
prepaid products such as general-use prepaid cards, because it
concluded that consumers used such cards in many different ways.
---------------------------------------------------------------------------
\103\ 69 FR 55996 (Sept. 17, 2004).
---------------------------------------------------------------------------
In its final rule, the Board included payroll card accounts within
the definition of account in Sec. 1005.2(b) (Payroll Card Rule).\104\
The Board also established provisions in Regulation E specific to
payroll card accounts that modified certain Regulation E provisions as
the Board deemed appropriate. As noted above, Regulation E generally
requires financial institutions to provide periodic statements in
writing. See Sec. 1005.9(b). The Board allowed providers of payroll
card accounts to avoid this requirement, if the institution makes
available to the consumer: (1) The account balance, through a readily
available telephone line; (2) an electronic history of account
transactions that covers at least 60 days (including all the
information required in periodic statements by Sec. 1005.9(b)); and
(3) a written history of account transactions that is provided promptly
in response to an oral or written request and that covers at least 60
days (including all the information required in periodic statements by
Sec. 1005.9(b)). See Sec. 1005.18(b). Related provisions in Sec.
1005.18(c) modify other requirements of Regulation E with respect to
payroll card accounts. They include modification related to the
requirements for initial disclosures, annual error resolution notices
(otherwise required by Sec. 1005.8(b)), and error resolution and
limitations on liability, in recognition of the modified periodic
statement requirement.
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\104\ 71 FR 51437, 51438 (Aug. 30, 2006).
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As noted above, in adopting the Payroll Card Rule, the Board
considered whether also to include GPR cards within Regulation E. The
Board ultimately concluded that, as of 2006, it was premature to do so.
In its view of the marketplace at that time, the Board noted that
consumers did not often use other prepaid products such as general-use
prepaid cards in the same way that they used payroll card accounts. The
Board stated that ``[F]or payroll card accounts that are established
through an employer, there is a greater likelihood [than for general-
use prepaid cards] that the account will serve as a consumer's
principal transaction account and hold significant funds for an
extended period of time.'' \105\
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\105\ 71 FR 51437, 51441 (Aug 30, 2006).
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Similarly, in an earlier interim final rule that established that
payroll card accounts are covered accounts under Regulation E, the
Board expressed its belief that to the extent that consumers use
general-use prepaid cards like gift cards, ``consumers would derive
little benefit from receiving full Regulation E protections for a card
that may only be used on a limited, short-term basis and which may hold
minimal funds, while the costs of providing Regulation E initial
disclosures, periodic statements, and error resolution rights would be
quite significant for the issuer.'' \106\ It also noted that GPR cards
are ``generally designed to make one-time or a limited number of
payments to consumers and are not intended to be used on a long-term
basis.'' \107\
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\106\ 71 FR 1473, 1475 (Jan. 10, 2006).
\107\ Id.
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In 2009, Congress enacted the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (Credit CARD Act).\108\ Among
other provisions, the Credit CARD Act instructed the Board to
promulgate new rules regarding expiration dates and dormancy or
inactivity fees for gift cards, gift certificates, and certain types of
general-use prepaid cards that are marketed or labeled as gift cards.
The statute generally excluded general-use prepaid cards that are
reloadable and not marketed or labeled as a gift card or gift
certificate. Credit CARD Act section 401; EFTA section 915. In 2010,
the Board issued the resulting implementing regulations, set forth in
Sec. 1005.20 of current Regulation E (Gift Card Rule).\109\
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\108\ Public Law 111-24, 123 Stat. 1734 (2009).
\109\ 75 FR 16580 (Apr. 1, 2010).
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Following the Credit CARD Act, the Gift Card Rule only covers
certain general-use prepaid cards. Under the rule, covered general-use
prepaid cards are those that are non-reloadable cards or that are
reloadable and marketed or sold as a gift card. See Sec. 1005.20(a)(3)
(definition of a ``general-use prepaid card''). Moreover, like the
statute, the Gift Card Rule excludes those general-use prepaid cards
that are reloadable and not marketed or labeled as a gift card or gift
certificate. Sec. 1005.20(b)(2). For covered prepaid products, the
Gift Card Rule requires the disclosure of certain fees and restricts a
person's ability to impose dormancy, inactivity, or service fees for
certain prepaid products, primarily gift cards. Sec. 1005.20(d) and
(f). Additionally, among other things, the Gift Card Rule generally
prohibits the sale or issuance of covered prepaid products that have an
expiration date of less than five years. Sec. 1005.20(e). In adopting
the Gift Card Rule, the Board did not apply the majority of Regulation
E's protections, including provisions regarding periodic statements,
liability for unauthorized transactions, and error resolution to
covered prepaid products. However, Congress explicitly gave the Board
the authority to do so. Credit CARD Act section 401; EFTA section
915(d)(1).
[[Page 77115]]
2. FMS Regulations of the Treasury Department
The Treasury Financial Management Service (FMS), now part of
Treasury's Bureau of the Fiscal Service, manages all Federal payments.
In 2010, it promulgated an interim final rule that permitted delivery
of Federal payment to prepaid cards (the FMS Rule).\110\ Among other
things, the FMS Rule provides that for a prepaid card to be eligible to
receive Federal payments, the card account must be held at an insured
financial institution. Additionally, the card account must be set up to
meet the requirements for FDIC or NCUSIF pass-through deposit or share
insurance, as discussed in greater detail below. Additionally, the card
account must not have an attached line of credit or loan feature that
triggers automatic repayment from the card account. Moreover, the card
account issuer must comply with all of the requirements, and provide
the cardholder with all of the consumer protections, that apply to
payroll card accounts under Regulation E. 31 CFR 210(b)(5)(i).
---------------------------------------------------------------------------
\110\ 75 FR 80335 (Dec. 22, 2010). Prior to the effective date
of the FMS Rule, prepaid cards (other than those issued under FMS-
established programs) were not eligible to receive Federal payments.
---------------------------------------------------------------------------
Based on Bureau outreach including discussions with industry
participants, comment letters received in response to the Prepaid
ANPR,\111\ as well as a review of numerous prepaid products' terms and
conditions, discussed in more detail below, the Bureau believes that
many providers currently comply with the FMS Rule for all of their
prepaid products, including those not receiving Federal payments. The
Bureau further believes that to comply with the FMS Rule, many prepaid
product providers had to adjust their systems and programs.\112\ For
example, to the extent that a provider did not maintain procedures for
resolving errors with respect to the prepaid products it offered (or
maintained procedures different from what Regulation E requires), the
provider had to either adjust its processes to provide these
protections or ensure that their prepaid products do not receive
Federal payments.
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\111\ 77 FR 30923 (May 24, 2012).
\112\ In issuing the FMS Rule, Treasury noted that it:
[B]elieves that a number of prepaid cards already provide most,
though not necessarily all, of the payroll card protections to
cardholders. It is our expectation that some issuers of existing
prepaid cards will choose to modify the terms and conditions of the
card accounts to include all of the payroll card protections to
cardholders, so that their cards will be eligible to receive Federal
payments. We also anticipate that as new prepaid card programs are
developed, issuers seeking to make the cards available to Federal
payment recipients will structure their cards to incorporate
Regulation E's payroll card protections.
75 FR 80335, 80338 (Dec. 22, 2010).
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3. Pass-Through Deposit Insurance
The FDIC, among other things, protects funds placed by depositors
in insured depository institutions. FDIC insurance protects deposit
accounts, including checking and savings accounts, money market deposit
accounts and certificates of deposit against loss up to $250,000 per
depositor, per insured depository institution, within each account
ownership category (e.g., for individual owners, co-owners, trust
beneficiaries, and the like).\113\ The NCUSIF plays a similar role for
insured credit unions.\114\
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\113\ See, e.g., http://www.fdic.gov/deposit/deposits/dis/.
\114\ See, e.g., http://www.ncua.gov/DataApps/Pages/SI-NCUA.aspx.
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As noted above, the Bureau understands that funds loaded onto
prepaid products are typically held in pooled accounts at depository
institutions or credit unions. Both the FDIC and NCUA have special
rules, discussed below, regarding how such accounts may qualify for, as
applicable, FDIC or NCUSIF pass-through insurance. The Bureau believes
that provided these requirements are met, most prepaid products are
eligible for FDIC (or NCUSIF) pass-through deposit (or share)
insurance.
With respect to the FDIC's rules for determining the ownership of
deposits placed at insured depository institutions by agents or
custodians of the true holder of the funds, its 2008 General Counsel
Opinion No. 8 provides that FDIC's deposit insurance coverage will
``pass through'' the custodian to the underlying individual owners of
the deposits in the event of failure of an insured depository
institution, provided that three specific criteria are met. Those
criteria are as follows. First, the account records of the insured
depository institution must disclose the existence of the agency or
custodial relationship. This requirement can be satisfied by opening
the account under a title such as the following: ``ABC Company as
Custodian for Cardholders.'' Second, the records of the insured
depository institution or records maintained by the custodian or other
party must disclose the identities of the actual owners and the amount
owned by each such owner. Third, the funds in the account actually must
be owned (under the agreements among the parties or applicable law) by
the purported owners and not by the custodian (or other party).\115\
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\115\ FDIC General Counsel Opinion No. 8, Insurability of Funds
Underlying Stored Value Cards and Other Nontraditional Access
Mechanisms, 73 FR 67155, 67157 (Nov. 13, 2008), internal citations
omitted.
---------------------------------------------------------------------------
The NCUA's regulations similarly state that:
[I]f the account records of an insured credit union disclose the
existence of a relationship which may provide a basis for additional
insurance, the details of the relationship and the interest of other
parties in the account must be ascertainable either from the records
of the credit union or the records of the member maintained in good
faith and in the regular course of business.
12 CFR 745.2(c)(2). NCUA regulations governing share insurance for
specific types of accounts provide additional details. For example,
provisions governing retirement and other employee benefit plan
accounts specifically address pass-through insurance, stating that
``[a]ny shares of an employee benefit plan in an insured credit union
shall be insured on a `pass-through' basis, in the amount of up to the
[Standard Maximum Share Insurance Amount] for the non-contingent
interest of each plan participant, in accordance with Sec. 745.2 of
this part.'' 12 CFR 745.9-2(a); see also, e.g., 12 CFR 745.3, 745.4,
745.5, 745.8, 745.9-1.
4. Interchange and the Board's Regulation II
Section 1075 of the Dodd-Frank Act added new section 920 to EFTA
regarding debit card interchange and amended EFTA section 904(a) to
give the Board sole authority to prescribe rules to carry out the
purposes of section 920.\116\ It contains several provisions related to
debit cards and electronic debit transactions. EFTA section 920(a)(2)
requires that the amount of any interchange fee that an issuer of debit
cards receives or charges with respect to an electronic debit
transaction be reasonable and proportional to the cost incurred by the
issuer with respect to the transaction. It directs the Board to
establish standards for assessing whether the amount of any interchange
fee is reasonable and
[[Page 77116]]
proportional to the cost incurred by the issuer. However, as discussed
below, there are a few exemptions from the limitation on interchange
fees that an issuer may receive from or charge to a merchant.
---------------------------------------------------------------------------
\116\ The amendment is known as ``The Durbin Amendment,'' after
U.S. Senator Richard Durbin of Illinois, who was the amendment's
chief sponsor. See, e.g., David Morrison, Durbin Amendment Lawsuit
Unresolved as 2013 Winds Down, Credit Union Times Magazine, Dec. 18,
2013, available at http://www.cutimes.com/2013/12/18/durbin-amendment-lawsuit-unresolved-as-2013-winds; see also Zhu Wang, Debit
Card Interchange Fee Regulation: Some Assessments and
Considerations, 98 Econ. Q. 159 (2012) available at https://www.richmondfed.org/publications/research/economic_quarterly/2012/q3/pdf/wang.pdf.
---------------------------------------------------------------------------
EFTA section 920(c) sets forth definitions that apply solely for
the purposes of EFTA section 920. Section 920(c)(5) defines an
electronic debit transaction as ``a transaction in which a person uses
a debit card.'' Additionally, section 920(c)(2) defines debit card to
include ``a general-use prepaid card, as that term is defined in
section 915(a)(2)(A),'' which is the Credit CARD Act's definition of
general-use prepaid card. Accordingly, interchange transaction fees for
transactions made with general-use prepaid cards (as defined under the
Credit CARD Act) would be subject to the debit card interchange fee
restrictions set forth in EFTA section 920(a).
As noted above, EFTA section 920(a) provides certain exemptions
from the interchange fee limitations for certain cards. Section
920(a)(7)(A) provides exemptions from the fee restrictions for general-
use prepaid (and debit) cards provided to a consumer pursuant to
government-administered payment programs and for certain general
purpose reloadable prepaid cards. In addition, there is a blanket
exemption from the interchange fee limitations for cards of issuers
with total assets of less than $10 billion. EFTA section 920(a)(6).
Thus, interchange fees for transactions made with these prepaid cards
meeting the criteria for the statutory exemptions are generally not
subject to the fee restrictions of EFTA section 920(a). However, EFTA
section 920(a)(7)(B) provides that after July 21, 2012, interchange
fees for transactions made with prepaid cards that receive the
exemption set forth in EFTA section 920(a)(7)(A) are nonetheless
limited by the Act's interchange fee restrictions if certain fees such
as an overdraft fee may be charged with respect to the card. The
exemption for interchange fees of cards of issuers with total assets
below $10 billion is not subject to section 920(a)(7)(B). In July 2011,
the Board promulgated Regulation II (12 CFR part 235) to implement EFTA
section 920. The provisions regarding debit card interchange fee
restrictions became effective as of October 1 of that year.\117\
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\117\ 76 FR 43394 (July 20, 2011); 76 FR 43478 (July 20, 2011);
amended by 77 FR 46258 (Aug. 3, 2012).
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5. FinCEN Rules
FinCEN also regulates prepaid products pursuant to its mission,
which it describes as to safeguard the financial system from illicit
use and combat money laundering and promote national security through
the collection, analysis, and dissemination of financial intelligence
and strategic use of financial authorities. As noted above, it has
issued regulations to regulate certain prepaid products. In 2011,
pursuant to a mandate under the Credit CARD Act, FinCEN published a
final rule to amend BSA regulations applicable to money services
businesses with respect to stored value or ``prepaid access'' (FinCEN's
Prepaid Access Rule).\118\ Subject to certain specific exemptions, a
``prepaid program'' is defined as an ``arrangement under which one or
more persons acting together provide(s) prepaid access.'' 31 CFR
1010.100(ff)(4)(iii). The term ``prepaid access'' is defined as
``access to funds or the value of funds that have been paid in advance
and can be retrieved or transferred at some point in the future through
an electronic device or vehicle, such as a card, code, electronic
serial number, mobile identification number, or personal
identification.'' 31 CFR 1010.100(ww).
---------------------------------------------------------------------------
\118\ 76 FR 45403 (July 29, 2011).
---------------------------------------------------------------------------
FinCEN's Prepaid Access Rule established a comprehensive approach
toward regulating prepaid access. Among other things, the Rule requires
each provider or seller of prepaid access to: (1) File suspicious
activity reports; (2) collect and retain certain customer and
transactional information; and (3) maintain an anti-money laundering
program. These BSA requirements are similar to those that apply to
other categories of money services businesses.\119\
---------------------------------------------------------------------------
\119\ 76 FR 45403, 45419 (July 29, 2011).
---------------------------------------------------------------------------
6. State Laws
Many States have passed consumer protection laws or other rules to
regulate prepaid products in general, and in particular, certain types
of prepaid products such as government benefits cards. Illinois is an
example of a State that has issued regulations applicable to prepaid
products in general. In 2013, Illinois imposed pre-acquisition, on-card
and at-the-time-of-purchase disclosure requirements on ``general-use
reloadable prepaid cards.'' \120\ IL SB 1829 (2013), Public Act 098-
0545, codified at 205 Ill. Comp. Stat. 616/10 and 616/46. California is
an example of a State that has enacted laws on specific types of
prepaid products. In 2013, California enacted a law that extended
protections similar to the FMS Rule to prepaid products receiving
unemployment benefits and basic-needs benefits from the State of
California. CA A 1820 (2013), ch. 557, codified at Cal. Unemp. Ins.
Code Sec. 1339.1 and Cal. Welf. & Inst. Code Sec. 11006.2. In 2014,
California enacted another law extending similar protections to cards
used for distribution of child support payments. CA A 2252 (2014), ch.
180, codified at Cal. Fam. Code Sec. 17325.
---------------------------------------------------------------------------
\120\ The Illinois law defines ``general use reloadable card''
as:
[A] card, code, or other access device that is: (1) Issued on a
prepaid basis primarily for personal, family, or household purposes
to a consumer in a specified amount in exchange for payment; (2)
issued under an agreement containing terms and conditions that
permit funds to be added to the card, code, or other device after
the initial purchase or issuance, including a temporary non-
reloadable card issued solely in connection with a general use
reloadable card, code, or other device; and (3) not marketed or
labeled as a gift card or gift certificate; and (4) redeemable upon
presentation at multiple, unaffiliated merchants for goods or
services or usable at automated teller machines.
205 ILCS 616/10.
---------------------------------------------------------------------------
Further, the Bureau understands that many States have money
transmitter laws that may apply to prepaid product providers. The laws
vary by State but generally require companies to be licensed and to
post a surety bond to cover accountholder losses, if the providers
become insolvent. Most States further require that the companies hold
high-grade investments to back the money in customer accounts. However,
the Bureau also understands that States vary in the amount of their
oversight of companies licensed under the money transmitter laws, and
many may not have streamlined processes to pay out funds in the event a
prepaid product provider were to file for bankruptcy protection.\121\
---------------------------------------------------------------------------
\121\ See, e.g., Pew Charitable Trusts, Imperfect Protection--
Using Money Transmitter Laws to Insure Prepaid Cards (Mar. 2013).
---------------------------------------------------------------------------
C. Existing Regulation of Credit Products and Overdraft Services
Offered in Connection With Transaction Accounts
In this rulemaking, the Bureau has considered whether and to what
extent it should regulate credit features offered in connection with
prepaid accounts. In approaching this question, the Bureau is conscious
of the regulatory framework that has developed, including for credit
products subject to Regulation Z and overdraft services on traditional
deposit accounts that are exempt from Regulation Z but subject to
certain parts of Regulation E. On several occasions, Federal regulators
have addressed deposit account overdraft services in various
rulemakings including those conducted pursuant to Regulations E and Z
as well as in public guidance documents. The relevant actions are
discussed below.
[[Page 77117]]
1. Open-End (Not Home-Secured) Credit Products Under the Truth in
Lending Act and the Electronic Fund Transfer Act
Credit products are generally subject to the Truth in Lending Act
and Regulation Z, although the application of specific provisions of
the statute and regulation depends on the attributes of the particular
credit product. In 1968, Congress enacted TILA to promote the informed
use of consumer credit by requiring disclosures about its terms and
cost and to provide standardized disclosures. Congress has revised TILA
several times and its purpose now is to ``assure a meaningful
disclosure of credit terms so that the consumer will be able to compare
more readily the various credit terms available to him and avoid the
uninformed use of credit, and to protect the consumer against
inaccurate and unfair credit billing and credit card practices.'' 15
U.S.C. 1601(a). TILA thus defined credit broadly to mean the right
granted by a creditor to a debtor to defer payment of debt or incur
debt and defer its payment. 15 U.S.C. 1602(f).\122\
---------------------------------------------------------------------------
\122\ The term creditor in Regulation Z generally means a person
who regularly extends consumer credit that is subject to a finance
charge or is payable by written agreement in more than four
installments (not including a down payment), and to whom the
obligation is initially payable, either on the face of the note or
contract, or by agreement when there is no note or contract. See
Sec. 1026.2(a)(17)(i).
---------------------------------------------------------------------------
Congress has amended TILA on several occasions to provide consumers
of certain types of credit products with additional protections. The
Fair Credit Billing Act (FCBA),\123\ enacted in 1974, added a number of
substantive protections for consumers who use open-end credit \124\ or
use credit cards subject to TILA. Public Law 93-495 (Oct. 28, 1974).
For example, the FCBA increased rights and remedies for consumers who
assert billing errors and required a minimum 14-day grace period for
payments for creditors that offer a grace period, prompt re-crediting
of refunds, and refunds of credit balances. Credit cards are also
subject to these requirements,\125\ but also to a broad range of
additional protections. Regulation Z defines the term ``credit card''
to mean any card, plate, or other single credit device that may be used
from time to time to obtain credit. See Sec. 1026.2(a)(15)(i). A
charge card is a credit card on an account for which no periodic rate
is used to compute a finance charge. See Sec. 1026.2(a)(15)(iii).
Cognizant that many financial institutions issue credit cards to
cardholders with whom they also have a deposit account relationship,
Congress in the FCBA also restricted the right of such institutions
from taking funds out of a deposit account to satisfy their credit card
claims.\126\ In 1988, Congress amended TILA through the Fair Credit and
Charge Card Disclosure Act. These revisions required issuers of credit
cards and charge cards to provide certain disclosures at the time of
application and solicitation.
---------------------------------------------------------------------------
\123\ Public Law 93-495, 88 Stat. 1511 (1974).
\124\ As discussed in greater detail in the section-by-section
analysis of Sec. 1026.2(a)(20), open-end credit exists where there
is a plan in which the creditor reasonably contemplates repeated
transactions; the creditor may impose a finance charge from time to
time on an outstanding unpaid balance; and the amount of credit that
may be extended to the consumer during the term of the plan (up to
any limit set by the creditor) is generally made available (even if
not disclosed) to the extent that any outstanding balance is repaid.
Sec. 1026.2(a)(20). Closed-end credit is credit that does not meet
the definition of open-end credit. Sec. 1026.2(a)(10).
\125\ Indeed, credit cards are subject to specialized and
heightened disclosure requirements in advertisements, at the time of
account opening, periodically for each billing cycle (i.e., periodic
statements), and when certain terms of the account change. In
addition, for credit card accounts disclosures generally are
required on or with applications or solicitations. Among the
required disclosures for credit cards on or with an application or
solicitation is a tabular disclosure setting forth seven different
disclosures. Sec. 1026.60. This ``Schumer box'' must be similar to
model forms in Regulation Z appendix G-10 and must set forth certain
fees, interest rates, transaction charges, and other required
charges.
\126\ See Gardner v. Montgomery County Teachers Fed. Credit
Union, 864 F.Supp.2d (D. Md. 2012) (providing an overview of the
FCBA's no offset provision).
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In 2009, Congress enhanced protections for credit cards in the
Credit CARD Act, which it enacted to ``establish fair and transparent
practices related to the extension of credit'' in the credit card
market.\127\ The Credit CARD Act regulates both the underwriting and
pricing of credit card accounts. Specifically, it prohibits credit card
issuers from extending credit without assessing the consumer's ability
to pay and imposes special rules regarding the extension of credit to
persons under the age of 21 and to college students. The Credit CARD
Act also restricts the fees that an issuer can charge during the first
year after an account is opened, and limits the instances and the
amount of such fees in which issuers can charge ``back-end'' penalty
fees when a consumer makes a late payment or exceeds his or her credit
limit. The CARD Act also restricts the circumstances under which
issuers can increase interest rates on credit cards and establishes
procedures for doing so. The Board generally implemented these
provisions in subpart G of Regulation Z. Thus, while all open-end (not
home-secured) credit plans receive some of TILA's protections,
generally only open-end (not home-secured) credit plans that are
accessed by credit cards receive the additional protections of the
Credit CARD Act.
---------------------------------------------------------------------------
\127\ Public Law 111-24, 123 Stat. 1734 (2009).
---------------------------------------------------------------------------
Although EFTA does not generally focus on credit issues, Congress
provided one important protection in that statute as well. Known as the
compulsory use provision, it provides that no person may ``condition
the extension of credit to a consumer on such consumer's repayment by
means of preauthorized electronic fund transfers.'' EFTA section
913(1).\128\ (A preauthorized electronic fund transfer is an electronic
fund transfer authorized in advance to recur at substantially regular
intervals, such as a recurring direct deposit or ACH debit.) Where
applicable, the compulsory use provision thus prevents a creditor from
requiring a particular form of payment, such as a recurring ACH debit
to another account, as a form of repayment of the credit. This provides
consumers with the ability to control how and when they repay credit
and does not allow a creditor to insist on a particular form of
repayment. Thus, as implemented in Regulations Z and E, some of these
protections are broadly applicable to credit generally while others are
specific to particular credit products. For example, open-end lines of
credit that consumers can link to a deposit account to pull funds when
the account has insufficient funds are subject to certain disclosure
requirements under Regulation Z, certain provisions of the FCBA, and
the compulsory use provision under Regulation E (although compulsory
use exempts overdraft lines of credit).
---------------------------------------------------------------------------
\128\ As implemented in Regulation E, Sec. 1005.10(e)(1), this
provision contains an exception for overdraft credit plans: ``No
financial institution or other person may condition an extension of
credit to a consumer on the consumer's repayment by preauthorized
electronic fund transfers, except for credit extended under an
overdraft credit plan or extended to maintain a specified minimum
balance in the consumer's account.''
---------------------------------------------------------------------------
2. Federal Regulatory Treatment of Deposit Account Overdraft Services
A separate regulatory regime has evolved over the years with regard
to treatment of overdraft services, which started as courtesy programs
under which financial institutions would decide on a manual, ad hoc
basis to cover particular transactions for which a consumer lacked
funds in their deposit account rather than to return the transactions
and subject consumers to a
[[Page 77118]]
not-sufficient-funds (NSF) fee, merchant fees, and other negative
consequences from bounced checks. Although Congress did not exempt
overdraft services or similar programs offered in connection with
deposit accounts from TILA, the Board in issuing Regulation Z in 1969
carved financial institutions' ``bounce-protection'' programs out of
the new regulation.\129\ See, e.g., Sec. 1026.4(c)(3) (excluding
charges imposed by a financial institution for paying items that
overdraw an account from the definition of ``finance charge,'' unless
the payment of such items and the imposition of the charge were
previously agreed upon in writing); Sec. 1026.4(b)(2).\130\ The Board
distinguished between ``bounce protection programs'' where there is no
written agreement to pay items that overdraw the account, and more
formal, line-of-credit overdraft programs where there is a written
agreement to pay overdrafts. Because financial institutions reserved
discretion to pay particular overdrafts and exercised that discretion
on an ad hoc basis, the Board exempted informal bounce protection
programs but subjected overdraft lines of credit to Regulation Z when
the creditor imposes a finance charge or the line of credit is accessed
by a debit card.\131\
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\129\ 34 FR 2002 (Feb. 11, 1969).
\130\ Section 1026.4(b)(2) provides that any charge imposed on a
checking or other transaction account is an example of a finance
charge only to the extent that the charge exceeds the charge for a
similar account without a credit feature.
\131\ Later in the 1970s, the Board added provisions in
Regulation Z specifically addressing credit cards. 40 FR 43200
(Sept. 19, 1975). The Board subsequently carved debit cards, where
there is no agreement to extend credit, out of the definition of
credit card. 46 FR 50288, 50293 (Oct. 9, 1981).
---------------------------------------------------------------------------
The Board revisited the exception of bounce protection programs
from Regulation Z in 1981, in a rulemaking in which the Board
implemented the Truth in Lending Simplification and Reform Act.\132\ In
the related proposal, the Board considered adjusting its overdraft
exemption to apply only to ``inadvertent'' overdrafts because, the
Board stated, a charge imposed for honoring an instrument under any
agreement between the institution and the consumer is a charge imposed
for a credit extension and thus fits the general definition of a
finance charge, regardless of whether the charge and the honoring of
the check are reflected in a written agreement.\133\ Ultimately,
however, the Board made only a ``few minor editorial changes'' to the
exception in Sec. 1026.4(c)(3) from the definition of finance charge
that applied to fees for paying items that overdraw an account where
there is no written agreement to pay, concluding that it would exclude
from Regulation Z ``overdraft charges from the [definition of] finance
charge unless there is an agreement in writing to pay items and impose
a charge.'' \134\
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\132\ Public Law 96-221, sec. 601, 94 Stat. 132; 45 FR 80648
(Dec. 5, 1980).
\133\ Id. at 80657.
\134\ 46 FR 20848, 20855 (Apr. 7, 1981).
---------------------------------------------------------------------------
The Board also took up the status of bounce protection programs in
the early 1980s in connection with the enactment of EFTA. As noted
above, EFTA's compulsory use provision generally prohibits financial
institutions or other persons from conditioning the extension of credit
on a consumer's repayment by means of preauthorized electronic fund
transfers. The Board, however, exercised its EFTA section 904(c)
exception authority to create an exception to the compulsory use
provision for credit extended under an overdraft credit plan or
extended to maintain a specified minimum balance in the consumer's
account. See Sec. 1005.10(e)(1). In adopting this exception, the Board
aligned Regulation E with its approach to overdraft in Regulation Z--it
exempted overdraft services from rules otherwise applicable to credit
products. The Board stated that ``overdraft protection is a service
that financial institutions have been providing to consumers at little
or no extra cost beyond the cost of the protected account.'' \135\
---------------------------------------------------------------------------
\135\ 46 FR 2972, 2973 (Jan. 13, 1981).
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Overdraft services in the 1990s began to evolve away from the
historical model of bounce protection programs in a number of ways. One
major industry change was a shift away from manual ad hoc decision-
making by financial institution employees to a system involving heavy
reliance on automated programs to process transactions and to make
overdraft decisions. A second was to impose higher overdraft fees. In
addition, broader changes in payment transaction types also increased
the impacts of these other changes on overdraft services. In
particular, debit card use expanded dramatically, and financial
institutions began extending overdraft services to debit card
transactions. In the 1990s, many institutions expanded transactional
capabilities by replacing consumers' ATM-only cards with debit cards
that consumers could use to make electronic payments to merchants and
service providers directly from their checking accounts using the major
payment networks (and thus most merchants could accept them).\136\ As a
result, debit card transaction volumes grew quickly as payment networks
that enable these transactions broadened. Acceptance by grocery stores,
gas stations, fast food restaurants, and other retailers helped to
drive the popularity of debit card payments across regional and global
ATM networks (accessed by using a PIN). By the late 1990s, ``signature
debit'' transaction volumes became the most common type of debit card
transaction.\137\ These debit cards offered acceptance at all merchants
that honored payments from the major payment networks, such as internet
retailers.\138\
---------------------------------------------------------------------------
\136\ See R. Borzekowski et al., Consumers' Use of Debit Cards:
Patterns, Preferences, and Price Response, at 2 (Apr. 2006)
available at http://www.federalreserve.gov/pubs/feds/2006/200616/200616pap.pdf (noting that, as of 2006, ``Annual debit card
transactions at the point of sale have been growing at over twenty
percent per year since 1996 and now exceed credit card
transactions.''). By 2006, debit card payment transaction volumes in
the United States had exceeded both check and credit card payments,
and from 2006 to 2011, the total volume of U.S. consumer debit card
transactions nearly doubled.
\137\ Fumiko Hayashi, Fed. Reserve Bank of Kansas City, The New
Debit Card Regulations: Initial Effects on Networks and Banks, Econ.
Rev., 4th quarter 2012, at 83 chart 2. With respect to ``signature
debit'' transactions, a consumer does not use a PIN but instead
typically signs a copy of a transaction receipt provided by the
merchant in order to affirm the consumer's identity. For further
information on the difference between signature-based and PIN-based
card transactions, see, for example, the preamble of the Board's
proposed rule to implement the Durbin amendment, 75 FR 81722, 81723
(Dec. 28, 2010).
\138\ See generally CFPB Overdraft White Paper, at 11-17
(explaining growth of debit card transactions from consumers'
deposit accounts) available at http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf.
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As a result of these operational changes, overdraft services became
a significant source of revenue for banks and credit unions as the
volume of transactions involving checking accounts increased due
primarily to the growth of debit cards.\139\ Before debit card use
grew, overdraft fees on check and ATM transactions formed a greater
portion of deposit account overdrafts. Debit card transactions
presented consumers with markedly more opportunities to incur an
overdraft fee when making a purchase because of increased acceptance
and use of debit cards for relatively small transactions (e.g., fast
food and grocery stores).\140\ Over time, revenue from overdraft
increased and began to influence significantly the overall cost
structure for many deposit accounts, as providers began relying heavily
on back-end pricing while eliminating or reducing front-end pricing
(i.e., free checking accounts) as discussed above.\141\
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\139\ CFPB Overdraft White Paper, at 16.
\140\ See CFPB Overdraft White Paper, at 11-12.
\141\ See id., at 16-17.
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[[Page 77119]]
As a result of the growth of debit card transactions and the
changing landscape of deposit account overdraft services, Federal
banking regulators expressed increasing concern about consumer
protection issues and began a series of issuances and rulemakings.
First, in September 2001, the Office of the Comptroller of the Currency
(OCC) released an interpretive letter expressing concern about
overdraft protection services.\142\ The letter noted that overdraft
services are extensions of credit but that related fees may not be
finance charges under Regulation Z. In declining to issue a ``comfort
letter'' regarding an unnamed overdraft service, the OCC called
attention to a number of troubling practices, including inadequate
disclosure to consumers of the risk of harm from overdraft services and
failure to properly help consumers who were using overdraft services as
``a means of meeting regular obligations'' to find more economical
forms of credit.\143\
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\142\ Office of the Comptroller of Currency, Interpretive Letter
No. 914, 3rd Party Program, (Aug. 3, 2001) available at http://www.occ.gov/static/interpretations-and-precedents/sep01/int914.pdf.
\143\ OCC Interpretive Letter No. 914.
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The Board also signaled concern with overdraft services in a number
of rulemaking actions. In a 2002 proposal to amend Regulation Z with
regard to the status of certain credit card-related fees and other
issues, the Board noted that some overdraft services may not be all
that different from overdraft lines of credit and requested comment on
whether and how Regulation Z should be applied to banks' bounce-
protection services, in light of the Regulation's exclusion of such
services but inclusion of lines-of-credit where a finance charge is
imposed or is accessed by a debit card.\144\ The Board did not modify
the Regulation Z exemptions when it issued final rules in 2003,\145\
but proposed revisions to Regulation DD (which implements the Truth in
Savings Act) and its commentary in 2004 to address concerns about the
uniformity and adequacy of institutions' disclosure of overdraft fees
generally and to address concerns about advertised automated overdraft
services in particular.\146\ The Board specifically noted that it was
not proposing to cover overdraft services under TILA and Regulation Z,
but that further consideration of the need for such coverage would be
appropriate if consumer protection concerns about these overdraft
services were to persist in the future.\147\ When the Board finalized
the Regulation DD proposal in 2005, it noted that it declined at that
time to extend Regulation Z to overdraft services. In doing so, it
noted that industry commenters were concerned about the cost of
imposing Regulation Z requirements on deposit accounts and about the
compliance burden of providing an APR calculated based on overdraft
fees without corresponding benefits to consumers in better
understanding the costs of credit. The Board also noted that some
members of its Consumer Advisory Council believed that overdraft
services are the functional equivalent of a traditional overdraft line
of credit and thus should be subject to Regulation Z, but that
financial institutions' historical practice of paying occasional
overdrafts on an ad hoc basis should not be covered by Regulation Z.
While not specifically addressing these concerns, the Board emphasized
that its decision not to apply Regulation Z did not preclude future
consideration regarding whether it was appropriate to extend Regulation
Z to overdraft services.\148\
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\144\ 67 FR 72618, 72620 (Dec. 6, 2002).
\145\ The March 2003 final rule preamble stated that ``[t]he
Board's staff is continuing to gather information on these services,
which are not addressed in the final rule.'' 68 FR 16185 (Apr. 3,
2003).
\146\ 69 FR 31760 (June 7, 2004).
\147\ Id. at 31761.
\148\ 70 FR 29582, 29584-85 (May 24, 2005). In this 2005
rulemaking, the Board revised Regulation DD to address concerns
about the uniformity and adequacy of information provided to
consumers when they overdraw their deposit accounts. Among other
things, the final rule required institutions that promote the
payment of overdrafts in an advertisement to disclose on periodic
statements, total fees imposed for paying overdrafts and total fees
imposed for returning items unpaid on periodic statements, both for
the statement period and the calendar year to date, and to include
certain other disclosures in advertisements of overdraft services.
Ultimately, in 2009, the Board expanded this provision to all
institutions not just those that promote the payments of overdrafts.
See 74 FR 5584 (Jan. 29, 2009).
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In February 2005 (prior to the Board having finalized the
Regulation DD changes discussed above), the Federal banking agencies
also issued joint guidance on overdraft programs in response to the
increased availability and customer use of overdraft services (Joint
Guidance).\149\ The purpose of the Joint Guidance was to assist insured
depository institutions in the responsible disclosure and
administration of overdraft protection services. It grew out of concern
that
---------------------------------------------------------------------------
\149\ 70 FR 9127 (Feb. 24, 2005) (Joint Guidance) available at
http://www.gpo.gov/fdsys/pkg/FR-2005-02-24/pdf/05-3499.pdf. See also
Office of Thrift Supervision Guidance on Overdraft Protection
Programs, 70 FR 8428 (Feb. 18, 2005).
[D]isclosure, and implementation of some overdraft protection
programs, intended essentially as short-term credit facilities, are
of concern [to the Federal banking agencies]. For example, some
institutions have promoted this credit service in a manner that
leads consumers to believe that it is a line of credit by informing
consumers that their account includes an overdraft protection limit
of a specified dollar amount without clearly disclosing the terms
and conditions of the service, including how fees reduce overdraft
protection dollar limits, and how the service differs from a line of
credit.\150\
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\150\ 70 FR 9127, 9129 (Feb. 24, 2005).
The Joint Guidance stated that ``the existing regulatory exceptions
[i.e., exceptions in Regulation Z such that the Regulation does not
apply] were created for the occasional payment of overdrafts, and as
such could be reevaluated by the Board in the future, if necessary.
Were the Board to address these issues more specifically, it would do
so separately under its clear [TILA] authority.'' \151\ The Joint
Guidance went on to state that ``[w]hen overdrafts are paid, credit is
extended. Overdraft protection programs may expose an institution to
more credit risk (e.g., higher delinquencies and losses) than overdraft
lines of credit and other traditional overdraft protection options to
the extent these programs lack individual account underwriting.'' \152\
This guidance remains in effect.
---------------------------------------------------------------------------
\151\ Id. at 9128.
\152\ Id.
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In the late 2000s as controversy regarding overdraft services
continued to mount despite the increase in regulatory activity, Federal
agencies began exploring various additional measures with regard to
overdraft, including whether to require that consumers affirmatively
opt in before being charged for overdraft services. First, in May 2008,
the Board along with the National Credit Union Administration and the
former Office of Thrift Supervision proposed to exercise their
authority under section 5 of the Federal Trade Commission Act (FTC Act)
\153\ to prohibit institutions from assessing any fees on a consumer's
account in connection with an overdraft service, unless the consumer
was given notice and the right to opt out of the service, and the
consumer did not opt out.\154\ At the same time, the Board issued a
proposal under Regulation DD to expand disclosure requirements and
revise periodic statement requirements to provide aggregate totals for
overdraft fees and for returned item fees for the periodic statement
period and year-to-date.\155\ The Board finalized portions of
[[Page 77120]]
the Regulation DD proposal in January 2009.\156\ In addition, although
the three agencies did not finalize their FTC Act proposal, the Board
ultimately adopted a similar opt-in requirement for ATM and point of
sale transactions under Regulation E in late 2009.
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\153\ Section 5 of the FTC Act prohibits ``unfair or deceptive
acts or practices in or affecting commerce.'' 15 U.S.C. 45. See also
Federal Deposit Ins. Act section 8 (extending to the Board authority
to take appropriate action when unfair or deceptive acts or
practices are discovered). 12 U.S.C. 1818.
\154\ 73 FR 28904 (May 19, 2008).
\155\ 73 FR 28730 (May 19, 2008).
\156\ 74 FR 5584 (Jan. 29, 2009). Specifically, this rule
required, among other things, all depository institutions to
disclose aggregate overdraft fees on periodic statements, and not
solely institutions that promote the payment of overdrafts.
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The overdraft opt-in rule in Regulation E applies to all accounts
covered by Regulation E, including payroll card accounts. In addressing
overdraft services for the first time as a feature of deposit accounts
in Regulation E,\157\ the Board concluded that the opt-in rule carried
out ``the express purposes of EFTA by: (a) Establishing notice
requirements to help consumers better understand the cost of overdraft
services for certain EFTs; and (b) providing consumers with a choice as
to whether they want overdraft services for ATM and one-time debit card
transactions in light of the costs associated with those services.''
\158\ Not surprisingly, the rule did not expressly discuss GPR cards,
which as noted above, the Board had not subjected to Regulation E
coverage.\159\
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\157\ 74 FR 59033 (Nov. 17, 2009).
\158\ Id. at 59037.
\159\ Id. at 59040.
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Following the adoption of the Board's overdraft opt-in-rule, the
FDIC expanded on the previously-issued Joint Guidance when it issued a
Financial Institution Letter that reaffirmed its existing supervisory
expectations with respect to overdraft payment programs generally and
provided specific guidance with respect to automated overdraft payment
programs.\160\ In 2011, the OCC proposed similar guidance regarding
automatic overdraft programs and deposit advance products. This
guidance, if finalized, would have clarified the OCC's application of
principles of safe and sound banking practices in connection with
deposit-related consumer credit products such as automated overdraft
services and direct deposit advance programs.\161\ The OCC withdrew
this proposed guidance in 2013.\162\
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\160\ Fed. Deposit Ins. Corp., Fin. Inst. Letter FIL-81-2010,
Overdraft Payment Programs and Consumer Protection Final Overdraft
Payment Supervisory Guidance, (Nov. 24, 2010) (FDIC Overdraft
Payment Supervisory Guidance), available at https://www.fdic.gov/news/news/financial/2010/fil10081.html.
\161\ 76 FR 33409 (June 8, 2011).
\162\ 78 FR 25353 (Apr. 30, 2013).
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Since the Bureau assumed authority from the Board for implementing
most of EFTA in 2011, it has taken a number of steps--including
research, analysis, and solicitation of comment--to assess the impact
and efficacy of the Board's 2009 overdraft opt-in rule as it pertains
to deposit accounts. In early 2012, the Bureau issued a Request For
Information (RFI) that sought input from the public on a number of
overdraft topics, including: Lower cost alternatives to overdraft
protection programs, consumer alerts and information provided regarding
balances and overdraft triggers, the impact of changes to Regulations
DD and E and overdraft opt-in rates, the impact of changes in financial
institutions' operating policies, the economics of overdraft programs,
and the long-term impact on consumers.\163\ In response, the Bureau
received over 1000 comments. This RFI did not request information
specific to prepaid products, and few commenters specifically addressed
prepaid products. The Bureau has also undertaken significant research
into overdraft services that has resulted, to date, in the release of a
white paper of initial data findings in June 2013 and a data point in
July 2014.\164\
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\163\ 77 FR 12031 (Feb. 28, 2012).
\164\ CFPB Overdraft White Paper, available at http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf.; CFPB Overdraft Data Point, available at http://www.consumerfinance.gov/reports/data-point-checking-account-overdraft/.
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The Bureau has previously indicated that it is considering whether
rules governing overdraft and related services in connection with
deposit accounts are warranted, and, if so, what types of rules would
be appropriate. A possible rulemaking might include new or revised
disclosures or address specific acts or practices.\165\
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\165\ See http://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201404&RIN=3170-AA42.
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3. Other Relevant Federal Regulatory Activity
In addition to the two general regulatory regimes governing credit
products generally and overdraft services as outlined above, two
Federal initiatives have specifically addressed the possibility of
credit features being offered in connection with prepaid products.
First, the Treasury FMS Rule (described above), adopted in late
December 2011, only permits Federal payments to be deposited onto a
prepaid product if the product is not attached to a line of credit or
loan agreement under which repayment from the account is triggered upon
delivery of the Federal payments, among other conditions. See 31 CFR
210.5(b)(5)(i)(C). The Supplementary Information to that Interim Final
Rule indicates that the goal of this requirement is to prevent payday
lending and other arrangements in which a financial institution or
creditor ``advances'' funds to a cardholder's account, and then repays
itself for the advance and any related fees by taking some or all of
the cardholder's next deposit.\166\ The Treasury FMS Rule does not,
however, directly address the permissibility of overdraft services.
---------------------------------------------------------------------------
\166\ 75 FR 80335 (Dec. 22, 2010).
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Second, as is discussed above in the broader regulatory overview,
the Board's Regulation II implementing provisions of the Dodd-Frank Act
generally caps interchange fees that may be imposed on debit cards.
However, Regulation II provides exemptions from the fee restrictions
for certain GPR cards; as a result, interchange fees for transactions
made with these prepaid cards are generally not subject to the fee
restrictions of EFTA section 920(a). 12 CFR 235.5(d)(1). However, EFTA,
as amended by the Dodd-Frank Act, carves out of this exemption
interchange fees for transactions made with these prepaid cards if,
with respect to the card, an overdraft fee may be charged. EFTA and
Regulation E provide a separate, blanket exemption for cards or issuers
with assets of less than $10 billion, so these cards are not subject to
the fee restrictions even if overdraft fees may be charged on the
account.
Separately, the Department of Defense (the Department) recently
proposed amendments to its regulation (32 CFR part 232) that implements
the Military Lending Act (MLA), 10 U.S.C. 987, et se.\167\ Under the
MLA, a creditor generally may not apply a military annual percentage
rate (MAPR) greater than 36 percent in connection with an extension of
consumer credit to a military service member or dependent. 10 U.S.C.
987(b). The Department's proposal would modify its regulation to expand
the scope of coverage to which the regulation applies to a broad range
of open-end and closed end credit products, but would exclude overdraft
services that are exempted from Regulation Z as discussed above.\168\
For open-end (not home secured) credit card accounts, any credit-
related charge that is a finance charge under Regulation Z (as well as
certain other charges) would be included in calculating the MAPR \169\
for a particular billing cycle and the MAPR for that billing cycle
could not
[[Page 77121]]
exceed 36 percent.\170\ For such credit card accounts, the Department's
proposal, however, provides that a card issuer does not have to include
in the calculation of the MAPR any charge that is a bona fide fee and
that is reasonable and customary for that type of fee.\171\
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\167\ 79 FR 58602 (Sept. 29, 2014).
\168\ 79 FR 58602 at 58616.
\169\ 79 FR 58602 at 58610.
\170\ 79 FR 58602 at 58619.
\171\ 79 FR 58602 at 58638. See proposed Sec. 232.4(d) of the
Department's proposal. The exclusion from the MAPR calculation for
bona fide fees does not apply to periodic rates. It also does not
apply to any credit insurance premium, including charges for single
premium credit insurance, fees for debt cancellation or debt
suspension agreements, or to any fees for credit related ancillary
products sold in connection with and either at or before
consummation of the credit transaction or upon account opening,
because those charges are expressly included in the definition of
``interest'' in the applicable statute (10 U.S.C. 987(i)(3)) and
therefore must be included in the MAPR calculation.
---------------------------------------------------------------------------
D. The Bureau's May 2012 Advance Notice of Proposed Rulemaking
As noted above, the Bureau issued the Prepaid ANPR, which posed a
series of questions for public comment about how the Bureau might
consider regulating GPR cards. The Bureau sought input on the following
topics: (1) The disclosure of fees and terms; (2) if consumers should
be informed whether their funds are protected by FDIC pass-through
deposit insurance; (3) unauthorized transactions and the costs and
benefits of requiring card issuers to provide limited liability
protection from unauthorized transactions similar to those protections
available for other accounts under Regulation E; and (4) other product
features including credit features in general and overdraft services in
particular, linked savings accounts, and credit repair or credit
building features such as features that claim to offer consumers the
opportunity to improve or build credit).
The Bureau received over 220 comments from a variety of
commenters.\172\ Industry commenters, including depository institutions
and credit unions, prepaid program managers, payment networks and
industry trade associations, submitted the majority of comments. The
Bureau also received comment letters from consumer and other interest
groups, as well as several individual consumers. In preparing this
notice, the Bureau has evaluated the comments received in response to
the Prepaid ANPR and has engaged in additional analysis of prepaid
products and consumer behavior. As discussed in greater detail in the
section-by-section analysis below, the proposal covers a variety of
prepaid products including GPR cards. The Bureau notes that covered
account types have different characteristics.
---------------------------------------------------------------------------
\172\ The comments can be reviewed at http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0019-0001.
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E. Other Payments-Related Bureau Actions
In June 2014, the Bureau issued a Request for Information regarding
the opportunities and challenges associated with the use of mobile
financial products and services (Mobile RFI).\173\ As part of the
Mobile RFI, the Bureau is exploring how mobile technologies are
impacting economically vulnerable consumers with limited access to
traditional banking systems. The Mobile RFI asked questions on a number
of topics, including access for economically vulnerable consumers and
the ways that mobile technologies could expand access to financial
services, the use of mobile technologies for real-time money
management, the types of customer service or technical assistance that
are available to consumers when they use mobile products, and privacy
and data security issues. The comment period on the Mobile RFI ended on
September 10, 2014. The Bureau received approximately 48 comments,
which it is in the process of reviewing.
---------------------------------------------------------------------------
\173\ 79 FR 33731 (June 12, 2014).
---------------------------------------------------------------------------
In July 2014, the Bureau began accepting consumer complaints about
prepaid products.\174\ In addition to prepaid cards, consumers may also
submit complaints about payroll cards, government benefit cards, gift
cards, and mobile wallets.\175\ In August 2014, the Bureau issued a
consumer advisory on virtual currencies that discussed the risks to
consumers posed by such currencies.\176\ At the same time, the Bureau
also began accepting consumer complaints regarding virtual
currencies.\177\
---------------------------------------------------------------------------
\174\ Press Release, CFPB Begins Accepting Consumer Complaints
on Prepaid Cards and Additional Nonbank Products, available at
http://www.consumerfinance.gov/newsroom/cfpb-begins-accepting-consumer-complaints-on-prepaid-cards-and-additional-nonbank-products./.
\175\ See http://www.consumerfinance.gov/complaint/#credit-card.
\176\ CFPB Consumer Advisory, Risks to Consumers Posed by
Virtual Currencies (Aug. 2014), available at http://files.consumerfinance.gov/f/201408_cfpb_consumer-advisory_virtual-currencies.pdf.
\177\ See http://www.consumerfinance.gov/complaint/#money-transfer.
---------------------------------------------------------------------------
The section-by-section analysis below discusses in greater detail
the potential application of this proposed rule to certain mobile
financial products and services. The Bureau also recognizes that the
proposed rule may have potential application to virtual currency and
related products and services. As a general matter, however, the
Bureau's analysis of mobile financial products and services, as well as
and virtual currencies and related products and services, including the
applicability of existing regulations and this proposed regulation to
such products and services, is ongoing.
III. Overview of Outreach and Related Industry and Consumer Research
The Bureau conducted extensive and significant additional outreach
and research since it issued the Prepaid ANPR as part of its efforts to
study and evaluate prepaid products. In addition to reviewing the
comments received, the Bureau has engaged in a variety of outreach and
other research efforts to understand better how consumers use prepaid
products and where problems might exist or potentially develop. These
efforts include meetings with industry, consumer groups, and non-
partisan research and advocacy organizations, market research and
monitoring, and related efforts. Relatedly, the Bureau has collected
information from industry participants pursuant to section 1022(c)(4)
of the Dodd-Frank Act, which allows the Bureau to gather information
from time to time regarding the organization, business conduct,
markets, and activities of covered persons and service providers to aid
its market monitoring efforts.
Further, as discussed in greater detail below, the Bureau conducted
qualitative testing of prototype disclosure forms with consumers who
use prepaid cards and reviewed numerous prepaid products' terms and
conditions. The Bureau sought to determine current industry practices
in a number of areas to inform its understanding of the potential costs
and benefits of extending various Regulation E provisions to prepaid
accounts. As described in greater detail below, Bureau staff conducted
a study of publicly-available account agreements for prepaid products
that appear to meet the Bureau's proposed definition of the term
``prepaid account.''
A. Focus Groups and Consumer Testing
As noted above, in formulating this notice, the Bureau engaged a
third-party vendor, ICF International (ICF), to coordinate qualitative
consumer testing consisting of informal focus groups and one-on-one
interviews. The Bureau sought to gain insight about how and why
consumers use prepaid cards (including GPR and payroll cards), as well
as to see how they interact with prototype forms developed by the
Bureau. Under direction from the Bureau, ICF facilitated four focus
groups in December 2013 to gather in-depth
[[Page 77122]]
information about how consumer shop for prepaid cards and factors they
consider when acquiring such products. Each focus group lasted
approximately ninety minutes, included eight to ten participants, and
was held in Bethesda, Maryland. In early 2014, ICF facilitated three
rounds of one-on-one interviews, each lasting approximately 60 to 75
minutes, in Baltimore, Maryland; Los Angeles, California; and Kansas
City, Missouri. Each round included nine or ten participants. In
conjunction with the release of this notice, the Bureau is making
available a report prepared by ICF regarding the focus groups and
consumer testing (ICF Report).\178\ The testing and focus groups were
conducted in accordance with OMB Control Number 3170-0022.
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\178\ For a detailed discussion of the Bureau's consumer
testing, see ICF Report, available at http://files.consumerfinance.gov/f/201411_cfpb_summary-findings-design-testing-prepaid-card-disclosures.pdf.
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A total of sixty-nine consumers representing a range of ages,
races, and education levels participated in the focus groups and
individual interviews.\179\ Specifically, 40 consumers participated in
the focus groups, and 29 consumers participated in the interviews. All
testing was conducted in English, but both the focus groups and
individual interviews included native speakers of languages other than
English. All participants self-identified as having used a prepaid card
in the previous six months (for focus group participants) or 12 months
(for interview participants).\180\ Several participants had payroll
cards in addition to or in lieu of GPR cards.
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\179\ For a detailed discussion of the methodology used in the
consumer testing, including participant selection, see ICF Report,
at 2-4.
\180\ Based on oral responses, it appeared that perhaps one out
of the forty focus group participants may have only used a gift card
and not a GPR or payroll card. See ICF Report, at 4.
---------------------------------------------------------------------------
Participants reported that they used prepaid cards for a variety of
reasons. While some participants reported using, as applicable, a GPR
card or payroll card, in lieu of a deposit account, others reported
that they also had a deposit account and used their prepaid cards only
occasionally. Still others specifically mentioned using their cards
primarily for online purchases. These participants expressed the belief
that prepaid cards addressed some of their privacy and security
concerns, in that cards could remain anonymous and cardholders could
not lose more funds than what they loaded onto the card. Some
participants, particularly those that did not have deposit accounts,
described prior bad experiences with banks in general and overdraft
fees on checking accounts in particular, in explaining why they chose
to use a prepaid card.
Focus group findings highlights. Few focus group participants
reported doing any formal comparison shopping before purchasing a
prepaid card in a retail store. Further, while some participants who
had purchased their cards online reported doing more research about
different cards' terms and conditions pre-purchase, they, too, rarely
engaged in systematic comparison shopping. Most participants reported
that they were very aware of the fees associated with their current
prepaid card, but few reported understanding all of the fees when they
purchased their prepaid cards. Instead, most reported learning about a
card's fees post-acquisition after unknowingly incurring certain fees
and seeing that the fees were deducted from their card balance. When
asked about which fees were most important to them, almost all
participants cited one of the following fees: (1) Monthly maintenance
fees; (2) per purchase fees; (3) ATM withdrawal fees; and (4) cash
reload fees. ICF also asked participants to share their thoughts about
how easily they could understand the information included in on-package
disclosures from two existing prepaid cards (brand names redacted).
Comprehension varied. Many participants overlooked any asterisks
included on these disclosures to explain how fees may be assessed or
how fees differ from what was disclosed. Participants were also
confused about whether the disclosures provided a comprehensive
overview of all potential fees.
Based on the observations from and information gathered in focus
groups and the Bureau's outreach more generally, the Bureau and ICF
developed several prototype disclosure forms to test with participants
in the individual interview segment of the consumer testing. The Bureau
and ICF focused mainly on designing and testing ``short form''
disclosures that would highlight key information about a hypothetical
prepaid product in a format that would be easy to understand, yet small
enough to fit on existing packaging material used to market prepaid
products on J-hooks in retail stores.\181\ The Bureau and ICF developed
short form prototypes that would accommodate prepaid products that have
a single service plan and prototypes for products that have multiple
service plans. A ``long form'' prototype form that included all of the
hypothetical prepaid product's fees was also developed.
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\181\ The Bureau notes, however, that under the proposal, the
short form would be disclosed in all acquisition scenarios, not just
retail stores. See section-by-section analysis of Sec. 1005.18(b),
below.
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Individual interviews findings highlights. ICF asked participants
questions to assess how well they were able to comprehend the fees and
other information included on prototype forms. In some cases, ICF asked
participants to engage in shopping exercises to compare fee information
printed on different prototype forms. After each round of testing, ICF
analyzed and briefed the Bureau on the results of testing. The Bureau
used this feedback to make changes, as necessary, to the form design
for the following round of testing.
In the first round of testing, the Bureau focused on testing a
variety of prototype short form disclosures. Specifically, the Bureau
tested short forms that: (1) Included a ``top-line'' of four fees
displayed more prominently than the other fees; (2) grouped similar
fees by category; or (3) listed fees without including either the top-
line or categories. Generally, participants were able to understand the
basic fee information presented in all of the prototype disclosure
forms. However, many participants expressed a desire for a form that is
both easy to read and that prominently displays the most important fee
information. These participants also expressed that they felt that
prototype forms that included a ``top line'' disclosure of certain fees
accomplished these objectives.
Another design issue on which the Bureau and ICF focused was
whether and how to develop a form that might not include all of a
prepaid product's fees and full explanations of the conditions under
which those fees could be imposed. In other words, the Bureau used
testing to determine how to best present a subset of key information
about a prepaid product in the short form disclosure, while effectively
indicating to consumers that additional information not included on the
form was also available. The first round's prototype forms included
multiple asterisks to indicate additional information was available for
fees that could vary in amount. Many participants, however, did not
notice the text associated with the asterisks or struggled to
accurately identify which symbol was associated with which fee.
In an attempt to improve comprehension, the Bureau introduced forms
in the second round of testing that only included a single symbol and
explanatory sentence to indicate all of the fees that might vary on the
form. This modification appeared to increase the frequency with which
participants
[[Page 77123]]
noticed the language associated with the symbol, and thus, the
frequency which participants noticed that fees could vary also
increased. In the third round of testing, in addition to reviewing
additional short form prototypes, participants engaged in a shopping
exercise with a prototype long form disclosure to compare the relative
utility of the short form and long form disclosures.
Before the second round of testing, the Bureau also posted a blog
on its Web site that included two of the prototype short form designs
used during the second round of testing in Los Angeles.\182\ The Bureau
invited the public to provide impressions of the prototypes and suggest
how the Bureau could improve their design and submit their feedback
through comments directly on the blog, by sending an email, or through
posting a message to the Bureau via social media. The Bureau received
over 80 comments from industry, consumer advocacy groups and individual
consumers, in addition to email submissions and other correspondence.
These comments informed the Bureau's form design process for the third
round of testing as well as the model forms.
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\182\ Eric Goldberg, Prepaid cards: Help design a new
disclosure, CFPB Blog Post, (Mar.18, 2014), http://www.consumerfinance.gov/blog/prepaid-cards-help-design-a-new-disclosure/.
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B. Study of Prepaid Product Features
In order to better understand existing compliance with Regulation E
and other features and protections currently offered by prepaid
products, the Bureau conducted a study of publicly-available account
agreements for prepaid products that appear to meet the Bureau's
proposed definition of the term ``prepaid account'' (Study of Prepaid
Account Agreements).\183\ Specifically, the Bureau sought to determine
current industry practices in a number of areas to inform its
understanding of the potential costs and benefits of extending various
Regulation E provisions to prepaid accounts. Bureau staff examined
certain key provisions in the account agreements of prepaid cards and
other similar prepaid programs currently available to consumers and
compared those terms against one another and, for some provisions,
against the protections presently provided by Regulation E for payroll
card accounts and cards used for the distribution of certain government
benefits \184\ (and, by virtue the FMS Rule, to other prepaid cards
receiving Federal payments as well).
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\183\ Available at http://files.consumerfinance.gov/f/201411_cfpb_study-of-prepaid-account-agreements.pdf.
\184\ See existing Sec. Sec. 1005.18 and 1005.15, respectively.
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The Study of Prepaid Account Agreements covers 325 publicly-
available account agreements for prepaid programs that, the Bureau
believes, could be subject to the definition of prepaid account set
forth in this proposal.\185\ The analysis includes agreements for GPR
card programs (including GPR cards marketed for specific purposes, such
as travel or receipt of tax refunds, or for specific users, such as
teenagers or students), as well as payroll cards, cards used for the
distribution of certain government benefits, and similar card programs
were included. Agreements for prepaid programs specifically used for
P2P transfers that appeared to be encompassed by the proposed
definition of prepaid account were also included. Gift, incentive and
rebate card programs, health spending account and flexible spending
account programs, and needs-tested State and local government benefit
card programs were not included in the analysis, as the Bureau is
proposing to exclude such products from this proposed rulemaking. While
the Bureau collected a large number of agreements, it cautions that
this collection is neither comprehensive or nor complete. The Bureau
only included programs for which agreements were readily available
online. In addition, there does not currently exist any comprehensive
listing of prepaid card issuers, program managers, or programs against
which the Bureau could compare the completeness of its analysis.
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\185\ The Bureau does not intend for a program's inclusion in or
exclusion from the Study of Prepaid Account Agreements to be a
determination as to whether this proposed rule would or would not
apply to that prepaid account program.
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The Study of Prepaid Account Agreements examines key provisions
regarding error resolution protections (including provisional credit);
limited liability protections; access to account information; overdraft
and treatment of negative balances and declined transaction fees; FDIC
(or NCUSIF) pass-through deposit (or share) insurance; and general
disclosure of fees. Where relevant, results of the analysis are
discussed in the section-by-section analysis below. The Study of
Prepaid Account Agreements is being published concurrently with this
notice. It explains how Bureau staff identified publicly available
prepaid account agreements online for inclusion in the analysis. It
also discusses the Bureau's methodology, key assumptions, observations,
and findings for each category of review. The Bureau cautions that its
analysis is, in many ways, subjective and thus is not intended to be
relied upon as an assessment of any legal issue including whether a
prepaid program actually complies with Regulation E's existing
provisions governing payroll card accounts or cards used for the
distribution of certain government benefits, the FMS Rule, or this
proposed rule.
IV. Legal Authority
A. Electronic Fund Transfer Act
EFTA section 902 establishes that the purpose of the statute is to
provide a basic framework establishing the rights, liabilities, and
responsibilities of participants in electronic fund and remittance
transfer systems but that its primary objective is the provision of
individual consumer rights. Among other things, EFTA contains
provisions regarding disclosures made at the time a consumer contracts
for an electronic fund transfer service (EFTA section 905(a)), notices
of certain changes to account terms or conditions (EFTA section
905(b)), provision of written documentation to consumers regarding
electronic fund transfers (EFTA section 906), error resolution (EFTA
section 908), consumers' and financial institutions' liability for
unauthorized electronic fund transfers (EFTA sections 909 and 910), and
compulsory use of electronic fund transfers (EFTA section 913). With
respect to disclosures provided prior to opening an account, EFTA
section 905(a) states that the terms and conditions of electronic fund
transfers involving a consumer's account shall be disclosed at the time
the consumer contracts for an electronic fund transfer service, in
accordance with regulations of the Bureau. It also establishes that the
Bureau shall issue model clauses for optional use by financial
institutions to facilitate compliance with the disclosure requirements
of EFTA section 905 and to aid consumers in understanding the rights
and responsibilities of participants in electronic fund transfers by
utilizing readily understandable language. As discussed in more detail
below, proposed revisions to Sec. 1005.18(b) (pre-acquisition
disclosure requirements) are proposed pursuant to the Bureau's
disclosure authority under EFTA section 905, and its adjustments and
exceptions authority under EFTA section 904.
As amended by the Dodd-Frank Act, EFTA section 904(a) authorizes
the Bureau to prescribe regulations
[[Page 77124]]
necessary to carry out the purposes of EFTA. As noted above, the
express purposes of EFTA, are to establish ``the rights, liabilities,
and responsibilities of participants in electronic fund and remittance
transfer systems'' and to provide ``individual consumer rights.'' EFTA
section 902(b). EFTA section 904(c) further provides that regulations
prescribed by the Bureau may contain such classifications,
differentiations, or other provisions, and may provide for such
adjustments or exceptions, for any class of electronic fund transfers
or remittance transfers that the Bureau deems necessary or proper to
effectuate the purposes of EFTA, to prevent circumvention or evasion,
or to facilitate compliance. The Senate Report accompanying EFTA noted
that regulations are ``essential to the act's effectiveness'' and
``[permit] the [Bureau] to modify the act's requirements to suit the
characteristics of individual EFT services. Moreover, since no one can
foresee EFT developments in the future, regulations would keep pace
with new services and assure that the act's basic protections continue
to apply.'' \186\ For reasons discussed in this notice, the Bureau is
proposing amendments to Regulation E with respect to prepaid accounts
that may offer an overdraft service or credit feature pursuant to the
Bureau's authority under, as applicable, sections 904(a) and (c).
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\186\ See S. Rept. No. 95-1273, at 26 (Oct. 4, 1978).
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B. Section 1022 of the Dodd-Frank Act
Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules ``as may be necessary or appropriate to enable the
Bureau to administer and carry out the purposes and objectives of the
Federal consumer financial laws, and to prevent evasions thereof.''
Among other statutes, title X of the Dodd-Frank Act, EFTA, and TILA are
Federal consumer financial laws.\187\ Accordingly, in adopting this
final rule, the Bureau is exercising its authority under Dodd-Frank Act
section 1022(b) to prescribe rules under EFTA, TILA, and title X that
carry out the purposes and objectives and prevent evasion of those
laws. Section 1022(b)(2) of the Dodd-Frank Act prescribes certain
standards for rulemaking that the Bureau must follow in exercising its
authority under section 1022(b)(1). See Section 1022(b) Analysis below
for a discussion of the Bureau's standards for rulemaking under Dodd-
Frank Act section 1022(b)(2).
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\187\ Dodd-Frank Act section 1002(14) (defining ``Federal
consumer financial law'' to include the ``enumerated consumer laws''
and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act
section 1002(12) (defining ``enumerated consumer laws'' to include
TILA and EFTA).
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Dodd-Frank Act section 1022(c)(1) provides that, to support its
rulemaking and other functions, the Bureau shall monitor for risks to
consumers in the offering or provision of consumer financial products
or services, including developments in markets for such products or
services. The Bureau may make public such information obtained by the
Bureau under this section as is in the public interest. Dodd-Frank Act
section 1022(c)(3). Moreover, section 1022(c)(4) provides that, in
conducting such monitoring or assessments, the Bureau shall have the
authority to gather information from time to time regarding the
organization, business conduct, markets, and activities of covered
persons and service providers. Proposed Sec. 1005.19 is proposed
pursuant to the Bureau's authority under Dodd-Frank sections 1022(c)
and 1032(a), as well as its authority under EFTA sections 904 and 905.
As discussed in the section-by-section analysis below, proposed Sec.
1005.19 would mandate the collection of and posting by the Bureau of
prepaid account terms and conditions and posting on a Bureau-maintained
Web site. It would also require that financial institutions disclose
such terms and conditions.
C. Section 1032 of the Dodd-Frank Act
Section 1032(a) of the Dodd-Frank Act provides that the Bureau
``may prescribe rules to ensure that the features of any consumer
financial product or service, both initially and over the term of the
product or service, are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances.'' The authority granted to the Bureau in
section 1032(a) is broad, and empowers the Bureau to prescribe rules
regarding the disclosure of the ``features'' of consumer financial
products and services generally. Accordingly, the Bureau may prescribe
disclosure requirements in rules regarding particular features even if
other Federal consumer financial laws do not specifically require
disclosure of such features.
Dodd-Frank Act section 1032(c) provides that, in prescribing rules
pursuant to section 1032, the Bureau ``shall consider available
evidence about consumer awareness, understanding of, and responses to
disclosures or communications about the risks, costs, and benefits of
consumer financial products or services.'' Accordingly, in developing
the proposed rule under Dodd-Frank Act section 1032(a), the Bureau has
considered available studies, reports, and other evidence about
consumer awareness, understanding of, and responses to disclosures or
communications about the risks, costs, and benefits of consumer
financial products or services. Moreover, the Bureau has considered the
evidence developed through its consumer testing of the model forms as
discussed above and in the ICF Report.
In addition, Dodd-Frank Act section 1032(b)(1) provides that ``any
final rule prescribed by the Bureau under [section 1032] requiring
disclosures may include a model form that may be used at the option of
the covered person for provision of the required disclosures.'' Any
model form issued pursuant to that authority shall contain a clear and
conspicuous disclosure that, at a minimum, uses plain language that is
comprehensible to consumers, contains a clear format and design, such
as an easily readable type font, and succinctly explains the
information that must be communicated to the consumer. Dodd-Frank Act
section 1032(b)(2). As discussed in more detail below, certain portions
of the proposed rule are proposed pursuant to the Bureau's disclosure
authority under Dodd-Frank section 1032(a).
D. The Truth in Lending Act
As discussed above, TILA is a Federal consumer financial law. In
adopting TILA, Congress explained that:
[E]conomic stabilization would be enhanced and the competition
among the various financial institutions and other firms engaged in
the extension of consumer credit would be strengthened by the
informed use of credit. The informed use of credit results from an
awareness of the cost thereof by consumers. It is the purpose of
this subchapter to assure a meaningful disclosure of credit terms so
that the consumer will be able to compare more readily the various
credit terms available to him and avoid the uninformed use of
credit, and to protect the consumer against inaccurate and unfair
credit billing and credit card practices.\188\
\188\ TILA section 102(a); 15 U.S.C. 1601(a).
TILA and Regulation Z define credit broadly as the right granted by a
creditor to a debtor to defer payment of debt or to incur debt and
defer its payment. TILA section 103(f); 15 U.S.C. 1602(f); 12 CFR
1026.2(a)(14); 15 U.S.C. 1602(f). TILA and Regulation Z set forth
disclosure and other requirements that apply to creditors. Different
rules apply to creditors depending on whether they are extending
``open-end credit'' or ``closed-end credit.'' Under the statute and
Regulation Z, open-end credit exists
[[Page 77125]]
where there is a plan in which the creditor reasonably contemplates
repeated transactions; the creditor may impose a finance charge from
time to time on an outstanding unpaid balance; and the amount of credit
that may be extended to the consumer during the term of the plan (up to
any limit set by the creditor) is generally made available to the
extent that any outstanding balance is repaid. Sec. 1026.2(a)(20).
Typically, closed-end credit is credit that does not meet the
definition of open-end credit. Sec. 1026.2(a)(10).
The term ``creditor'' generally means a person who regularly
extends consumer credit that is subject to a finance charge or is
payable by written agreement in more than four installments (not
including a down payment), and to whom the obligation is initially
payable, either on the face of the note or contract, or by agreement
when there is no note or contract. See TILA section 103(g); 15 U.S.C.
1602(g); 12 CFR 1026.2(a)(17)(i). TILA defines finance charge broadly
as the sum of all charges, payable directly or indirectly by the person
to whom the credit is extended, and imposed directly or indirectly by
the creditor as an incident to the extension of credit. TILA section
106(a); 12 U.S.C. 1605(a); see 12 CFR 1026.4.
The term ``creditor'' also includes a card issuer, which is a
person or it's agent that issues credit cards, when that person extends
credit accessed by the credit card. See Sec. 1026.2(a)(17)(iii) and
(iv); TILA section 103(g); 15 U.S.C. 1602(g). Regulation Z defines the
term ``credit card'' to mean any card, plate, or other single credit
device that may be used from time to time to obtain credit. See Sec.
1026.2(a)(15). A charge card is a credit card on an account for which
no periodic rate is used to compute a finance charge. See Sec.
1026.2(a)(15)(iii). In addition to being creditors under TILA and
Regulation Z, card issuers also generally must comply with the credit
card rules set forth in the FCBA and in the Credit CARD Act (if the
card accesses an open-end credit plan), as implemented in Regulation Z
subparts B and G. See generally Sec. Sec. 1026.5(b)(2)(ii), .7(b)(11),
.12 and .51-.60.
TILA section 105(a). As amended by the Dodd-Frank Act, TILA section
105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations
to carry out the purposes of TILA, and provides that such regulations
may contain additional requirements, classifications, differentiations,
or other provisions, and may provide for such adjustments and
exceptions for all or any class of transactions, that the Bureau judges
are necessary or proper to effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate compliance. As
discussed above, pursuant to TILA section 102(a), a purpose of TILA is
``to assure a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various credit terms
available to him and avoid the uninformed use of credit.'' Moreover,
this stated purpose is tied to Congress' finding that ``economic
stabilization would be enhanced and the competition among the various
financial institutions and other firms engaged in the extension of
consumer credit would be strengthened by the informed use of
credit[.]'' TILA section 102(a). Thus, strengthened competition among
financial institutions is a goal of TILA, achieved through the
effectuation of TILA's purposes.
Historically, TILA section 105(a) has served as a broad source of
authority for rules that promote the informed use of credit through
required disclosures and substantive regulation of certain practices.
However, Dodd-Frank Act section 1100A clarified the Bureau's section
105(a) authority by amending that section to provide express authority
to prescribe regulations that contain ``additional requirements'' that
the Bureau finds are necessary or proper to effectuate the purposes of
TILA, to prevent circumvention or evasion thereof, or to facilitate
compliance. This amendment clarified the authority to exercise TILA
section 105(a) to prescribe requirements beyond those specifically
listed in the statute that meet the standards outlined in section
105(a). Accordingly, as amended by the Dodd-Frank Act, TILA section
105(a) authority to make adjustments and exceptions to the requirements
of TILA applies to all transactions subject to TILA, except with
respect to the provisions of TILA section 129 that apply to the high-
cost mortgages referred to in TILA section 103(bb), 15 U.S.C. 1602(bb).
For the reasons discussed in this notice, the Bureau is proposing
amendments to Regulation Z with respect to certain prepaid accounts
that are associated with overdraft services or credit features to carry
out TILA's purposes and is proposing such additional requirements,
adjustments, and exceptions as, in the Bureau's judgment, are necessary
and proper to carry out the purposes of TILA, prevent circumvention or
evasion thereof, or to facilitate compliance. In developing these
aspects of the proposal pursuant to its authority under TILA section
105(a), the Bureau has considered the purposes of TILA, including
ensuring meaningful disclosures, facilitating consumers' ability to
compare credit terms, and helping consumers avoid the uninformed use of
credit, and the findings of TILA, including strengthening competition
among financial institutions and promoting economic stabilization.
V. Section-by-Section Analysis of the Proposed Rule
Regulation E
Subpart A--General
Section 1005.2 Definitions
2(b) Account
Section 1005.2(b)(1) defines an ``account'' for purposes of
Regulation E as a demand deposit (checking), savings, or other consumer
asset account (other than an occasional or incidental credit balance in
a credit plan) held directly or indirectly by a financial institution
and established primarily for personal, family, or household purposes.
As discussed above, the Board in 2006 added a definition for ``payroll
card account'' to the definition of account in Regulation E. Under the
current regulation, a payroll card account is an account that is
directly or indirectly established through an employer and to which
electronic fund transfers of the consumer's wages, salary, or other
employee compensation (such as commissions), are made on a recurring
basis, whether the account is operated or managed by the employer, a
third-party payroll processor, a depository institution or any other
person. Sec. 1005.2(b)(2). EFTA and Regulation E currently apply to
payroll card accounts, except as provided in existing Sec. 1005.18.
Similar exceptions and other provisions specific to accounts used for
the distribution of government benefits are in existing Sec. 1005.15.
Gift cards, although not included in the Sec. 1005.2(b) definition of
account, are addressed in Sec. 1005.20.
The Board, in adopting rules to include payroll card accounts
within the ambit of Regulation E, explicitly acknowledged that
Regulation E did not, at that time, cover general spending cards to
which a consumer might transfer by direct deposit some portion of the
consumer's wages.\189\ As a result, some regulators, the prepaid
industry, and others have thus interpreted Regulation E not to apply to
various types of prepaid products that are not payroll card accounts,
accounts used for
[[Page 77126]]
the distribution of government benefits, or gift cards.\190\
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\189\ 71 FR 51437, 51441 (Aug. 30, 2006).
\190\ See, e.g., FMS Rule, 75 FR 80335, 80337 (Dec. 22, 2010).
However, as evidenced by the Study of Prepaid Account Agreements,
many prepaid providers have, for a variety of reasons, elected to
apply some or all of Regulation E's provisions (as modified by the
Payroll Card Rule) to their non-payroll prepaid products generally.
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After the Bureau assumed authority for implementing most of EFTA
pursuant to the transfer of certain authorities from the Board to the
Bureau under the Dodd-Frank Act, it analyzed whether other types of
prepaid products, in addition to payroll card accounts, certain
government benefit accounts, and gift cards, could or should be
expressly included within Regulation E. In the Prepaid ANPR, the Bureau
explained that in the six years that had elapsed since the Board issued
the Payroll Card Rule, the prepaid card market had changed markedly.
Beyond just industry growth, consumers also have increasingly used
prepaid products the same way other consumers use traditional demand
deposit accounts. Further, as general use prepaid cards become a more
accepted and well-known alternative financial product, the difference
between prepaid and traditional deposit accounts begins to blur. Thus,
the Bureau sought comment in the Prepaid ANPR on how the Bureau should
define GPR cards in the context of Regulation E and whether certain
prepaid products should not be included in this definition, such as
cards that may serve a limited purpose (e.g., university cards or
health spending cards).\191\
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\191\ 77 FR 30923, 30925 (May 23, 2012).
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In the first instance, most commenters to the Prepaid ANPR
(industry, consumer advocacy groups, and others) did not object to
bringing prepaid products within the ambit of Regulation E, at least at
some broad level. While there were some concerns from industry and
others, which are discussed further below, about exactly which types of
prepaid products the Bureau might subject to Regulation E, most
commenters favored inclusion of GPR cards, with some reservations about
specific provisions of the rule. Among other reasons, several trade
associations noted that insofar as many GPR card issuers and program
managers already voluntarily comply with Regulation E, the Bureau
should formalize GPR cards' inclusion in Regulation E as a means of
standardizing protections for consumers.
Most comments focused on the types of prepaid products the Bureau
should include in this rulemaking and the scope of any resulting rules.
Many industry commenters urged the Bureau to focus its rulemaking only
on those products that consumers can or do use in the same ways as
traditional demand deposit accounts. Many commenters contrasted such
products, which include GPR cards (which do not have limits on where
and how consumers can use the product), with those that are issued with
restrictions on use. Commenters suggested, for example, that the Bureau
exclude Health Savings Account cards because they cannot be used in the
place of a traditional demand deposit account due to limitations on
their use. Similarly, industry commenters also suggested that the
Bureau exclude limited-use transit cards, university cards, and mall
cards. Some industry commenters also urged the Bureau to exclude
certain corporate-related cards, such as those used for expense
reimbursement or for distribution of health or transit benefits. Within
this vein, industry commenters also suggested that the Bureau exclude
cards used to disburse insurance payments because, one commenter
argued, they are not part of the class of consumer asset accounts
intended to be regulated under Regulation E. Another industry commenter
argued that cards that are not reloadable by the consumer or that are
corporate-funded typically serve a limited audience for a limited use
and therefore should not be covered by the proposed rule. Further,
these commenters warned that if such cards were covered by the
definition of prepaid accounts, the cost of adding Regulation E
protections could cause issuers of those cards to discontinue offering
them.
In addition, industry commenters disagreed over whether the Bureau
should limit its proposed rule to products represented by physical
cards or whether it should also include other types of prepaid products
such as those that are entirely online (and might use a barcode or QR
code displayed on a mobile device such as a smartphone or other online
means to interact with a payment network). One prepaid card distributor
commenter urged the Bureau to include these non-card products because
such products may have the same features as physical cards. However,
commenters urged the Bureau to distinguish between digital wallets that
simply store payment credentials for other accounts or cards and those
non-card products that in fact store funds themselves. To the extent
that the credentials loaded into a digital wallet are for other
accounts are protected by Regulations E or Z, commenters argued that
those products should provide consumers with sufficient protections
without direct regulation of the wallets themselves. With the exception
of these few topics, however, industry commenters generally discussed
how Regulation E's substantive requirements should be tailored to
prepaid products rather than what products should be defined as prepaid
accounts in the first instance. These comments are discussed in detail
below.
Consumer group commenters generally did not favor restrictions on
any definition the Bureau might propose; they instead favored inclusion
of limited purpose products such as university cards, health spending
cards, and other similar products. They argued that the Bureau should
include in its proposed definition all products that act like debit
cards and that are currently not covered by Regulation E, as well as
certain reloadable gift cards. Like many industry commenters, consumer
groups urged the Bureau to apply Regulation E to those prepaid products
that consumers can use as transaction account substitutes because, in
part, consumers do not know that debit cards may have protections that
prepaid products lack. The consumer groups diverged from industry
commenters, however, by largely urging the Bureau not to modify the
substantive requirements of Regulation E in applying them to prepaid
products. These differences are discussed in detail below.
In addition to reviewing the comments it received on the Prepaid
ANPR, the Bureau has conducted significant outreach to aid its
understanding of the scope and diversity of the prepaid product
marketplace. In particular, the Bureau has spoken with prepaid card
program managers, issuers, distributors, processors, and other parties
involved in various aspects of the prepaid card industry, as well as
government agencies and non-profits that are involved in administering
prepaid card programs. This outreach has included providers of prepaid
products that are not sold to consumers, such as prepaid cards used to
distribute financial aid to students and insurance payouts to
consumers. The Bureau understands (based on its outreach efforts as
well as its Study of Prepaid Account Agreements) that many providers of
prepaid products voluntarily comply with most or all of Regulation E,
as it applies to payroll card accounts. As discussed in detail below,
the Bureau believes that objections about the burden of including
various types of products within the ambit of this proposed rule are
largely negated by the
[[Page 77127]]
fact that a significant majority of these products are already
substantially in compliance with existing Regulation E provisions.
In developing this proposal, the Bureau first considered the
applicability of EFTA to prepaid products. EFTA, among other things,
governs transactions that involve an electronic fund transfer to or
from a consumer's account. It defines an account to be ``a demand
deposit, savings deposit, or other asset account . . . as described in
regulations of the Bureau, established primarily for personal, family,
or household purposes. . . .'' EFTA section 903(2), 15 U.S.C. 1693a(2).
Insofar as the statute defines account broadly to include any other
asset account and for the other reasons discussed below, the Bureau
believes it is reasonable to interpret ``account'' in EFTA to include
prepaid accounts. Thus, it proposes to include prepaid accounts
expressly within Regulation E's definition of account. To clarify the
scope of the proposed rule and to modify Regulation E to reflect the
characteristics of prepaid accounts, the Bureau proposes to modify the
definition of ``account'' under Sec. 1005.2(b) to create a specific
sub-definition for prepaid account.
The Bureau believes that proposing to apply Regulation E to prepaid
accounts is appropriate for several reasons. As noted above and by many
commenters, prepaid products are more frequently being used today by
consumers as transaction account substitutes. In particular, GPR cards
(including those sold at retail locations and online) are increasingly
being used by consumers as a substitute for a checking account, credit
card, or both. The Bureau also understands that consumers use other
types of prepaid products as transaction account substitutes as well.
For example, students may receive financial aid disbursements onto
prepaid cards that the students then use as their primary transaction
vehicle during the school term. Insurers may pay out insurance claims
for property or casualty losses or workers' compensation claims onto
prepaid cards. Consumers, in turn, may use this card as their primary
transaction vehicle until the funds are depleted.
The Bureau recognizes that not all consumers use prepaid products
as transaction account substitutes and that not all types of prepaid
products lend themselves to use as transaction account substitutes.
Nevertheless, the Bureau believes that the features of non-GPR card
prepaid products as well as the ways consumers can and do use those
products warrant their inclusion as prepaid accounts for several
reasons. First, inclusion aligns appropriately with the purposes of
EFTA. The legislative history of EFTA indicates that Congress' primary
goal was to protect consumers using electronic fund transfer services.
Although, at the time, providers of electronic payment services argued
that enactment of EFTA was premature and that the electronic payment
market should be allowed to develop further on its own, Congress
believed that establishing a framework of rights and duties for all
parties would benefit both consumers and providers.\192\ Likewise, the
Bureau believes that now it is appropriate to establish such a
framework for prepaid accounts, because doing so would benefit both
consumers and providers. In addition, were it to finalize this
proposal, the Bureau believes that consumers will be better able to
assess the risks of using prepaid products. Indeed, the Bureau is
concerned that because prepaid cards can be so similar to credit and
debit cards (which are protected under Regulations Z and E), consumers
may not realize that their prepaid cards lack the same benefits and
protections as those other cards. This proposal, if finalized, would
serve to make these protections more consistent and eliminate a
regulatory gap.
---------------------------------------------------------------------------
\192\ See S. Rept. No. 95-915, at 2-3 (1978) and H.R. Rept. No.
95-1315, at 2-4 (1978).
---------------------------------------------------------------------------
Second, the Bureau believes that the Board's reasoning in 2006 for
excluding GPR cards from the Payroll Card Rule is now, eight years
later, no longer applicable. At the time, the Board concluded that it
was premature to cover other prepaid cards under Regulation E because,
in its view of the marketplace at that time, consumers did not often
use prepaid cards in the same way that they used payroll cards; the
Board noted, ``for payroll card accounts that are established through
an employer, there is a greater likelihood [than for GPR cards] that
the account will serve as a consumer's principal transaction account
and hold significant funds for an extended period of time.'' \193\ The
Board also noted that, in its opinion, to the extent that consumers use
GPR cards like gift cards, ``consumers would derive little benefit from
receiving full Regulation E protections for a card that may only be
used on a limited, short-term basis and which may hold minimal funds,
while the costs of providing Regulation E initial disclosures, periodic
statements, and error resolution rights would be quite significant for
the issuer.'' \194\
---------------------------------------------------------------------------
\193\ 71 FR 51441 (Aug. 30, 2006).
\194\ 71 FR 1473, 1475 (Jan. 10, 2006) (also noting that GPR
cards are ``generally designed to make one-time or a limited number
of payments to consumers and are not intended to be used on a long-
term basis'').
---------------------------------------------------------------------------
Third, consumers' use of prepaid products has evolved significantly
since 2006. Although some consumers may continue to treat GPR cards and
other prepaid products as if they were gift cards, many do not. Many
consumers now use other types of prepaid products in the same ways and
to fill the same needs as they did payroll card accounts in 2006.
Consumers can and do have wages and/or benefits loaded onto prepaid
cards through direct deposit and thus may load substantial sums onto
their cards.\195\ Consumers use prepaid cards for a variety of
purposes, including making purchases, paying bills, and receiving
payments.\196\ For those consumers without other transaction accounts,
they may depend entirely on their prepaid cards to meet their payment
account needs.\197\ As a result, the Bureau believes that such products
should be considered consumer asset accounts subject to EFTA and
Regulation E. The Bureau notes that while not all prepaid products can
or will be used as transaction account substitutes, the proposed
prepaid account definition discussed below appropriately includes a
variety of prepaid product types that the Bureau believes warrant
protection under Regulation E. The Bureau is concerned that to try to
carve out very specific types of products that are, or can be, used for
short-term limited purposes is complicated and could result in consumer
confusion as to what protections might apply to otherwise
indistinguishable products.
---------------------------------------------------------------------------
\195\ See, e.g., Fed. Deposit Ins. Corp, Appendix to 2013 FDIC
National Survey of Unbanked and Underbanked Households (Oct. 2014)
(2013 FDIC Survey), at 55, available at https://www.fdic.gov/householdsurvey/2013report.pdf (finding that for households that
reloaded prepaid debit cards in the last 12 months, 17.7 percent of
all households and 27.7 percent of unbanked households did so via
direct deposit of a paycheck).
\196\ See, e.g., id. at 48 (finding that for all households that
used prepaid debit cards in the last 12 months, 44.5 percent did so
to pay for everyday purchases or to pay bills and 19.4 percent did
so to receive payments).
\197\ See, e.g., id. (finding that finding that for unbanked
households that used prepaid debit cards in the last 12 months, 65
percent did so to pay for everyday purchases or to pay bills and
41.8 percent did so to receive payments).
---------------------------------------------------------------------------
As the Bureau's consumer testing and industry studies have shown,
many consumers are using prepaid accounts in the same ways as they use
other types of accounts, such as debit and credit card accounts. Even
if not all consumers
[[Page 77128]]
use their prepaid accounts in this way, consumers may not realize that,
in many ways, their prepaid accounts may provide fewer protections than
substitute products (and, in fact, may expect their prepaid cards to be
safer).\198\ Further, to the extent the Board determined that consumers
in 2006 did not use prepaid accounts in a way that warranted regulatory
protections, the Bureau believes that those conditions no longer exist.
As discussed in detail below, the Bureau is proposing to bring a broad
range of prepaid products within the ambit of Regulation E and also is
proposing to modify certain substantive provisions of Regulation E as
appropriate for different types of prepaid accounts.
---------------------------------------------------------------------------
\198\ See, e.g., ICF Report, at 10 (noting that ``When asked
what would happen if there were a fraudulent or inaccurate charge on
their prepaid account, most participants believed that their prepaid
card provider would credit the funds to their account. This belief
seemed to be based almost exclusively on prior experiences with
prepaid card providers and other financial institutions, rather than
an understanding of any legal protections that may or may not
exist.'')
---------------------------------------------------------------------------
In crafting the proposed definition of prepaid account, the Bureau
has focused on prepaid product attributes and consumer use cases. While
consumers are increasingly using prepaid accounts as transaction
account substitutes, the Bureau does realize, as discussed above, that
not all consumers will use prepaid accounts in that way and that many
continue to maintain checking and other deposit accounts while also
using prepaid accounts. The Bureau also acknowledges that certain
accounts subject to the proposed definition (e.g., products usable only
for person-to-person transfers and products that cannot be reloaded)
cannot be used as transaction account substitutes. Nevertheless,
because the Bureau believes that consumer protections are best
understood when they apply evenly across like products, the Bureau is
proposing a definition that would focus on attributes relating to how
prepaid accounts are issued and used, instead of how or where they are
loaded (and by whom). The Bureau believes it appropriate to cast a wide
net in including products within the proposed definition of prepaid
account even if, as discussed further below, it may also be appropriate
to adjust certain provisions in Regulation E depending on a particular
product's features and how it can be used.
The proposed definition of prepaid account is discussed below. It
is followed by a discussion of the modifications and limitations the
Bureau is proposing for that definition. Finally, the new requirements
and modifications the Bureau is proposing to Regulation E for prepaid
accounts are discussed.
2(b)(2) Bona Fide Trust Account
The current definition of account in Regulation E includes an
exception for bona fide trust accounts. See existing Sec.
1005.2(b)(3). To accommodate the proposed definition for the term
prepaid account and a proposed adjustment to the definition of payroll
card account, the Bureau proposes to renumber the exception for bona
fide trust accounts as Sec. 1005.2(b)(2) without any substantive
changes to the exception. Note that to accommodate this proposed
change, the Bureau does not need to renumber existing comments 2(b)(2)-
1 and -2 because those comments are currently misnumbered in the
Official Interpretations to Regulation E.
2(b)(3) Prepaid Account
Overview
In determining to propose revisions to Regulation E's definition of
account to include prepaid accounts, the Bureau considered which types
of prepaid products should be covered by its proposed definition. As
discussed below, the Bureau proposes to add new Sec. 1005.2(b)(3) to
set forth this proposed definition.
2(b)(3)(i)
Proposed Sec. 1005.2(b)(3)(i) would define the term prepaid
account as a card, code, or other device, that is not otherwise an
account under Sec. 1005.2(b)(1), that is established primarily for
personal, family, or household purposes, and that satisfies three
additional criteria as laid out in proposed Sec. 1005.2(b)(3)(i)(A)
through (C), discussed below.
The Bureau's proposed definition of prepaid account is based on the
formulation for the definition of general-use prepaid card in the Gift
Card Rule (Sec. 1005.20). As the Board noted when it adopted the Gift
Card Rule, that definition of general-use prepaid card largely tracks
the language of the Credit CARD Act as codified in EFTA Section
915(a)(2)(A).\199\ The Bureau examined other similar definitions, such
as those used in FinCEN's Prepaid Access Rule or in the Board's
Regulation II, but believes that its proposed approach aligns, as
explained in detail below, best with the types of prepaid products the
proposed definition is intended to cover and with the purposes of EFTA
and Regulation E. The Bureau believes that its proposed definition
closely calibrates to the products that it intends to cover as well as
provides greater consistency within Regulation E.
---------------------------------------------------------------------------
\199\ See 75 FR 16580, 16588 (Apr. 1, 2010). Congress also used
this definition of prepaid card in the Dodd-Frank Act provisions
governing debit card interchange and routing requirements. Dodd-
Frank Act section 1075, EFTA section 920(a)(7)(A)(ii), 15 U.S.C.
1693o-2(a)(7)(A)(ii).
---------------------------------------------------------------------------
Proposed comment 2(b)(3)(i)-1 would clarify that for purposes of
subpart A to Regulation E, except for Sec. 1005.17 (requirements for
overdraft services), the term ``debit card'' also includes a prepaid
card.
The first part of the proposed definition--an account established
primarily for personal, family, or household purposes--mirrors a
portion of the existing definition of account. See Sec. Sec.
1005.2(b)(1). Proposed comment 2(b)(3)(i)-2 would explain that proposed
Sec. 1005.2(b)(3) applies only to cards, codes, or other devices that
are acquired by or provided to a consumer primarily for personal,
family, or household purposes. For further commentary interpreting this
phrase, proposed comment 2(b)(3)(i)-2 would refer to existing comments
20(a)-4 and -5.
2(b)(3)(i)(A)
Proposed Sec. 1005.2(b)(3)(i)(A) would define a prepaid account as
either issued on a prepaid basis to a consumer in a specified amount or
not issued on a prepaid basis but capable of being loaded with funds
thereafter.
This portion of the proposed definition expands upon the phrase
``issued on a prepaid basis'' used in the Gift Card Rule's definition
of general-use prepaid card in Sec. 1005.20(a)(3).\200\ However, the
Bureau seeks to ensure that accounts that are not loaded at acquisition
are nonetheless eligible to be prepaid accounts. Unlike gift cards,
which are typically loaded with value at purchase, other types of
prepaid products may be issued before a consumer or third party loads
value onto it (e.g., payroll card accounts). The Bureau believes that
the Gift Card Rule's limitation is unnecessary and inappropriate with
respect to its definition for prepaid accounts. Thus, because the
Bureau believes that prepaid products should be subject to the same
protections regardless of the timing of loading, the proposed
definition also includes a prepaid product that is ``not issued on a
prepaid
[[Page 77129]]
basis but capable of being loaded with funds thereafter.''
---------------------------------------------------------------------------
\200\ Section 1005.20(a)(3) defines the term general use prepaid
card as ``a card, code, or other device that is: (i) Issued on a
prepaid basis primarily for personal, family, or household purposes
to a consumer in a specified amount, whether or not that amount may
be increased or reloaded, in exchange for payment; and (ii)
Redeemable upon presentation at multiple, unaffiliated merchants for
goods or services, or usable at automated teller machines.''
---------------------------------------------------------------------------
The Bureau is also proposing this approach in part because it is
concerned that prepaid providers could restructure existing products to
avoid coverage by the proposed rule if they were to separate account
acquisition from initial funding. For example, a GPR card provider
could create a card product that did not require an initial load at the
time of purchase or a university could give a card to a student prior
to the disbursement of financial aid and, without the proposed
additional language, could be outside the proposed rule. The Bureau
believes that by making the scope of the proposed definition broad it
will limit attempts to evade the proposed consumer protections for
prepaid accounts. In addition, the Bureau believes that this proposed
provision would ensure that consumers who use prepaid accounts receive
the protections in this proposed rule--particularly the pre-acquisition
disclosures regarding fees and other key terms--prior to and upon
establishment of the account.
Proposed comment 2(b)(3)(i)-3 would clarify that to be ``issued on
a prepaid basis,'' a prepaid account must be loaded with funds when it
is first provided to the consumer for use. For example, if a consumer
purchases a prepaid account and provides funds that are loaded onto a
card at the time of purchase, the prepaid account is issued on a
prepaid basis. A prepaid account offered for sale in a retail store is
not issued on a prepaid basis until purchased by the consumer.
Proposed comment 2(b)(3)(i)-4 would clarify what types of accounts
would satisfy the portion of the proposed prepaid account definition
regarding an account that is not issued on a prepaid basis but is
capable of being loaded with funds thereafter. Specifically, proposed
comment 2(b)(3)(i)-4 would explain that a prepaid account that is not
issued on a prepaid basis but is capable of being loaded with funds
thereafter includes a prepaid card issued to a consumer with a zero
balance to which funds may be loaded by the consumer or a third party
subsequent to issuance. This does not include a product that can never
store funds, such as digital wallet that only holds payment credentials
for other accounts.
Proposed comment 2(b)(3)(i)-5 would clarify that to satisfy
proposed Sec. 1005.2(b)(3)(i)(A), a prepaid account must either be
issued on a prepaid basis or be capable of being loaded with funds.
This means that the prepaid account must be capable of holding funds,
rather than merely acting as a pass-through vehicle. For example, if a
product is only capable of storing a consumer's payment credentials for
other accounts but is incapable of having funds stored on it, such a
product would not be a prepaid account. However, if a product allows a
consumer to transfer funds, which can be stored before the consumer
designates a destination for the funds, the product would satisfy
proposed Sec. 1005.2(b)(3)(i)(A).
With these examples, the Bureau seeks to make clear that it does
not intend to extend the proposed definition of prepaid account to a
product that can never store funds. To the extent that a digital
wallet, for example, merely stores payment credentials (e.g., a
consumer's bank account or payment card information), rather than
storing the funds themselves, the digital wallet would not be
considered a prepaid account under the proposed rule. If, however, a
digital wallet allows a consumer to store funds in it directly, then
the digital wallet would be a prepaid account if the other criteria of
the proposed definition are also met.
The Bureau proposes not to limit its definition to prepaid accounts
that are reloadable, as explained in proposed comment 2(b)(3)(i)-6,
which would provide that prepaid accounts need not be reloadable by the
consumer or a third party. Some industry commenters to the Prepaid ANPR
urged the Bureau to limit this proposed rule to those products that can
be reloaded by a consumer. One of these commenters urged exclusion for
cards issued pursuant to a special arrangement (such as insurance
cards), arguing that such cards are quite different than GPR cards
since they are not reloadable by the consumer. These commenters did not
cite specific evidence to provide a basis for such a rationale. On the
other hand, some industry commenters and several consumer group
commenters suggested a more expansive rule based on how the consumer
expects to use the card, rather than on how it may be loaded with
funds.
The Bureau believes that it would be inappropriate to exclude a
product from the definition of prepaid account based on whether it can
be reloaded or who can (or cannot) load funds into the account. First,
products that may limit consumers from loading funds include payroll
card accounts, which are already subject to Regulation E. Other
products reloadable only by a third party also may hold funds which
similarly represent a meaningful portion of a consumer's available
income. This may be true, for example, for students receiving financial
aid disbursements or a consumer receiving worker's compensation
payments. The Bureau believes that, like consumers relying on payroll
card accounts, which the Board previously acknowledged should be
protected by Regulation E,\201\ consumers may use these products as
transaction account substitutes even when consumers cannot reload the
cards themselves, and thus such products should be similarly protected.
---------------------------------------------------------------------------
\201\ See 71 FR 51437, 51441 (Aug. 30, 2006).
---------------------------------------------------------------------------
Second, the Bureau does not believe that non-reloadable prepaid
products should have fewer protections than reloadable products. While
it is true that consumers may not generally use non-reloadable products
as transaction account substitutes given that the funds will eventually
be spent down in their entirety, the Bureau believes that extending
protections to all broadly usable prepaid accounts is beneficial to
consumers. As noted, consumers may not realize the differences between
protections available for traditional debit cards and prepaid cards and
even less so between different types of prepaid products. Providers'
marketing strategies could exacerbate these concerns. To the extent
prepaid accounts are marketed as being ``safer'' than other products,
consumers are less likely to understand technical and legal differences
in regulatory coverage.
Third, if the Bureau excluded non-reloadable cards from the
definition of prepaid account, a provider intent on evading Regulation
E could issue non-reloadable cards repeatedly to the same consumer
instead of reloading a covered reloadable card. Including non-
reloadable products (that otherwise meet the relevant criteria) in the
proposed definition of prepaid account would eliminate this
possibility.
Nevertheless, the Bureau seeks comment on the scope of this part of
the proposed definition, including as to specific types of prepaid
products that should be included or excluded from coverage, as well as
the rationale for inclusion or exclusion. In particular, the Bureau
seeks comment on whether the definition as proposed could have the
unintended consequence of including products that do not warrant
protection by the Bureau as well as any additional concerns regarding
products covered by the proposed definition. The Bureau requests that
commenters specifically identify the reasons why inclusion of
particular products in the definition of prepaid account would be
burdensome to providers or not beneficial to consumers, including
relevant data to support claims where available and appropriate.
[[Page 77130]]
The Bureau's proposed definition does not focus on particular
products based on how they are distributed--such as GPR cards sold at
retail locations or payroll card accounts distributed by employers--but
instead focuses on the characteristics of a product--such as whether it
can store funds and how it can be used by a consumer. An alternative
approach would have been to list specific types of products. The Bureau
is not proposing such an approach because it believes that it is
difficult to craft such a list that would remain accurate as products
evolve and that such a list would create opportunities for evasion.
Finally, the Bureau also requests comment on whether it should adopt
specific exceptions to the proposed definition.
2(b)(3)(i)(B)
The next part of the proposed definition of prepaid account
addresses how such products must be able to be used to be considered a
prepaid account. As the Board noted in adopting the Gift Card Rule, a
key difference between a general-use prepaid card and a store gift card
is where the card can be used.\202\ While store gift cards and gift
certificates can be used at only a single merchant or an affiliated
group of merchants (see Sec. 1005.20(a)(1)(ii) and (2)(ii)), a
general-use prepaid card is defined, in part, as redeemable upon
presentation at multiple, unaffiliated merchants for goods or services,
or usable at automated teller machines (Sec. 1005.20(a)(3)(ii)). In
response to the Prepaid ANPR, commenters largely urged that the Bureau
maintain this distinction. As noted above, some industry commenters
also urged the Bureau to exclude from the proposed rule those products
that are issued with restrictions on how or where they can be used,
such as health savings account cards and certain transit cards.
---------------------------------------------------------------------------
\202\ See 75 FR 16580, 16588 (Apr. 1, 2010).
---------------------------------------------------------------------------
The Bureau is proposing to add Sec. 1005.2(b)(3)(i)(B), which
would state that to qualify as a prepaid account, the card, code or
other device must be redeemable upon presentation at multiple,
unaffiliated merchants for goods or services, usable at automated
teller machines, or usable for person-to-person transfers. Proposed
comment 2(b)(3)(i)-7 would refer to existing comments 20(a)(3)-1 and -2
from the Gift Card Rule for guidance regarding the meaning of the
phrase multiple, unaffiliated merchants.\203\
---------------------------------------------------------------------------
\203\ The Gift Card Rule explains that a card, code, or other
device is redeemable upon presentation at multiple, unaffiliated
merchants if, for example, such merchants agree to honor the card,
code, or device if it bears the mark, logo, or brand of a payment
network, pursuant to the rules of the payment network. See comment
20(a)(3)-1.
---------------------------------------------------------------------------
The Bureau believes it is appropriate to limit the definition of
prepaid account to those products that consumers can use at multiple
unaffiliated merchants for goods or services, at ATMs, or for P2P
transfers. First, a core feature of a conventional debit card is that
it is usable at multiple, unaffiliated merchants and at ATMs. Insofar
as a purpose of this rulemaking is to provide comparable coverage for
products with comparable functionality--in this case traditional debit
cards and prepaid cards--it is appropriate to structure the proposed
definition in a way that products with similar features have the
protections afforded by Regulation E. Additionally, insofar as the
Bureau understands that consumers expect to have equivalent protections
on prepaid accounts that they do on accounts linked to debit cards, it
is appropriate to include in the definition of prepaid account those
products that have attributes similar to debit cards.
In other words, a prepaid account would be one that is accepted
widely at unaffiliated merchants, rather than only a single merchant or
specific group of merchants, such as those located on a college campus
or within a mall or defined shopping area. The Bureau believes that
products usable at a single merchant (e.g., a merchant's gift card) do
not warrant equivalent protections at this time. The Bureau believes it
is appropriate to exclude closed loop gift cards from this rulemaking
because of how they differ from other prepaid products and traditional
debit cards. Not only can closed loop gift cards not be used in lieu of
more traditional banking products, but they also cannot be used for P2P
transfers or in any other way other than transacting with a merchant on
the closed loop. As a result, consumers are less likely to load funds
needed for day-to-day use or to load a substantial amount of funds onto
such a card. Thus, the Bureau does not believe it appropriate to
provide those products with the same protections at this time. While
consumers may mistakenly assume that protections that apply to debit
cards also apply to general-use prepaid cards, they are unlikely to be
similarly confused with respect to closed loop gift cards. Indeed,
consumers often do not register gift cards and are frequently
instructed to treat them like cash.\204\ However, as merchants and
others increasingly move to accepting card-based payments for their
products and services, prepaid accounts have become more viable
substitutes for more traditional financial products and services.
---------------------------------------------------------------------------
\204\ See, e.g., Dan Rutherford, Giving or receiving gift cards?
Know the terms and avoid surprises, CFPB Blog Post (Dec. 21, 2012),
http://www.consumerfinance.gov/blog/giving-or-receiving-gift-cards-know-the-terms-and-avoid-surprises/.
---------------------------------------------------------------------------
Prepaid products are also growing in popularity as a vehicle for
consumers to transmit payments to each other or to businesses. The
Bureau has identified an increasing number of products that allow
consumers to make P2P or P2B payments without using a third-party
branded payment network. These services may not always have wide
merchant acceptance, but they do allow consumers to send money to other
consumers and businesses. While some P2P transfer products may also be
usable at an ATM or redeemable at multiple, unaffiliated merchants,
some are not. However, unlike many limited-use prepaid products that
have acceptance limited to a restricted location (such as on a college
campus or in a mall), P2P products do not have such a limitation.
Indeed, insofar as a P2P product may be accepted by anyone that
contracts with the P2P provider, the model is not very different from a
card association that contracts with unaffiliated merchants. Further,
insofar as consumers may use these products to pay anyone with funds
stored in the account, the Bureau believes that they should be included
in the proposed definition of prepaid account.
The Bureau recognizes, however, that a product that is solely
usable for storing funds and P2P transfers is different from other
types of prepaid accounts, such as GPR cards. The Bureau believes that
there is benefit to consumers in harmonizing those protections with
those currently offered (and, if the proposal is finalized, that will
be offered) by other types of prepaid accounts. Thus, the Bureau
proposes to add new comment 2(b)(3)(i)-8 to further explain when
accounts capable of P2P transfers are prepaid accounts. Specifically,
the comment would explain that a prepaid account capable of person-to-
person transfers is an account that allows a consumer to send funds to
another consumer or business. An account may qualify as a prepaid
account if it permits person-to-person transfers even if it is neither
redeemable upon presentation at multiple, unaffiliated merchants for
goods or services, nor usable at ATMs. A transaction involving a store
gift card would not be a person-to-person transfer if it could only be
used to make payments to the merchant or affiliated group of merchants
on whose behalf the card was issued.
[[Page 77131]]
The Bureau seeks comment on this portion of its proposed definition
of prepaid account. In particular, the Bureau solicits comment on P2P
payment products and whether they warrant inclusion in this rule. Note,
of course, that a P2P payment product must satisfy the other
requirements of the proposed rule to be a prepaid account, including
that the product be capable of storing funds. The Bureau also seeks
comment on whether there are specific types of products that offer P2P
services that the Bureau should specifically exempt, such as those that
are provided or established by an employer primarily for use at an
affiliated group of merchants even if those products can be used to
make occasional or incidental transfers to other employees, or for P2P
products that are not available to the general public.
2(b)(3)(i)(C)
Regulation E's gift card provisions cover some prepaid products
that also could fall within the proposed definition of prepaid account
as described above. In particular, Sec. 1005.20 contains provisions
applicable to gift certificates, store gift cards, and general-use
prepaid cards.\205\ For those products marketed and sold as gift cards
(and that meet certain other qualifications), the Gift Card Rule
requires certain disclosures, limits the imposition of certain fees,
and contains other restrictions. The Gift Card Rule is distinct from
the rest of subpart A of Regulation E, however, and does not provide
consumers who use gift cards with the other substantive protections of
Regulation E, such as limited liability and error resolution
protections, or periodic statements. The Gift Card Rule expressly
excludes those general-use prepaid cards that are reloadable and not
marketed or labeled as gift cards or gift certificates, while including
general-use prepaid cards that are not reloadable as well as those that
are marketed or labeled as gift cards or gift certificates. See Sec.
1005.20(b)(2).
---------------------------------------------------------------------------
\205\ The Gift Card Rule defines a general-use prepaid card as
``a card, code, or other device that is: (i) Issued on a prepaid
basis primarily for personal, family, or household purposes to a
consumer in a specified amount, whether or not that amount may be
increased or reloaded, in exchange for payment; and (ii) Redeemable
upon presentation at multiple, unaffiliated merchants for goods or
services, or usable at automated teller machines.'' Sec.
1005.20(a)(3).
---------------------------------------------------------------------------
In response to the Prepaid ANPR, the Bureau received numerous
industry comments urging it to exclude gift cards from this proposed
rule. In their letters, these commenters argued that the protections
for gift cards in the Gift Card Rule more appropriately match how such
products are used. As one commenter noted, a consumer is unlikely to
replace a traditional deposit account with a gift card that can only be
used at a single merchant. Other commenters noted that many provisions
of Regulation E would not be easily applied to most gift cards. For
example, to the extent that this proposed rule might apply error
resolution provisions to gift cards, such a rule might be difficult to
apply because gift card holders often do not register the cards, thus
potentially making it difficult for providers to determine when
unauthorized transactions occur. Similarly, providing access to
transactional account history to gift cardholders could also be
difficult and impractical.
Commenters were also concerned that it would be overly burdensome
if prepaid products were subject both to the requirements of this
proposed rule and the Gift Card Rule. To the extent they expressed an
opinion, consumer group commenters largely agreed that existing
protections for gift cards were sufficient, although one consumer group
commenter urged the Bureau to include network branded open loop
reloadable gift cards loaded with at least $500, because when a card is
loaded with $500 the risk of harm from loss is higher.
The Bureau is proposing to add Sec. 1005.2(b)(3)(i)(C), which
would provide that a prepaid account is not a gift certificate as
defined in Sec. 1005.20(a)(1) and (b); a store gift card as defined in
Sec. 1005.20(a)(2) and (b); a loyalty, award, or promotional gift card
as defined in Sec. 1005.20(a)(4) and (b); or a general-use prepaid
card as defined in Sec. 1005.20(a)(3) and (b) that is both marketed
and labeled as a gift card or gift certificate.
The Bureau notes that the exemption in the Gift Card Rule for
general-use prepaid cards applies to products that are reloadable and
not marketed or labeled as gift cards or gift certificates. See Sec.
1005.20(b)(2). The Bureau is proposing to exclude from the definition
of prepaid account only such general-use prepaid products that are both
marketed and labeled as gift cards or gift certificates, as the Bureau
is concerned that some products it intends to include may be
inadvertently excluded due to occasional or incidental marketing
activities. Comment 2(b)(3)(i)-9 would explain this distinction. For
example, comment 20(b)(2)-2 describes, in part, a network-branded
general purpose reloadable card that is principally advertised as a
less-costly alternative to a bank account but is promoted in a
television, radio, newspaper, or internet advertisement, or on signage
as ``the perfect gift'' during the holiday season. For purposes of the
Gift Card Rule, such a product would be considered marketed as a gift
card or gift certificate because of this occasional holiday marketing
activity. For purposes of proposed Sec. 1005.2(b)(3)(i)(C), however,
such a product would not be considered to be both marketed and labeled
as a gift card or gift certificate and thus would be covered by the
definition of prepaid account.
Generally speaking, the Bureau believes that having to apply both
the existing gift card regulatory requirements and the proposed prepaid
account requirements could adversely impact the gift card market,
although the Bureau recognizes that some of the concerns it has
regarding prepaid accounts can also be applied to gift cards. The
Bureau acknowledges that if the requirements of this proposed rule were
applied to gift cards at this time, it is possible that those
requirements, in the context of the typical gift card, could confuse
consumers and disrupt many gift cards' cost structures. For example,
the Gift Card Rule already specifies disclosure with respect to key
fees that are typically imposed in connection with gift cards. See
Sec. 1005.20(c)(3). In addition and as noted previously, the Bureau
believes that consumers may be more aware that gift cards have fewer
protections than other products and thus treat gift cards
accordingly.\206\ Because most gift cards are not reloadable, not
usable at ATMs, and/or not open loop, consumers are less likely to use
gift cards as transaction account substitutes. Were the Bureau to
impose provisions for access to account information and error
resolution, and create limits on liability for unauthorized EFTs, the
Bureau is concerned that the cost structure of gift cards could change
dramatically; unlike other types of prepaid products (which, as the
Bureau's Study of Prepaid Account Agreements indicates, already are
frequently in compliance with many existing provisions of Regulation
E), gift cards do not typically offer these protections. In addition,
while issuers of GPR cards typically encourage consumers to register
their cards (so that the cards can become reloadable), the same
motivations do not exist for open-loop gift cards. The Bureau
nevertheless seeks comment on whether it would be
[[Page 77132]]
appropriate to impose the provisions in this proposal on some or all
types of gift cards, the nature of consumer harm with respect to gift
cards, and whether the Bureau's understanding of gift cards as
discussed herein is accurate.
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\206\ See, e.g., Fed. Trade Comm'n, Consumer Information: Gift
Cards (Feb. 2011), https://www.consumer.ftc.gov//0182-gift-cards
(Web page providing consumers with general information on buying and
using gift cards).
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The Bureau understands that there are certain non-reloadable
products covered by the Gift Card Rule that providers do not market or
sell as gift cards (and instead may be marketed more like prepaid
accounts) and that may be used more broadly, and these cards would be
covered by both the Gift Card Rule and this proposal. In addition,
these products are typically network branded and thus appear similar to
other types of covered prepaid accounts. For example, the Bureau
understands providers are increasingly looking to market non-reloadable
prepaid products to consumers as a means of conducting specific
transactions (e.g., paying a single utility bill or making a purchase
online). Despite the fact that these may be marketed as a single-use
(as opposed to reloadable) prepaid card, the fact that these products
are not marketed or labeled as gift cards, and are network branded and
usable at any merchant that accepts the network brand may imply to
consumers that these products are the same as the reloadable version of
the product and thus warrant the same protections. The Bureau seeks
comments on whether and, if so, how compliance with both this proposed
rule and the Gift Card Rule would impose unique burdens on financial
institutions offering such cards. The Bureau also seeks comment on
whether the provisions of the Gift Card Rule alone are sufficient to
protect those consumers that use non-reloadable general-use prepaid
cards not marketed or sold as gift cards or gift certificates or
whether consumers of such products would benefit from the proposed
rule's protections. Finally, the Bureau seeks comment on whether there
are any other types of products not discussed herein to which the Gift
Card Rule applies and which might also be affected by this proposal.
2(b)(3)(ii)
As discussed above, Regulation E currently contains provisions
specific to payroll card accounts and specifically defines such
accounts. See Sec. 1005.2(b)(2). Insofar as the Bureau is generally
proposing to adapt existing payroll card account rules to prepaid
accounts in Sec. 1005.18, which currently addresses only payroll card
accounts, the term payroll card account would be largely subsumed
within the larger definition of prepaid account. Nevertheless, the
Bureau believes that because there are certain provisions of Regulation
E that would remain specific to payroll card accounts, it is
appropriate to propose to maintain the term payroll card account as a
standalone sub-definition of prepaid account. Specifically, the Bureau
proposes that Sec. 1005.2(b)(3)(ii) provide that the term ``prepaid
account'' includes a ``payroll card account'' and would otherwise
restate the existing payroll card account definition. In addition, the
Bureau proposes to renumber existing comment 2(b)-2, which concerns
certain employment-related cards not covered as payroll card accounts,
as comment new 2(b)(3)(ii)-1. In addition, the Bureau proposes to add
to new comment 2(b)(3)(ii)-1 an explanation that the existing examples
given of cards would not be payroll card accounts (i.e., cards used
solely to disburse incentive-based payments, such as bonuses,
disbursements unrelated to compensation, and cards used in isolated
instances to which an employer typically does not make recurring
payments, such as when providing final payments or in emergency
situations where other payment methods are unavailable), such cards
could constitute prepaid accounts generally, provided the other
conditions of the proposed definition of that term in Sec.
1005.2(b)(3) are satisfied. Similar to existing comment 2(b)-2,
proposed comment 2(b)(3)(ii)-1 would also state that, in addition, all
transactions involving the transfer of funds to or from a payroll card
account or prepaid account are covered by the regulation, even if a
particular transaction involves payment of a bonus, other incentive-
based payment, or reimbursement, or the transaction does not represent
a transfer of wages, salary, or other employee compensation.
The Bureau seeks comment on this portion of its proposed definition
of prepaid account.
2(b)(3)(iii)
As discussed above, Regulation E currently contains provisions in
Sec. 1005.15 that are specifically applicable to an account
established by a government agency for distributing government benefits
to a consumer electronically. While such accounts are currently defined
only in existing Sec. 1005.15(a)(2), the Bureau believes that given
the other modifications to Regulation E proposed herein, it is
appropriate to explicitly add such accounts used for the distribution
of government benefits as a stand-alone sub-definition of prepaid
account as well. Specifically, the Bureau is proposing that Sec.
1005.2(b)(3)(iii) state that the term prepaid account includes a
government benefit account, as defined in existing Sec. 1005.15(a)(2).
The Bureau seeks comment on this portion of its proposed definition of
prepaid account.
2(b)(3)(iv)
Proposed Sec. 1005.2(b)(3)(iv) would address prepaid products
established in connection with certain health care and employee benefit
programs. Specifically, the proposed provision would state that the
term prepaid account does not include a health savings account,
flexible spending account, medical savings accounts, or a health
reimbursement arrangement. Proposed comment 2(b)(3)(iv)-1 would define
these terms by referencing existing provisions in the Internal Revenue
Code. Specifically, the Bureau is proposing that ``health savings
account'' means a health savings account as defined in 26 U.S.C.
223(d); ``flexible spending account'' means a cafeteria plan which
provides health benefits or a health flexible spending arrangement
pursuant to 26 U.S.C. 125; ``medical savings account'' means an Archer
MSA as defined in 26 U.S.C. 220(d); and ``health reimbursement
arrangement'' means a health reimbursement arrangement which is treated
as employer-provided coverage under an accident or health plan for
purposes of 26 U.S.C. 106.
The Bureau believes that while these health care and employee
benefit accounts may, in some ways, be similar to other types of
prepaid accounts, coverage under Regulation E is not necessary at this
time. These products typically come with limits on the amount of funds
that can be loaded on to them, the methods for loading, and numerous
restrictions on where, when, and how those funds can be spent. These
products can rarely be used to withdraw cash or to send money to
another person or make payment to any merchant of the consumer's
choosing (such as can be done with a P2P product or a GPR card).
Instead, health insurers or employers (or their service providers)
typically issue these products in connection with a consumer's
healthcare or employee benefits plan and are governed by the terms of
that plan and related regulations.\207\ For example, health savings
accounts and medical savings accounts can typically only be used to pay
for qualified medical expenses. Nevertheless, the
[[Page 77133]]
Bureau seeks comment on whether these or other types of health care and
employee benefit accounts should be included within the definition of
prepaid account in light of the important role they play for consumers.
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\207\ See, e.g., Internal Revenue Serv., Publication 969, Health
Savings Accounts and Other Tax-Favored Health Plans (Jan. 22, 2014),
available at http://www.irs.gov/pub/irs-pdf/p969.pdf.
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Scope of Proposed Definition and Application to Virtual Wallets and
Virtual Currency Products
The Bureau seeks comment on the scope of its proposed definition
for the term prepaid account. In particular and as noted above, the
Bureau is aware of an increasing number of mobile financial products,
each with different features, capabilities, and consumer protections.
Determining how this proposed rule might apply to those products may be
difficult in light of the quick evolution of these products and their
features. Although the Bureau anticipates that this proposal, if
effective today, would apply to relatively few mobile banking products
(see, e.g., proposed comments 2(b)(3)(i)-4 and 2(b)(3)(i)-5), it seeks
comment on whether it has appropriately predicted the scope of products
this rule would apply to and whether there are products it excludes
that should be included or vice versa.
With respect to mobile financial products and services, the Bureau
anticipates that this proposed rule would apply to certain mobile
wallets. The Bureau also recognizes that the proposed rule may have
potential application to virtual currency and related products and
services. As a general matter, however, the Bureau's analysis of mobile
financial products and services, as well as and virtual currencies and
related products and services, including the applicability of existing
regulations and this proposed regulation to such products and services,
is ongoing. The proposed rule does not specifically resolve these
issues.
Section 1005.10 Preauthorized Transfers
10(e) Compulsory Use
10(e)(1) Credit
In the discussion of the Bureau's proposed changes to Regulation Z,
below, the Bureau explains in detail its approach to regulation of
overdraft services and credit features on prepaid accounts. (That
discussion provides an overall explanation of the Bureau's proposed
approach to overdraft services and other credit features in connection
with prepaid accounts in this rulemaking, including with respect to
proposed changes to Regulation E, the details of which are set forth
below.) As part of that approach, the Bureau is proposing to revise the
compulsory use provision of Regulation E, Sec. 1005.10(e)(1), to make
clear that it applies to credit features offered on prepaid accounts.
EFTA's compulsory use provision, EFTA section 913(1), prohibits any
person from conditioning the extension of credit to a consumer on the
consumer's repayment by means of preauthorized electronic fund
transfers. As implemented in Regulation E, Sec. 1005.10(e)(1)
currently states that ``[n]o financial institution or other person may
condition an extension of credit to a consumer on the consumer's
repayment by preauthorized electronic fund transfers, except for credit
extended under an overdraft credit plan or extended to maintain a
specified minimum balance in the consumer's account.'' The term
``credit'' is defined in Sec. 1005.2(f) to mean the right granted by a
financial institution to a consumer to defer payment of debt, incur
debt and defer its payment, or purchase property or services and defer
payment therefor. The term ``preauthorized electronic fund transfer''
is defined in Sec. 1005.2(k) to mean an electronic fund transfer
authorized in advance to recur at substantially regular intervals. See
EFTA section 903(10).
Congress enacted the compulsory use provision to prevent financial
institutions that are creditors from mandating repayment of credit by
future preauthorized electronic fund transfers. Were the compulsory use
provision not to exist, creditors could access consumers' available
funds at the same institution via direct transfers, or at other
institutions via recurring ACH transfers, to repay the debt. By doing
so, consumers could lose access to these funds and lose the ability to
prioritize repayment of debits, as a creditor could compel the consumer
to grant the creditor preauthorized transfer access to a consumer's
asset account as a condition for agreeing to provide credit to that
consumer.
As is discussed below, the Bureau proposes certain modifications to
the compulsory use provision. In particular, the Bureau proposes not to
extend the provision's exception for overdraft credit plans to such
plans offered on prepaid accounts. As discussed in more detail in the
section-by-section analysis of Regulation Z proposed Sec. 1026.12(d),
the Bureau believes that applying Sec. 1005.10(e)(1), with the
proposed changes discussed below, along with proposed changes to the
timing requirement for a periodic statement in Regulation Z Sec.
1026.5(b)(2)(ii), and the prohibition on offsets in Regulation Z Sec.
1026.12(d), would together allow consumers to retain control over the
funds in their prepaid accounts even when a credit card feature becomes
associated with that account.
By not extending the exception for overdraft credit plans in the
current Regulation E compulsory use provision--and consistent with the
statutory compulsory use provision (EFTA section 913(1))--creditors
would be required to offer prepaid account consumers a means to repay
their outstanding credit balances other than by automatic repayment
(such as by means of a transfer of funds from the asset account to the
credit account that the consumer initiates on the prepaid account's
online banking Web site). With the proposed changes to the Regulation Z
periodic statement requirement--consistent with TILA section 163--
creditors would be required to adopt reasonable procedures designed to
ensure that periodic statements are mailed or delivered at least 21
days prior to the payment due date disclosed on the periodic statement
and the due date disclosed must be the same day of the month for each
billing cycle. And, with the proposed changes to the Regulation Z no-
offset provision--consistent with TILA section 169--card issuers would
be permitted to move funds automatically from the prepaid account held
by the card issuer to the credit card account held by the card issuer
to pay some or all of the credit card debt no more frequently than once
per month, such as on the payment due date (pursuant to the consumer's
signed, written agreement that the issuer may do so).
Overdraft Credit Plans
In adopting what is now Sec. 1005.10(e)(1) in 1981 to implement
EFTA section 913(1), the Board used its EFTA exception authority to
exclude overdraft credit plans from the general compulsory use rule of
EFTA section 913(1).\208\ Comment 10(e)(1)-2 further explains that a
financial institution may require the automatic repayment of an
overdraft credit plan.
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\208\ See 46 FR 2972, 2973 (Jan. 13, 1981) (``After careful
consideration of the issues raised, the Board is adopting the
amendment as proposed. The Board believes that it has the legal
authority to adopt this exception [for overdraft lines of credit]
under section 904(c) of the act, which expressly authorizes the
Board to provide adjustments and exceptions for any class of
electronic fund transfer that in the Board's judgment are necessary
or proper to carry out the purposes of the act or to facilitate
compliance.''). Further, the bases for Bureau's proposal not to
extend this exception to prepaid accounts is discussed below in the
Overview of the Bureau's Regulation Z proposal.
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The Bureau proposes to provide that the compulsory use provision's
general
[[Page 77134]]
prohibition against conditioning the extension of credit to a consumer
on the consumer's repayment by means of preauthorized electronic fund
transfers would apply to credit plans, including overdraft credit
plans, that are credit card accounts under Regulation Z accessed by
prepaid cards that are credit cards under proposed Regulation Z Sec.
1026.2(a)(15)(i) or accessed by an account number that is a credit card
under Regulation Z where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor, discussed in further detail below. Regulation Z proposed
comment 2(a)(15)-2.i.F would provide that the term ``credit card'' in
Sec. 1026.2(a)(15)(i) includes a prepaid card (including a prepaid
card that is solely an account number) that is a single device that may
be used from time to time to access a credit plan, except if that
prepaid card only accesses credit that is not subject to any finance
charge as defined in Sec. 1026.4 or any fee described in Regulation Z
Sec. 1026.4(c) such as an applicable fee to apply for credit or a late
payment fee and is not payable by written agreement in more than four
installments. Regulation Z proposed comment 2(a)(15)-2.i.G, discussed
below, would provide that the term ``credit card'' in Sec.
1026.2(a)(15)(i) also includes an account number that is not a prepaid
card that may be used from time to time to access a credit plan that
allows deposits directly into particular prepaid accounts specified by
the creditor but does not allow the consumer to deposit directly
extensions of credit from the plan into asset accounts other than
particular prepaid accounts specified by the creditor. (Such an account
number is referred to in the proposal as an ``account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor.'') See also
Regulation Z proposed Sec. 1026.2(a)(15)(vii).
The proposal would revise Sec. 1005.10(e)(1) to provide that the
exception for credit extended under an overdraft credit plan or
extended to maintain a specified minimum balance in the consumer's
account does not apply to credit extended under a credit plan that is a
credit card account accessed by an access device for a prepaid account
where the access device is a credit card under Regulation Z or accessed
by an account number that is a credit card where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.
Proposed comment 10(e)(1)-3 would provide guidance on how the
prohibition in Sec. 1005.10(e)(1) applies to credit extended under a
credit plan that is a credit card account accessed by prepaid cards or
account numbers that are credit cards under Regulation Z as discussed
above. Proposed comment 10(e)(1)-3 would explain that under Sec.
1005.10(e)(1), creditors must not require by electronic means on a
preauthorized, recurring basis repayment of credit extended under a
credit plan that is a credit card account accessed by an access device
for a prepaid account where the access device is a credit card under
Regulation Z (Sec. 1026.2(a)(15)(i)). In addition, proposed comment
10(e)(1)-3 would provide that Sec. 1005.10(e)(1) also would prevent
creditors from requiring by electronic means on a preauthorized,
recurring basis repayment of credit extended under a credit plan that
is a credit card account accessed by an account number that is a credit
card under Regulation Z (Sec. 1026.2(a)(15)(i)) where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor. Proposed comment 10(e)(1)-3
would also provide that the prohibition in Sec. 1005.10(e)(1) would
apply to any credit extended under a credit card plan as described
above, including credit arising from transactions not using the credit
card itself but taking place under plans that involve credit cards. For
example, if the consumer writes a check that accesses a credit card
plan as discussed above, the resulting credit would be subject to the
prohibition in Sec. 1005.10(e)(1) since it is incurred through a
credit card plan, even though the consumer did not use an associated
credit card.
Additionally, proposed comment 10(e)(1)-3 would cross-reference
Regulation Z Sec. 1026.2(a)(15)(i), comment 2(a)(15)-2.i.F to explain
that a prepaid card is not a credit card under Regulation Z if the
access device only accesses credit that is not subject to any finance
charge as defined in Regulation Z Sec. 1026.4 or any fee described in
Regulation Z Sec. 1026.4(c) and is not payable by written agreement in
more than four installments. Thus, the prohibition in Sec.
1005.10(e)(1) would not apply to credit extended under an overdraft
credit plan that is not a credit card account. An overdraft credit plan
would not be a credit card account if it is accessed only by a prepaid
card that only accesses credit that is not subject to any finance
charge as defined in Regulation Z Sec. 1026.4 or any fee described in
Regulation Z Sec. 1026.4(c) and is not payable by written agreement in
more than four installments.
Proposed comment 10(e)(1)-3.i would explain the connection between
the prohibition in proposed Sec. 1005.10(e)(1) on the compulsory use
of preauthorized electronic fund transfers to repay credit extended
under a credit plan accessed by prepaid cards that are credit cards and
account numbers linked to prepaid accounts that are credit cards under
Regulation Z Sec. 1026.2(a)(15)(i) and comment 2(a)(15)-2.i.F and .G,
and the prohibition on offsets by credit card issuers in proposed Sec.
1026.12(d). Under Regulation Z Sec. 1026.12(d)(1), a card issuer may
not take any action, either before or after termination of credit card
privileges, to offset a cardholder's indebtedness arising from a
consumer credit transaction under the relevant credit card plan against
funds of the cardholder held on deposit with the card issuer. Under
proposed Regulation Z Sec. 1026.12(d)(3), with respect to credit card
accounts that are accessed by prepaid cards or by account numbers where
extensions of credit are permitted to be deposited directly only in
particular prepaid accounts specified by the creditor, a card issuer
generally would not be prohibited under Sec. 1026.12(d) from
periodically deducting all or part of the cardholder's credit card debt
from a deposit account (such as a prepaid account) held with the card
issuer (subject to the limitations of Regulation Z Sec. 1026.13(d)(1))
under a plan that is authorized in writing by the cardholder, so long
as the creditor does not deduct all or part of the cardholder's credit
card debt from the deposit account (such as a prepaid account) more
frequently than once per calendar month, pursuant to such a plan. A
card issuer for such credit card accounts would be prohibited under
Sec. 1026.12(d) from automatically deducting all or part of the
cardholder's credit card debt from a deposit account (such as a prepaid
account) held with the card issuer more frequently than once per
calendar month, such as on a daily or weekly basis, or whenever
deposits are made to the deposit account. Under proposed Regulation Z
Sec. 1026.12(d)(3), with respect to credit card accounts that are
accessed by prepaid cards or by account numbers where extensions of
credit are permitted to be deposited directly only in particular
prepaid accounts specified by the creditor, electronic fund transfers
pursuant to a plan described in Sec. 1026.12(d)(3) would be
``preauthorized electronic fund transfers'' under Sec. 1005.2(k)
because such electronic fund transfers would be authorized in
[[Page 77135]]
advance to recur periodically (but could not recur more frequently than
once per calendar month). Proposed comment 10(e)(1)-3.i thus would
explain that Sec. 1005.10(e)(1) further restricts the card issuer from
requiring payment from a deposit account (including a prepaid account)
of credit card balances by electronic means on a preauthorized,
recurring basis where the credit card account is accessed by an access
device for a prepaid account, or is accessed by an account number that
is a credit card under Regulation Z where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.
Consistent with the statutory text and purposes of EFTA, the Bureau
proposes not to extend the exception for overdraft credit plans
currently in Sec. 1005.10(e)(1) to credit plans that are credit card
accounts under Regulation Z accessed by prepaid cards or accessed by an
account number that is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. The purposes of EFTA are to
establish the rights, liabilities, and responsibilities of consumers
participating in EFT systems and to provide individual consumer rights.
See EFTA section 902(b). Further, EFTA's legislative history states
that EFTA compulsory use provision is ``designed to assure that EFT
develops in an atmosphere of free choice for the consumer.'' \209\ The
Bureau believes its proposal not to extend the Regulation's existing
exception for overdraft credit plans to prepaid accounts should ensure
that consumers have choice when deciding whether and how to link their
prepaid accounts to credit accounts and have control over the funds in
their prepaid accounts if and when such a link is established.
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\209\ See Senate Report No. 95-915 at 16.
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As is discussed in greater detail below in the discussion of
Regulation Z, the Bureau also believes that not extending the exception
for overdraft credit plans to prepaid accounts is consistent with the
purposes of and provisions in TILA (TILA section 169) and Regulation Z
(Sec. 1026.12(d)) that prohibit offsets by credit card issuers and
will protect consumers' right to exercise control over the funds
deposited into their prepaid accounts. In particular, the Bureau
believes that the proposed revisions to Sec. 1005.10(e)(1) are
necessary to prevent results that are contrary to these offset
provisions. The Bureau is concerned that, with respect to credit card
accounts that are accessed by prepaid cards or by account numbers where
extensions of credit are permitted to be deposited directly only in
particular prepaid accounts specified by the creditor, some card
issuers may attempt to avoid the TILA offset prohibition by requiring
that all or part of the cardholder's credit card debt be automatically
deducted from the prepaid account to help ensure that the debt is
repaid (similar to how overdraft services function today). For example,
the Bureau believes that without the proposed changes to the compulsory
use provision, financial institutions might require that prepaid
account consumers set up automated payment plans to repay the overdraft
credit advances and set the payment due date for each overdraft advance
to align with the expected date of subsequent deposits to the prepaid
account. The Bureau believes that this type of payment arrangement
could undermine the purposes of the offset and periodic statement
provisions in Regulation Z.
To the extent that the Board justified its original treatment of
overdraft credit plans as providing benefits to consumers from
automatic payment, the Bureau notes that under the proposal consumers
would still be allowed to choose automatic payment for credit card
accounts linked to prepaid accounts (as discussed above) if they find
it beneficial to do so. The Bureau also believes that certain credit
card rules in Regulation Z that would apply under the proposal to
credit card accounts linked to prepaid accounts (as discussed above)
would help consumers avoid late payments and excessive late fees with
respect to overdraft plans. For example, under the Regulation Z
proposal, card issuers would be required, under proposed Sec.
1026.5(b)(2)(ii)(A)(1), to adopt reasonable procedures to ensure that
Regulation Z periodic statements for credit card accounts linked to
prepaid account (as discussed above) are mailed or delivered at least
21 days prior to the payment due date disclosed on the periodic
statement and the due date disclosed must be the same day of the month
for each billing cycle. The Bureau believes this will help ensure that
consumers have sufficient time after receiving periodic statements for
the credit card accounts linked to prepaid accounts (as discussed
above) to make payment on their credit card accounts. Also, under the
Regulation Z proposal, card issuers of credit card accounts linked to
prepaid accounts (as discussed above) would be limited in the
circumstances in which they could increase interest rates for late
payments and would be limited in the amount of late fees they could
charge to consumers who pay late. See Regulation Z Sec. Sec.
1026.52(b) and 1026.55.
This proposal does not address overdraft plans accessed by access
devices that do not access prepaid accounts and does not amend the
compulsory use provision as it applies to those other products.
Technical Revisions
Consistent with proposed Sec. 1005.10(e)(1), comment 10(e)(1)-2
related to the exception for overdraft credit plans would be amended to
explain that this exception does not apply to credit extended under a
credit plan that is accessed by an access device for a prepaid account
where the access device is a credit card under Regulation Z, Sec.
1026.2(a)(15)(i), or is accessed by an account number that is a credit
card under Regulation Z where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. In addition, the proposal would move existing guidance in
comment 10(e)(1)-1 related to when financial institutions may provide
incentives to consumers to agree to automatic repayment plans to a new
comment 10(e)(1)-4; no substantive changes are intended.
10(e)(2) Employment or Government Benefit
EFTA section 913(2), as implemented by Sec. 1005.10(e)(2),
provides that no financial institution or other person may require a
consumer to establish an account for receipt of electronic fund
transfers with a particular institution as a condition of employment or
receipt of a government benefit. Existing comment 10(e)(2)-1 explains
that an employer (including a financial institution) may not require
its employees to receive their salary by direct deposit to any
particular institution. These provisions regarding compulsory use
precede the addition of the Payroll Card Rule to Regulation E.
In September 2013, the Bureau reiterated the applicability of
Regulation E's prohibition on compulsory use for payroll card
accounts.\210\ The Bureau explained that, among other things,
Regulation E's compulsory use provision prohibits employers from
mandating that employees receive wages only on a payroll card of the
employer's choosing.\211\
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\210\ CFPB Bulletin 2013-10, Payroll Card Accounts (Regulation
E) (Sept. 12, 2013), available at http://files.consumerfinance.gov/f/201309_cfpb_payroll-card-bulletin.pdf.
\211\ Id. at 3.
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The Bureau believes that the same standards should apply to
government
[[Page 77136]]
benefit accounts. The Bureau is aware that many State and local
governments use prepaid cards for distributing non-needs tested
benefits and similar payments, such as unemployment insurance and child
support payments.\212\ These products are subject to EFTA and
Regulation E. The Bureau understands that most, though not all, State
governments using prepaid cards to distribute unemployment insurance
payments also offer recipients the option of receiving these payments
via direct deposit and/or paper check.\213\
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\212\ See, e.g., Bd. of Governors of the Fed. Reserve Sys.,
Report to the Congress on Government-Administered, General-Use
Prepaid Cards (July 2014), available at http://www.federalreserve.gov/publications/files/2014_Prepaid_Cards_Final.pdf. Nearly every State offers a prepaid
card to disburse child support and unemployment insurance payments.
Id. at 3.
\213\ See, e.g., Lauren K. Saunders & Jillian McLaughlin, 2013
Survey of Unemployment Prepaid Cards: States Save Workers Millions
in Fees; Thumbs Down on Restricting Choice (Jan. 2013), available at
http://www.nclc.org/images/pdf/pr-reports/report-prepaid-card-2013.pdf.
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Based on discussions with interested stakeholders, the Bureau is
aware that some may have perceived some ambiguity surrounding
compulsory use of prepaid cards to distribute non-needs tested state
and local government benefits. Specifically, some questions have arisen
as to whether compulsory use of prepaid cards for non-needs tested
benefits is permissible under Regulation E. EFTA and Regulation E
clearly apply to the electronic distribution of non-needs tested
government benefits generally, and EFTA section 913(2) prohibits
``requiring a consumer to establish an account for receipt of
electronic fund transfers with a particular financial institution as a
condition of . . . receipt of a government benefit.''
Therefore, the Bureau believes it is appropriate to clarify the
application of the compulsory use provision in Regulation E to accounts
established to receive such benefits. Thus, the Bureau is proposing to
add comment 10(e)(2)-2, which would make clear that a government agency
may not require consumers to receive government benefits by direct
deposit to any particular institution. A government agency may require
direct deposit of benefits by electronic means if recipients are
allowed to choose the institution that will receive the direct deposit.
Alternatively, a government agency may give recipients the choice of
having their benefits deposited at a particular institution (designated
by the government agency) or receiving their benefits by another means.
Relatedly, the Bureau seeks comment on whether a financial institution
would comply with this provision if it provides the first payment to a
benefit recipient on a government benefit card and, at that time,
provides information on how to divert or otherwise direct future
payments to an account of the consumer's choosing.
The Bureau is also proposing to make consumers' options more clear,
for both government benefit accounts and payroll card accounts, via a
notice on the pre-acquisition short form disclosure for these types of
prepaid accounts. See section-by-section analysis of Sec. Sec.
1005.15(c)(2) and 1005.18(b)(2)(i)(A).
The Bureau requests comment on its proposed clarification of the
prohibition on compulsory use of specific accounts for receipt of
government benefits. The Bureau also seeks comment on whether a similar
restriction should be extended to other types of prepaid accounts
(other than payroll card accounts and government benefit accounts),
such as cards used by post-secondary educational institutions for
financial aid disbursements or insurance companies to pay out claims.
In particular, the Bureau seeks comment on how consumers are enrolled
in these other types of prepaid accounts, whether those enrollment
methods involve concerns similar to those addressed above regarding
prepaid cards for distribution of government benefits, and what the
impact, if any, would be of expanding this provision to other types of
prepaid accounts. Finally, the Bureau seeks comment on whether other
interventions are appropriate with respect to prepaid products
distributed by employers, government entities, educational
institutions, and other third parties in connection with the payment of
funds to particular groups.
Section 1005.12 Relation to Other Laws
12(a) Relation to the Truth in Lending Act
Section 1005.12(a) provides guidance on whether the issuance
provisions in Regulation E Sec. 1005.5 or the unsolicited issuance
provisions in Regulations Z Sec. 1026.12(a) apply where access devices
under Regulation E also are credit cards under Regulation Z. (For
discussion of when this may occur, see the Regulation Z proposal,
below.) In addition, Sec. 1005.12(a) also provides guidance on how the
provisions on liability for unauthorized use and for resolving errors
in Regulation E Sec. Sec. 1005.6 and 1005.11 and Regulation Z
Sec. Sec. 1026.12(b) and 1026.13 interact where a credit transaction
is incidental to an electronic fund transfer.
Issuance Rules
Consistent with EFTA section 911(a) (15 U.S.C. 1693i(a)), existing
Sec. 1005.5(a) provides that a financial institution generally may
issue an access device to a consumer only: (1) In response to an oral
or written request for the device; or (2) As a renewal of, or in
substitution for, an accepted access device whether issued by the
institution or a successor. Nonetheless, consistent with EFTA section
911(b) (15 U.S.C. 1693i(b)), Sec. 1005.5(b) provides that a financial
institution may distribute an access device to a consumer on an
unsolicited basis if four enumerated situations are met.
In contrast, the issuance rules for a credit card under Regulation
Z are more restrictive. Consistent with TILA section 132, Regulation Z
Sec. 1026.12(a), provides that regardless of the purpose for which a
credit card is to be used, including business, commercial, or
agricultural use, no credit card shall be issued to any person except:
(1) In response to an oral or written request or application for the
card; or (2) As a renewal of, or substitute for, an accepted credit
card.
Section 1005.12(a) provides guidance on whether the issuance
provisions in Regulation E or the unsolicited issuance provisions in
Regulations Z apply where access devices under Regulation E also are
credit cards under Regulation Z. Specifically, Sec. 1005.12(a)(1)
currently provides that EFTA and Regulation E subpart A govern: (1) The
addition to an accepted credit card, as defined in Regulation Z (Sec.
1026.12, comment 12-2), of the capability to initiate electronic fund
transfers; (2) The issuance of an access device that permits credit
extensions pursuant to an overdraft line of credit (involving a
preexisting agreement between a consumer and a financial institution to
extend credit only when the consumer's account is overdrawn or to
maintain a specified minimum balance in the consumer's account), or
under an overdraft service (as defined in Regulation E Sec.
1005.17(a)); and (3) The addition of an overdraft service, as defined
in Sec. 1005.17(a), to an accepted access device. On the other hand,
Sec. 1005.12(a)(2) provides that TILA and Regulation Z apply to (1)
the addition of a credit feature to an accepted access device; and (2)
the issuance of a credit card that is also an access device, except the
issuance of an access device that permits credit extensions pursuant to
a preexisting overdraft line of credit or under an overdraft service.
The application of these various provisions
[[Page 77137]]
to prepaid accounts and proposed revisions to the relevant prongs of
Sec. 1005.12 are discussed below.
Generally, the proposal would amend Sec. 1005.12(a) to provide
that the unsolicited issuances rules in Regulation Z Sec. 1026.12(a)
apply to the addition of a credit feature or plan to an access device
for a prepaid account where the credit feature or plan would make the
access device into a credit card under Regulation Z, even if the credit
feature is structured as an overdraft line of credit.
First, as noted, Sec. 1005.12(a)(1)(ii) provides that the issuance
rules of EFTA and Regulation E subpart A govern the issuance of an
access device that permits credit extensions (under a preexisting
agreement between a consumer and a financial institution) only when the
consumer's account is overdrawn or to maintain a specified minimum
balance in the consumer's account, or under an overdraft service, as
defined in Sec. 1005.17(a). Current comment 12(a)-2 then explains that
for access devices that also constitute credit cards, the issuance
rules of Regulation E apply if the only credit feature is a preexisting
credit line attached to the asset account to cover overdrafts (or to
maintain a specified minimum balance), known as an overdraft credit
plan, or an overdraft service, as defined in Sec. 1005.17(a). For
checking accounts, a consumer may have a preexisting agreement with the
financial institution to cover checks that overdraft the account. This
overdraft line of credit would be subject to Regulation Z. If a debit
card is then added to access this overdraft line of credit under the
preexisting agreement, Sec. 1005.12(a)(1)(ii) provides that the debit
card (which would also be a credit card under Regulation Z) may be
issued under the issuance rules in Regulation E, instead of the
issuance rules in Regulation Z. Regulation Z's issuance rules apply if
there is another type of credit feature being added to a debit card
that would make the debit card into a credit card; for example, one
permitting direct extensions of credit that do not involve the asset
account.
The proposal would amend Sec. 1005.12(a)(1)(ii) to provide that
this provision does not apply to access devices for prepaid accounts.
Thus, even if an access device for a prepaid account is issued to
access a preexisting overdraft plan, the access device would be subject
to the unsolicited issuance rules in TILA and Regulation Z Sec.
1026.12(a) when that overdraft plan would make the access device into a
credit card under Regulation Z. See proposed Sec. 1005.12(a)(2)(ii).
The proposal also would move comment 12(a)-2 related to preexisting
overdraft credit plans to proposed comment 12(a)-1 and would revise the
comment to explain that it does not apply to access devices for prepaid
accounts.
As discussed above, Sec. 1005.12(a)(1)(ii) contemplates the
situation where there is a preexisting agreement between a financial
institution and the consumer for an overdraft line of credit where the
institution will cover checks that overdraft the account and the
Regulation E access device is issued to access this plan. For the
reasons set forth in the section-by-section analysis of Regulation Z,
the Bureau believes that credit card rules in Regulation Z, including
the unsolicited issuance rules in Sec. 1026.12(a), generally should
apply to credit card accounts that are linked to prepaid accounts as
discussed above. Consistent with the unsolicited issuance rules in
Regulation Z Sec. 1026.12(a), the Bureau is proposing these changes
because it is concerned that unsolicited issuance of a prepaid card
that can access an overdraft credit plan would pose risks to consumers.
The Bureau seeks to ensure that prepaid account consumers are fully
aware of the addition, or potential addition, of a credit feature to a
prepaid account.
Similarly, the proposal would carve prepaid accounts out from Sec.
1005.12(a)(1)(iii), which provides that the issuance rules in EFTA and
Regulation E govern the addition of an overdraft service, as defined in
Sec. 1005.17(a), to an accepted access device. Current comment 12(a)-3
provides that the addition of an overdraft service, as that term is
defined in Sec. 1005.17(a), to an accepted access device does not
constitute the addition of a credit feature subject to Regulation Z.
Comment 12(a)-3 also explains that the provisions of Regulation E
apply, including the liability limitations (Sec. 1005.6) and the
requirement to obtain consumer consent to the service before any fees
or charges for paying an overdraft debit card or ATM transaction may be
assessed on the account (Sec. 1005.17). The proposal would amend Sec.
1005.12(a)(1)(iii) to provide that this provision does not apply to
access devices for prepaid accounts. The proposal also would move
comment 12(a)-3 to proposed comment 12(a)-2 and revise the comment to
indicate that this comment does not apply to access devices for prepaid
accounts. As discussed in more detail in the section-by-section
analysis of Sec. 1005.17, the proposal would revise the term
``overdraft service'' as defined in Sec. 1005.17(a) to exclude a
credit plan that is accessed by an access device for a prepaid account
where the access device is a credit card under Regulation Z, because
these credit plans would be subject to the provisions in Regulation Z.
Second, the proposal would also add references to prepaid accounts
in portions of the regulation stating that certain activities are
subject to TILA and Regulation Z issuance rules. For example, Sec.
1005.12(a)(2)(i) currently provides that the unsolicited issuance rules
of TILA section 132 and Regulation Z Sec. 1026.12(a) apply to the
addition of a credit feature to an accepted access device. The proposal
would amend Sec. 1005.12(a)(2)(i) to provide that the unsolicited
issuance rules in TILA and Regulation Z Sec. 1026.12(a) would apply to
the addition of a credit feature or plan to an accepted access device,
including an access device for a prepaid account, that would make the
access device into a credit card under Regulation Z. Proposed comment
12(a)-4 would explain that Regulation Z governs the addition of any
credit feature or plan to an access device for a prepaid account where
the access device also would be a credit card under Regulation Z.
Proposed comment 12(a)-4 would note that Regulation Z (Sec.
1026.2(a)(20), comment 2(a)(20)-2(ii)) provides guidance on whether a
program constitutes a credit plan, and that Regulation Z (Sec.
1026.2(a)(15)(i), comment 2(a)(15)-2) defines the term credit card and
provides examples of cards or devices that are and are not credit
cards.
Similarly, Sec. 1005.12(a)(2)(ii) currently provides that TILA and
Regulation Z apply to the issuance of a credit card that is also an
access device, except as provided in Sec. 1005.12(a)(1)(ii). Proposed
comment 12(a)-3 would cross reference proposed Sec. 1005.18(g) and
Regulation Z Sec. 1026.12(h), which would prevent prepaid cards from
accessing credit card accounts when the prepaid cards are issued. For
the reasons discussed in the section-by-section analysis of proposed
Sec. 1005.18(g), proposed Sec. 1005.18(g)(1)(ii) would prohibit a
financial institution from allowing a prepaid account access device to
access a credit plan subject to Regulation Z that would make the access
device into a credit card at any time prior to 30 calendar days after
the prepaid account has been registered. In addition, proposed Sec.
1005.18(g)(1)(i) also would prohibit a financial institution from
opening a credit card account subject to Regulation Z for the holder of
a prepaid account, or providing a solicitation or application to open a
credit card account subject to Regulation Z that would be accessed by
the access device for a prepaid account
[[Page 77138]]
that is a credit card, prior to 30 calendar days after the prepaid
account has been registered. For the reasons discussed in the section-
by-section analysis of Regulation Z proposed Sec. 1026.12(h), proposed
Sec. 1026.12(h) would require a credit card issuer to wait at least 30
calendar days from prepaid account registration before opening a credit
card account for a holder of a prepaid account, or providing a
solicitation or application to the holder of the prepaid account to
open a credit card account, that would be accessed by the access device
for a prepaid account that is a credit card.
The Bureau believes that its proposed application of Regulations E
and Z to the issuance of access devices strikes an appropriate balance
between the regulations. The proposal recognizes that prepaid card
issuers are not likely to have preexisting agreements with the customer
to extend overdraft credit prior to issuing the prepaid card. The
Bureau believes in particular that the addition of a credit feature to
an accepted prepaid access device causes a significant transformation
with respect to a prepaid account. The Bureau believes that applying
the Regulation Z issuance rules to the addition of such a credit
feature to a prepaid access device will help ensure that consumers are
fully aware of the implications of their decision to effect such a
transformation.
Rules Applicable to Limits on Liability for Unauthorized Use and to
Billing Errors Procedures
Section 1005.6 generally sets forth provisions for when a consumer
may be held liable, within the limitations described in Sec.
1005.6(b), for an unauthorized electronic fund transfer involving the
consumer's account. Section 1005.11 generally sets forth the procedures
for resolving errors relating to electronic fund transfers involving a
consumer's account. Section 1005.18(e) sets forth a consumer's
liability for unauthorized electronic fund transfers and the procedures
for investigating errors related to electronic fund transfers involving
prepaid accounts. See generally section-by-section analysis of proposed
Sec. 1005.18(e).
Relatedly, Regulation Z Sec. 1026.12(b) sets forth limits on the
amount of liability that a credit card issuer may impose on a consumer
for unauthorized use of a credit card. Regulation Z Sec. 1026.13
generally sets forth error resolution procedures for billing errors
that relate to extensions of credit that are made in connection with
open-end accounts or credit card accounts.
Regulation E Sec. 1005.12(a)(1)(iv) currently provides guidance on
how the provisions on limits on liability for unauthorized use and the
provisions setting forth error resolution procedures under Regulation E
and Regulation Z apply when credit is extended incident to an
electronic fund transfer. Specifically, Sec. 1005.12(a)(1)(iv)
provides that EFTA and Regulation E govern a consumer's liability for
an unauthorized electronic fund transfer and the investigation of
errors involving an extension of credit that occurs pursuant to an
overdraft line of credit (under an agreement between the consumer and a
financial institution to extend credit when the consumer's account is
overdrawn or to maintain a specified minimum balance in the consumer's
account), or under an overdraft service, as defined in Sec.
1005.17(a). Comment 12(a)-1 provides that for transactions involving
access devices that also function as credit cards, whether Regulation E
or Regulation Z applies depends on the nature of the transaction. For
example, if the transaction solely involves an extension of credit, and
does not include a debit to a checking account (or other consumer asset
account), the liability limitations and error resolution requirements
of Regulation Z apply. If the transaction debits a checking account
only (with no credit extended), the provisions of Regulation E apply.
If the transaction debits a checking account but also draws on an
overdraft line of credit attached to the account, Regulation E's
liability limitations apply, in addition to Regulation Z Sec.
1026.13(d) and (g) (which apply because of the extension of credit
associated with the overdraft feature on the checking account).\214\ If
a consumer's access device is also a credit card and the device is used
to make unauthorized withdrawals from a checking account, but also is
used to obtain unauthorized cash advances directly from a line of
credit that is separate from the checking account, both Regulation E
and Regulation Z apply. Comment 12(a)-1 also sets forth examples that
illustrate these principles.
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\214\ Section 1026.13(d) provides that a consumer need not pay
(and the creditor may not try to collect) any portion of any
required payment that the consumer believes is related to a disputed
amount reflected on the consumer's credit card bill. It also
provides that if the cardholder has enrolled in an automatic payment
plan, the card issuer shall not deduct any part of the disputed
amount or related finance or other charges from the consumer's asset
account if the consumer provides to the card issuer a billing error
notice that the card issuer receives any time up to 3 business days
before the scheduled payment date. Section 1026.13(g) sets forth
requirements governing what a creditor must do if it determines that
a consumer owes all or part of the disputed amount and related
finance or other charges.
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With respect to limits on liability for unauthorized use, Sec.
1005.12(a) and comment 12(a)-1 are consistent with EFTA section 909(c),
which applies EFTA's limits on liability for unauthorized use to
transactions which involve both an unauthorized electronic fund
transfer and an extension of credit pursuant to an agreement between
the consumer and the financial institution to extend such credit to the
consumer in the event the consumer's account is overdrawn. 15 U.S.C.
1693g(c). In adopting rules in 1980 to implement EFTA, the Board
generally applied Regulation E's error resolution procedures to credit
transactions that are incident to an electronic fund transfer involving
an extension of credit that occurs under an agreement between the
consumer and a financial institution to extend credit when the
consumer's account is overdrawn or to maintain a specified minimum
balance in the consumer's account.\215\ In proposing these rules, the
Board stated that the proposed rule would simplify procedures for
financial institutions where an electronic fund transfer results in
both a debit to a consumer's account and a credit extension.\216\
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\215\ 45 FR 8249, 8257 (Feb. 6, 1980).
\216\ 44 FR 25850, 25857 (May 3, 1979).
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For the reasons discussed in more detail in the section by section
analysis of Regulation Z proposed Sec. 1026.13(i), the Bureau proposes
to amend Sec. 1005.12(a)(1)(iv) by moving the current language to
proposed Sec. 1005.12(a)(1)(iv)(A) and applying it to access devices
that do not access prepaid accounts. The Bureau also proposes to add
proposed Sec. 1005.12(a)(1)(iv)(B) to provide that with respect to a
prepaid account, EFTA and Regulation E govern a consumer's liability
for an unauthorized electronic fund transfer and the investigation of
errors involving an extension of credit, under a credit plan subject to
Regulation Z subpart B, that is incident to an electronic fund transfer
when the consumer's prepaid account is overdrawn. Proposed Sec.
1005.12(a)(1)(iv)(B) that applies to credit in connection with a
prepaid account is similar but not the same as proposed Sec.
1005.12(a)(1)(iv)(A) which applies to accounts other than prepaid
accounts. Like proposed Sec. 1005.12(a)(1)(iv)(A), proposed Sec.
1005.12(a)(1)(iv)(B) generally would apply Regulation E's limits on
liability for unauthorized use and error resolution procedures to
transactions that are partially funded through an
[[Page 77139]]
electronic fund transfer using a prepaid card and partially funded
through credit under a plan that is accessed by a prepaid card when the
consumer's prepaid account is overdrawn.\217\
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\217\ This treatment would not apply to plans accessed by an
account number that is a credit card under Regulation Z, where
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor. See the
discussion of Regulation Z Sec. 1026.13(i) below.
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However, unlike proposed Sec. 1005.12(a)(1)(iv)(A), proposed Sec.
1005.12(a)(1)(iv)(B) would not focus on whether there is an agreement
between a consumer and a financial institution to extend credit when
the consumer's prepaid account is overdrawn or to maintain a specified
minimum balance in the consumer's prepaid account. Instead, proposed
Sec. 1005.12(a)(1)(iv)(B) focuses on whether credit is extended under
a ``plan'' when the consumer's prepaid account is overdrawn and the
plan is subject to the provisions in Regulation Z subpart B. For
example, a credit plan that is accessed by a prepaid card that is a
credit card would be subject to the provisions of subpart B. Under the
proposal, a prepaid card can be a credit card under Regulation Z even
if the creditor retains discretion not to pay the credit transactions.
As discussed in the section-by-section analysis of Regulation Z
proposed Sec. 1026.2(a)(15)(i), proposed comment 2(a)(15)-2.i.F would
provide that the term ``credit card'' for purposes of Regulation Z
includes a prepaid card that is a single device that may be used from
time to time to access a credit ``plan,'' except if the prepaid card
only accesses credit that is not subject to any finance charge as
defined in Regulation Z Sec. 1026.4 or any fee described in Regulation
Z Sec. 1026.4(c) such as an application fee to apply for credit or a
late payment fee and is not payable by written agreement in more than
four installments. As discussed in the section-by-section analysis of
proposed Regulation Z Sec. 1026.2(a)(20), with respect to credit that
is accessed by a prepaid card, a ``plan'' includes a program where the
consumer is obligated contractually to repay the credit. For example,
such a plan includes a program under which a creditor routinely pays
transactions when a consumer has insufficient or unavailable funds in a
prepaid account and the consumer is obligated contractually to repay
those transactions. Under the proposal, such a program would constitute
a plan notwithstanding that the creditor retains discretion not to pay
such transactions. Thus, proposed Sec. 1005.12(a)(1)(iv)(B) focuses on
whether credit is extended under a ``plan'' that is subject to the
provisions of subpart B, rather than whether there is an agreement
between a consumer and a financial institution to extend credit when
the consumer's account is overdrawn or to maintain a specified minimum
balance in the consumer's account.
Comment 12(a)-1 provides guidance on determining the applicable
regulation related to liability and error resolution, primarily
focusing on examples of when a debit card that also is a credit card
under Regulation Z accesses a checking account. Under the proposal,
comment 12(a)-1 would be moved to proposed comment 12(a)-5. The
proposal also would amend proposed comment 12(a)-5 to provide guidance
on determining the applicable regulation related to liability and error
resolution for overdraft credit plans in connection with asset
accounts, including prepaid accounts.
Proposed comment 12(a)-5.i would also explain that for an account
other than a prepaid account where credit is extended incident to an
electronic fund transfer under an agreement to extend overdraft credit
between the consumer and the financial institution, Regulation E's
liability limitations and error resolution provisions apply, in
addition to Regulation Z Sec. 1026.13(d) and (g) (which apply because
of the extension of credit associated with the overdraft feature on the
asset account). With respect to an account other than for a prepaid
account, incidental credit that is not extended under an agreement
between the consumer and the financial institution where the financial
institution agrees to extend credit is governed solely by the error
resolution procedures in Regulation E, and Regulation Z Sec.
1026.23(d) and (g) do not apply.
Proposed comment 12(a)-5 would provide that with respect to a
prepaid account where credit is extended under a credit plan that is
subject to Regulation Z subpart B, Regulation E's liability limitations
and error resolution provisions apply, in addition to Regulation Z
Sec. 1026.13(d) and (g) (which apply because of the extension of
credit associated with the overdraft feature on the asset account).
Under the proposal, a credit plan is subject to Regulation Z subpart B
if the credit plan is accessed by an access device that is a credit
card under Regulation Z or the credit plan is open-end credit. An
access device for a prepaid account would not be a credit card if the
access device only accesses credit that is not subject to any finance
charge as defined in Regulation Z Sec. 1026.4 or any fee described in
Regulation Z Sec. 1026.4(c) and is not payable by written agreement in
more than four installments. See Regulation Z comment 2(a)(15)-2.i.F.
Proposed comment 12(a)-5 would explain that incidental credit under a
credit plan that only can be accessed by an access device for a prepaid
account that is not a credit card is not subject to Regulation Z
subpart B and is governed solely by the error resolution procedures in
Regulation E because the credit plan is not accessed by a credit card
and the plan is not open-end credit. In this case, Regulation Z Sec.
1026.13(d) and (g) do not apply.
Comment 12(a)-1.i and ii would be moved to proposed comment 12(a)-
5-.ii and iii, respectively, and would be revised to indicate how the
principles and examples apply generally to asset accounts, including
checking accounts and prepaid accounts.
The Bureau believes that it is appropriate to apply the limits on
liability and the error resolution procedures in Regulation E generally
to transactions that debit a prepaid account but also draw on an
overdraft plan that is subject to Regulation Z subpart B. The Bureau
believes that its proposed approach is consistent with EFTA section
909(c), which applies EFTA's limits on liability for unauthorized use
to transactions which involve both an unauthorized electronic fund
transfer and an extension of credit pursuant to an agreement between
the consumer and the financial institution to extend such credit to the
consumer in the event the consumer's account is overdrawn. 15 U.S.C.
1693g(c). An unauthorized electronic fund transfer on a prepaid account
generally would be subject to the limits on liability in Sec. 1005.6
and proposed Sec. 1005.18(e); an unauthorized electronic fund transfer
on a prepaid account also is an error for purposes of error resolution
procedures set forth in Sec. 1005.11 and proposed Sec. 1005.18(e).
See Sec. 1005.11(a)(1)(i). Although billing errors under Regulation Z
Sec. 1026.13(a) include a broader category than only unauthorized use,
the Bureau believes it is necessary and proper to apply Regulation E's
error resolution provisions and limited Regulation Z error resolution
provisions to these transactions, to facilitate compliance with EFTA
section 908 and TILA section 161 on error resolution. The Bureau is
concerned that conflicting provisions could apply to transactions that
debit a prepaid account but also draws on an overdraft plan subject to
Regulation Z subpart B if Regulation E's provisions applied to limits
on liability
[[Page 77140]]
for unauthorized use, and Regulation Z's provisions generally apply to
investigation of billing errors, including transactions involving
unauthorized use. To avoid these potential conflicts and to facilitate
compliance, under proposed Regulation Z Sec. 1026.12(a)(1)(v), if the
transaction debits a prepaid account but also draws on an overdraft
plan subject to Regulation Z subpart B, Regulation E's liability
limitations and error resolution procedures apply to the entire
transaction and Regulation Z's error resolution rules in Sec.
1026.13(d) and (g) apply to the credit portion of the transaction. This
approach is also consistent with the existing provisions in Sec.
1005.11(a)(1)(iv) and Regulation Z Sec. 1026.13(i), which applies
Regulation E's liability limitation and error resolution procedures to
extensions of credit that is incident to an electronic fund transfer.
The Bureau solicits comment on this approach. The Bureau also
solicits comment on whether there are any other preferable approaches
to determining how the liability limitations and error resolution
procedures in Regulations E and Z should apply to transactions that
debit prepaid accounts but also draw on overdraft plans that are
subject to Regulation Z subpart B.
12(b) Preemption of Inconsistent State Laws
In 2013, the Bureau published a final determination as to whether
certain laws of Maine and Tennessee relating to unclaimed gift cards
are inconsistent with and preempted by EFTA and Regulation E.\218\ The
Bureau concluded that it had no basis for concluding that the
provisions at issue in Maine's unclaimed property law relating to gift
cards are inconsistent with, or therefore preempted by, Federal law.
The Bureau did determine, however, that one provision in Tennessee's
unclaimed property law relating to gift cards is inconsistent with, and
therefore preempted by, Federal law. The Bureau's notice of its
preemption determination stated that the determination would also be
reflected in the commentary accompanying Regulation E.
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\218\ 78 FR 24386, 24391 (Apr. 25, 2013).
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The Bureau proposes to add a summary of its preemption
determination with respect to Tennessee's unclaimed property law as
comment 12(b)-4. Proposed comment 12(b)-4 would state that the Bureau
had determined that a provision in the State law of Tennessee is
preempted by the Federal law, effective April 25, 2013. Specifically,
section 66-29-116 of Tennessee's Uniform Disposition of Unclaimed
(Personal) Property Act is preempted to the extent that it permits gift
certificates, store gift cards, and stored-value cards, as defined in
Sec. 1005.20(a), to be declined at the point-of-sale sooner than the
gift certificates, store gift cards, or stored value cards and their
underlying funds are permitted to expire under Sec. 1005.20(e).
Existing comment 12(b)-2 states, in part, that the Bureau
recognizes state law preemption determinations made by the Board prior
to July 21, 2011, unless and until the Bureau makes and publishes any
contrary determination. The Bureau proposes to make this statement into
a standalone comment in proposed comment 12(b)-2 under the heading
Preemption determinations generally. The Bureau proposes to renumber
the remainder of existing comment 12(b)-2 as proposed comment 12(b)-3,
to make the heading for that comment Preemption determination--Michigan
for the sake of clarity, and to update proposed comment 12(b)-3.i
through .iv to provide full citations to the preempted Michigan law at
issue therein, which appear in chapter 488 of the Michigan Compiled
Laws. Additionally, the Bureau proposes adding language in proposed
comment 12(b)-3.iv to clarify that the preemption of sections 488.17
and 488.18 of Michigan law does not apply to transfers of $15 or less,
which, pursuant to existing Sec. 1005.9(e), are not subject to Sec.
1005.9. Section 1005.9(e) (then Sec. 205.9(e)) was added by the Board
in 2007 to eliminate the requirement to provide terminal receipts for
transactions of $15 or less.\219\
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\219\ See 72 FR 36589 (July 5, 2007).
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The Bureau seeks comment on this portion of its proposal.
Section 1005.15 Electronic Fund Transfer of Government Benefits
Section 1005.15 of Regulation E currently contains provisions
specific to certain accounts established by government agencies for
distributing government benefits to consumers electronically, such as
through ATMs or POS terminals. As discussed in more detail above, the
Board amended Regulation E in 1994 to specifically address such
accounts. In 1997, the Board modified Regulation E to exempt ``needs-
tested'' EBT programs established or administered under State or local
law in response to a 1996 change to EFTA made by the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996.\220\
All accounts used to distribute benefits for Federally administered
programs (including needs-tested EBT programs) and non-needs tested
State and local programs, such as those used to distribute unemployment
insurance payments, pensions, and child support, are currently covered
by Sec. 1005.15.\221\
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\220\ Public Law 104-193, 110 Stat. 2105 (1996).
\221\ See, e.g., 62 FR 43467 (Aug. 14, 1997).
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Although the Bureau is proposing to include these accounts in the
general definition of prepaid account in proposed Sec. 1005.2(b)(3),
as discussed above, the Bureau is proposing for ease of administration
to modify existing Sec. 1005.15 to address the proposed revisions for
government benefit accounts, rather than subsuming the rules for such
accounts into proposed Sec. 1005.18 as the Bureau proposes to do with
respect to payroll card accounts. These proposed revisions and
additions would generally align the requirements in Sec. 1005.15 with
the proposed requirements for prepaid accounts generally in Sec.
1005.18, which are discussed in more detail in the section-by-section
analysis of proposed Sec. 1005.18 below.
15(a) Government Agency Subject to Regulation
Existing Sec. 1005.15(a)(1) provides that a government agency is
deemed to be a financial institution for purposes of EFTA and
Regulation E if it directly or indirectly issues an access device to a
consumer for use in initiating an electronic fund transfer of
government benefits from an account, other than needs-tested benefits
in a program established under State or local law or administered by a
State or local agency. It also provides that the agency shall comply
with all applicable requirements of EFTA and Regulation E, except as
provided in Sec. 1005.15. The Bureau is proposing to adjust the final
sentence of Sec. 1005.15(a)(1) to reflect that proposed Sec. 1005.15,
as discussed in detail below, is no longer only providing an exception
to a Regulation E requirement. The Bureau is otherwise not proposing to
modify Sec. 1005.15(a)(1).
Existing Sec. 1005.15(a)(2) defines, for purposes of Sec.
1005.15, the term ``account'' to mean an account established by a
government agency for distributing government benefits to a consumer
electronically, such as through ATMs or POS terminals, but does not
include an account for distributing needs-tested benefits in a program
established under State or local law or administered by a State or
local agency. For ease of reference, the Bureau is proposing to define
such an account as a ``government benefit
[[Page 77141]]
account;'' no substantive change is intended by the addition of this
definition.
The Bureau does not intend for the proposed revisions in Sec.
1005.15 to alter the programs or agencies to which Sec. 1005.15 is
applicable. Thus, the Bureau also does not expect that its proposed
revisions to Sec. 1005.15 would impose significant burden on
government agencies distributing funds via government benefit accounts.
The Bureau understands that government benefit account programs are
typically administered by financial institutions pursuant to a contract
between the institution and the agency.\222\ The Bureau is not aware of
any covered programs run solely by an agency. Although the Bureau does
not propose to substantively revise Sec. 1005.15(a), the Bureau
requests comment as to whether these provisions in existing Sec.
1005.15(a) remain relevant in light of both current industry practices
and the Bureau's proposed definition for ``prepaid account'' in Sec.
1005.2(b)(3). Specifically, the Bureau seeks comment on the effect on
consumers and covered government benefit account programs were the
Bureau to remove it.
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\222\ See, e.g., Bd. of Governors of the Fed. Reserve Sys.,
Report to the Congress on Government-Administered, General-Use
Prepaid Cards, at 3 (July 2014), available at http://www.federalreserve.gov/publications/es/2014_Prepaid_Cards_Final.pdf.
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The Bureau notes that although it is proposing to maintain Sec.
1005.15 for government benefit accounts, there is some question as to
whether separate provisions remain necessary or whether the
requirements for such accounts could be subsumed into proposed Sec.
1005.18. The Bureau thus requests comment on whether, in light of the
proposal herein to address all other types of covered prepaid accounts
in Sec. 1005.18, the Bureau should subsume all requirements for
government benefit accounts into Sec. 1005.18 as well.
15(b) Issuance of Access Devices
Existing Sec. 1005.15(b) explains that for purposes of Sec.
1005.15, a consumer is deemed to request an access device when the
consumer applies for government benefits that the agency disburses or
will disburse by means of an electronic fund transfer. The agency shall
verify the identity of the consumer receiving the device by reasonable
means before the device is activated. The Bureau is not proposing to
modify Sec. 1005.15(b).
15(c) Pre-Acquisition Disclosure Requirements
The Bureau is proposing new disclosure requirements for government
benefit accounts that would be provided before a consumer acquires a
government benefit account. The requirements in proposed Sec.
1005.15(c) would be in addition to the initial disclosure requirements
in existing Sec. 1005.7(b) and would correspond to the requirements in
proposed Sec. 1005.18(b) for prepaid accounts generally.\223\
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\223\ The Bureau is also proposing, for purposes of government
benefit accounts, to expand the requirement in existing Sec.
1005.7(b)(5) to disclose fees related to EFTs to cover all fees
related to the government benefit account, as discussed below in the
section-by-section analysis of proposed Sec. 1005.15(f). See also
proposed Sec. 1005.18(f) (proposing the same requirement for
prepaid accounts).
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EFTA section 905(a) sets forth disclosure requirements for accounts
subject to the Act.\224\ In addition to these disclosures, the Bureau
is proposing to use its authority under EFTA sections 904(a) and (c),
905(a), and section 1032(a) of the Dodd-Frank Act to require government
agencies to provide disclosures prior to the time a consumer acquires a
government benefit account. As discussed in more detail in the section-
by-section analysis of proposed Sec. 1005.18(b)(1)(i) below for
prepaid accounts, the Bureau believes that adjustment of the timing
requirement is necessary and proper to effectuate the purposes of EFTA
to provide a framework to establish the rights, liabilities, and
responsibilities of government benefit account consumers, because the
proposed revision will assist consumers' understanding of the terms and
conditions of their government benefit accounts.
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\224\ Specifically, EFTA section 905(a) states that ``[t]he
terms and conditions of electronic fund transfers involving a
consumer's account shall be disclosed at the time the consumer
contracts for an electronic fund transfer service, in accordance
with regulations of the Bureau.'' 15 U.S.C. 1693c(a)
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The Bureau is proposing in new Sec. 1005.15(c) to extend to
government benefit accounts the same pre-acquisition disclosure
requirements proposed for prepaid accounts, which are discussed in
detail in the section-by-section analysis of proposed Sec. 1005.18(b)
below. Specifically, proposed Sec. 1005.15(c)(1) would state that
before a consumer acquires a government benefit account, a government
agency shall comply with the pre-acquisition disclosure requirements
applicable to prepaid accounts as set forth in proposed Sec.
1005.18(b), in accordance with the timing requirements of proposed
Sec. 1005.18(h).
To address issues of compulsory use (see existing Sec.
1005.10(e)(2) and proposed comment 10(e)(2)-2), the Bureau is proposing
that a notice be provided at the top of the short form to highlight to
consumers that they are not required to accept a government benefit
account. Specifically, proposed Sec. 1005.15(c)(2) would state that
before a consumer acquires a government benefit account, the agency
must provide a statement pursuant to proposed Sec. 1005.18(b)(2)(i)(A)
that the consumer does not have to accept the government benefit
account and that the consumer can ask about other ways to get their
benefit payments from the agency instead of receiving them through the
account, in a form substantially similar to proposed Model Form A-
10(a). As explained in the section-by-section analysis of Sec.
1005.10(e)(2) above, the Bureau is proposing to clarify that Regulation
E does not permit a government agency to require individuals to receive
government benefits by direct deposit to any particular institution. As
noted, the Bureau believes it is important for consumers to realize
they have the option of not accepting a government benefit account
before they acquire the account, and that receiving such notice at the
top of the short form will help to ensure consumers are aware of this
right.
Proposed comment 15(c)-1 would explain that Model Form A-10(a)
contains a model form for the pre-acquisition short disclosure
requirements for government benefit accounts pursuant to Sec.
1005.15(c). Government agencies may use Sample Form A-10(e) of Appendix
A to this part to comply with the pre-acquisition long form disclosure
requirements of Sec. 1005.15(c)(1).
Proposed comment 15(c)-2 would reiterate that Sec.
1005.18(b)(1)(i) generally requires delivery of both the short form
disclosure required by Sec. 1005.18(b)(2)(i) and the long form
disclosure required by Sec. 1005.18(b)(2)(ii) before a consumer
acquires a prepaid account. Proposed comment 15(c)-2.i would provide an
example illustrating when a consumer receives disclosures before
acquisition of an account for purposes of proposed Sec. 1005.15(c)(1).
Specifically, the example would address a situation in which a
government agency informs a consumer that she can receive distribution
of benefits via a government benefit account in the form of a prepaid
card. In the first example, the consumer receives the short form and
long form disclosures to review at the time the consumer receives
benefits eligibility information from the agency. After
[[Page 77142]]
receiving the disclosures, the consumer agrees to receive benefits via
the government benefit account. The comment explains that these
disclosures were provided to the consumer pre-acquisition, and the
agency has complied with proposed Sec. 1005.15(c)(1). By contrast, if
the consumer does not receive the short form and long form disclosures
to review until the time at which the consumer receives the prepaid
card, these disclosures were provided to the consumer post-acquisition
and were not provided in compliance with proposed Sec. 1005.15(c)(1).
Proposed comment 15(c)-3 would explain that the disclosures and
notice required by Sec. 1005.15(c)(1) and (2) may be given in the same
process or appointment during which the consumer acquires or agrees to
acquire a government benefit account. When a consumer receives benefits
eligibility information and signs up or enrolls to receive benefits
during the same process or appointment, a government agency that gives
the disclosures and notice required by proposed Sec. 1005.15(c)(1) and
(2) before issuing a government benefit account complies with the
timing requirements of proposed Sec. 1005.15(c).
15(d) Access to Account Information
15(d)(1) Periodic Statement Alternative
EFTA section 906(c) requires that a financial institution provide
each consumer with a periodic statement for each account of such
consumer that may be accessed by means of an electronic fund transfer.
Section 1005.9(b), which implements EFTA section 906(c), generally
requires a periodic statement for each monthly cycle in which an
electronic fund transfer occurred or, if there are no such transfers, a
periodic statement at least quarterly.\225\ Financial institutions must
deliver periodic statements in writing and in a form that the consumer
can keep, unless consent is received for electronic delivery or unless
Regulation E provides otherwise. See Sec. Sec. 1005.4(a)(1) and
1005.9(b).
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\225\ The periodic statement must include transaction
information for each EFT, the account number, the amount of any fees
assessed, the beginning and ending account balance, the financial
institution's address and telephone number for inquiries, and a
telephone number for preauthorized transfers. See Sec. 1005.9(b).
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In the 1994 EBT Rule, the Board adopted a final rule that modified
the periodic statement requirement for government benefit accounts.
Pursuant to that rule, existing Sec. 1005.15(c) explains that
government agencies can provide periodic statements that comply with
the general provisions in Regulation E, or alternatively, the agency
must make available to the consumer: (1) The account balance, through a
readily available telephone line and at a terminal (such as by
providing balance information at a balance-inquiry terminal, or
providing it, routinely or upon request, on a terminal receipt at the
time of an electronic fund transfer); and (2) a written history of
account transactions that is provided promptly in response to an oral
or written request and that covers at least 60 days.
The Bureau is proposing to revise existing Sec. 1005.15(c) as new
Sec. 1005.15(d)(1), which would generally align the periodic statement
alternative for government benefit accounts with the proposed
alternative for prepaid accounts discussed below in the section-by-
section analysis of proposed Sec. 1005.18(c). Specifically, the Bureau
is proposing in Sec. 1005.15(d)(1) an alternative to the periodic
statement requirement that would allow government agencies to instead
provide access to account balance by telephone and at a terminal, 18
months of transaction history online, and 18 months written transaction
history upon request. To further the purposes of EFTA to provide a
framework to establish the rights, liabilities, and responsibilities of
prepaid account consumers (including government benefit account
consumers), the Bureau believes it is necessary and proper to exercise
its authority under EFTA section 904(c) to continue the exception to
the periodic statement requirements of EFTA section 906(c) for
government benefit accounts and to modify that exception in Regulation
E to more closely align it with the proposed requirements for prepaid
accounts generally. See also the section-by-section analysis of
proposed Sec. 1005.18(c)(1) below.
Proposed Sec. 1005.15(d)(1) and (1)(i) retain the existing
language in current Sec. 1005.15(c) and (c)(1), and would state that a
government agency need not furnish periodic statements required by
Sec. 1005.9(b) if the agency makes available to the consumer the
consumer's account balance, through a readily available telephone line
and at a terminal (such as by providing balance information at a
balance-inquiry terminal or providing it, routinely or upon request, on
a terminal receipt at the time of an electronic fund transfer). This
language is unchanged from existing Sec. 1005.15(c)(1). Existing Sec.
1005.18(b)(1)(i) for payroll card accounts and proposed Sec.
1005.18(c)(1)(i) for prepaid accounts, however, do not include the
requirement to provide balance information at a terminal. As discussed
below in the section-by-section analysis of proposed Sec.
1005.18(c)(1)(i), the Bureau is seeking comment on whether a similar
requirement to provide balance information at a terminal should be
added to the requirements of proposed Sec. 1005.18(c) for prepaid
accounts generally. The Bureau requests comment on whether,
alternatively, the requirement to provide balance information for
government benefit accounts at a terminal should be eliminated from
Sec. 1005.15 given the other enhancements proposed herein and for
parity with proposed Sec. 1005.18.
The second piece of the proposed periodic statement alternative for
government benefit accounts, proposed Sec. 1005.15(d)(1)(ii), would be
an electronic history of the consumer's account transactions, such as
through a Web site, that covers at least 18 months preceding the date
the consumer electronically accesses the account. As noted above, the
requirement to provide an electronic history of a consumer's account
transactions would be new to government benefit accounts. This
provision would mirror proposed Sec. 1005.18(c)(1)(ii) for prepaid
accounts generally. The Bureau does not believe that this proposed
requirement would impose significant burden on government agencies, as
the Bureau believes that may government benefit account programs
already provide electronic access to account information. For example,
the Bureau found that all the government benefit card programs included
in its Study of Prepaid Account Agreements already provide online
access to account information \226\ and, in most cases, electronic
periodic statements as well.\227\
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\226\ See Study of Prepaid Account Agreements, at 18 tbl.5. All
account agreements reviewed for cards used to distribute government
benefits indicated that electronic access to account information is
available. The Bureau acknowledges that this selection may have some
bias as all account agreements, including those for government
benefit programs, reviewed in the Study were obtained online; as
such, those programs may be more likely than others to provide
electronic access to account information.
\227\ The Study of Prepaid Account Agreements found that 95.38
percent of account agreements for government benefit cards indicate
that those programs provide electronic periodic statements (in
addition to electronic access to account history information). See
id., at 20 tbl.7.
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The third piece of the proposed periodic statement alternative,
proposed Sec. 1005.15(d)(1)(iii), would be a requirement to provide a
written history of the consumer's account transactions promptly in
response to an oral or written request and that covers at least
[[Page 77143]]
18 months preceding the date the agency receives the consumer's
request. This provision is similar to existing Sec. 1005.15(c)(2), but
has been modified to change the time period covered by the written
history from 60 days to 18 months, and to otherwise mirror the language
used in proposed Sec. 1005.18(c)(1)(iii) for prepaid accounts
generally.
15(d)(2) Additional Access to Account Information Requirements
The Bureau is proposing new Sec. 1005.15(d)(2), which would
require that a government agency comply with the account information
requirements applicable to prepaid accounts as set forth in proposed
Sec. 1005.18(c)(2), (3), and (4). As discussed in more detail below,
proposed Sec. 1005.18(c)(2) requires that the electronic and written
histories in the periodic statement alternative must include the
information set forth in Sec. 1005.9(b). This provision currently
exists for payroll card accounts in existing Sec. 1005.18(b)(2), but
does not presently appear in Sec. 1005.15 for government benefit
accounts. Proposed Sec. 1005.18(c)(3) would require disclosure of all
fees assessed against the account, in both the history of account
transactions provided as periodic statement alternatives, as well as in
any periodic statement. Proposed Sec. 1005.18(c)(4) would require
disclosure, in both the history of account transactions provided as
periodic statement alternatives, as well as in any periodic statement,
monthly and annual summary totals of fees imposed on and the total
amount of deposits and debits made to a prepaid account. Proposed
comment 15(d)-1 would refer to proposed comments 18(c)-1 through -5 for
guidance on access to account information requirements.
To further the purposes of EFTA to provide a framework to establish
the rights, liabilities, and responsibilities of prepaid account
consumers (including government benefit account consumers), the Bureau
believes it is necessary and proper to exercise its authority under
EFTA section 904(c) to modify the periodic statement requirements of
EFTA section 906(c) to require inclusion of all fees charged and a
summary total of both monthly and annual fees. See also the section-by-
section analysis of proposed Sec. 1005.18(c)(3) and Sec.
1005.18(c)(4) below. These proposed revisions will assist consumers'
understanding of the account activity on their government benefit
accounts. In addition, the Bureau is also using its disclosure
authority pursuant to the Dodd-Frank Act section 1032(a) because the
Bureau believes that disclosure of all fees and account activity
summaries ensure that the features of government benefit accounts, over
the term of the account, are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs, benefits, and risks associated with government benefit
accounts.
15(e) Modified Disclosure Requirements
Existing Sec. 1005.15(d) provides that a government agency that
follows the periodic statement alternative in existing Sec. 1005.15(c)
must modify certain initial and ongoing disclosures given to consumers.
Existing Sec. 1005.15(d)(1) requires modification of the initial
disclosures given pursuant to Sec. 1005.7(b) to reflect the methods a
consumer can employ to obtain account balance information and copies of
written account history, and to address corresponding changes in the
timing requirements for the error resolution notice required by Sec.
1005.7(b)(10). Existing Sec. 1005.15(d)(2) addresses modification of
the annual error resolution notice required by Sec. 1005.8(b).
Existing Sec. 1005.15(d)(3) and (4) adjust the triggering of the 60-
day period for reporting unauthorized transfers pursuant to the limited
liability provisions in Sec. 1005.6(b)(3) and the error resolution
provisions of Sec. 1005.11. Because the Bureau is proposing to modify
the periodic statement alternative for government benefit accounts in
proposed Sec. 1005.15(d)(1), the Bureau is proposing to modify the
requirements in existing Sec. 1005.15(d), renumbered as new Sec.
1005.15(e), to adjust the corresponding timing provisions therein and
to align with the requirements of proposed Sec. 1005.18(d) for prepaid
accounts generally, discussed below.
15(e)(1) Initial Disclosures
15(e)(1)(i) Account Information
Proposed Sec. 1005.15(e)(1)(i) would require that a government
agency modify the disclosures required under Sec. 1005.7(b) by
disclosing a telephone number that the consumer may call to obtain the
account balance, the means by which the consumer can obtain an
electronic account history, such as the address of a Web site, and a
summary of the consumer's right to receive a written account history
upon request (in place of the a periodic statement required by Sec.
1005.7(b)(6)), including a telephone number to call to request a
history. The disclosure required by proposed Sec. 1005.15(e)(1)(i) may
be made by providing a notice substantially similar to the notice
contained in proposed appendix A-5.
15(e)(1)(ii) Error Resolution
Mirroring existing Sec. 1005.15(d)(1)(iii), proposed Sec.
1005.15(e)(1)(ii) would require that a government agency modify the
disclosures required under Sec. 1005.7(b) by providing a notice
concerning error resolution that is substantially similar to the notice
contained in proposed appendix A-5, in place of the notice required by
Sec. 1005.7(b)(10). These proposed modifications are discussed below
in the section-by-section analysis of appendix A-5.
15(e)(2) Annual Error Resolution Notice
Mirroring existing Sec. 1005.15(d)(2), proposed Sec.
1005.15(e)(2) would require that an agency provide an annual notice
concerning error resolution that is substantially similar to the notice
contained in proposed appendix A-5, in place of the notice required by
Sec. 1005.8(b). The Bureau is proposing to add that, alternatively,
the agency may include on or with each electronic or written history
provided in accordance with proposed Sec. 1005.15(d)(1), a notice
substantially similar to the abbreviated notice for periodic statements
contained in paragraph (b) of appendix A-3, modified as necessary to
reflect the error resolution provisions set forth in proposed Sec.
1005.15. The Bureau is proposing to allow each electronic and written
history to include an abbreviated error resolution notice, in lieu of
an annual notice, for parity with proposed Sec. 1005.18(d)(2) for
prepaid accounts generally, which is based on existing Sec.
1005.18(c)(2) for payroll card accounts.
The Bureau seeks comment, however, on whether it should continue to
require annual error resolution notices for government benefit accounts
in certain circumstances, such as those accounts for which a consumer
has not accessed an electronic history or requested a written history
in an entire calendar year and thus would not have received any error
resolution notice during the course of the year.
15(e)(3) Modified Limitations on Liability Requirements
EFTA section 909 governs consumer liability for unauthorized
electronic fund transfers. EFTA section 908 governs the timing and
other requirements for consumers and financial institutions on error
resolution, including provisional credit. EFTA section 909 on consumer
liability is implemented by existing Sec. 1005.6. For accounts under
Regulation E generally,
[[Page 77144]]
including payroll card accounts, Sec. 1005.6(a) provides that a
consumer may be held liable for an unauthorized electronic fund
transfer resulting from the loss or theft of an access device only if
the financial institution has provided certain required disclosures and
other conditions are met.\228\ If the consumer provides timely notice
to the financial institution within two business days of learning of
the loss or theft of the access device, the consumer's liability is the
lesser of $50 or the amount of unauthorized transfers made before
giving notice. Sec. 1005.6(b)(1). If timely notice is not given, the
consumer's liability is the lesser of $500 or the sum of (1) the lesser
of $50 or the amount of unauthorized transfers occurring within two
business days of learning of the loss/theft and (2) the amount of
unauthorized transfers that occur after two business days but before
notice is given to the financial institution. Sec. 1005.6(b)(2).
Section 1005.6(b)(3) provides, in part, that a consumer must report an
unauthorized electronic fund transfer that appears on a periodic
statement within 60 days of the financial institution's transmittal of
the statement in order to avoid liability for subsequent transfers.
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\228\ The required disclosures for this purpose include a
summary of the consumer's liability under Sec. 1005.6, or under
State law or other applicable law or agreement, for unauthorized
electronic fund transfers; the telephone number and address of the
person or office to be notified when the consumer believes an
unauthorized transfer has been or may be made; and the financial
institution's business days. Sec. Sec. 1005.6(a) and 1005.7(b)(1)
through (3).
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For government agencies that follow the periodic statement
alternative in existing Sec. 1005.15(c), existing Sec. 1005.15(d)(3)
provides that for purposes of Sec. 1005.6(b)(3), regarding a 60-day
period for reporting any unauthorized transfer that appears on a
periodic statement, the 60-day period shall being with the transmittal
of a written account history or other account information provided to
the consumer under existing Sec. 1005.15(c). The Bureau notes that
this provision only modifies the 60-day period for consumers to report
an unauthorized transfer and does not alter any other provision of
Sec. 1005.6.
Proposed Sec. 1005.15(e)(3) would modify existing Sec.
1005.15(d)(3) to adjust the timing requirements for reporting
unauthorized transfers based on the proposed requirement to provide
consumers with electronic account history under proposed Sec.
1005.15(d)(1)(ii), as well as written history upon request.
Specifically, proposed Sec. 1005.15(e)(3)(i) would provide that for
purposes of existing Sec. 1005.6(b)(3), the 60-day period for
reporting any unauthorized transfer shall begin on the earlier of the
date the consumer electronically accesses the consumer's account under
proposed Sec. 1005.15(d)(1)(ii), provided that the electronic history
made available to the consumer reflects the unauthorized transfer, or
the date the agency sends a written history of the consumer's account
transactions requested by the consumer under proposed Sec.
1005.15(d)(1)(iii) in which the unauthorized transfer is first
reflected.
Proposed Sec. 1005.15(e)(3)(ii), which mirrors existing Sec.
1005.18(c)(3)(ii) and proposed Sec. 1005.18(e)(1)(ii), would provide
that an agency may comply with proposed Sec. 1005.15(e)(3)(i) by
limiting the consumer's liability for an unauthorized transfer as
provided under existing Sec. 1005.6(b)(3) for any transfer reported by
the consumer within 120 days after the transfer was credited or debited
to the consumer's account.
The Bureau notes that nothing in this proposal modifies the
requirement to comply with existing Sec. 1005.6(b)(4), regarding an
extension of time limits if a consumer's delay in notifying the agency
was due to extenuating circumstances, nor any other provisions of
existing Sec. 1005.6.
15(e)(4) Modified Error Resolution Requirements
EFTA section 908 governs the timing and other requirements for
consumers and financial institutions on error resolution, including
provisional credit, and is implemented for accounts under Regulation E
generally, including government benefit accounts, in Sec. 1005.11.
Section 1005.11(c)(1) and (3)(i) requires that a financial institution,
after receiving notice that a consumer believes an electronic fund
transfer from the consumer's account was not authorized, must
investigate promptly and determine whether an error occurred (i.e.,
whether the transfer was unauthorized), within ten business days (20
business days if the electronic fund transfer occurred within 30 days
of the first deposit to the account). Upon completion of the
investigation, the financial institution must report the
investigation's results to the consumer within three business days.
After determining that an error occurred, the financial institution
must correct an error within one business day. See Sec. 1005.11(c)(1).
Under EFTA section 909(b), the burden of proof is on the financial
institution to show that an alleged error was in fact an authorized
transaction; if the financial institution cannot establish proof of
valid authorization, the financial institution must credit the
consumer's account.
Existing Sec. 1005.11(c)(2) provides that if the financial
institution is unable to complete the investigation within ten business
days, its investigation may take up to 45 days if it provisionally
credits the amount of the alleged error back to the consumer's account
within ten business days of receiving the error notice.\229\
Provisional credit is not required if the financial institution
requires but does not receive written confirmation within 10 business
days of an oral notice by the consumer. See Sec. 1005.11(c)(2)(i)(A).
If the investigation establishes proof that the transaction was, in
fact, authorized, the financial institution may reverse any provisional
credit previously extended (assuming there are still available funds in
the account). See Sec. 1005.11(d)(2).
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\229\ The financial institution has 90 days (instead of 45) if
the claimed unauthorized electronic fund transfer was not initiated
in a state, resulted from a point-of-sale debit card transaction, or
occurred within 30 days after the first deposit to the account was
made. See Sec. 1005.11(c)(3)(ii).
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For government agencies that follow the periodic statement
alternative in existing Sec. 1005.15(c), existing Sec. 1005.15(d)(4)
provides that an agency shall comply with the requirements of existing
Sec. 1005.11 in response to an oral or written notice of an error from
the consumer that is received no later than 60 days after the consumer
obtains the written account history or other account information under
existing Sec. 1005.15(c) in which the error is first reflected. The
Bureau notes that this provision only modifies the 60-day period for
consumers to report an error and does not alter any other provision of
Sec. 1005.11.
Proposed Sec. 1005.15(e)(4) would modify existing Sec.
1005.15(d)(3) to adjust the timing requirements for reporting errors
based on the proposed requirement to provide consumers with electronic
account history under proposed Sec. 1005.15(d)(1)(ii), as well as
written history upon request. Specifically, proposed Sec.
1005.15(e)(4)(i) would provide that an agency shall comply with the
requirements of existing Sec. 1005.11 in response to an oral or
written notice of an error from the consumer that is received by the
earlier of 60 days after the date the consumer electronically accesses
the consumer's account under proposed Sec. 1005.15(d)(1)(ii), provided
that the electronic history made available to the consumer reflects the
alleged error, or 60 days after the date the agency sends a written
history of the consumer's account transactions requested by the
consumer under proposed
[[Page 77145]]
Sec. 1005.15(d)(1)(iii) in which the alleged error is first reflected.
Proposed Sec. 1005.15(e)(4)(ii) would provide that in lieu of
following the procedures in proposed Sec. 1005.15(e)(4)(i), an agency
complies with the requirements for resolving errors in existing Sec.
1005.11 if it investigates any oral or written notice of an error from
the consumer that is received by the agency within 120 days after the
transfer allegedly in error was credited or debited to the consumer's
account.
Proposed comment 15(e)-1 would refer to proposed comments 18(d)-1
through -3, discussed below, for guidance on modified limited liability
and error resolution requirements.
The Bureau notes that proposed Sec. 1005.15 does not contain an
exclusion that corresponds to proposed Sec. 1005.18(e)(3), which would
exempt a financial institution from compliance with the liability
limits and error resolution requirements under Sec. Sec. 1005.6 and
1005.11 for any prepaid account for which it has not completed its
collection of consumer identifying information and identity
verification, provided the institution has disclosed to the consumers
the risks of not registering the prepaid account. The Bureau is not
proposing a similar exclusion for government benefit accounts because
existing Sec. 1005.15(b) requires that government agencies verify
consumers' identities before an access device for an account governed
by Sec. 1005.15 is activated.
15(f) Initial Disclosure of Fees and Other Key Information
The Bureau is proposing Sec. 1005.15(f) to provide that for
government benefit accounts, a government agency shall comply with the
requirements governing initial disclosure of fees and other key
information applicable to prepaid accounts as set forth in proposed
Sec. 1005.18(f), in accordance with the timing requirements of
proposed Sec. 1005.18(h). This proposed requirement is in addition to
the pre-acquisition disclosure requirements of proposed Sec.
1005.15(c), discussed above.
As discussed in more detail in the section-by-section analysis of
proposed Sec. 1005.18(f) below, the Bureau is proposing to modify the
initial disclosure of fees requirement in Sec. 1005.7(b)(5) for
prepaid accounts, including government benefit accounts. EFTA section
905(a)(4) requires financial institutions to disclose to consumers, as
part of an account's terms and conditions, any charges for electronic
fund transfers or for the right to make such transfers. Existing Sec.
1005.7(b)(5) implements this requirement by stating that, as part of
the initial disclosures, any fees imposed by a financial institution
for electronic fund transfers or for the right to make transfers must
be disclosed. Existing comment 7(b)(5)-1 further clarifies that other
fees (for example, minimum-balance fees, stop-payment fees, or account
overdrafts) may, but need not, be disclosed. The Bureau believes that
for prepaid accounts (including government benefit accounts), however,
it is important that the initial account disclosures provided to
consumers list all fees that may be imposed in connection with the
account, not just those fees related to electronic fund transfers.
Thus, to further the purposes of EFTA to provide a framework to
establish the rights, liabilities, and responsibilities of prepaid
account users, the Bureau believes it is necessary and proper to
exercise its authority under EFTA section 904(c) to propose an
adjustment of the requirement EFTA section 905(a)(4), which is
implemented in existing Sec. 1005.7(b)(5), for government benefit
accounts. Specifically, the Bureau is proposing Sec. 1005.15(f), which
would cross-reference Sec. 1005.18(f) to require that, pursuant to
proposed Sec. 1005.18(f)(1), in addition to disclosing any fees
imposed by a government agency for electronic fund transfers or the
right to make such transfers, the agency must also provide in its
initial disclosures given pursuant to Sec. 1005.7(b)(5) all other fees
imposed by the agency in connection with a government benefit account.
For each fee, an agency must disclose the amount of the fee, the
conditions, if any, under which the fee may be imposed, waived, or
reduced, and, to the extent known, whether any third party fees may
apply. The Bureau believes that most agencies are already disclosing
all fees in the terms and conditions accompanying government benefit
accounts. These disclosures pursuant to proposed Sec. Sec. 1005.15(f)
and 1005.18(f) must include all of the information required to be
disclosed pursuant to Sec. 1005.18(b)(2)(ii)(B) and must be provided
in a form substantially similar to Sample Form A-10(e).
The Bureau believes that for consistency purposes and to facilitate
consumer understanding of a government benefit account's terms, it is
useful for the fee disclosure provided pursuant to Sec. 1005.7(b)(5),
as modified by proposed Sec. 1005.18(f), to be in the same format of
the long form disclosure requirement of proposed Sec.
1005.18(b)(2)(ii)(A), as applied to government benefit accounts via
proposed Sec. 1005.15(c).
15(g) Credit Card Plans Linked to Government Benefit Accounts
The Bureau is proposing Sec. 1005.18(g), which would require that
for credit plans linked to government benefit accounts, a government
agency must comply with prohibitions and requirements applicable to
prepaid accounts as set forth in proposed Sec. 1005.18(g). See the
section-by-section analysis of proposed Sec. 1005.18(g) below for
additional information on this proposed requirement. The Bureau seeks
comment on this portion of its proposal for government benefit
accounts.
Section 1005.17 Requirements for Overdraft Services
17(a) Definitions
Section 1005.17 sets forth requirements that financial institutions
must follow in order to provide ``overdraft services'' to consumers
related to consumers' accounts. Under Sec. 1005.17, financial
institutions must provide consumers with notice of their right to opt
in, or affirmatively consent, to the institution's overdraft service
for ATM and one-time debit card transactions, and obtain the consumer's
affirmative consent, before fees or charges may be assessed on the
consumer's account for paying such overdrafts.
Section 1005.17(a) currently defines ``overdraft service'' to mean
a service under which a financial institution assesses a fee or charge
on a consumer's account held by the institution for paying a
transaction (including a check or other item) when the consumer has
insufficient or unavailable funds in the account. Section 1005.17(a)
also provides that the term ``overdraft service'' does not include any
payment of overdrafts pursuant to: (1) A line of credit subject to
Regulation Z, including transfers from a credit card account, home
equity line of credit, or overdraft line of credit; (2) A service that
transfers funds from another account held individually or jointly by a
consumer, such as a savings account; or, (3) A line of credit or other
transaction exempt from Regulation Z pursuant to Sec. 1026.3(d). In
adopting the provisions in what is now Sec. 1005.17, the Board
indicated that these methods of covering overdrafts were excluded
because they require the express agreement of the consumer.\230\
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\230\ 74 FR 59033, 59040 (Nov. 17, 2009).
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As discussed in the Overview of Regulation Z Proposal section, the
[[Page 77146]]
Bureau is declining to extend the current regulatory scheme governing
overdraft services on checking accounts to prepaid accounts, and is
instead proposing to regulate these types of services generally under
Regulation Z (as well as Regulation E's compulsory use provision). The
proposal would amend Sec. 1005.17(a)(1) to explain that the term
``overdraft service'' does not include credit plans that are accessed
by prepaid cards that are credit cards under Regulation Z.
Specifically, the proposal would amend Sec. 1005.17(a)(1) to provide
that the term ``overdraft services'' does not include any payments of
overdrafts pursuant to a line of credit or credit plan subject to
Regulation Z, including transfers from a credit card account, home
equity line of credit, overdraft line of credit, or a credit plan that
is accessed by an access device for a prepaid account where the access
device is a credit card under Regulation Z. Similar to the other
exemptions from the definition of ``overdraft service,'' credit card
plans require the express agreement of consumers in that, under the
proposal, such plans can be added to previously issued prepaid accounts
only upon consumer request. See Regulation Z Sec. 1026.12(a)(1) and
proposed comment 12(a)(1)-7. In addition, under the proposal, a credit
card account may not be added to a previously issued prepaid account
until 30 calendar days after the prepaid account has been registered.
See proposed Sec. 1005.18(g)(1) and Regulation Z Sec. 1026.12(h). The
Bureau believes that the provisions in Regulation Z Sec. 1026.12(a)(1)
and (h) and Sec. 1005.18(g)(1) would provide sufficient protections to
ensure that the addition of a credit card account to a previously
issued prepaid account would occur only with the consumer's consent.
The Bureau also notes that the opt-in provision in Sec. 1005.17
would not apply to credit accessed by a prepaid card that is not a
credit card because the card only accesses credit that is not subject
to any finance charge defined in Regulation Z Sec. 1026.4 or any fee
described in Regulation Z Sec. 1026.4(c) and is not payable by written
agreement in more than four installments. This is because Sec.
1005.17(a) applies only to overdraft services where a financial
institution assessed a fee or charge for the overdraft. For prepaid
accounts under the proposal, any fees or charges for ATM or one-time
``debit card'' transactions (as that term is used in Sec. 1005.17)
that access an institution's overdraft service would be considered
``finance charges'' under the proposal.\231\ Thus, a prepaid card that
is not a credit card could not be charging any fees or charges for ATM
or one-time ``debit card'' transactions (as that term is used in
Regulation E Sec. 1005.17) for accessing the overdraft service, such
that the opt-in provision in Regulation E Sec. 1005.17 would apply. If
a prepaid card was charging any fees or charges for ATM or one-time
``debit card'' transactions (as that term is used in Regulation E Sec.
1005.17) that accessed the overdraft service, the prepaid card would be
a credit card under Regulation Z. In that case, the prepaid card would
not be subject to the opt-in requirement in Sec. 1005.17, but would be
subject to provisions of Regulation Z, as discussed above.
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\231\ Under the proposal, the term ``debit card'' in subpart A
of Regulation E generally includes prepaid cards, except for
purposes of Sec. 1005.17. See proposed comment Sec.
1005.2(b)(3)(i)-8.
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Section 1005.18 Requirements for Financial Institutions Offering
Prepaid Accounts
Regulation E currently applies to payroll card accounts (as well as
government benefit accounts, as discussed above in the section-by-
section analysis of Sec. 1005.15). Section 1005.18 contains provisions
specific to payroll card accounts. Because payroll card accounts would
be largely subsumed into the proposed definition of prepaid account,
the Bureau proposes to revise Sec. 1005.18 by replacing it with
provisions governing prepaid accounts, which the Bureau proposes to
apply to payroll card accounts as well.
The current provisions in Sec. 1005.18, as discussed below,
provide an alternative to the periodic statement requirement of Sec.
1005.9(b) for payroll card accounts and make corresponding adjustments
to certain other provisions in Regulation E for financial institutions
following the periodic statement alternative. In addition to providing
a periodic statement alternative (and corresponding adjustments) for
prepaid accounts, proposed Sec. 1005.18 also contains other
modifications and additions to certain requirements in Regulation E,
including with respect to pre-acquisition and other disclosures,
limited liability and error resolution, and credit card plans linked to
prepaid accounts. The provisions of proposed Sec. 1005.18 are
discussed below in turn.
The Bureau notes that while proposed Sec. 1005.18 would set forth
specific requirements for prepaid accounts, there are other provisions
in Regulation E subparts A and B that would apply to prepaid accounts
by virtue of their being deemed accounts in the Regulation. Thus, to
the extent a provision in Regulation E applies to an ``account,''
unless otherwise modified by proposed Sec. 1005.18, that provision
would apply to a prepaid account. For example, Sec. 1005.8(a) requires
provision of a change in terms notice in certain circumstances. As the
Bureau is not proposing to modify this requirement for prepaid
accounts, it would apply to prepaid accounts in the same manner as it
does to all other accounts under Regulation E.
18(a) Coverage
The Bureau is proposing to modify Sec. 1005.18(a) to state that a
financial institution shall comply with all applicable requirements of
EFTA and Regulation E with respect to prepaid accounts except as
modified by proposed Sec. 1005.18. Proposed Sec. 1005.18(a) would
also refer to proposed Sec. 1005.15 for rules governing government
benefit accounts.
Existing comment 18(a)-1 addresses issuance of access devices under
Sec. 1005.5 and explains that a consumer is deemed to request an
access device for a payroll card account when the consumer chooses to
receive salary or other compensation through a payroll card account.
The Bureau is proposing to add a cross-reference to Sec. 1005.5(b)
(regarding unsolicited issuance of access devices) in comment 18(a)-1
and to add additional guidance that would explain that a consumer is
deemed to request an access device for a prepaid account when, for
example, the consumer acquires a prepaid account offered for sale at a
retail store or acquires a prepaid account by making a request or
submitting an application by telephone or online. The Bureau notes that
while financial institutions may provide prepaid accounts to consumers
on an unsolicited basis, they must comply with the provisions on
unsolicited issuance in existing Sec. 1005.5(b) and compulsory use in
Sec. 1005.10(e)(2).
The Bureau is also proposing to revise existing comment 18(a)-2
regarding application of Regulation E to employers and services
providers to refer to prepaid accounts in addition to payroll card
accounts, but otherwise intends to leave comment 18(a)-2 unchanged.
The Bureau seeks comment on this portion of its proposal.
18(b) Disclosure Requirements for Prepaid Accounts
Overview
The Bureau is proposing to adopt new disclosures for prepaid
accounts that would be provided before a consumer
[[Page 77147]]
acquires a prepaid account. These proposed disclosures, which the
Bureau developed during a period of consumer testing and outreach,
would be adopted in proposed Sec. 1005.18(b) and would be in addition
to the initial disclosure requirements in existing Sec.
1005.7(b).\232\ The Bureau believes that providing disclosures before
the consumer's acquisition of the prepaid account will ensure that all
consumers, regardless of the type of prepaid account they are
acquiring, receive the proposed disclosures at a relevant time in the
acquisition sequence.
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\232\ The Bureau is also proposing, for purposes of prepaid
accounts, to expand the requirement in existing Sec. 1005.7(b)(5)
to disclose fees related to EFTs to require the disclosure of all
fees related to the prepaid account, as discussed below in the
section-by-section analysis of proposed Sec. 1005.18(f).
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The proposal would require that a financial institution provide to
the consumer both a ``short form'' and a ``long form'' disclosure
before the consumer acquires a prepaid account. The short form would
set forth the prepaid account's most important fees to facilitate basic
understanding of the account's key terms and, when feasible, comparison
shopping with other prepaid account products. The Bureau believes that
this form would quickly allow the consumer to assess key fees and terms
of the prepaid account. Meanwhile, the long form disclosure would list
all of the fees associated with the prepaid account and would include
more detailed information on how those fees are assessed. The long form
would give consumers an opportunity to review all fee information about
the prepaid account before acquiring an account.
The Bureau is also proposing exceptions to the general disclosure
requirement for situations where a consumer acquires a prepaid account
in certain retail stores or orally by telephone. In these situations, a
financial institution would still always have to provide the short form
disclosure to the consumer prior to acquisition, but it would have the
option of providing the long form disclosure post-acquisition, as long
as the financial institution provides methods for consumers to access
the long form electronically and orally prior to acquisition. See
proposed Sec. 1005.18(b)(1)(i) through (iii).
Disclosure Requirements Generally
EFTA section 905(a) sets forth disclosure requirements for
accounts, stating that the terms and conditions of electronic fund
transfers involving a consumer's account must be provided at the time
the consumer contracts for an electronic fund transfer service, in
accordance with the regulations of the Bureau. Section 905(a) further
states that the disclosures must include, among other things and to the
extent applicable, any charges for electronic fund transfers or for the
right to make such transfers (section 905(a)(4)), that a fee may be
imposed for use of certain ATMs (section 905(a)(10)), information
regarding the type and nature of electronic fund transfers that the
consumer can initiate (section 905(a)(3)), and details regarding the
consumer's liability for unauthorized transactions and whom to contact
in the event an unauthorized transaction has occurred (section
905(a)(1) and (2)).\233\
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\233\ In addition, the Truth in Savings Act (TISA) (12 U.S.C.
44, et seq.) contains disclosure requirements for accounts issued by
depository institutions. Specifically, Regulation DD (10 CFR part
1030), which implements TISA, requires disclosure of the amount of
any fee that may be imposed in connection with the account (or an
explanation of how the fee will be determined) and the conditions
under which the fee may be imposed. 12 CFR 1030.4(b)(4).
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In prior rulemakings, the Board implemented provisions in
Regulation E consistent with these statutory requirements, primarily in
existing Sec. 1005.7. Specifically, section 1005.7(a) states that the
required disclosures must be provided to a consumer at the time a
consumer contracts for an electronic fund transfer or before the first
electronic fund transfer is made involving the consumer's account.
Section 1005.7(b) also sets forth what a financial institution must
include in its initial disclosures, including details regarding the
types of transfers that the consumer may make and the limitations on
the frequency and dollar amount of the transfers, any fees imposed by
the financial institution for electronic fund transfers or for the
right to make transfers, and a notice that a fee may be imposed by an
ATM operator when the consumer initiates an electronic fund transfer or
makes a balance inquiry, among other requirements.
At various points, these general provisions in Sec. 1005.7 were
modified for use with other types of accounts or in other contexts. See
generally Sec. 1005.14(b)(1) (disclosures provided by certain service
providers);\234\ current Sec. 1005.15(d) (disclosures related to the
electronic fund transfer of government benefits);\235\ Sec. 1005.16
(disclosures at ATMs);\236\ Sec. 1005.17(d) (overdraft
disclosures);\237\ current Sec. 1005.18(c)(1) (payroll card account
disclosures); \238\ and Sec. 1005.31 (disclosures related to
remittance transfers).\239\
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\234\ 61 FR 19662, 19674 (May 2, 1996).
\235\ 61 FR 19662, 19670 (May 2, 1996).
\236\ 78 FR 18221, 18224 (Mar. 26, 2013).
\237\ 74 FR 59033, 59053 (Nov. 17, 2009).
\238\ 71 FR 51437, 51449 (Aug. 30, 2006).
\239\ 77 FR 50244, 50285 (Aug. 20, 2012).
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Comments Received and Stakeholder Outreach Regarding Disclosure
In proposing new requirements and a modification of the existing
disclosure requirements in Sec. 1005.7(b)(5) for prepaid accounts, the
Bureau has considered comments received in response to the Prepaid
ANPR, in addition to conducting further outreach. In the Prepaid ANPR,
the Bureau noted that one of its goals was to allow consumers to easily
compare financial products by ensuring transparent fee disclosure.\240\
The Bureau also asked three specific sets of questions related to
disclosure: (1) What steps could the Bureau take to most effectively
regulate prepaid products to provide the consumer with transparent,
useful, and timely fee disclosures?; (2) How can the Bureau best enable
a consumer to compare various GPR cards, or other payment products,
that may have different fee structures or be offered through various
distribution channels? Should market participants be required to
provide disclosure pre-sale, post-sale, or both?; and (3) Should the
existence, or lack thereof, of FDIC pass-through insurance associated
with a GPR card be disclosed to the consumer? If so, how and when
should the existence of FDIC pass-through insurance be disclosed? \241\
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\240\ 77 FR 30923, 30925 (May 24, 2012).
\241\ Id.
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Comments received in connection with the first two sets of these
questions are addressed below, and the comments received in connection
with the set of questions regarding FDIC pass-through deposit insurance
are addressed below in the section-by-section analysis of proposed
Sec. 1005.18(b)(2)(i)(B)(13).
As to the first set of questions, commenters focused primarily on
disclosures that would appear on the external packaging material of a
GPR card sold in a retail store. Many industry and consumer advocacy
group commenters suggested that the Bureau develop specific
disclosures, such as a uniform chart or fee box, that a financial
institution would affix to a GPR card's packaging when the card is
offered for sale in a retail store, instead of a more general rule that
stated only that fees be disclosed clearly and conspicuously without
providing specific instructions or model forms. Many of these industry
commenters suggested that adopting a standardized form would be less
confusing than complying with a clear and conspicuous standard. Apart
from suggesting a standardized form, industry
[[Page 77148]]
commenters mostly agreed that on-package disclosures should include
only the fees that a consumer would most commonly incur while using a
prepaid account, in order to increase the likelihood that consumers
would understand and use the disclosures.
Many consumer advocacy group commenters, on the other hand,
encouraged the Bureau to require full disclosure to the consumer of all
fees associated with a GPR card before the consumer acquires an
account, rather than only a subset of certain fees. These groups were
concerned that consumers would not have a full understanding of a
prepaid account's true costs without this information and that
providers could subvert the disclosure's purpose by adjusting fee
schedules to increase or add fees not required to be disclosed on a
shorter disclosure.
Separately, some consumer advocacy group commenters suggested that
the Bureau propose an ``all-in'' cost disclosure. These commenters
explained that an ``all-in'' disclosure would present a single number
to the consumer that would estimate the approximate cost of a prepaid
account product. These consumer advocacy group commenters also asserted
that such a disclosure could estimate, for example, the average monthly
cost of using the prepaid account product based on one or several
different use cases. Some of the consumer advocacy group commenters
also suggested that the Bureau could collect actual usage data from
issuers of prepaid accounts and use that data to develop an algorithm
or other equation to serve as the basis for this type of all-in
disclosure.\242\
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\242\ The ``all-in'' disclosure concept is discussed in more
detail in the section-by-section analysis of proposed Sec.
1005.18(b).
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As to the second set of questions regarding how to facilitate
consumer comparison shopping and whether pre- or post-sale disclosures
are necessary, many industry and consumer advocacy group commenters
agreed that it was important for consumers to receive disclosures
before they buy a prepaid account. Industry commenters further
discouraged the Bureau from implementing any disclosure regulations
that would mandate a specific method of delivery for disclosures
provided after the consumer acquires a prepaid account, which they
viewed as potentially imposing a large burden on industry without
significantly benefiting the consumer. Industry and consumer advocacy
group commenters also encouraged the Bureau to develop disclosures to
accommodate the variety of distribution channels through which prepaid
products are distributed and sold, while also considering how
distribution may evolve in the future. Several consumer advocacy group
commenters emphasized the need for the Bureau to ensure disclosures
provided online through a Web site are easy to locate, while also
considering that many consumers lack internet access and would have
difficulty viewing disclosures online. Some commenters also suggested
that providers implement mechanisms to ensure consumers purchasing
prepaid accounts online have actually reviewed the disclosures.
In addition to reviewing comments received in response to the
Prepaid ANPR, the Bureau has also engaged in additional outreach with
interested stakeholders and conducted consumer focus groups and one-on-
one testing of prototype disclosures. As discussed in greater detail
above and in the report published with this proposal, the Bureau
engaged a contractor, ICF, to hold four focus group sessions to gain a
general understanding of how and why consumers use prepaid accounts.
The Bureau also worked with ICF to conduct one-on-one interviews with
consumers to test various model form prototypes the Bureau developed,
including variations of the model short form and sample long form
disclosures proposed herein.
Based on its review of the comments received in response to the
Prepaid ANPR, outreach with stakeholders, insights gathered from
consumer testing, and its general market analysis, the Bureau is
proposing a new pre-acquisition disclosure regime that it believes will
standardize industry disclosures, increase consumers' understanding of
prepaid accounts' terms, and improve consumers' ability to compare
prepaid account products prior to acquiring a prepaid account. The
Bureau is also proposing model forms and sample forms.
Proposed Disclosure Regime
As noted above, EFTA section 905(a) sets forth disclosure
requirements for accounts subject to the Act.\243\ Proposed section
1005.18(b) would implement EFTA section 905(a) for prepaid accounts. In
addition, the Bureau is proposing to use its authority under EFTA
sections 904(a) and (c), 905(a), and section 1032(a) of the Dodd-Frank
Act to require financial institutions to provide disclosures prior to
the time a consumer acquires a prepaid account and for disclosures to
include all fees that may be charged for the prepaid account. The
Bureau is also proposing, in certain circumstances that financial
institutions provide disclosures in languages other than English. As
discussed in the section-by-section analysis of proposed Sec.
1005.18(b)(1)(i), proposed Sec. 1005.18(b)(2)(ii)(A), and proposed
Sec. 1005.18(b)(6), the Bureau believes that adjustment of the timing
and fee requirement and the disclosure language is necessary and proper
to effectuate the purposes of EFTA to provide a framework to establish
the rights, liabilities and responsibilities of prepaid account users,
because the proposed revision will assist consumers' understanding of
the terms and conditions of their prepaid accounts. In addition, the
Bureau believes that pre-acquisition disclosures of all fees for
prepaid accounts as well as certain foreign language disclosures will,
consistent with Dodd-Frank section 1032(a), ensure that the features of
the prepaid accounts are fully, accurately, and effectively disclosed
to consumers in a manner that permits consumers to understand the
costs, benefits, and risks associated with the account.
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\243\ The relevant portion of EFTA section 905 states that
``[t]he terms and conditions of electronic fund transfers involving
a consumer's account shall be disclosed at the time the consumer
contracts for an electronic fund transfer service, in accordance
with regulations of the Bureau . . .''
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The Bureau believes that there are many ways a consumer could
obtain a prepaid account and that the proposed disclosure regime should
be adaptable to this variety. For example, a consumer might purchase a
prepaid account in a retail store, online through a provider's Web
site, or by calling a provider by telephone. A consumer could also
receive a prepaid account from an employer in the form of a payroll
card account or a student might receive a prepaid account from their
university in connection with the disbursement of financial aid. The
Bureau believes that framing the disclosure regime as one that would
apply before the consumer's acquisition of the prepaid account will
ensure that any consumer who obtains a prepaid account, regardless of
the type of prepaid account or its method of acquisition, will receive
the proposed disclosures.
The proposed pre-acquisition disclosure regime would have two
parts. First, the Bureau is proposing that a consumer would receive a
``short form'' disclosure before acquiring a prepaid account. The short
form, as demonstrated in proposed Model Forms A-10(a) through (d) and
as discussed below in the section-by-section analysis of proposed Sec.
1005.18(b)(3)(iii)(A), would consist of a ``static'' portion that would
set forth fees that must be
[[Page 77149]]
disclosed for all prepaid account products, even if such fees are $0 or
if they relate to features not offered for a particular prepaid account
product.\244\ This static portion would have a ``top-line'' component
highlighting four types of fees (the periodic fee, per-purchase fees,
ATM withdrawal fees, and the cash reload fee) at the top of the form.
The Bureau believes these fee types are the most important to consumers
when shopping for a prepaid account.\245\ The top-line fees would be
displayed in a more prominent and larger font size than the remainder
of the disclosures on the form to draw consumers' attention to those
fees quickly. Three additional fee types (ATM balance inquiry fees, a
customer service fee, and an inactivity fee) and a statement regarding
the availability of overdraft services and other credit features would
also be required to appear in the static portion of the short form.
Additionally, the short form would include an ``incidence-based''
portion that would list up to three additional fees that consumers most
commonly incur for a particular prepaid account product. Short forms
for payroll card accounts and government benefit accounts would also
include a notice at the top of the form regarding compulsory use that
consumers are not required to accept such cards as the only method of
receiving funds).\246\ See Sec. 1005.10(e)(2)
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\244\ The Bureau refers to a ``prepaid account product'' to mean
a product that offers prepaid accounts with identical fee schedules
to any consumer who opens an account.
\245\ See section-by-section analysis of proposed Sec.
1005.18(b)(2)(i) for a complete discussion of the short form's
contents.
\246\ See section-by-section analysis of proposed Sec.
1005.18(b)(2)(i)(A) for a discussion of the notice requirement on
the short form for payroll card accounts. See section-by-section
analysis of proposed Sec. 1005.15(c)(2) for a discussion of the
notice requirement on the short form for government benefit
accounts.
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The second part of the Bureau's proposed pre-acquisition disclosure
regime would require that, before acquiring a prepaid account,
consumers would always receive a stand-alone ``long form'' disclosure
that would set forth all of a prepaid account product's fees and their
qualifying conditions, except for accounts that consumers acquire in
retail stores or orally by telephone. For prepaid accounts consumers
acquire in retail stores, financial institutions could disclose a URL
and telephone number on the short form that a consumer would use to
access the content of the long form disclosure prior to acquisition,
but they would not have to provide a stand-alone long form disclosure
prior to the consumer's acquisition of the prepaid account. For prepaid
accounts acquired orally by telephone, financial institutions could
inform a consumer that they can access the long form by telephone or
online, but would not have to provide the long form disclosure before
acquisition unless a consumer requests it.\247\
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\247\ In all acquisition scenarios, however, the financial
institution would have to provide a version of the long form in the
terms and conditions included inside a package in a retail setting
or provided to the consumer through other methods, such as in the
mail after acquisition. See comment to proposed Sec. 1005.18(f).
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This proposal would mean that consumers would receive or have
access to the short form and long form disclosures in all prepaid
account acquisition scenarios. Thus, consumers acquiring prepaid
accounts in the form of a payroll card account, a government benefit
account, at a bank branch, at a retail store, or on a Web site, for
example, would always have the opportunity to review the short form and
long form disclosures before acquiring a prepaid account. The Bureau
believes it is important for consumers to have access to both of these
disclosures in all acquisition scenarios because they serve different
but complementary goals. First, the Bureau believes that by prominently
displaying important fees with limited explanatory text, the short form
will increase the likelihood consumers notice the disclosure of these
key fees and are able to use the disclosure to inform their acquisition
choice. The short form would present the key fees of a prepaid account
in a simplified format rather than requiring a consumer to navigate an
exhaustive list of fees and their qualifications for each product in
order to identify those that are most relevant. The Bureau also
believes that the short form's design, and in particular the emphasized
top-line portion of the disclosure, will prominently present key fees,
and create a visual hierarchy of information that will more effectively
draw consumer's attention to a prepaid account product's key terms. The
Bureau also believes this visual hierarchy on the short form will
increase the likelihood that consumers will engage with the disclosure.
Research has shown that such engagement, or the formation of the intent
to use the disclosure, is an important first step to ensure that
consumers utilize and understand any disclosure.\248\ The Bureau
believes that, in many cases, consumers spend little time reviewing fee
disclosures when shopping for prepaid accounts, and it is therefore
important that any disclosure quickly draw consumers' attention to the
most important information regarding that particular account with
minimal clutter on the form.
---------------------------------------------------------------------------
\248\ See, e.g., Ian Ayres & Alan Schwartz, The No-Reading
Problem in Consumer Contract Law, 66 Stan. L. Rev. 545 (2014).
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The Bureau also believes that by standardizing most components of
the short form, consumers will receive consistent, key fee information
about prepaid account products regardless of how or where they shop for
or obtain prepaid accounts. For example, under this proposal, a
consumer who takes a package containing a prepaid account access device
off of a J-hook in a retail store would see a short form listing the
same types of fees in the static portion of the short form included on
the exterior of the packaging material as the fee types included in the
static portion of the short form for an entirely different prepaid
account product a consumer would see when shopping online. Similarly,
consumers receiving payroll card accounts at their place of employment
would receive a short form disclosure containing the same fees in the
static portion of the short form before agreeing to receive wages via
the payroll card account. The Bureau believes that standardizing pre-
acquisition disclosures across all possible acquisition channels will
make it easier for consumers to compare different types of prepaid
account products.
As discussed below in the section-by-section analysis of proposed
Sec. 1005.18(b)(2)(i)(B)(8), however, the Bureau is also proposing to
include an incidence-based portion on the short form disclosure to
highlight the most commonly charged fees that are not otherwise
captured in the form. In part, the Bureau has proposed to include this
incidence-based portion on the short form to address concerns that
providers could simply change their fee structures to make their
products appear less expensive relative to other products. The Bureau
acknowledges that this portion of the short form would not be
standardized across different prepaid account products due to the
different fees financial institutions would be required to disclose on
the incidence-based portion of the short form. \249\ The Bureau
believes, however, that having identical fee types listed in the static
portion of the short form will be
[[Page 77150]]
sufficiently consistent so as to facilitate consumer comparison
shopping, even if the incidence-based portion of the form introduces
some variance. At the same time, the incidence-based portion of the
short form disclosure will ensure that consumers are made aware of any
other significant fees relating to a particular prepaid account
product.
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\249\ The Bureau also notes that the proposed updating
requirements for the proposed incidence-based fee disclosure could
result in these fees being different for the same prepaid account
product due to differing proposed requirements for timing of
revisions to in-store versus online forms. See the section-by-
section analysis of proposed Sec. 1005.18(b)(2)(i)(B)(8)(I).
---------------------------------------------------------------------------
The Bureau also recognizes that providing only a subset of fee
information about a prepaid account on the short form might not give
all consumers the information they need to make their acquisition
decisions. Thus, the Bureau is proposing also to require provision pre-
acquisition of the long form disclosure, which would set forth all of a
prepaid account's fees to a consumer and the conditions under which
those fees could be imposed. The Bureau expects that consumers seeking
to learn about more fees than those listed on the short form will
utilize the long form. The proposed long form also would provide
detailed explanations to consumers about conditions that may cause fees
to vary, such as the impact of crossing a threshold number of
transactions or receiving direct deposits into the prepaid account.
Such explanations would not be permitted on the short form in order to
preserve its simplicity, but may be relevant to some consumers'
acquisition decisions. See proposed Sec. 1005.18(b)(2)(i)(C).\250\
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\250\ As discussed in greater detail below, the Bureau is
proposing Sec. 1005.18(b)(1)(ii) and (b)(iii) to require that for
prepaid accounts consumers acquire in retail stores or orally by
telephone, long form disclosures would only need to be made
accessible, but not necessarily provided, pre-acquisition (although
they must be provided after acquisition with the terms and
conditions as part of the initial disclosures).
---------------------------------------------------------------------------
The Bureau does not believe consumers would necessarily benefit
from receiving only this long form disclosure before acquiring a
prepaid account. In the Bureau's testing, for example, many
participants reported feeling overwhelmed by the amount of information
included on a prototype long form and they struggled to compare two
long form disclosures, even those that listed identical fee types. The
Bureau believes that the potential size and complexity of the long form
might overwhelm and lead consumers to disregard the disclosure and also
not use it to comparison shop across products or even to evaluate a
single product. As discussed above, the short form, on the other hand,
will be in a simpler format and its static portion, the Bureau
believes, will facilitate comprehension and comparison shopping.
Insofar as the Bureau does recognize that the subset of fee information
on the short form may be incomplete for some consumers, the Bureau
believes that providing both the short form and long form disclosures
would strike the right balance between giving consumers key information
about a prepaid account to aid understanding and comparison shopping,
while also providing them with the opportunity to review all of a
prepaid account's fee information pre-acquisition.
The Bureau also recognizes that in certain acquisition scenarios,
it is less likely that a consumer would engage in comparison shopping.
For example, when the consumer receives disclosures for a payroll card
account, it may be more difficult for that consumer to comparison shop.
Even in this situation, though, the Bureau believes that consumers
would benefit from receiving the short form and long form disclosures
prior to acquiring the payroll card account because the disclosures
will facilitate the consumer's understanding of the account's terms and
may allow for subsequent comparisons to be made.
The Bureau understands that many prepaid account providers
currently provide disclosures that include many (if not all) of their
prepaid account's fees, and therefore the Bureau does not believe that
this aspect of the proposal introduces a significant new burden, as
discussed in greater detail below in the Section 1022 Analysis. As
discussed below, however, the Bureau does recognize that there are
different forms of disclosures that could apply to prepaid account pre-
acquisition disclosures and that burden may vary.
Alternative Approaches Considered by the Bureau
The Bureau has considered a variety of approaches to pre-
acquisition disclosures, including those suggested by commenters to the
Prepaid ANPR and others who have opined to the Bureau and in other
publications about prepaid account disclosures.
``All-in'' disclosure. Among the alternatives the Bureau has
considered is disclosure of a single monthly cost for using a prepaid
account. Proponents commented that such a disclosure is appealing
because it would provide a quick and understandable reference point
and, as compared to a disclosure listing several different numbers with
line items for each fee type, could also allow for easier comparisons
among prepaid account products. Proponents have suggested that this
figure could be conceptually similar to the ``Energy Star'' cost
disclosure regime the FTC has implemented for appliances,\251\ and
would present the average amount paid by users of that particular
prepaid account product over a designated time period (such as monthly)
or the output of a formula intended to replicate typical consumers' use
of prepaid accounts.
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\251\ The FTC's Energy Labeling Rule shows consumers how much it
might cost to run an appliance each year based on how much energy it
uses, and makes it easier for shoppers to compare the energy use
among similar models. See Fed. Trade Comm'n, EnergyGuide Labeling:
FAQs for Appliance Manufacturers (May 2013), available at http://www.business.ftc.gov/documents/bus-82-energyguide-labels-faqs.
---------------------------------------------------------------------------
While the Bureau believes that this ``all-in'' disclosure could
potentially have several benefits, it declines to propose such an
approach at this time for several reasons. First, the Bureau is
concerned that it may not be possible to develop a single formula to
reflect accurately how most consumers typically use a prepaid account.
A single formula might include several fee types, such as ATM
withdrawal fees, any periodic maintenance fees, and cash reload fees,
and weight them based on how often a consumer might incur those fees
during a month to determine the approximate cost to all consumers of
that prepaid account product. The Bureau's testing, along with other
studies, has identified, however, that there is no single, typical use
case for all prepaid accounts.\252\ Thus, it would be difficult to
determine which fee types should be included in such a formula and how
often such fees might be incurred.
---------------------------------------------------------------------------
\252\ See, e.g., 2014 Pew Study, at 13.
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Second and relatedly, a prepaid account that might have a higher
cost under a formula adopted by the Bureau may actually be less costly
for certain consumers, depending on how they use the card. For example,
a formula might factor in several ATM withdrawal fees each month, but
for consumers not using the prepaid account for ATM withdrawals, the
disclosure of that single number could be confusing or misleading, and
potentially cause a consumer to acquire a prepaid account with a lower
all-in cost according to the prescribed formula, but that will cost the
particular consumer more. Although multiple usage formulas might
rectify this to some degree, the Bureau believes that disclosing more
than one such number on a single form could compound consumer
confusion.
The Bureau also is concerned that an all-in number that presents
the average amount paid by users of that particular prepaid account
product over a designated time period would also be
[[Page 77151]]
confusing because consumers would likely struggle to interpret how such
a summary statistic would apply to their own prepaid account
usage.\253\ In addition, historical data does not exist for new
products and may be inaccurate for products that have changed fees or
features. For these reasons, the Bureau has concluded, at this time,
that an all-in disclosure would be of limited utility, and could
perhaps even be misleading to consumers, but the Bureau might
reconsider the utility of this approach in the future.
---------------------------------------------------------------------------
\253\ For example, when testing a concept that presented a fee
amount next to a graphic representing the range of the maximum and
minimum fees that other providers might charge for the same service,
the Bureau found that the vast majority of testing participants did
not understand this graphic or how it might apply to their own
prepaid card usage.
---------------------------------------------------------------------------
Category headings. The Bureau also considered a short form
disclosure that would include category headings based on the function
for which a consumer would utilize the service associated with each
fee, a format that many prepaid account providers have already adopted,
in lieu of the top-line fee format on the short form that the Bureau is
proposing.\254\ The Bureau declines to propose this ``categories''
approach for several reasons. First, the Bureau believes that category
headers take up needed space on the form that may limit disclosure of
other, more important information about the prepaid accounts,
particularly given that some categories might include only one
fee.\255\ Second, the Bureau believes it would be difficult on the same
short form to include both its proposed top-line concept and to divide
fees into categories. Though space constraints are only an issue for
accounts sold in retail stores (due to packaging material size
constraints), the Bureau is proposing that a short form with the same
format and content would be disclosed in all acquisition scenarios, and
thus, it is important that the short form's design can be implemented
in all of these scenarios. Finally, during consumer testing, the Bureau
did not find that participants' comprehension of fees and their purpose
improved when a form included categories; indeed, most participants
understood most fees without such a label. Although the Bureau is not
proposing to include category headings in the proposed short form, it
is proposing that the long form disclosure--which would have more space
and detail--would include such headings to facilitate navigation of the
larger amount of information that the Bureau anticipates will be
included on that form. See proposed Sec. 1005.18(b)(4)(i)(B).
---------------------------------------------------------------------------
\254\ See ICF Report, at App. C, 2A. As listed in the prototype,
an ``Add and withdraw money'' category, for example, would list the
various ways the consumer could withdraw money from a prepaid
account, such as through a withdrawal from an automated teller
machine.
\255\ For example, a ``Maintenance'' category might include only
one periodic fee, such as a monthly fee.
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The Bureau seeks comment on all of these alternatives and its
proposed approach. In particular, the Bureau seeks comment on the
utility of including category headings as part of the short form, in
lieu of the top-line, and on incorporating an ``all-in'' summary fee
concept into prepaid account disclosures. The Bureau also seeks comment
on whether it should consider other disclosure alternatives and why
such alternatives would be more appropriate than the Bureau's proposed
pre-acquisition disclosure regime. Finally, the Bureau seeks comment on
whether any pre-acquisition disclosure regime that requires consumers
to receive forms disclosing fee information before acquiring a prepaid
account is necessary.
To implement its proposed pre-acquisition disclosure regime, the
Bureau is proposing timing, content, form and other requirements for
prepaid account disclosures. The following discussion sets forth these
proposed requirements in detail.
18(b)(1) Timing of Disclosures
18(b)(1)(i) General
As discussed above, Sec. 1005.7(b) of Regulation E currently
requires financial institutions to provide certain initial disclosures
when a consumer contracts for an electronic fund transfer service or
before the first electronic fund transfer is made involving a
consumer's account. The Bureau is proposing in revised Sec.
1005.18(b)(1)(i) that, in addition to these initial disclosures that
are usually provided in an account's terms and conditions document, a
financial institution must also provide a consumer with certain fee-
related disclosures before a consumer acquires a prepaid account.
Specifically, the Bureau is proposing that except when a consumer
acquires a prepaid account in a retail store or orally by telephone, as
described in proposed Sec. 1005.18(b)(1)(ii) or (iii), a financial
institution must provide a short form and a long form disclosure
required by proposed Sec. 1005.18(b)(2)(i) and (ii) before a consumer
acquires a prepaid account. The Bureau believes consumers in all
acquisition scenarios would benefit from receiving these additional,
pre-acquisition disclosures prior to contracting for an electronic fund
transfer service or before the first electronic fund transfer is made
involving the account, at which point they would receive the initial
disclosures that Regulation E already requires.
The Bureau believes disclosures that provide fee information prior
to a consumer's acquisition of a prepaid account (rather than at the
time of contracting for an electronic fund transfer service, which may
be later) are necessary and beneficial to consumers for several
reasons. First, the Bureau believes a consumer should receive clear
disclosures about prepaid accounts before acquiring them. Based on its
outreach, the Bureau understands that some financial institutions may
already provide limited disclosures to consumers prior to acquisition,
and that some financial institutions may not disclose the fees that
consumers may find relevant to their acquisition decision until the
account is purchased (or otherwise acquired), the packaging material is
opened, and a consumer reviews the enclosed terms and conditions
document. For example, one prepaid product currently sold in retail
stores imposes an inactivity fee after ninety days of no transactions,
but this fee is not disclosed on an outward-facing external surface of
the prepaid account access device's packaging material that is visible
before purchase. Further, the Bureau believes that some employees
acquiring payroll card accounts may receive information about the
accounts in a manner that makes it difficult for an employee to
comprehend the accounts' key fees. For example, employees might receive
terms and conditions documents regarding payroll card accounts at the
same time they receive other benefits-related paperwork, making the
fees difficult for employees to comprehend while sorting through other
important and time-sensitive paperwork. Similarly, certain providers of
prepaid accounts online may present disclosures on their Web sites in a
way that makes it difficult for consumers to have the chance to review
them prior to acquisition.
Additionally, the Bureau believes that pre-acquisition disclosures
can also decrease the ability of financial institutions to obscure key
fees. Many participants in the Bureau's consumer testing reported
incurring fees that they did not become aware of until after they
purchased their prepaid account. Several participants also admitted to
having difficulty understanding the disclosures they received with
their current prepaid accounts and were very unsure as to whether key
fees had been
[[Page 77152]]
disclosed before they acquired the accounts.
Second, as some commenters to the Prepaid ANPR emphasized, in order
to comparison shop among products, it is helpful for consumers to be
able to review disclosures setting forth key terms in like ways before
choosing a product. As noted earlier, the Bureau recognizes that
consumers offered prepaid products by third parties like employers or
educational institutions may be unable to easily comparison shop. For
example, at the time students are offered a student card from their
university, such as when registering for school, they might be unable
to compare that card with other products. The Bureau believes, however,
that even in this scenario, students will benefit from receiving the
short form and the long form disclosure so that they can better
understand the product's terms before deciding to accept it.
Additionally, the Bureau believes that both of these disclosures may
inform the way in which these consumers decide to use the product once
they have acquired it and enable them to, at a convenient time, compare
it with any other products.
Third, the Bureau believes that consumers could potentially use
their prepaid account for an extended period of time and perhaps incur
substantial fees over that time. For example, during the Bureau's
consumer testing, participants indicated that they tend to use a given
prepaid account product, even one they do not like, at least until they
spend the entirety of the initial load amount, which could be as much
as $500. Others reported reloading the account, using it for as long as
one or two years after purchase, and often arranging to receive direct
deposit of wages or benefits into the account. Thus, the Bureau
believes that whatever disclosure information a consumer uses when
selecting a prepaid account could have a significant, and potentially
long-term, impact, especially if a consumer chooses to receive direct
deposit into a prepaid account. Current research supports this belief.
Specifically, one study indicates that prepaid accounts receiving
direct deposit of government benefits might have life spans of as long
as three years, and consumers who receive non-government direct deposit
on their accounts use them on average for longer than one year.\256\
Though other, older research estimates the average life span of some
prepaid accounts may be on average less than six months, the Bureau
believes that even this period of time is significant if consumers load
most or all of their funds into their prepaid accounts.\257\
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\256\ Fumiko Hayashi & Emily Cuddy, Fed. Reserve Bank of Kansas
City, General Purpose Reloadable Prepaid Cards: Penetration, Use,
Fees and Fraud Risks at 33-35 (Working Paper No. RWP 14-01, 2014),
available at https://www.kansascityfed.org/publicat/reswkpap/pdf/rwp14-01.pdf.enter/publications/discussion-papers/2012/D-2012-
August-Prepaid.pdf.
\257\ A 2012 study by the Federal Reserve Bank of Philadelphia
indicates that the average life span of GPR cards tends to be
between 3 and 6 months. See 2012 FRB Philadelphia Study, at 18.
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Regulation E, however, currently only provides for initial
disclosures to be delivered at the time a consumer contracts for an
electronic fund transfer service or before the first electronic fund
transfer is made involving a consumer's account. The Bureau believes
that, in the prepaid account context, this might sometimes be too late.
With prepaid accounts, consumers often contract for an electronic fund
transfer when acquiring the prepaid account and completing an initial
load. The Bureau therefore is concerned that consumers may receive the
fee-related, initial disclosures required by Sec. 1005.7(b) (which
proposed Sec. 1005.18(f) would modify for prepaid accounts) that are
typically provided within the prepaid account's terms and conditions
document too late to utilize them to decide on the right prepaid
account product for their needs and to comparison shop among various
prepaid account products.
The Bureau is therefore proposing Sec. 1005.18(b)(1)(i), which
would require a financial institution, in most cases, to provide the
short and long form disclosures described in proposed Sec.
1005.18(b)(2)(i) and (ii) before a consumer acquires a prepaid account.
As noted above, this aspect of the proposal is authorized under EFTA
sections 904(a) and (c), 905(a), and Dodd-Frank sections 1032(a). The
Bureau seeks comments on all aspects of its proposal to mandate pre-
acquisition disclosures. In particular, the Bureau solicits feedback on
whether pre-acquisition disclosures are necessary or if the fee
information provided pursuant to existing Sec. 1005.7(b) (as modified
by proposed Sec. 1005.18(f)) at the time a consumer contracts for the
prepaid account is sufficient to inform consumers about the account's
terms and conditions.
The Bureau is also proposing to add comment 18(b)(1)(i)-1, which
would provide examples of what would and would not qualify as having
provided disclosures pre-acquisition. The first example would clarify
how pre-acquisition disclosures work in a bank branch context.
Specifically, proposed comment 18(b)(1)(i)-1.i would explain that when
a consumer inquires about obtaining a prepaid account at a branch
location of a bank, then receives the printed short form and long form
disclosures related to the prepaid account product, and after receiving
the disclosures, agrees to open a prepaid account with the bank, a
consumer would have received the short form and long form disclosures
pre-acquisition. Another proposed example would address payroll card
accounts. Specifically, proposed comment 18(b)(1)(i)-1.ii would explain
that if a consumer learns that he or she can receive wages via a
payroll card account, at which time a consumer receives the short form
and long form disclosure to review, and a consumer agrees to receive
wages via a payroll card account, a consumer would have received the
short form and long form disclosures pre-acquisition. Proposed comment
18(b)(1)(i)-1.ii would further clarify that if a consumer receives the
payroll card or other device at the end of the first pay period, at
which time a consumer also receives the short form and long form
disclosure to review for the first time, these disclosures were
provided to a consumer post-acquisition, and thus not provided in
compliance with proposed Sec. 1005.18(b)(1)(i).
Proposed comment 18(b)(1)(i)-2 would provide further explanation
regarding circumstances when short form and long form disclosures would
be considered to have been delivered after a consumer acquires a
prepaid account, and thus in violation of the timing requirement in
proposed Sec. 1005.18(b)(1)(i). Specifically, proposed comment
18(b)(1)(i)-2 would explain that when the short form and long form
disclosures required under proposed Sec. 1005.18(b)(2)(i) and (ii) are
presented after a consumer has initiated a purchase for a prepaid
account on a financial institution's Web site, but before a consumer
provides any personal identifying information and agrees to accept the
prepaid account, such disclosures would be made pre-acquisition in
accordance with proposed Sec. 1005.18(b)(1)(i). Proposed comment
18(b)(1)(i)-2 would also explain that the short form and long form
disclosures that are provided electronically when a consumer acquires a
prepaid account on a financial institution's Web site are considered to
be given after a consumer acquires a prepaid account if a consumer can
easily bypass the disclosures before acquiring a prepaid account.
Proposed comment 18(b)(1)(i)-
[[Page 77153]]
2 would also clarify that a financial institution can present the short
form and long form disclosures on the same Web page to fulfill the
requirements of proposed Sec. 1005.18(b)(1)(i), and that a financial
institution could also present the short form disclosure on a Web page
and include a hyperlink directly to the long form disclosure on that
same Web page, but, if it does so, a consumer must not have to review
any unrelated pages before viewing the long form disclosure. The Bureau
nevertheless seeks comment on whether additional guidance is necessary
regarding how electronic disclosures can be provided in compliance with
the pre-acquisition timing requirement in proposed Sec.
1005.18(b)(1)(i).
Some consumer advocacy groups that responded to the Prepaid ANPR
suggested that the Bureau also require that financial institutions
confirm that consumers have read disclosures provided online. The
Bureau believes that such a requirement is infeasible. Nevertheless,
the Bureau seeks comment on whether technology exists that could be
implemented by all potentially covered entities and that would permit
them to confirm a consumer has read online disclosures, or if providing
guidance that a consumer should not be able to easily bypass the pre-
acquisition disclosures would ensure that consumers have sufficient
opportunity to review disclosures provided electronically.
18(b)(1)(ii) Disclosures for Prepaid Accounts Acquired in Retail Stores
The Bureau is proposing an adjustment to its proposed general pre-
acquisition timing requirement where consumers acquire prepaid accounts
in retail stores. Proposed Sec. 1005.18(b)(1)(ii) would provide that
financial institutions would have to provide a written version of the
short form disclosure before a consumer acquires a prepaid account in
person in a retail store. But it would permit financial institutions to
delay providing the long form disclosure until after the consumer
acquires a prepaid account as long as certain conditions are met. Those
conditions are described in proposed Sec. 1005.18(b)(1)(ii)(A) through
(C).
The Bureau believes that in many cases it is not feasible for
financial institutions that offer prepaid accounts in retail stores to
provide printed long form disclosures prior to acquisition. For
example, retail stores may require financial institutions to use
packaging material with specific dimensions that accommodate standard
J-hook display racks. The Bureau understands that the dimensions of a
typical J-hook display used today for prepaid accounts may limit a
prepaid account access device's packaging material to no larger than 4
inches by 5.25 inches. In addition, the length of the hooks on which a
prepaid account's packaging material is displayed is finite and can
accommodate only a limited number of packages depending on each
package's thickness.
Due to these apparent size and space limitations, the Bureau
believes that many financial institutions would not be able to present
both the short and long form disclosures required by Sec.
1005.18(b)(2)(i) and (ii) on the packaging before a consumer acquires a
prepaid account in a retail store, without overhauling the packaging's
design or otherwise adjusting the relevant retail space. For example,
more disclosures could require longer, wider or thicker packaging
material than that currently used. The Bureau believes that such
packaging adjustments would impose a significant burden and likely
decrease the number of prepaid account products that could be sold at
one time in retail stores. In turn, this could increase the cost of
prepaid account products and limit comparison shopping (if the retail
store maintains the same overall space for the display and sale of all
prepaid account products).
Nevertheless, the Bureau believes it is important that consumers be
provided an opportunity to review both the short form and long form
disclosures before acquisition. Thus, proposed Sec. 1005.18(b)(1)(ii)
would require that in retail stores, a financial institution could
provide the long form disclosure after a consumer acquires a prepaid
account in person in a retail store, as long as the three conditions
discussed below are met. The Bureau believes these conditions will
ensure a consumer receives a written, short form disclosure that
includes methods for accessing the long form disclosure by telephone or
via a Web site.
Proposed Sec. 1005.18(b)(1)(ii)(A) would set forth the first
condition: that the access device for the prepaid account available for
sale in a retail store must be inside of a packaging material. This
condition would apply even if the product, when sold, is only a
temporary access device. As noted above, J-hooks place limitations on
the size and volume of packaging material that can be used to market
prepaid accounts. If a financial institution does not use such
packaging material because, for example, a customer service
representative is responsible for distributing prepaid accounts to
consumers, then the Bureau does not believe that space constraints
would prevent a financial institution from providing both the short and
long form disclosure pre-acquisition. The Bureau considered requiring
that in order to qualify for the retail store exemption, the packaging
material should also be directly accessible to a consumer. Under such a
requirement, a financial institution would not qualify for the retail
store exemption if the prepaid account access devices were inside of
packaging material, but such packaging material was stored behind glass
or a counter, and a consumer would have to request to see a package
from a customer service representative in order to review the
disclosures. The Bureau decided against proposing this requirement. The
Bureau believes that retailers that do not make packaging material
directly accessible to consumers may have justifiable reasons for doing
so, such as security concerns, yet still face space constraints that
make pre-acquisition delivery of both proposed forms difficult.
Nevertheless the Bureau seeks comment on whether retailers that use
packaging material, but do not make it directly accessible to
consumers, actually do face space constraints that justify allowing
them to disclose the long form post-acquisition.
Proposed Sec. 1005.18(b)(1)(ii)(B) would set forth the second
condition: the short form disclosures required by proposed Sec.
1005.18(b)(2)(i) must be provided on or be visible through an outward-
facing, external surface of a prepaid account access device's packaging
material in the tabular format described in proposed Sec.
1005.18(b)(3)(iii). The Bureau recognizes that fulfilling this
condition could mean that some financial institutions that offer
prepaid accounts in retail stores and want to comply with proposed
Sec. 1005.18(b)(1)(ii) may have to change their packaging. The Bureau,
however, believes that the majority of current prepaid account
products' packaging material would allow financial institutions to
include the short form content requirements on an external surface that
is visible to a consumer pre-acquisition without altering the structure
of the existing packaging.
The third condition, set forth in proposed Sec.
1005.18(b)(1)(ii)(C), would require that a financial institution
include a telephone number and URL on the short form disclosure, as
required by proposed Sec. 1005.18(b)(2)(i)(B)(11), that a consumer can
use to access the long form disclosure while in a retail store. The
Bureau believes that even if it is not feasible for a consumer to
receive both the short and long form disclosures pre-acquisition in
some
[[Page 77154]]
retail settings, the consumer should at least be able to access the
long form disclosure by telephone or via a Web site, should they want
to obtain comprehensive fee information. The Bureau understands that
many consumers use mobile devices that can access the internet, and the
Bureau notes that all of the participants in the Bureau's consumer
testing reported having a smartphone with internet access. Indeed,
recent polls indicate that as many as 65 percent of adults in the
United States own a smartphone.\258\ The Bureau therefore believes that
many consumers at least have the ability to access a Web site through
the URL that would be listed on the short form pursuant to proposed
Sec. 1005.18(b)(2)(i)(B)(11) when shopping for a prepaid account.
Several testing participants also mentioned, however, that even though
they have a smartphone, they were concerned whether all consumers would
be able to access a Web site when in a retail store or whether they
would always have sufficient reception to access a Web site from their
smartphone while indoors. The Bureau is therefore also proposing that
when a financial institution is not disclosing the long form before a
consumer acquires a prepaid account, the financial institution must
also make the long form available to a consumer by telephone, a method
that even consumers with mobile devices that are not smartphones could
use to access the long form disclosure's contents.
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\258\ The Nielsen Company, The Digital Consumer, at 5 (Feb.
2014), available at http://www.nielsen.com/content//corporate/us/en/reports-downloads/2014%20Reports/the-digital-consumer-report-feb-2014.pdf. In 2012, the Board estimated that 35 percent of the U.S.
population uses smartphones. See Bd. of Governors of the Fed.
Reserve, Consumers and Mobile Financial Services, at 3 n1 (Mar.
2012), available at http://www.Federalreserve.gov//mobile-device-report-201203.pdf (internal citations omitted).
---------------------------------------------------------------------------
The Bureau recognizes that proposed Sec. 1005.18(b)(ii)(C) assumes
that a consumer would have a mobile device capable of either accessing
the internet or making calls when shopping in a retail store. But it
believes that providing these two methods will increase the likelihood
that most consumers would be able to access the long form disclosure in
a retail store. The Bureau also acknowledges that it might be
complicated for financial institutions to provide the long form
disclosure by telephone, whether using an interactive voice response
system or through a customer service agent. Further, as discussed in
the section-by-section analysis of proposed Sec. 1005.18(b)(1)(iii),
it may be harder for a consumer to understand the information in the
long form when delivered orally. Nevertheless, the Bureau believes that
if a consumer takes the affirmative step to request additional
information about a prepaid account by telephone when shopping in a
retail store, it could be more likely that the consumer is seeking out
specific information that is not included on the short form, and will
therefore be less likely to suffer from information overload.
The Bureau further recognizes that permitting financial
institutions to only provide a short form disclosure to a consumer pre-
acquisition in retail stores means that consumers may not see full fee
information before acquiring a prepaid account. It could be due to the
technical reasons described above or due to the fact that consumers
lack the time or motivation to seek it out. Indeed, in the Bureau's
consumer testing, some participants had difficulty noticing and
understanding language that listed the methods for accessing the long
form disclosure on the short form. Some participants also reported that
they would be unlikely to use their mobile device to seek out such
information when shopping because, in the past, they spent limited time
shopping for a prepaid account.
The Bureau therefore considered whether, as some non-partisan
research and advocacy organizations have suggested, it might be better
for consumers to see all of a prepaid account's fees pre-acquisition
for prepaid accounts sold in retail stores and all other acquisition
scenarios to avoid putting the burden on consumers to seek out
additional information. The Bureau declines to propose this approach
for multiple reasons. First, the Bureau believes that recent research
indicates that many consumers have difficulty comprehending and
utilizing extensive amounts of information when making decisions about
certain financial products.\259\ Second, when consumers use a
disclosure, recent research indicates they might have trouble
identifying which information is relevant to them, prioritizing and
comprehending the information they encounter, or utilizing that
information to make the best choice for their situation.\260\ The
Bureau believes this comprehension difficulty could be exacerbated in a
retail store where consumers often make acquisition decisions quickly.
During its consumer testing, the Bureau also learned that only a few
types of fees drive most consumers' decisions about prepaid accounts.
The Bureau believes the proposed short form disclosure captures these
fees. Third, when participants in the Bureau's consumer testing saw
longer lists of fees during testing, they frequently cited one of the
fees included on the short form disclosure as that which would most
influence their decision about which prepaid product to acquire. In
other words, testing participants were not relying on the additional
information in the long form disclosure to make a decision. The results
suggest that the participants would have reached the same decision
reviewing a short form disclosure.
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\259\ See James Lacko & Janis Pappalardo, The Failure and
Promise of Mandated Consumer Mortgage Disclosures: Evidence from
Qualitative Interviews and a Controlled Experiment with Mortgage
Borrowers, 100 a.m. Econ. Rev. 516 (2010); Kleimann Commc'n Group,
Know Before You Owe: Evolution of the Integrated TILA RESPA
Disclosures (July 9, 2012). See generally, Eric Johnson et al. Can
Consumers Make Affordable Care Affordable? The Value of Choice
Architecture, PLOS One, Dec. 2013, at 1, 2.
\260\ Id.
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Testing participants also spent more time comparing two long form
disclosures when engaging in a shopping comparison exercise Such time
is additional time that the Bureau believes consumers are less likely
to spend when shopping in a retail setting. Finally, consumers in
testing also generally found it more difficult to perform side-by-side
comparisons of two long form disclosures included on the inside of
prototype packaging material versus comparing two short form
disclosures provided on an outside surface of prototype packaging
material. The Bureau also considered the significant cost to industry
of providing the long form disclosure. As discussed above, the
packaging adjustments including such a disclosure would likely require
based on the space constraints in many retail locations.
To summarize, the Bureau proposes that, in retail stores, financial
institutions may provide the proposed long form disclosure after
acquisition, if the three conditions in proposed Sec.
1005.18(b)(1)(ii)(A) through (C) are satisfied. The Bureau also notes
that pursuant to proposed Sec. 1005.18(f), all consumers, including
those shopping in retail stores, would get a long form disclosure in
the terms and conditions document that they receive after they have
acquired a prepaid account. In a retail setting, the terms and
conditions document would likely be provided inside the packaging
material and immediately accessible to a consumer post-acquisition.
Nevertheless, the Bureau seeks comment on all aspects of this
approach to fee disclosures for prepaid accounts
[[Page 77155]]
sold in retail locations. Specifically, the Bureau seeks comment on
what information consumers should receive when shopping for a prepaid
account in a retail store and how comprehensive this information could
be, given the space constraints imposed by J-hooks. The Bureau also
seeks comment on whether to require disclosure of the long form pre-
acquisition in retail stores instead of permitting financial
institutions to only make it accessible to a consumer. Finally, the
Bureau solicits comment on whether the two methods (Web site or
telephone number) that the Bureau has proposed to include on the short
form in retail stores are reliable ways for consumers to access the
long form disclosure when shopping in a retail store, and whether there
are other methods that could be required instead of or in addition to
those that are proposed. The Bureau also seeks comment on whether it
should require that consumers must be able to access the telephone
number listed after regular business hours.\261\
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\261\ The Bureau also considered requiring that financial
institutions list an SMS short code on the short form disclosure
provided in retail stores. See section-by-section analysis of
proposed Sec. 1005.18(b)(2)(i)(B)(11) for a discussion of this
alternative.
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Proposed comment 1005.18(b)(1)(ii)-1 would provide guidance on the
definition of retail store. Specifically, proposed comment
1005.18(b)(1)(ii)-1 would explain that, for purposes of the proposed
requirements of Sec. 1005.18(b)(1)(ii), a retail store is a location
where a consumer can obtain a prepaid account in person and that is
operated by an entity other than a financial institution or by an agent
of the financial institution. Proposed comment 1005.18(b)(1)(ii)-1
would further clarify that a bank or credit union branch is not a
retail store, but that drug stores and grocery stores at which a
consumer can acquire a prepaid account may be retail stores. Proposed
comment 1005.18(b)(1)(ii)-1 would also clarify that a retail store that
offers one financial institution's prepaid account products exclusively
would be considered an agent of the financial institution, and, thus,
both the short form and the long form disclosure must be provided pre-
acquisition pursuant to proposed Sec. 1005.18(b)(1)(i) in such
settings.
The Bureau believes that if a financial institution is the sole
provider of prepaid account products in a given retail store, or is
otherwise an agent of the financial institution, then it is easier for
the financial institution to manage the distribution of disclosures to
a consumer, and they might be less dependent on the J-hook
infrastructure to market their products to consumers. Thus, the Bureau
believes that financial institutions with such exclusive relationships
should have fewer hurdles to providing both the short form and long
form disclosures to a consumer before acquisition. Nevertheless, the
Bureau seeks comment on whether agents of the financial institution
face space constraints in retail stores that would make it difficult to
provide the short form and long form disclosures pre-acquisition.
Proposed comment 1005.18(b)(1)(ii)-2 would clarify that except when
providing the long form disclosure post-acquisition in accordance with
the retail store exception set forth in proposed Sec.
1005.18(b)(1)(ii), the short form and long form disclosures required by
proposed Sec. 1005.18(b)(2)(i) and (ii) must be provided to a consumer
pre-acquisition in compliance with proposed Sec. 1005.18(b)(1)(i).
Proposed comment 1005.18(b)(1)(ii)-2 would further explain that
disclosures are considered to have been provided post-acquisition if
they are inside the packaging material accompanying a prepaid account
access device that a consumer cannot see or access before acquiring the
prepaid account, or if it is not readily apparent to a consumer that he
or she has the ability to access the disclosures inside of the
packaging material. Proposed comment 1005.18(b)(1)(ii)-2 would also
provide the example that if the packaging material is presented in a
way that consumers would assume they must purchase the prepaid account
before they can open the packaging material, the financial institution
would be deemed to have provided disclosures post-acquisition.
Proposed comment 1005.18(b)(1)(ii)-3 would explain that a payroll
card account offered to and accepted by consumers working in retail
stores would not be considered a prepaid account acquired in a retail
store for purposes of proposed Sec. 1005.18(b)(1)(ii), and thus, a
consumer would have to receive the short form and long form disclosures
pre-acquisition pursuant to the timing requirement set forth in
proposed Sec. 1005.18(b)(1)(i). The Bureau does not believe that there
are space constraints involved in offering payroll card accounts to
retail store employees. Thus, the Bureau believes that retail store
employees receiving payroll card accounts must receive both the short
form and long form disclosures pre-acquisition in accordance with
proposed Sec. 1005.18(b)(1)(i).
Proposed comment 18(b)(1)(ii)-4 would clarify that pursuant to
proposed Sec. 1005.18(b)(1)(ii)(C), a financial institution must make
the long form accessible to a consumer by telephone and by a Web site
when not providing a printed version of the long form disclosure to a
consumer prior to acquisition of a prepaid account. Proposed comment
18(b)(1)(ii)-4 would clarify that a financial institution could, for
example, provide the long form disclosure by telephone using an
interactive voice response system or by using a customer service agent.
18(b)(1)(iii) Disclosures for a Prepaid Account Acquired Orally by
Telephone
Similar to its proposed alternative for retail stores, the Bureau
is also proposing, for several reasons, to modify the general pre-
acquisition disclosure requirement in proposed Sec. 1005.18(b)(1)(i)
when a consumer acquires a prepaid account orally by telephone. First,
the Bureau believes prepaid accounts acquired by telephone introduce
logistical challenges that make it difficult for financial institutions
to provide both the short form and the long form disclosures to all
consumers. The Bureau also believes that it may be more difficult for
consumers to process information disclosed orally and that therefore,
generally, less fee information should be provided when consumers
acquire prepaid accounts by telephone. The Bureau acknowledges that
consumers are probably less likely to comparison shop when acquiring
prepaid accounts by telephone, but the Bureau believes that some
consumers might want to compare the short form disclosure of prepaid
account products they are considering acquiring orally by telephone to
short form disclosures for other prepaid accounts that they might
already possess or have available on their computer during the
telephone call.
The Bureau is therefore proposing that before a consumer acquires a
prepaid account orally by telephone, a financial institution must
disclose orally the short form information that would be required by
proposed Sec. 1005.18(b)(2)(i). See proposed Sec. 1005.18(b)(1)(iii).
The Bureau believes that disclosing only limited information by
telephone will increase the likelihood that a consumer will understand
any information about the prepaid account when acquiring it orally by
telephone. Proposed Sec. 1005.18(b)(1)(iii) would further state that a
financial institution may provide the disclosures required by Sec.
1005.18(b)(2)(ii) after a consumer acquires a prepaid account orally by
telephone if the financial institution
[[Page 77156]]
communicates to a consumer orally, before a consumer acquires the
prepaid account, that the information required to be disclosed by Sec.
1005.18(b)(2)(ii) is available orally by telephone and on a Web site.
The Bureau believes that a financial institution should be able to
disclose information contained in the long form orally, by, for
example, allowing a consumer to ask a customer service agent about a
fee or by using an automated system, but the Bureau questions the
effectiveness of requiring that the full long form disclosure be
provided orally to every consumer. Rather, the Bureau believes that as
long as consumers are made aware of their ability to access the
information contained in the long form disclosure, they will be able to
get enough information to make an informed acquisition decision. Those
who wish to learn more about the prepaid account can do so, and
financial institutions would not be unduly burdened by having to
provide the long form disclosure to all consumers who acquire prepaid
accounts by telephone.
The Bureau recognizes that proposed Sec. 1005.18(b)(1)(ii)(C)
would require that a financial institution always disclose the
telephone number and the URL that a consumer can use to access in the
long form disclosure on all short forms when qualifying for the retail
store exception. But, for prepaid accounts acquired orally by telephone
pursuant to proposed Sec. 1005.18(b)(1)(iii), the Bureau believes it
is sufficient to let a consumer know that the long form disclosure is
available by telephone and through a Web site without having to
actually dictate the telephone number and the URL of the Web site,
unless a consumer requests them. A version of the long form, however,
would still be required to be provided after acquisition in the prepaid
account's initial disclosures. See proposed Sec. 1005.18(f).
The Bureau seeks comment on all aspects of this part of the
proposal. Specifically, the Bureau seeks comment on whether consumers
will benefit from hearing the contents of only the short form disclosed
orally. The Bureau also seeks comment on whether financial institutions
should be required to disclose all fees associated with a prepaid
account orally before acquisition instead of having the option not to
disclose full fee information as long as they make consumers aware of
the methods by which they can access the content of the long form
disclosure.
Proposed comment 18(b)(1)(iii)-1 would explain that, for purposes
of proposed Sec. 1005.18(b)(1)(iii), a prepaid account is considered
to have been acquired orally by telephone when a consumer speaks to a
customer service agent or communicates with an automated system, such
as an interactive voice response system, to provide personal
identifying payment information to acquire a prepaid account, but would
clarify that prepaid accounts acquired using a mobile device without
speaking to a customer service agent or communicating with an automated
system are not considered to have been acquired orally by telephone.
The Bureau believes that the proposed general pre-acquisition
disclosure requirement in proposed Sec. 1005.18(b)(1)(i) should be
modified when a consumer acquires a prepaid account orally by
telephone. By contrast, if a consumer is using a smartphone to access a
mobile application to acquire a prepaid account, and is not receiving
disclosures about the prepaid account orally, the Bureau proposes that
disclosures could be provided electronically pursuant to proposed Sec.
1005.18(b)(3)(i)(B) and that a consumer still receive both the short
form and long form disclosures pre-acquisition. Though a consumer may
access a mobile application to acquire a prepaid account on a mobile
phone device, the Bureau believes that once a consumer has entered the
application, disclosures can be provided in a similar, if not
identical, way to how they are offered on a Web site. Thus, the Bureau
believes that in such a scenario the logistical challenges justifying
an alternative requirement for accounts acquired orally using the
telephone are not present.
Proposed comment 18(b)(1)(iii)-2 would explain how disclosures
provided orally can comply with the pre-acquisition timing requirement
in proposed Sec. 1005.18(b)(2)(i). Specifically, proposed comment
18(b)(1)(iii)-2 would clarify that to comply with the pre-acquisition
requirement set forth in proposed Sec. 1005.18(b)(1)(i) for prepaid
accounts acquired orally by telephone, a financial institution may, for
example, read the short form disclosure required under proposed Sec.
1005.18(b)(2)(i) over the telephone after a consumer has initiated the
purchase of a prepaid account by calling the financial institution, but
before a consumer agrees to acquire the prepaid account. Proposed
comment 18(b)(1)(iii)-2 would also clarify that although the long form
disclosure required by proposed Sec. 1005.18(b)(2)(ii) is not required
to be given pre-acquisition when a consumer acquires a prepaid account
orally by telephone, a financial institution must communicate to a
consumer that the long form is available upon request either orally by
telephone or on a Web site. Finally, the proposed comment would clarify
that a financial institution must provide information on all fees in
the terms and conditions as required by existing Sec. 1005.7(b)(5), as
modified by proposed Sec. 1005.18(f), before the first electronic fund
transfer is made from a consumer's prepaid account.
18(b)(2) Content of Disclosures
Proposed Sec. 1005.18(b)(2) would set forth substantive content
requirements for the Bureau's proposed pre-acquisition disclosure
regime. Specifically, proposed Sec. 1005.18(b)(2)(i) would set forth
the information a financial institution would have to provide on the
short form disclosure, and proposed Sec. 1005.18(b)(2)(ii) would set
forth the information a financial institution would have to provide on
the long form disclosure. The proposed content for each disclosure is
discussed in detail below.
18(b)(2)(i) Short Form Content Requirements
Proposed Sec. 1005.18(b)(2) would set forth substantive content
requirements for the Bureau's proposed pre-acquisition disclosure
regime. Specifically, proposed Sec. 1005.18(b)(2)(i) would set forth
the information a financial institution would have to provide on the
short form disclosure, and proposed Sec. 1005.18(b)(2)(ii) would set
forth the information a financial institution would have to provide on
the long form disclosure. The proposed content for each disclosure is
discussed in detail below.
18(b)(2)(i) Short Form Content Requirements
As explained above, the Bureau is proposing that financial
institutions provide a short form disclosure before a consumer acquires
a prepaid account. See proposed Sec. 1005.18(b)(1)(i). Proposed Sec.
1005.18(b)(2)(i) would require disclosure of specific information on
the short form about a prepaid account, including certain notices,
fees, and other information, as applicable. Specifically, for all
prepaid accounts, financial institutions would be required to disclose,
in the static portion of the short form, the fee types set forth in
proposed Sec. 1005.18(b)(2)(i)(B)(1) through (7), even if such fees
are not charged or if those features are not offered in connection with
a particular prepaid account product. A disclosure regarding whether a
prepaid account might offer an overdraft service or another type of
credit feature to a consumer would also
[[Page 77157]]
be disclosed in the static portion of the short form pursuant to
proposed Sec. 1005.18(b)(2)(i)(B)(9). In addition, the short form
would require, in proposed Sec. 1005.18(b)(2)(i)(B)(8), disclosure of
up to three additional fees most commonly incurred by users of a given
prepaid account product in the prior 12-month period. This portion of
the disclosure would vary across prepaid account products. Pursuant to
proposed Sec. 1005.18(b)(3)(iii)(A), the short form disclosure would
be in a form substantially similar to the proposed Model Forms A-10(a)
through (d).
Depending on the structure of a particular prepaid account,
however, the Bureau understands that the short form may not capture all
of a particular prepaid account's fees or explain the conditions under
which a financial institution might impose those fees. The Bureau's
consumer testing, however, indicated that when participants were shown
prototype short forms, most understood that they represented only a
subset of fee information and that they could potentially be charged
fees not shown on the form. Further, except in certain retail stores or
with respect to accounts acquired orally by telephone, under the
proposed pre-acquisition disclosure regime, a consumer would receive a
long form disclosure simultaneously with the short form and therefore
have the opportunity to see all fees associated with a prepaid account
and any relevant conditions before acquiring a prepaid account.\262\
See proposed Sec. 1005.18(b)(1)(i). Further, most testing participants
did not identify any additional fees that they would like to see listed
in a short form. The Bureau therefore believes that the proposed short
form would contain most fees that might be charged in connection with a
prepaid account, and those fees that are most important for a consumer
to know in advance of acquiring a prepaid account.
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\262\ For prepaid accounts acquired in retail stores or orally
by telephone, the long form would have to be made available to the
consumer either electronically or by telephone. See section-by-
section analysis of proposed Sec. 1005.18(b)(1)(ii) and (iii).
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The Bureau also recognizes that disclosing even this proposed
subset of fee information on the short form runs the same risk of
information overload that the Bureau believes could occur if all fees
were disclosed to a consumer instead of just a subset of fees. The
Bureau believes, however, based on its consumer testing and other
research, that incorporating elements of visual hierarchy will mitigate
these risks. Most importantly, the fee types that would be disclosed
pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(1) through (4) in the
top-line of the short form would use font size and other elements to
promote readability.\263\ The Bureau is proposing to add comment
18(b)(2)(i)-1 to explain what a provider should disclose on the short
form when fees are inapplicable to a particular prepaid account
product. Specifically, proposed comment 18(b)(2)(i)-1 would explain
that the disclosures required by proposed Sec. 1005.18(b)(2)(i) must
always be provided prior to prepaid account acquisition, even when a
particular disclosure is inapplicable to a specific prepaid account.
The proposed comment would also provide an example that if a financial
institution does not charge a fee to a consumer for withdrawing money
at an ATM in the financial institution's network or an affiliated
network, which is a type of fee that would be required to be disclosed
pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(3), the financial
institution should list ``ATM withdrawal (in network)'' on the short
form disclosure and list ``$0'' as the fee. Proposed comment
18(b)(2)(i)-1 would further clarify that if, however, the financial
institution does not allow a consumer to withdraw money from ATMs that
are in the financial institution's network or from those in an
affiliated network, the financial institution would still have to list
``ATM withdrawal (in-network)'' and ``ATM withdrawal (out-of-network)''
on the short form disclosure but instead state ``not offered'' or ``N/
A.'' The Bureau believes it important that the static portion of the
short form disclosure would list identical account features and fee
types across all prepaid account products, to enable consumers to
quickly determine and compare the potential cost of certain offered
features.
---------------------------------------------------------------------------
\263\ See the section-by-section analysis of proposed Sec.
1005.18(b)(4)(iii).
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The Bureau is also proposing to adopt comment 18(b)(2)(i)-2, to
further explain how to disclose fees and features on the short form
disclosure. Specifically, the proposed comment would explain that no
more than two fees could be listed for each fee type required to be
listed by proposed Sec. 1005.18(b)(2)(i)(B)(2), (3) and (5) in the
short form disclosure, and that only one fee could be disclosed for
each fee type required to be listed by proposed Sec.
1005.18(b)(2)(i)(B)(1), (4), (6), (7) and (8). The proposed comment
would clarify, however, that proposed Sec. 1005.18(b)(2)(i)(B)(8)
would require the disclosure of up to three additional fees. Finally,
the proposed comment would clarify that for example, if a financial
institution offers more than one method for loading cash into a prepaid
account, only the fee for the method that would charge the highest fee
would be disclosed, and the financial institution could use an asterisk
or other symbol next to the cash reload fee disclosed to indicate that
the fee may be lower. See section-by-section analysis of proposed
comment 18(b)(2)(i)(C)-1.
As discussed in detail above, the Bureau believes that simplicity
and clarity are important goals of the short form disclosure. Insofar
as allowing complicated explanations and multiple different fees to be
disclosed for a particular feature could disrupt those goals, the
Bureau proposes that for most fees on the short form, a financial
institution only be permitted to list one fee--the highest fee a
consumer could incur for a particular activity, as discussed in more
detail below in the section-by-section analysis of proposed Sec.
1005.18(b)(2)(i)(C). The Bureau notes that these limitations would only
apply to the short form disclosure; the financial institution would
have both the long form disclosure and any other portion of the
packaging material or Web site to disclose other relevant fees.
The Bureau also believes there is particular value in maintaining
simplicity on the short form by limiting the top-line portion of the
form in order to encourage consumer engagement with the disclosure.
Thus, the Bureau is proposing to require only four fee types in the
top-line. For two of those fee types--per purchase fees and ATM
withdrawal fees--the Bureau is also proposing to require disclosure of
two fee values. See proposed comment 18(b)(2)(i)-2. The Bureau believes
that it is important to include two per purchase fees--a per purchase
fee when a consumer uses a signature and a per purchase fee when a
consumer uses a PIN--because consumers could potentially incur these
fees every time they use their prepaid accounts, and the fee could vary
depending on how a consumer completes the transaction. The Bureau
believes including two per purchase fees will highlight for consumers
that the fees for completing a transaction using a personal
identification number versus the fee for using a signature could
differ. Similarly, the Bureau believes that it is important to include
two ATM withdrawal fees in order to highlight that fees for in-network
and out-of-network transactions may differ and to signal to consumers
that the product's ATM network may have an impact on the fee incurred,
which could lead a consumer to seek out more information about the
[[Page 77158]]
relevant network. The Bureau notes that in its testing, some
participants were confused about the meaning of an ATM network.
By contrast, the Bureau is proposing to allow only one periodic fee
and one cash reload fee to be listed in the top-line of the short form.
The Bureau acknowledges that both of these fees might also vary based,
for example, on how often a consumer uses a prepaid account or the
method used to reload cash into a prepaid account. Despite this
possibility for variation, however, the Bureau believes consumers will
benefit more from immediately seeing the two ways the per purchase and
ATM withdrawal fees may vary.
The Bureau seeks comment on all aspects of this part of the
proposal. Specifically, the Bureau solicits feedback on whether
mandating disclosure of inapplicable features on the short form
disclosure would be unnecessarily confusing to consumers, or whether
financial institutions will find it difficult to explain elsewhere on a
prepaid account access device's packaging material or on their Web
sites that certain features may not be available. In addition, the
Bureau seeks comment on whether only providing the highest fee on the
short form disclosure for a given fee type will be misleading to
consumers, even when financial institutions include a symbol, like an
asterisk, to indicate the fee amount could vary. The Bureau also seeks
comment on the proposed type of and number of fees included in the top-
line portion of the form, as discussed further below in the section-by-
section analysis of proposed Sec. 1005.18(b)(4)(iii). Finally, the
Bureau also solicits comment on whether the cost of purchasing or
activating a prepaid account should be included on the short form
disclosure.
18(b)(2)(i)(A) Payroll Card Account Notices
Pursuant to existing Sec. 1005.10(e)(2), no financial institution
or other person may require a consumer to establish an account for
receipt of electronic fund transfers with a particular institution as a
condition of employment or receipt of a government benefit. See also
existing comment 10(e)(2)-1 and proposed comment 10(e)(2)-2. The Bureau
believes it is important for consumers to realize they have the option
of not receiving payment of wages via a payroll card account, and that
receiving such notice at the top of the short form disclosure will help
to ensure consumers are aware of this right. Thus, the Bureau is
proposing that a notice be provided at the top of the short form for a
payroll card account to highlight for consumers that they are not
required to accept a particular payroll card account.
Specifically, proposed Sec. 1005.18(b)(2)(i)(A) would require
that, when offering a payroll card account, a financial institution
must include a statement on the short form that a consumer does not
have to accept the payroll card account, and that a consumer can ask
about other methods to get wages or salary from the employer instead of
receiving them via a payroll card account, in a form substantially
similar to the language set forth in Model Form A-10(b). The Bureau is
proposing a similar notice requirement for government benefit accounts.
Proposed Sec. 1005.18(b)(2)(i)(A) would state that for requirements
regarding what notice to give a consumer when offering a government
benefit account, see proposed Sec. 1005.15(c)(2).
18(b)(2)(i)(B) Fees and Other Information
18(b)(2)(i)(B)(1) Periodic Fee
Proposed Sec. 1005.18(b)(2)(i)(B)(1) would require disclosure of a
periodic fee charged for holding a prepaid account, assessed on a
monthly or other periodic basis, using the term ``Monthly fee,''
``Annual fee,'' or a substantially similar term. This proposed
provision is intended to capture regular maintenance fees that a
financial institution levies on a consumer solely for having a prepaid
account for a period of time, whether the fee is charged monthly,
annually, or for some other period of time. A financial institution
could choose a label for this fee that accurately reflects the relevant
periodic interval. Pursuant to the formatting requirements in proposed
Sec. 1005.18(b)(4), a financial institution would be required to
disclose this fee in the top-line of the short form disclosure.
The Bureau believes that all prepaid accounts should disclose such
a periodic fee, or the absence thereof, for several reasons. First, the
Bureau's analysis of fee data indicates that many prepaid accounts
charge a recurring fee, typically on a monthly basis. Second, the
Bureau believes a periodic fee is one that consumers will likely pay no
matter what other fees they incur because it is imposed for maintaining
the prepaid account, unless a financial institution offers a way for a
consumer to avoid that fee (e.g., through the receipt of a regular
direct deposit or maintaining a certain average daily account balance).
Those prepaid accounts that do not assess a periodic fee often charge
other fees instead, typically per purchase fees.\264\ The Bureau
therefore believes that the lack of a periodic fee is also an important
feature of a prepaid account that should be included in the top-line to
allow consumers to more easily identify this trade-off between periodic
fees and per purchase fees. Third, the Bureau believes that the
existence of a monthly fee (or lack thereof) is typically a key factor
in a consumer's decision about whether to acquire a particular prepaid
account. Additionally, in the Bureau's testing, participants frequently
cited periodic fees as one of the most important factors influencing
their decision about which prepaid account product to acquire.
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\264\ Per purchase fees are also proposed to be on the top-line
of the short form. See proposed Sec. 1005.18(b)(2)(i)(B)(2).
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18(b)(2)(i)(B)(2) Per Purchase Fee
Proposed Sec. 1005.18(b)(2)(i)(B)(2) would require disclosure of
two fees for making a purchase using a prepaid account, both for which
when a consumer uses a personal identification number and when a
consumer provides a signature, including at point-of-sale terminals, by
telephone, on a Web site, or by any other means, using the term ``Per
purchase fee'' or a substantially similar term, and ``with PIN'' or
``with sig.,'' or substantially similar terms.
Although the Bureau understands that most prepaid accounts do not
charge per transaction fees for purchases of goods or services from a
merchant, some do. When charged, the impact of these fees could be
substantial for consumers who make multiple purchases. Often these fees
are charged when periodic fees are not (see proposed Sec.
1005.18(b)(2)(i)(B)(1)), and thus a consumer may be choosing between a
prepaid account that has no monthly fee but charges for each purchase
and a prepaid account that has a monthly fee but no per purchase
charge. Therefore, the Bureau believes it appropriate for all prepaid
accounts to disclose on the short form both whether there is a per
purchase fee and, if so, the fee for making those purchases. The
Bureau's model forms (see proposed Model Forms A-10(a) through (d))
would disclose this amount on the top-line portion of the short form.
The Bureau further recognizes that a handful of prepaid accounts
charge a different per purchase fee depending on whether the purchase
is processed as a signature or PIN transaction. While PIN debit
transactions require input of the accountholder's PIN code at the time
of authorization of the transaction, for a signature transaction, the
accountholder
[[Page 77159]]
may sign for the transaction but does not need to enter his or her PIN
code. The Bureau is therefore proposing model forms for prepaid
accounts that disclose both fees for these two authorization methods.
See proposed Model Forms A-10(a) through (d). Nevertheless, the Bureau
seeks comment on whether two per purchase fees should be disclosed on
the short form disclosure. The Bureau also solicits comment on whether
there are additional per purchase fees beyond using a PIN or a
signature that the Bureau should consider including in the short form
disclosure.
18(b)(2)(i)(B)(3) ATM Withdrawal Fees
Proposed Sec. 1005.18(b)(2)(i)(B)(3) addresses disclosure on the
short form of ATM fees for withdrawing cash. Specifically, proposed
Sec. 1005.18(b)(2)(i)(B)(3) would require disclosure of two fees for
using an ATM to initiate a withdrawal of cash in the United States from
a prepaid account, both within and outside of the financial
institution's network or a network affiliated with the financial
institution, using the term ``ATM withdrawal fee'' or a substantially
similar term, and ``in-network'' or ``out-of-network,'' or
substantially similar terms. The Bureau's model forms (see proposed
Model Forms A-10(a) through (d)) would disclose these ATM withdrawal
fees on the top-line portion of the short form.
The Bureau understands that most prepaid accounts have ATM fees
that differ depending on whether the ATM is in a network of which the
financial institution that issued the card is a member or an affiliate.
Typically, prepaid account cards can also be used on other ATM networks
of which the issuing financial institution is not a member or an
affiliate. Insofar as accessing these networks often costs the
financial institution more, they typically charge a higher fee to a
consumer for using that out-of-network ATM. For example, one current
prepaid account product charges $0 for in-network ATM withdrawals and
$2 for ATM withdrawals that occur out-of-network. Given that such
potential variances are common, the Bureau believes that disclosure of
fees for both in- and out-of-network ATMs withdrawals is important.
Although the Bureau notes that many participants during its consumer
testing were unfamiliar with the difference between ``in-network'' and
``out-of-network,'' the Bureau believes the inclusion of these two fees
on the top-line of the proposed short form would highlight for
consumers that such fee variations can occur and the importance of
understanding the ATM network associated with a particular prepaid
account product.
Nevertheless, the Bureau seeks comment on whether disclosure of
additional information regarding ATM withdrawal fees and ATM networks
is necessary on the short form. Specifically, the Bureau solicits
comment on whether the in- versus out-of network distinction makes
sense for prepaid accounts. The Bureau also solicits comment on whether
there are additional types of ATM withdrawal fees (other than foreign
ATM withdrawal fees, which are discussed below) that should be included
in the short form. For example, the Bureau is aware that some financial
institutions impose different ATM withdrawal fees on ATMs that are
``bank-owned.''
Proposed comment 18(b)(2)(i)(B)(3)-1 would clarify that if the fee
imposed on the consumer for using an ATM in a foreign country to
initiate a withdrawal of cash is different from the fee charged for
using an ATM in the United States within or outside the financial
institution's network or a network affiliated with the financial
institution, a financial institution would not disclose the foreign ATM
fee pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(3), but may be
required to do so pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(8), as
part of the incidence-based fee disclosure.
18(b)(2)(i)(B)(4) Cash Reload Fee
Proposed Sec. 1005.18(b)(2)(i)(B)(4) would require disclosure of a
fee for loading cash into a prepaid account using the term ``Cash
reload'' or a substantially similar term. Cash reloads are one of the
primary ways for a consumer to add funds to a prepaid account. As such,
the Bureau believes that the existence of a cash reload service and the
amount of any fee for using such a service, if any, is important for
consumers to know insofar this is a key feature of many prepaid
accounts. Further, the Bureau's model forms (see proposed Model Forms
A-10(a) through (d)) would disclose the cash reload fee on the top-line
of the short form disclosure as described in the section-by-section
analysis of proposed Sec. 1005.18(b)(4)(i).
The Bureau also proposes to adopt new comment Sec.
1005.18(b)(2)(i)(B)(4)-1, which would provide guidance on what would be
considered a cash reload fee. Specifically, the proposed comment would
explain that the cash reload fee, for example, would include the cost
of adding cash at a point-of-sale terminal, or the cost of purchasing
an additional card or other device on which cash is loaded and then
transferred into a prepaid account, or any other method a consumer may
use to load cash into a prepaid account. This proposed comment would
also clarify that if a financial institution offers more than one
method for a consumer to load cash into the prepaid account, proposed
Sec. 1005.18(b)(2)(i)(C) would require that it only disclose the
highest fee on the short form. The Bureau notes that consumers may
incur additional third party fees when loading cash onto a card or
other access device; these expenses are typically not controlled by the
financial institution or program manager and instead are charged by the
entity selling the cash reload product. Such fees would not be
incorporated into the proposed short form disclosure. See proposed
comment Sec. 1005.18(b)(2)(i)(C)-2. The Bureau notes, however, that,
pursuant to proposed comment 18(b)(2)(ii)(A)-3, fees imposed by third
parties acting as an agent of the financial institution would always
have to be disclosed in the long form.
The Bureau considered requiring financial institutions to list on
the short form disclosure both cash reload methods discussed in
proposed comment 18(b)(2)(i)(B)(4)-1: Loads via a point-of-sale
terminal and loads via an additional card or other device. The Bureau
recognizes that many prepaid accounts make both methods available to
consumers and only allowing providers to list the fee for the method
that imposes the highest fee could confuse consumers about which
methods are available, and inhibit their ability to accurately estimate
the fees they will incur based on the method they most commonly
utilize. The Bureau, however, believes it is important to limit the
amount of information on the short form disclosure to maintain its
simplicity in order to facilitate consumer understanding of the
information that is included. Further, in testing, the Bureau found
that participants consistently understood a disclosure containing a
single cash reload fee, and therefore the Bureau does not believe it is
as important to include two fees for this fee type. Although the Bureau
is proposing to allow only the highest cash reload fee to be disclosed
in the short form, however, financial institutions would be able to use
an asterisk or other symbol pursuant to proposed Sec.
1005.18(b)(2)(i)(C) discussed below (in addition to any other part of
the packaging material or Web site) to indicate when more than one
method exists for reloading cash into a prepaid account.
[[Page 77160]]
18(b)(2)(i)(B)(5) ATM Balance Inquiry Fees
Directly below the proposed top-line disclosure in the short form
disclosure, the Bureau proposes to include balance inquiry fees charged
by the financial institution for inquiring into the prepaid account's
balance at an ATM. Specifically, proposed Sec. 1005.18(b)(2)(i)(B)(5)
would require disclosure of two fees for using an ATM to check the
balance of a consumer's prepaid account, both within and outside of the
financial institution's network or a network affiliated with the
financial institution, using the term ``ATM balance inquiry'' or a
substantially similar term, and ``in-network'' or ``out-of-network,''
or substantially similar terms.
As discussed above regarding disclosure of ATM withdrawal fees the
Bureau believes it is important for consumers to know that different
fees could be imposed when requesting balance inquiries at an ATM in a
financial institution's network or outside of the network. The Bureau,
however, does believe it is less common for consumers to initiate ATM
balance inquiries transactions compared to withdrawals at ATMs, and
thus, the Bureau is not proposing to include the two balance-inquiry
fees in the top-line of the short form disclosure. Nevertheless, the
Bureau seeks comment on whether consumers incur ATM balance inquiry
fees frequently enough to justify including these fees in the top-line
of the short form disclosure.
Proposed comment 18(b)(2)(i)(B)(5)-1 would clarify that if the fee
imposed on a consumer for using an ATM in a foreign country to check
the balance of a consumer's prepaid account is different from the fee
charged for using an ATM within or outside the financial institution's
network or a network affiliated with the financial institution in the
United States, a financial institution would not disclose the foreign
ATM balance inquiry fee pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(5), but could be required to do so by proposed
Sec. 1005.18(b)(2)(i)(B)(8), discussed below.
18(b)(2)(i)(B)(6) Customer Service Fee
Proposed Sec. 1005.18(b)(2)(i)(B)(6) would require disclosure on
the short form of any fee for calling the financial institution or its
service provider, including an interactive voice response system, about
a consumer's prepaid accounts using the term ``Customer service fee''
or a substantially similar term. The Bureau believes that many
consumers regularly have issues with their prepaid accounts that
require talking to a customer service agent by telephone. The Bureau
also believes that some providers impose fees for making such a call.
Additionally, several participants in testing reported having incurred
such customer service fees. For these reasons, the Bureau believes that
the short form disclosure should include this fee. This disclosure
would be required even if the financial institution did not charge such
a fee. See proposed comment 18(b)(2)(i)-1.
18(b)(2)(i)(B)(7) Inactivity Fee
Proposed Sec. 1005.18(b)(2)(i)(B)(7) would require disclosure of a
fee for non-use, dormancy, or inactivity on a prepaid account, using
the term ``Inactivity fee'' or a substantially similar term, as well as
the duration of inactivity that triggers a financial institution to
impose such an inactivity fee.\265\ The Bureau believes that many
financial institutions charge consumers fees when they do not use their
prepaid account for a specified period of time. The Bureau believes
disclosure of these fees is important insofar as consumers sometimes
acquire a prepaid account for occasional use; such consumers may want
to know that a particular prepaid account product charges fees for
inactivity.\266\ Thus, the Bureau is proposing that financial
institutions disclose the existence, duration, and amount of inactivity
fees, or that no such fee will be charged, as part of the static
portion of the short form disclosure. The Bureau notes, however, that,
as with all the disclosures in the short form, the requirement to
disclose a particular fee type is not an endorsement of the practice of
imposing such a fee.
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\265\ The Bureau understands that some States bar or limit
inactivity fees, and nothing in this portion of the proposal is
meant to preempt any applicable State laws.
\266\ In testing, several participants mentioned only using
their prepaid cards occasionally.
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The Bureau, however, also believes that a lower inactivity fee may
correlate with a prepaid account product imposing a higher monthly
periodic fee on a consumer. Thus, a consumer who uses a prepaid account
only sporadically, but often enough to not reach the dormancy period
that would trigger the inactivity fee, might actually incur higher fees
if they shop based on the inactivity fee instead of the monthly
periodic fee. The Bureau considered whether the risk of potential
confusion to a consumer outweighs the benefit of including the
inactivity fee on the short form disclosure, but believes that
providing consumers with the inactivity fee amount and the relevant
duration of dormancy will allow consumers to make an informed choice
about which prepaid account product is best for their usage patterns.
Proposed comment 18(b)(2)(i)(B)(7)-1 would clarify that when a
financial institution is disclosing the inactivity fee in the long form
disclosure pursuant to proposed Sec. 1005.18(b)(2)(ii)(A), a financial
institution should specify whether this inactivity fee is imposed in
lieu of or in addition to the periodic fee disclosed pursuant to
proposed Sec. 1005.18(b)(2)(i)(B)(1).
The Bureau seeks comment on all aspects of this part of the
proposal. Specifically, the Bureau seeks comment on including the
inactivity fee as part of the static portion of the short form
disclosure could confuse consumers, and whether it is important to
communicate the potential relationship between inactivity fees and
monthly periodic fees more clearly on the short form disclosure.
18(b)(2)(i)(B)(8) Incidence-Based Fee Disclosures
In addition to the fee types that all financial institutions would
have to disclose in the static portion of the short form pursuant to
proposed Sec. 1005.18(b)(2)(i)(B)(1) through (7), the Bureau is
proposing that financial institutions would also disclose up to three
additional ``incidence-based'' fees not already disclosed elsewhere on
the short form that are incurred most frequently for that particular
prepaid account product. If a financial institution offers several
prepaid account products, the incidence-based fees analysis would be
conducted separately for each product, based on usage patterns in the
prior 12-month period. Thus, the incidence-based fees provided to a
consumer on the short form disclosure could vary from one product to
the next depending on which fees consumers incurred most frequently for
a particular prepaid account product.
The Bureau is proposing this disclosure because it is concerned
that, while the fee types disclosed in the static portion of the short
form under the proposed rule should generally include the key fees on
most prepaid accounts, that list is not comprehensive and there could
be other fees that consumers might incur with some frequency. The
Bureau is also concerned that absent this incidence-based disclosure,
there is a risk of evasion. For example, a financial institution could
restructure its fee schedule for a prepaid account product to make the
fees disclosed in the static portion of the
[[Page 77161]]
short form pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(1) through
(7) cheaper, knowing they would not be the fees that consumers would
most frequently pay. The Bureau believes that requiring financial
institutions to disclose other fees that are frequently paid by
consumers will limit the ability of financial institutions to evade
disclosing relevant fee information upfront on the short form
disclosure. Additionally, the Bureau believes that the incidence-based
portion of the short form, though it does mandate a specific metric to
determine which additional fees may be listed, would also provide some
flexibility to industry participants to disclose three more fee types
that might be particular to their prepaid account product and are
imposed for features that could be appealing to consumers.
Accordingly, the Bureau is proposing Sec. 1005.18(b)(2)(i)(B)(8),
which would establish a three-part provision to determine which
incidence-based fees a financial institution must include on its short
form disclosures. First, proposed Sec. 1005.18(b)(2)(i)(B)(8)(I) would
require, except as provided in proposed Sec.
1005.18(b)(2)(i)(B)(8)(II) or (III), disclosure of up to three fees,
other than any of those disclosed pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(1) through (7), that were incurred most frequently
in the prior 12-month period by consumers of that particular prepaid
account product.
Thus, for existing prepaid account products, proposed Sec.
1005.18(b)(2)(i)(B)(8)(I) would require that at the same time each
year, a financial institution assess whether the incidence-based fees
disclosed pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(8)(I) were the
most frequently incurred fees in the prior 12-month period, in
accordance with the timing requirements of proposed Sec. 1005.18(h).
Proposed Sec. 1005.18(b)(2)(i)(B)(8)(I) would further require that the
financial institution would then have to, if necessary and within 90
days, revise the incidence-based fees on disclosures provided in
written or electronic form pursuant to proposed Sec. 1005.18(b)(1)(i).
Disclosures provided on the packaging material of prepaid account
access devices, for example, in retail stores pursuant to proposed
Sec. 1005.18(b)(1)(ii), or in other locations, must be revised when
the financial institution is printing new packaging material for its
prepaid account access devices, in accordance with the timing
requirements in proposed Sec. 1005.18(h). Proposed Sec.
1005.18(b)(2)(i)(B)(8)(I) would also require that all disclosures
provided pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(8)(I) and
created after a financial institution makes an incidence-based fee
assessment and determines changes are necessary, would have to include
such changes in accordance with the timing requirements in proposed
Sec. 1005.18(h). This final requirement in proposed Sec.
1005.18(b)(2)(i)(B)(8)(I) would apply to all disclosures, whether in
written or electronic form, or on the packaging material of a prepaid
account product sold in a retail store.
The Bureau believes that it is important for the incidence-based
fee disclosure to list a prepaid account product's most commonly
incurred fees. The Bureau, however, recognizes that financial
institutions would need time to update disclosures upon assessing
whether any changes to the incidence-based fee disclosure are needed,
although it expects such changes to be infrequent. The Bureau believes
such updates will be easier for disclosures provided in electronic form
or in written form outside of a retail setting. Thus, the Bureau is
proposing that financial institutions would have to make written and
electronic updates within 90 days to ensure that consumers receive up-
to-date incidence-based fee disclosures. The Bureau, however,
recognizes that it could be more complicated and time-consuming for
financial institutions to make updates to packages used to market
prepaid accounts in retail stores, and is therefore proposing that
financial institutions would be able to implement updates on packaging
material whenever they are printing new stock during normal inventory
cycles. The Bureau acknowledges that this proposal could result in some
disclosures for the same prepaid account product (i.e., electronic
disclosures provided online or printed disclosures provided in person
without the use of packaging) having different incidence-based fee
disclosures on the short forms provided on retail store packaging
material. The Bureau, however, does not believe that this discrepancy
will significantly impact a consumer's decision regarding which prepaid
account product to acquire since consumers will most likely compare the
disclosures for two distinct products, and not consider disclosures for
the same prepaid account product found in different acquisition
channels.
The Bureau also recognizes that allowing financial institutions to
continue to use packaging with out-of-date incidence-based fee
disclosure in retail stores could reduce the effectiveness of this
disclosure. The Bureau, however, believes that imposing a cut-off date
after which sale or distribution of out-of-date retail packages would
be prohibited could be overly burdensome. Nevertheless, the Bureau
seeks comment about whether not including such a cut-off date would
negatively impact consumers in a significant way.
Though the Bureau is not proposing specific package update
requirements for the incidence-based fee disclosure, the Bureau notes,
however, that financial institutions generally must ensure all other
fee types and amounts disclosed pre-acquisition, whether on retail
packaging, online, or through other means, are accurate at the time
such disclosures are provided. The Bureau, therefore, does not believe
that a general disclosure update requirement is necessary for non-
incidence-based fee disclosures provided before a consumer acquires a
prepaid account, as a financial institution must continue to honor
whatever fee schedule it provides a consumer.
The Bureau is also proposing to adopt several comments to provide
additional guidance on incidence-based fee disclosures. First, proposed
comment 18(b)(2)(i)(B)(8)-1 would clarify how many additional fees a
financial institution must disclose pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(8)(I) and when disclosure of fewer than three
incidence-based fees would be permitted. Specifically, the proposed
comment would explain that if a prepaid account product only has one,
two or three fees not already disclosed pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(1) through (7), proposed Sec.
1005.18(b)(2)(i)(B)(8) would require disclosure of these fees assuming
it was incurred by a consumer at least once during the prior 12-month
period. Proposed comment 18(b)(2)(i)(B)(8)-1 would also clarify that,
conversely, if a prepaid account has four fees not already disclosed
pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(1) through (7), proposed
Sec. 1005.18(b)(2)(i)(B)(8)(I) would require disclosure of the three
fees most frequently incurred. Finally, the proposed comment would
clarify that if the disclosures made pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(1) through (7) capture a prepaid account product's
entire fee schedule, a financial institution has no obligation to
disclose additional information on the short form pursuant to proposed
Sec. 1005.18(b)(2)(i)(B)(8)(I).
The Bureau also proposes to add comment 18(b)(2)(i)(B)(8)-2, which
would clarify how to determine which fees were incurred most frequently
in the prior 12-month period. Specifically, the proposed comment would
explain
[[Page 77162]]
that incidence should be considered on a total basis across all
consumers using a particular prepaid account product. The proposed
comment would further clarify that, for example, if a given consumer
incurred one fee type ten times during the prior 12-month period, all
ten instances of that individual consumer's paying such a fee would be
factored into the total incidence calculation for that fee type. The
proposed comment would also clarify that if a financial institution
offers more than one prepaid account product, it would have to consider
a consumers' fee incidence for each product separately and not
consolidate the fee incidence across all of its prepaid account
products. Finally, the proposed comment would clarify that the price
for purchasing or activating a prepaid account could be an incidence-
based fee for purposes of proposed Sec. 1005.18(b)(2)(i)(B)(8).
Proposed comment 18(b)(2)(i)(B)(8)(I)-3 would provide guidance on
the relationship between proposed Sec. 1005.18(b)(2)(i)(B)(8)(I) and
the proposed effective date regime in proposed Sec. 1005.18(h).
Specifically, the proposed comment would explain that Sec.
1005.18(h)(2) further requires a financial institution to make its
first incidence-based fee assessment in time to ensure that all prepaid
accounts and related packaging material, access devices, and physical
other materials, that are offered, sold, or otherwise made available to
consumers in connection with a prepaid account include the incidence-
based disclosure within 12 months. The proposed comment would also
clarify that if a financial institution creates new disclosures within
nine months of the effective date, those disclosures would need to
include the appropriate incidence-based fee disclosure in accordance
with proposed Sec. 1005.18(h)(1). Proposed comment
18(b)(2)(i)(B)(8)(I)-4 would explain how to disclose incidence-based
fees for those prepaid account products that give consumers the
opportunity to choose among multiple service plans with different fee
schedules.\267\ Specifically, the proposed comment would explain that
when disclosing multiple service plans on a short form disclosure as
permitted by proposed Sec. 1005.18(b)(3)(iii)(B) (discussed below), a
financial institution must consider the frequency with which fees are
incurred from all of those plans as a whole to determine which three
additional fees to disclose pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(8)(I). The Bureau recognizes that it is possible
the most commonly incurred fees among all of the multiple service plans
could also be one of the fees that varies in amount depending on the
service plan selected by a consumer. But the Bureau believes it is
unlikely because the short form will capture most fees charged by most
prepaid account providers, and the multiple service plans, when
available, will only have those plans fee schedules vary based on a
couple of fee types--typically, the periodic fee and the per purchase
fees, both of which are already required to be disclosed for each
service plan. Thus, the Bureau believes it is unlikely that one of the
remaining fees that could qualify for the incidence-based fee
requirement would vary across service plans. The Bureau, however, seeks
comment on whether it is actually the case that most prepaid account
products offering multiple service plans only vary based on a couple of
fee types. If, however, the financial institution is disclosing the fee
schedule for only the service plan in which a consumer is enrolled by
default upon acquiring the prepaid account, the proposed comment would
further clarify that it would consider only the fee incidence for that
service plan . The proposed comment would also reference that proposed
comment 18(b)(3)(iii)(B)-1 provides guidance on what would constitute
multiple service plans. Proposed comment 18(b)(2)(i)(B)(8)(I)-5 would
explain that proposed Sec. 1005.18(b)(2)(i)(B)(8)(I) would not require
that financial institutions immediately destroy existing inventory in
retail stores or elsewhere in the distribution channel, to the extent
the disclosures on such packaging materials are otherwise accurate, to
comply with proposed Sec. 1005.18(b)(2)(i)(B)(8)(I). The proposed
comment would further clarify that for example, if a financial
institution determines that an incidence-based fee listed on a short
form disclosure in a retail store is no longer one of the most commonly
incurred fees and makes the appropriate change when printing new
disclosures, any packages in retail stores that contain the previous
incidence-based fee disclosure could still be sold and the financial
institution would comply with proposed Sec. 1005.18(b)(2)(i)(B)(8)(I).
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\267\ See section-by-section analysis of Sec.
1005.18(b)(3)(iii)(B) and comment 18(b)(3)(iii)(B)-1 for a more
detailed discussion of how the Bureau defines multiple service plans
for prepaid account products under the proposed pre-acquisition
disclosure regime.
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18(b)(2)(i)(B)(8)(II). Recognizing that new prepaid products have
no prior fee data history, the Bureau is also proposing additional
requirements to address such circumstances. Thus, proposed Sec.
1005.18(b)(2)(i)(B)(8)(II) would require that, if a particular prepaid
account product was not offered by the financial institution during the
prior 12-month period, the financial institution would have to disclose
up to three fees other than any of those fees disclosed pursuant to
proposed Sec. 1005.18(b)(2)(i)(B)(1) through (7) that it reasonably
anticipates will be incurred by consumers most frequently during the
next 12-month period. Proposed Sec. 1005.18(b)(2)(i)(B)(8)(II) would
also provide that the incidence-based fee disclosures for newly-created
prepaid account products would have to be included on all disclosures
created for the prepaid account product, whether the disclosure is
written, electronic, or on the packaging material of a prepaid account
product sold in a retail store, in accordance with the timing
requirements in proposed Sec. 1005.18(h). Although financial
institutions do not have actual fee data for new prepaid account
products, the Bureau believes that they nonetheless would have a
reasonable expectation as to which fees will be incurred most
frequently. Thus, proposed Sec. 1005.18(b)(2)(i)(B)(8)(II) would
require institutions, for those prepaid account products without prior
fee data, to estimate in advance the fees that should be disclosed in
the incidence-based portion of the short form disclosure.
The Bureau proposes to add commentary and provide examples
explaining how to apply proposed Sec. 1005.18(b)(2)(i)(B)(8)(II) in
situations where a financial institution has inadequate data regarding
a prepaid account's fee history. Specifically, proposed comment
18(b)(2)(i)(B)(8)(II)-1 would explain that the provider should use
available data to reasonably anticipate what fees should be disclosed.
The proposed comment would also provide guidance about what is
considered a new prepaid account product. Specifically, the proposed
comment would clarify that, for example, if a financial institution
changes the name of its prepaid account product and develops a new
marketing and distribution plan but does not alter the prepaid
account's fee schedule, this would be considered a new prepaid account
product for purposes of proposed Sec. 1005.18(b)(2)(i)(B)(8)(II);
however, insofar as the fee schedule remains unchanged, and the
financial institution reasonably anticipates that the fees it
previously disclosed pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(8)(I) would remain unchanged, the financial
institution should continue to disclose those fees for an additional
12-month period.
[[Page 77163]]
1005.18(b)(2)(i)(B)(8)(III). The Bureau is also proposing to add
additional requirements for when a particular prepaid account product's
fee schedule changes. Specifically, proposed Sec.
1005.18(b)(2)(i)(B)(8)(III) would require that if a financial
institution changes an existing prepaid account product's fee schedule
at any point after assessing its incidence-based fee disclosure
pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(8)(I), it would have to
determine whether, after making such changes, it reasonably anticipates
that the existing incidence-based fee disclosure would represent the
most commonly incurred fees for the remainder of the current 12-month
period. If the financial institution reasonably anticipates that the
current incidence-based fee disclosure would not represent the most
commonly incurred fees for the remainder of the current 12-month
period, it would have to update the incidence-based fee disclosure
within 90 days for disclosures provided in written or electronic form,
in accordance with the timing requirements in proposed Sec.
1005.18(h).
Proposed Sec. 1005.18(b)(2)(i)(B)(8)(III) would also state that
disclosures provided on a prepaid account product's packaging material,
for example, in retail stores pursuant to proposed Sec.
1005.18(b)(1)(ii), or in other locations, must be revised when the
financial institutions is printing new packaging material, in
accordance with the timing requirements of proposed Sec. 1005.18(h).
Finally, proposed Sec. 1005.18(b)(2)(i)(B)(8)(III) would also state
that all disclosures provided pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(8)(III) and created after a financial institution
makes an incidence-based fee assessment and determines changes are
necessary must include such changes, in accordance with the timing
requirements of proposed Sec. 1005.18(h). Proposed comment
18(b)(2)(i)(B)(8)(III)-1 would also provide several examples of
demonstrate how different changes to an existing prepaid account
product could impact the incidence-based fee disclosure. Specifically,
the proposed comment would explain that, for example, if a financial
institution changes its card replacement fee from $3.00 to $4.00 in May
after already assessing in January whether the incidence-based fees
need to be updated for the current 12-month period, this change in the
fee schedule would subject the prepaid account product to proposed
Sec. 1005.18(b)(2)(i)(B)(8)(III). The proposed comment would further
explain that, in this example, the financial institution would assess
whether it reasonably anticipates that the existing incidence-based fee
disclosure still lists what will be the most commonly incurred fees
from May until the following January when the financial institution
would conduct its next, annual incidence-based fees assessment.
The Bureau notes that its proposed model forms do not isolate or
identify these incidence-based fees in a way that distinguishes them
from the other fees disclosed under proposed Sec.
1005.18(b)(2)(i)(B)(5)-(7) that are not required to be in the top-line.
Thus, a consumer comparing two different prepaid account products may
see some types of fees that are the same (the seven standardized fees
disclosed pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(1)-(7)) and
may see some that differ (the three incidence-based fees disclosed
pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(8)). During its consumer
testing, the Bureau tested language identifying the incidence-based
fees as such, but this language was often ignored or misunderstood by
participants. Nevertheless, the Bureau recognizes that some variation
on the short form fee disclosure could lead to confusion, and thus the
Bureau seeks comment on whether the model forms should more clearly
indicate to a consumer the meaning of the incidence-based fees.
The Bureau also recognizes that the proposed procedure for
determining and disclosing incidence-based fees could be complicated in
some instances, particularly for new prepaid accounts or those with
revised fee schedules. Further, the Bureau acknowledges that basing the
incidence-based fees determination on fee incidence might not make
sense for all prepaid products. Thus, the Bureau seeks comment on all
aspects of this incidence-based fees proposal. Specifically, the Bureau
solicits feedback on whether other measures, such as fee revenue, would
be better measures of the most important remaining fees to disclose to
consumers considering a prepaid account. Relatedly, the Bureau seeks
comment on whether there should be a de minimis threshold below which
changes to the incidence ranking would not require form revisions, and
if so, what that threshold should be. Such comments would be most
useful if aided by data supporting the suggested threshold. The Bureau
also seeks comment on how often financial institutions should be
required to update the incidence-based fees disclosures, whether
financial institutions should have to all conduct their incidence-based
fee assessment at the same time in the 12-month period, and whether the
timing requirements for updates to electronic and written disclosures
versus those provided on retail packaging should be different.
Additionally, under the current proposal, a financial institution would
have to consider the cost of purchasing or activating the prepaid
account as a fee when determining its incidence-based fee disclosure,
but the Bureau is not otherwise mandating its disclosure in the short
form disclosure.\268\ The Bureau also seeks comment on whether the cost
to purchase the account, as a one-time fee, should be excluded from the
incidence-based fee disclosure or whether it should be mandated as part
of the static portion of the short form. The Bureau also solicits
comment on whether there are alternate approaches for disclosing key
fees not captured by the standardized portion of the short form that
recognize how products may vary and that would prevent evasion of the
short form's requirements.
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\268\ The Bureau notes, however, that this fee, when applicable,
would be listed in the long form disclosure pursuant to proposed
Sec. 1005.18(b)(2)(ii)(A).
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18(b)(2)(i)(B)(9) Overdraft Services and Other Credit Features
The Bureau is proposing that the short form disclosure would also
have to include a statement indicating whether the prepaid account
product could offer a credit feature to a consumer. Specifically,
proposed Sec. 1005.18(b)(2)(i)(B)(9) would require a statement on the
short form that credit-related fees may apply, in a form substantially
similar to proposed Model Form A-10(c), if, at any point, a credit plan
that would be a credit card account under Regulation Z, 12 CFR part
1026 may be offered in connection with the prepaid account. Proposed
Sec. 1005.18(b)(2)(i)(B)(9) would also state that such a credit plan
could be accessed by a credit card under Regulation Z, 12 CFR
1026.2(a)(15)(i), that also is an access device that accesses the
prepaid account, or the credit plan could be accessed by an account
number that is a credit card under Regulation Z, where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor offering the plan. Finally,
proposed Sec. 1005.18(b)(2)(i)(B)(9) would state that if neither of
these two types of credit plans would be offered in connection with the
prepaid account at any point, a financial institution would have to
disclose on the short form a statement that no overdraft or credit-
related fees
[[Page 77164]]
would be charged, in a form substantially similar to proposed Model
Form A-10(d) in Appendix A.
In the Bureau's consumer testing, many participants expressed a
desire to avoid using any financial products that offer overdraft.
Further, the 2014 Pew Survey indicates that many consumers turn to
prepaid cards specifically to avoid incurring any overdraft
charges.\269\ The Bureau therefore believes that if a financial
institution may offer a credit feature, then a consumer should be on
notice of this possibility before acquiring the prepaid account. The
Bureau believes that placing such notice on the short form would allow
a consumer to decide whether they want to acquire a product that may
offer credit, or whether they would prefer a product that would not
offer credit, which, when applicable would also be disclosed in a
statement on the short form disclosure. Without such a notice, the
Bureau believes that consumers may not have adequate information to
decide which prepaid product is best for them. The Bureau recognizes,
however, that receiving notice about credit features on the short form
disclosure might be confusing to consumers, since the Bureau is
proposing to prohibit financial institutions from offering credit
features to prepaid account holders until they have held an account for
at least thirty days, and not all account holders would qualify for
such credit features.\270\ See proposed Sec. Sec. 1005.18(g) and
1026.12(h). The Bureau, however, believes that the importance of
alerting all consumers as to whether a prepaid account product could
offer credit features outweighs any risk of confusion. The Bureau
nevertheless seeks comment on all aspects of this part of the proposal,
and, in particular, whether including notice of credit features on the
short form disclosure is the proper approach.
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\269\ 2014 Pew Study, at 1.
\270\ For a more detailed discussion of the Bureau's approach to
credit features offered on prepaid accounts, see the introduction to
the TILA discussion.
---------------------------------------------------------------------------
Proposed comment (b)(2)(i)(B)(9)-1 would explain that the statement
indicating whether a prepaid account product offers credit plans to a
consumer would have to be provided on all short form disclosures,
regardless of whether some consumers would be solicited to enroll in
such a plan, if such a plan could be offered.
The Bureau solicits comment on all aspects of the requirement to
include a statement on the availability of credit features, including
whether such statements should be required to be disclosed on the short
form, and what statements would be most helpful for consumers in
deciding between products that offer credit features and those that do
not.
18(b)(2)(i)(B)(10) Statement Regarding Other Fees
In addition to disclosure of specific fee types and a credit
feature, the short form would also require, in proposed Sec.
1005.18(b)(2)(i)(B)(10) disclosure of certain information regarding
additional fees that a financial institution could impose on a prepaid
account that are not captured in the short form. Specifically, proposed
Sec. 1005.18(b)(2)(i)(B)(10) would require financial institutions to
include on the short form a statement regarding the number of fees
other than those listed in the short form pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(1) through (8) that are listed on the long form
disclosure pursuant to proposed Sec. 1005.18(b)(2)(ii)(A), in a form
substantially similar to the clause set forth in appendix A-10(a)
through (d). The Bureau believes that because the short form may only
include a subset of a prepaid account's fees, it would be important for
consumers to understand when more fees might apply. As noted earlier,
many participants in the Bureau's consumer testing reported finding out
about fees only after they incur them. The Bureau believes that
including a statement on the short form disclosure indicating exactly
how many additional fees could apply to encourage consumers to seek out
more information about a prepaid account before acquisition.
The Bureau recognizes, however, that this statement might suggest
any other fees that apply are punitive when in fact such fees might be
charged for services a consumer could find beneficial, and that might
not be offered on competing cards. Nevertheless, the Bureau solicits
comment on whether including this type of statement on the short form
would be useful to consumers or if, instead, it might interfere with
their ability to make an informed choice among prepaid accounts.
Unlike the incidence-based fees, the Bureau does not believe it is
necessary to propose provisions about updating the statement regarding
other fees. Pursuant to proposed Sec. 1005.18(f), a financial
institution would have to include the long form disclosure in the terms
and conditions provided as part of a prepaid account's terms and
conditions. Thus, any updates that are made to the fees disclosed in
the long form would require an overhaul of all of the disclosures for a
given prepaid account product, which the Bureau believes is unlikely to
occur. The Bureau also seeks comment, however, on whether guidance
around updating this statement is necessary.
Proposed comment 18(b)(2)(i)(B)(10)-1 would provide examples of how
to comply with proposed Sec. 1005.18(b)(2)(i)(B)(10). Specifically,
the proposed comment would clarify that if a financial institution
charges a fee for issuing a consumer a replacement card, but this fee
is not among the top three fees its consumers incurred most frequently
during the prior 12-month period and therefore would not be disclosed
pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(8), and if this would be
the only fee the financial institution would not be required to
disclose elsewhere on the short form, then the financial institution
would include a statement on the short form disclosure that it may
charge one other fee not otherwise listed, in a form substantially
similar to the language set forth in the Model Forms in proposed
appendix A-10(a) through (d) of this part. The proposed comment would
also provide an example that if a financial institution does not charge
any fees other than those required to be disclosed pursuant to proposed
Sec. 1005.18(b)(2)(i)(B)(1) through (8), the financial institution
may, but is not required to, include a statement on the short form
disclosure that it does not charge any other fees not listed on the
short form disclosure.
Proposed comment 18(b)(2)(i)(B)(10)-2 would provide guidance about
how to count the total number of fees to disclose pursuant to proposed
Sec. 1005.18(b)(2)(i)(B)(10). Specifically, the proposed comment would
clarify that if the fee a financial institution imposes might vary,
even if the variation is based on a consumer's choice of how to utilize
a particular service, the financial institution must count each
variation of the fee that might be imposed as a separate fee. The
proposed comment would further explain that for example, if a financial
institution imposes one fee to issue a replacement card to the consumer
using standard mail service, but charges a different (and perhaps
higher) fee if the consumer requests expedited delivery of the
replacement card, and neither of these fees are incurred frequently
enough to be disclosed as an incidence-based fee pursuant to proposed
Sec. 1005.18(b)(2)(i)(B)(8), then the financial institution would
still count each of these fees separately when determining the total
number of fees to disclose pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(10). Even if a fee
[[Page 77165]]
could be waived under certain conditions, the proposed comment
clarifies that it would still be counted to comply with proposed Sec.
1005.18(b)(2)(i)(B)(10).
Nevertheless the Bureau seeks comment on whether this guidance is
sufficient to enable compliance with Sec. 1005.18(b)(2)(i)(B)(10). The
Bureau also solicits comment on whether its proposed approach to
addressing fee amount variations when counting the number of other fees
could actually be misleading to the consumer.
18(b)(2)(i)(B)(11) Telephone Number and Web site
Proposed Sec. 1005.18(b)(2)(i)(B)(11) would require disclosure, in
a form substantially similar to the language set forth in the Model
Forms in proposed appendix A-10(c) and (d), of a telephone number and
the unique URL of a Web site that a consumer may enter to access the
long form disclosure required under proposed Sec. 1005.18(b)(2)(ii).
Proposed Sec. 1005.18(b)(2)(i)(B)(11) would also state that this
disclosure would be required only when a financial institution chooses
not to provide a written form of the disclosures required by proposed
Sec. 1005.18(b)(2)(ii) before a consumer acquires a prepaid account at
a retail store as described in proposed Sec. 1005.18(b)(1)(ii). The
Bureau believes that using either of these methods, a consumer should
be able to access information about the fees listed in the long form
disclosure, and any conditions on the applicability of those fees, as
described in the section-by-section analysis of proposed Sec.
1005.18(b)(2)(ii)(A). As discussed above, the Bureau believes that if a
consumer is not receiving the long form disclosure before acquisition
in a retail store, it is important that they are still able to access
the information. The Bureau also believes it is important that the URL
of the Web site be unique to ensure that a consumer can directly access
the same type of stand-alone long form that could be required to be
provided pursuant to proposed Sec. 1005.18(b)(1)(i) in written or
electronic form before a consumer acquires a prepaid account.
Proposed comment 18(b)(2)(i)(B)(11)-1 would provide further details
about the telephone number that would have to be included on the short
form when a financial institution does not provide the long form
disclosure before a consumer acquires a prepaid account. Specifically,
proposed comment 18(b)(2)(i)(B)(11)-1 would state that a financial
institution must make the long form disclosure described in proposed
Sec. 1005.18(b)(2)(ii) accessible to a consumer orally via a telephone
number disclosed pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(11)
when a financial institution chooses not to provide a written form of
these disclosures before a consumer acquires a prepaid account, as
described in proposed Sec. 1005.18(b)(2)(i)(B)(11). The proposed
comment would further clarify that for example, a financial institution
could use a customer service agent or an interactive voice response
system, to provide this disclosure. Proposed comment
18(b)(2)(i)(B)(11)-1 would also explain that a consumer must not incur
a fee to call this telephone number before acquiring a prepaid account.
The proposed comment would further clarify that the telephone number
disclosed pursuant to Sec. 1005.18(b)(2)(i)(B)(11) could be the same
as the customer service number for which a financial institution impose
a fee on a consumer to use for other purposes, but a consumer could not
incur any customer service or other transaction fees when calling this
number to access the information set forth in proposed Sec.
1005.18(b)(2)(ii) before acquiring a prepaid account in retail store.
The Bureau considered requiring that this number be toll-free, but
ultimately decided that having a toll-free number is less important to
consumers, most of whom use mobile phones and do not incur additional
fees for making long distance calls, and such a requirement could
impose a burden on smaller prepaid account providers because they would
perhaps have to maintain a separate toll-free line just for their
prepaid account products. The Bureau notes that some card networks may
require financial institutions to maintain toll-free lines, and
therefore numbers disclosed in such cases will likely be toll-free.
Proposed comment 18(b)(2)(i)(B)(11)-2 would clarify that Sec.
1005.18(b)(2)(i)(B)(11) requires disclosure of a unique URL that must
take consumers to the Web page where disclosures described in Sec.
1005.18(b)(2)(ii) may be viewed when a financial institution chooses
not to provide a written form of those disclosures before a consumer
acquires a prepaid account, as described in proposed Sec.
1005.18(b)(1)(ii). The proposed comment would further clarify that an
entered URL that requires a consumer to navigate various other Web
pages before viewing the long form disclosure would not comply with
proposed Sec. 1005.18(b)(2)(i)(B)(11). The Bureau believes that
consumers make acquisition decisions in retail stores relatively
quickly--often while standing--and should not have to navigate
different links to access the Web page that contains the long form
disclosure. The Bureau has also considered requiring financial
institutions to use shortened URLs on the short form disclosure
provided in retail stores to decrease the amount of time required to
access the long form disclosure. The Bureau seeks comment on whether
such a requirement regarding the URL is necessary.
The Bureau also considered whether to propose to require financial
institutions to disclose an SMS short code, which might be easier to
type than a URL, that consumers could text to receive the URL that
links directly to the long form disclosure.\271\ The Bureau, however,
decided against including this method for several reasons. First,
sending a text message using an SMS short code would still require that
consumers have a mobile phone that is capable of sending text messages
and that a consumer receives adequate internet reception when in a
retail store. Thus, the Bureau does not believe that an SMS short code
would broaden the spectrum of consumers who could access the long form
disclosure when in a retail store, and it could impose an additional
cost on consumers who incur fees from their mobile carriers for
receiving text messages. Further, the Bureau did not believe that an
SMS short code would save a consumer who wants to access the long form
disclosure an appreciable amount of time. The Bureau also believed that
there could be security concerns involved with offering disclosures via
SMS. The Bureau has also considered, but is not requiring, that a quick
response (QR) code be included in the short form. Some Prepaid ANPR
commenters suggested QR codes as another method for accessing
information. Although potentially useful, a QR code would require a
substantial amount of space on the small short form and, the Bureau
believes, QR code adoption remains low.
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\271\ An SMS short code is a group of numbers one can send as a
text message using a mobile phone and receive a text message in
response.
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The Bureau seeks comment on its proposal to disclose a telephone
number and the unique URL of a Web site on the short form disclosure
when the long form disclosure is not provided pre-acquisition in retail
stores, and whether there are other methods the Bureau should consider
disclosing on the short form. The Bureau also seeks comment on whether
providing a SMS code or QR code on the short form would increase
[[Page 77166]]
the number of consumers who would be willing or able to access the long
form disclosure pre-acquisition in a retail store.
18(b)(2)(i)(B)(12) Statement Regarding Registration
The Bureau is also proposing that a statement regarding the
importance of registering the prepaid account with the financial
institution be included on the short form disclosure. Specifically,
proposed Sec. 1005.18(b)(2)(i)(B)(12) would require a statement that
communicates to a consumer that a prepaid account must be registered
with a financial institution or service provider in order for the funds
loaded onto the account to be protected, in a form substantially
similar to the clause included on proposed Model Forms A-10(a) through
(d).
As discussed in the section-by-section analysis of proposed Sec.
1005.18(e)(3), registration typically means that a consumer provides
identifying information such as name, address, date of birth, and
Social Security Number or other government-issued identification number
so that the financial institution can identify the cardholder and
verify the cardholder's identity. The Bureau is proposing to add this
statement because many consumer protections set forth in this proposal
would not take effect until a consumer registers an account. For
example, under proposed Sec. 1005.18(e)(3), a consumer would not be
entitled to error resolution rights or protection from unauthorized
transactions until after registering the prepaid account. The Bureau
believes that this is an important protection insofar as unregistered
prepaid accounts are like cash--once lost, funds may be difficult or
impossible to protect or replace because the financial institution may
not know who is the rightful cardholder.
The Bureau, however, recognizes that in some acquisition scenarios,
for example, government benefit accounts, payroll card accounts, or
cards used to disburse financial aid to students, this type of
statement might be less useful because consumers must register with the
government agency, employer, or institution of higher education, in
order to acquire the account. The Bureau therefore solicits comment on
whether the short form disclosure provided to consumers pre-acquisition
should always include this statement.
18(b)(2)(i)(B)(13) Statement Regarding FDIC (or NCUSIF) Insurance
The Bureau is proposing to address pass-through deposit (and share)
insurance in proposed Sec. 1005.18(b)(2)(i)(B)(13). As discussed
above, the FDIC, among other things, protects funds placed by
depositors in insured banks and savings associations; the NCUA provides
a similar role for funds places in credit unions. As explained in the
FDIC's 2008 General Counsel Opinion No. 8, the FDIC's deposit insurance
coverage will ``pass through'' the custodian to the actual underlying
owners of the deposits in the event of failure of an insured
institution, provided certain specific criteria are met.\272\
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\272\ 73 FR 67155, 67157 (Nov. 13, 2008).
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In response to the Prepaid ANPR, many consumer advocacy group
commenters suggested that the Bureau require that pass-through deposit
(or share) insurance cover all funds loaded into prepaid accounts,
while many industry group commenters suggested that the Bureau propose
clear disclosure of whether a prepaid product carries FDIC insurance or
not.
The Bureau believes it is not always easy to determine or explain
whether FDIC or NCUSIF pass-through deposit or share insurance would
apply to a particular prepaid account. Thus, as is discussed below, the
Bureau is proposing disclosure be made regarding FDIC or NCUSIF
insurance in only limited situations. In the Bureau's Study of Prepaid
Account Agreements, the Bureau found that 65.85 percent of all account
agreements reviewed stated that cardholder funds were protected by FDIC
deposit (or NCUSIF share) insurance (this includes agreements that
explained insurance coverage depends on card registration and/or that
it only applies to funds held by a bank or credit union in a pooled
account associated with the program). Of the remaining agreements,
17.23 percent implied that the program was FDIC or NCUSIF insured by
stating that the issuer is an FDIC or NCUSIF-insured institution, but
that did not address FDIC or NCUSIF insurance coverage for the program.
A small number of agreements, 6.15 percent of those reviewed, did not
address FDIC or NCUSIF insurance coverage for the program. For the
latter two categories of programs, it is possible that such programs
are in fact set up to be eligible for pass-through deposit (or share)
insurance, but it was not possible to tell from reviewing the program's
account agreement. Finally, 10.77 percent of agreements explicitly
stated that the program was not insured.\273\
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\273\ See Study of Prepaid Account Agreements, at 27-28 and tbl.
13. In addition, the Bureau has observed that some GPR card
providers disclose the existence of pass-through deposit insurance
coverage or that the issuing bank is an FDIC-insured institution on
their retail packaging, often quite prominently. The Bureau's Study
of Prepaid Account Agreements, however, did not examine pass-through
insurance statements made on GPR cards' retail packaging. Likewise,
the Study did not examine pass-through insurance statements made on
prepaid programs' other marketing materials or on their Web sites.
See id.
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In its consumer testing, the Bureau observed that some participants
misunderstood the scope of the protections FDIC pass-through deposit
insurance actually provides for prepaid accounts. During the consumer
focus groups, for example, participants were asked if they had heard of
FDIC deposit insurance and how it related to their GPR cards. Nearly
all participants said they had heard of FDIC deposit insurance, and
many consumers believed the funds on their GPR cards were FDIC-
insured.\274\ When consumers were asked to explain what it meant that
their GPR card had FDIC deposit insurance, most made vague references
to their funds being ``protected.'' Upon further probing, however, the
majority of participants incorrectly thought FDIC deposit insurance
would protect their funds in the event of fraudulent charges or a
stolen card.\275\ A few believed a problem of that nature would be
resolved faster if the prepaid card had FDIC deposit insurance than if
it did not. Some participants stated that FDIC insured money in banks;
they reasoned that because their card was most likely connected to a
bank, the money on their cards was therefore protected from fraud by
the FDIC, although others disagreed. Very few participants understood
FDIC insurance correctly in that it applies to the insolvency of the
bank that holds the underlying funds and not to the funds on a prepaid
card itself in the case of an unauthorized transaction on the account.
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\274\ See ICF Report, at 10.
\275\ The Bureau notes, however, that despite believing that
FDIC insurance could ``protect'' funds held in a prepaid account, no
testing participants mentioned FDIC insurance when asked to
interpret the statement ``Register your card to protect your
money,'' which would be disclosed pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(12). See ICF Report, at 5.
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In light of the results of the Bureau's Study of Prepaid Account
Agreements indicating that many products meeting the proposed
definition of prepaid account already provide pass-through deposit
insurance coverage and consumers' misunderstandings about what
protections pass-through deposit insurance actually affords, the Bureau
has decided not to propose any requirements related to the affirmative
existence of pass-through deposit insurance. The Bureau is proposing,
however, that financial institutions would have to disclose a statement
on the short form if a prepaid account is
[[Page 77167]]
not set up to be eligible for FDIC (or NCUSIF) pass-through deposit (or
share) insurance. Specifically, proposed Sec. 1005.18(b)(2)(i)(B)(13)
would require that if a prepaid account product is not set up to be
eligible for FDIC deposit or NCUSIF share insurance, a financial
institution would have to include a statement on the short form
disclosure that FDIC deposit insurance or NCUSIF share insurance, as
appropriate, does not protect funds loaded into the prepaid account, in
a form substantially similar to the clause set forth in Model Forms A-
10(c) and (d).
The Bureau seeks comment on all aspects of this part of the
proposal. Specifically, the Bureau solicits comment on whether the
existence--or lack thereof--of pass-through deposit (or share)
insurance should be disclosed on retail packaging, online disclosures,
or in any other medium, as many consumer advocacy group comments to the
Prepaid ANPR suggested. The Bureau has also observed that financial
institutions currently use varied language to describe FDIC (or NCUSIF)
insurance. The Bureau therefore solicits comment on whether specific
language should be used to describe pass-through deposit (or share)
insurance, and if so, what that language should be. The Bureau also
solicits comment on whether there is a simple way that this, and other
conditions on the applicability FDIC pass-through insurance described
above, can be disclosed, particularly in retail stores given the
limited space available on card packaging material. Finally, the Bureau
solicits comment on whether non-banks that issue prepaid accounts could
apply the proposed statement regarding FDIC or NCUSIF insurance to
their products, or whether the Bureau should propose an alternative
requirement regarding the disclosure of the availability of FDIC or
NCUSIF insurance for non-banks that issue prepaid accounts.
18(b)(2)(i)(B)(14) CFPB Web Site
Proposed Sec. 1005.18(b)(2)(i)(B)(14) would require disclosure of
the URL of the Web site of the Consumer Financial Protection Bureau in
a form that is substantially similar to the clauses set forth in
appendix A-10(a) of this part. The Bureau intends to develop resources
on its Web site that would, among other things, provide basic
information to consumers about prepaid accounts, the benefits and risks
of using them, how to use the proposed disclosures, and a URL to the
Bureau's complaint portal for prepaid products.
18(b)(2)(i)(C) Disclosing Variable Fees
Proposed Sec. 1005.18(b)(2)(i)(C) would set forth how, within the
confines of the proposed short form disclosure, financial institutions
could disclose fees that may vary. As noted above, in many instances,
prepaid accounts may have certain fees that vary depending on how a
consumer uses the account. For example, monthly periodic fees are, for
some prepaid account products, waived when a consumer receives direct
deposit or when the monthly balance exceeds a certain amount. In some
instances, these conditional situations could become complicated and
difficult to explain on a short form disclosure, particularly for
multiple fees. The Bureau believes that allowing multiple, complex
disclaimers on a single form would be complicated and make
comprehension and comparisons more difficult.
Thus, the Bureau is proposing Sec. 1005.18(b)(2)(i)(C), which
would provide that if the amount of the fee that a financial
institution imposes for each of the fee types disclosed pursuant to
proposed Sec. 1005.18(b)(2)(i)(B) could vary, a financial institution
would have to disclose the highest fee it could impose on a consumer
for utilizing the service associated with the fee, along with a symbol,
such as an asterisk, to indicate that a lower fee might apply, and
include text explaining that the fee could be lower, in a form
substantially similar to the clause set forth in the Model Forms A-
10(a) through (d) in appendix A. Proposed Sec. 1005.18(b)(2)(i)(C)
would also state that a financial institution would have to use the
same symbol and text for all fees that could be lower, but could use
any other part of the prepaid account product's packaging material or
Web site to provide more detail about how a specific fee type may be
lower. Proposed Sec. 1005.18(b)(2)(i)(C) would further state that a
financial institution must not disclose any third party fees imposed in
connection with any of the fees disclosed pursuant to Sec.
1005.18(b)(2)(i)(B)(1) through (8). To the extent third party fees
apply or fees could be lower, the Bureau is not proposing to allow that
information to be conveyed on the short form beyond allowing the
financial institution to use a symbol to indicate when this is the
case.
Proposed comment 18(b)(2)(i)(C)-1 would provide examples of how to
disclose variable fees on the short form in compliance with proposed
Sec. 1005.18(b)(2)(i)(C). Specifically, the proposed comment would
explain that, for example, if a financial institution charges a monthly
fee of $4.95, but the financial institution waives this fee if a
consumer receives direct deposit payments into the prepaid account, the
financial institution would list a monthly fee of $4.95 on the short
form disclosure with an asterisk (or other symbol) next to the dollar
amount that refers to a statement that explains the fee may be lower.
The proposed comment would also clarify that another example might be
if a financial institution charges a cash reload fee of $3.95 at reload
networks that are not agents of the financial institution but would
waive this fee if a consumer loads money at a point-of-sale terminal
operated by a retailer that is an agent of the financial institution.
In this example, the financial institution would disclose a cash reload
fee of $3.95 on the short form disclosure pursuant to proposed Sec.
1005.18(b)(2)(i)(C) with an asterisk (or other symbol) next to the
dollar amount that refers to the same statement that the fee may be
lower. The proposed comment would further clarify that proposed Sec.
1005.18(b)(2)(i)(C) does not permit a financial institution explain the
conditions under which a fee may be lower, but a financial institution
could use any other part of the prepaid account product's packaging
material or may use its Web site to disclose that information, and that
information would also be required to be disclosed pursuant to proposed
Sec. 1005.18(b)(2)(ii)(A). Proposed comment 18(b)(2)(i)(C)-2 would
explain that third parties could include service providers and other
entities, regardless of whether the entity is an agent of the financial
institution. The Bureau believes that regardless of whether a third
party has a relationship with the financial institution, no additional
fees should be disclosed on the short form.
The Bureau recognizes that its proposed approach to the disclosure
of variable fees on the short form could potentially obscure some
complexity in a prepaid account's fee structure. The Bureau, however,
proposes to require that this information be disclosed on the long form
(see proposed Sec. 1005.18(b)(2)(ii)(A)) and to permit its disclosure
outside the confines of the short form to mitigate any risk of
confusion. See comment 18(b)(2)(i)(C)-1. Thus, the Bureau believes that
its proposed short form disclosure--and the requirement to disclose the
highest fee with an indication that the fee may be lower in certain
circumstances--would allow consumers to know the maximum they will pay
for that fee type while indicating to consumers when
[[Page 77168]]
they could qualify for a lower fee. The Bureau, however, recognizes the
compromises it has made, and it seeks comment on whether there are
other ways that variability should be addressed. The Bureau also
solicits feedback on whether it should mandate or permit the disclosure
of third party fees on the short form. Also, the Bureau seeks comment
on whether financial institutions should be allowed to use more than
one type of symbol to explain variability of fees listed in the short
form. Additionally, the Bureau also seeks comment on whether a de
minimis exception should be allowed that would permit financial
institutions to disclose a different fee if it is close in value to the
highest fee.
18(b)(2)(ii) Long Form Content Requirements
In addition to the short form, the proposed rule would require
financial institutions to provide a long form disclosure pre-
acquisition. Pursuant to proposed Sec. 1005.18(b)(3)(iii)(A), in most
cases, the contents of the long form disclosure discussed below would
have to be in a form substantially similar to proposed Sample Form A-
10(e).
18(b)(2)(ii)(A) Fees
Proposed Sec. 1005.18(b)(2)(ii)(A) would require the disclosure in
the long form of all fees that may be imposed by the financial
institution in connection with a prepaid account. For each fee type,
the financial institution would have to disclose the amount of the fee,
the conditions, if any, under which the fee may be imposed, waived, or
reduced, including, to the extent known, any third party fee amounts
that may apply. Proposed Sec. 1005.18(b)(2)(ii)(A) would also require
that if such third party fees may apply but the amount of those fees
are not known, a financial institution would have to instead include a
statement indicating that third party fees may apply without specifying
the fee amount, and that a fee imposed by a third party who acts as an
agent of the financial institution for purposes of the prepaid account
would always be disclosed.
As noted above, this part of the proposal is authorized under EFTA
sections 904(a) and (c), 905(a), and Dodd-Frank Act sections 1032(a).
The Bureau believes that pre-acquisition disclosures of all fees for
prepaid accounts will, consistent with EFTA section 902 and Dodd-Frank
section 1032(a), assist consumers' understanding of the terms and
conditions of their prepaid accounts, and ensure that the features of
the prepaid accounts are fully, accurately, and effectively disclosed
to consumers in a manner that permits consumers to understand the
costs, benefits, and risks associated with the account. The Bureau
believes that this disclosure would, in many ways, be similar to what
many financial institutions disclose today regarding prepaid accounts'
fee structures in the terms and condition documents, but the content of
the long form in proposed Sec. 1005.18(b)(2)(ii)(A) would be provided
to a consumer as a stand-alone document before a consumer acquires a
prepaid account.\276\
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\276\ Pursuant to existing Sec. 1005.7(b)(5), as modified by
proposed Sec. 1005.18(f), a version of the long form must also be
provided in the terms and conditions for prepaid accounts at the
time the consumer contracts for an electronic funds transfer or
before the first electronic funds transfer is made involving the
consumer's account. See section-by-section analysis of proposed
Sec. 1005.18(f).
---------------------------------------------------------------------------
Proposed Sec. 1005.18(b)(2)(ii)(A) would also state that a
financial institution could not utilize any symbols, such as asterisks,
to explain the conditions under which any fee may be imposed. The
Bureau believes it is important that consumers can easily follow the
information in the long form, and that, when financial institutions do
not face space constraints like on the short form, text should be used
to explain any information about fees, instead of relying on a consumer
first to notice symbols and then associate them with text in a
footnote, for example. See proposed comment 18(b)(2)(ii)(A)-2.
The Bureau also proposes to add commentary to explain the format of
the long form disclosure. Specifically, proposed comment
18(b)(2)(ii)(A)-1 would explain that for example, if a financial
institution charges a cash reload fee, the financial institution must
list the amount of the cash reload fee and also specify any
circumstances under which a consumer could qualify for a lower fee. The
proposed comment would further explain that relevant conditions to
disclose in the long form disclosure could also include, for example,
if there is a limit on the amount of cash a consumer may load into the
prepaid account in a transaction or during a particular time period.
Proposed comment 18(b)(2)(ii)(A)-2, would explain that a financial
institution may, at its option, choose to disclose pursuant to proposed
Sec. 1005.18(b)(2)(ii)(A), any service or feature it provides or
offers even if it does not charge a fee for that service or feature.
The proposed comment would clarify that, for example, a financial
institution may choose to list ``online bill pay service'' and indicate
that the fee is ``$0'' or ``free'' when the financial institution does
not charge consumers a fee for that service or feature. Proposed
comment 18(b)(2)(ii)(A)-2 would further clarify that by contrast, where
a service or feature is available without a fee for an introductory
period, but where a fee may be imposed at the conclusion of the
introductory period for that service or feature, the financial
institution could not indicate that the fee is ``$0.'' The proposed
comment would clarify that the financial institution would instead have
to list the main fee and explain in the separate explanatory column how
the fee could be lower during the introductory period, what that
alternative fee would be, and when it will be imposed. The proposed
comment would provide further guidance that similarly, if a consumer
would have to enroll in an additional service to avoid incurring a fee
for another service, neither of those services would disclose a charge
of, ``$0,'' but, instead, would list each fee amount imposed if the
consumer does not enroll. The proposed comment would also provide an
example that if the monthly fee is waived once a consumer receives
direct deposit payments into the prepaid account, the monthly fee
imposed upon a consumer if they do not receive direct deposit would be
disclosed in the long form, and an explanation regarding how receiving
direct deposit might lower the fee would have to be included in the
explanatory column in the long form. A financial institution's ability
to disclose any fees of its choosing in the long form disclosure (as
long as the fee amounts disclosed are accurate) is different from the
disclosures required on the short form (see proposed Sec.
1005.18(b)(2)(i)(B)(1) through (7) and proposed comment 18(b)(2)(i)-1),
which must always be included, even when inapplicable to a particular
prepaid account product, and a financial institution cannot choose to
disclose more fee information than what is required.
Proposed comment 18(b)(2)(ii)(A)-3 would provide guidance on the
disclosure of third party fees in the long form disclosure.
Specifically, the proposed comment would explain that proposed Sec.
1005.18(b)(2)(ii)(A) generally requires the disclosure, to the extent
known, of any third party fee amounts that may apply. Proposed comment
18(b)(2)(ii)(A)-3 would further explain that, for example, a financial
institution that offers balance updates to a consumer via text message
would disclose that mobile phone carrier data charges could apply for
each text message a consumer receives. The
[[Page 77169]]
proposed comment would also clarify that proposed Sec.
1005.18(b)(2)(ii)(A) requires that a financial institution must always
disclose in the long form any fees imposed by a third party who is
acting as an agent of the financial institution for purposes of the
prepaid account product. The proposed comment would also provide an
example that any fees that the provider of a cash reload service who
has a relationship with the financial institution may impose would be
disclosed in the long form.
18(b)(2)(ii)(B) Overdraft Services and Other Credit Features
Proposed Sec. 1005.18(b)(2)(ii)(B) would require the financial
institution to include in the long form the disclosures described in
Sec. 1026.60(a), (b) and (c) of Regulation Z (12 CFR part 1026) if at
any point, a credit plan that would be a credit card account under
Regulation Z, 12 CFR part 1026 may be offered in connection with the
prepaid account. Proposed Sec. 1005.18(b)(2)(ii)(B) would further
state that such a credit plan could be accessed by a credit card under
Regulation Z, 12 CFR 1026.2(a)(15)(i), that also is an access device
that accesses the prepaid account, or a credit plan could be accessed
by an account number that is a credit card under Regulation Z where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor offering the
plan.
The Bureau recognizes that Regulation Z does not require these
disclosures to be provided until a consumer is actually solicited for
the credit plan. The Bureau, however, believes it is important for
consumers who are considering whether to acquire a prepaid account to
know not only if a credit plan could be offered at any point, as
required to be disclosed pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(9), but also what the possible cost of such a plan
might be. Because of the space constraints on the short form, as
discussed above, the Bureau believes it is appropriate for a consumer
to receive as part of the long form disclosure more complete
information about any credit plan that could be offered to them, even
if they would not be solicited for such a plan until at least thirty
days after registering a particular prepaid account. See proposed Sec.
1005.18(g) and 1026.12(h).
Proposed comment 18(b)(2)(ii)(B)-1 would clarify that the
disclosures described in Sec. 1026.60(a), (b) and (c) of Regulation Z
(12 CFR part 1026) would have to appear in the form required under 12
CFR 1026.60(a), (b) and (c), and, to the extent possible, on the same
printed page or Web page as the rest of the information required to be
listed pursuant to proposed Sec. 1005.18(b)(2)(ii). The Bureau
recognizes that depending on the number of fees included in the long
form disclosure, it might not be possible to include both disclosures
on the same printed page. The Bureau believes, however, that to the
extent it would be possible to include these disclosures on the same
printed page or Web page, doing so would make it easier for the
consumer to review the disclosures.
18(b)(2)(ii)(C) Telephone Number, Web Site and Mailing Address
Proposed Sec. 1005.18(b)(2)(ii)(C) would require disclosure of the
name, telephone number, Web site, and mailing address of the person or
office that a consumer could contact to learn about the terms and
conditions of the prepaid account, to obtain prepaid account balance
information, to request a written copy of transaction history pursuant
to proposed Sec. 1005.18(c)(1)(iii) if the financial institution does
not provide a periodic statement pursuant to existing Sec. 1005.9(b)
or to notify the person or office when a consumer believes that an
unauthorized electronic fund transfer has occurred as required by
existing Sec. 1005.7(b)(2) or proposed Sec. 1005.18(d)(1)(ii).
18(b)(2)(ii)(D) Statement Regarding FDIC (or NCUSIF) Insurance
Proposed Sec. 1005.18(b)(2)(ii)(D) would require that the long
form also include the disclosure required under proposed Sec.
1005.18(b)(2)(i)(B)(13) regarding FDIC (or NCUSIF), pass-through
deposit (or share) insurance, when appropriate. This statement would be
the same as the statement included on the short form pursuant to
proposed Sec. 1005.18(b)(2)(i)(B)(13). For more details, see section-
by-section analysis of proposed Sec. 1005.18(b)(2)(i)(B)(13).
18(b)(2)(ii)(E) CFPB Web Site and Telephone Number
Proposed Sec. 1005.18(b)(2)(ii)(D) would require disclosure of the
URL of the Web site of the Consumer Financial Protection Bureau, and a
telephone number a consumer could contact and the URL a consumer could
visit to submit a complaint related to a prepaid account. As discussed
in the section-by-section analysis of proposed Sec.
1005.18(b)(2)(i)(B)(14), the Bureau intends to develop resources on its
Web site that would, among other things, provide basic information to
consumers about prepaid accounts, the benefits and risks of using them,
and how to use the proposed disclosures. The Bureau also believes that
consumers would benefit from seeing the Consumer Financial Protection
Bureau's Web site and telephone number that they can use to submit a
complaint about a prepaid account.
The Bureau seeks comment on all aspects of the proposed contents of
the long form disclosure. In particular, the Bureau seeks comment on
whether it should propose more specific content requirements for the
long form disclosure, or whether some of the information the Bureau
proposes to include on the long form is unnecessary.
18(b)(3) Form of Pre-Acquisition Disclosures
Proposed Sec. 1005.18(b)(3) would set forth the requirements for
how the short form and long form disclosures must be presented.
Specifically, proposed Sec. 1005.18(b)(3)(i) sets forth general
requirements for written, electronic, and oral disclosures. Proposed
Sec. 1005.18(b)(3)(ii) would provide requirements regarding whether
these disclosures would have to be in a retainable form. Proposed Sec.
1005.18(b)(3)(iii) would set forth parameters for the tabular form in
which the disclosures would have to be presented, including specific
requirements for short forms presenting multiple service plans.
18(b)(3)(i) General
Except when such disclosures are provided electronically or orally,
as described in proposed Sec. 1005.18(b)(3)(iii)(B) and (C), proposed
Sec. 1005.18(b)(3)(i)(A) would provide that short form and long form
disclosures required by proposed Sec. 1005.18(b)(2)(i) and (ii)
generally must be disclosed in writing. The Bureau believes that
consumers can best review the terms of a prepaid account before
acquisition when seeing these disclosures in written form. As is
discussed above, however, the Bureau recognizes that in certain
situations it is not practicable to provide written disclosures. For
example, when a consumer acquires a prepaid account on the internet,
the Bureau believes that a financial institution cannot easily provide
written (non-electronic) disclosures to a consumer pre-acquisition.
Currently, Regulation E permits disclosures to be provided in
electronic form, subject to compliance with consumer consent and other
applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C 7001, et seq.). Sec.
1005.4(a)(1). The E-Sign Act generally allows the use of electronic
records to
[[Page 77170]]
satisfy any statute, regulation, or rule of law requiring that such
information be provided in writing, if a consumer has affirmatively
consented to such use and has not withdrawn such consent, and if
certain format of delivery requirements are met. Before receiving such
consent, the E-Sign Act requires that financial institutions make clear
to a consumer that they have the option of receiving records in paper
form, to specify whether a consumer's consent applies to a specific
transaction or throughout the duration of their relationship with the
financial institution, and to inform a consumer of how he or she might
withdraw consent and update information needed to contact them
electronically, among other requirements. The E-Sign Act also requires
financial institutions to retain record of any disclosures that have
been provided to a consumer electronically so that a consumer can
access them later.
When the Bureau issued regulations on remittance transfers, the
Bureau altered Regulation E's general requirement for remittance that
provides electronic disclosures are permissible as long as they comply
with the E-Sign Act. The Bureau mandated that certain disclosures could
be provided electronically, in retainable form, without having to
comply with the E-Sign Act if the sender electronically requests the
remittance transfer provider to send the remittance transfer. See Sec.
1005.31(a)(2).
The Bureau is proposing to modify the general Regulation E
electronic disclosure requirement for prepaid accounts in proposed
Sec. 1005.18(b)(3)(i)(B), which would require that a financial
institution would have to provide the short form and long form
disclosure required by proposed Sec. 1005.18(b)(2)(i) and (ii) in
electronic form when a consumer acquires a prepaid account through the
Internet, including via a mobile application. Proposed Sec.
1005.18(b)(3)(i)(B) would also state that disclosures required by
proposed Sec. 1005.18(b)(2)(i) and (ii) would have to be provided
electronically in a manner which is reasonably expected to be
accessible in light of how a consumer is acquiring the prepaid account.
In addition, proposed Sec. 1005.18(b)(3)(i)(B) would provide that the
electronic disclosures required by Sec. 1005.18(b)(2)(i) and (ii)
would not need to meet the consumer consent and other applicable
provisions of the E-Sign Act.
As in the remittances pre-purchase disclosure context, the Bureau
believes altering the general Regulation E requirement for prepaid
accounts is necessary to ensure consumers that receive relevant
disclosure information at the appropriate time. The Bureau believes
that during the pre-acquisition time period for prepaid accounts it is
important for consumers who decide to go online to acquire a prepaid
account to see the relevant disclosures for that prepaid account
product in electronic form. The Bureau believes that consumers will
often decide whether to acquire a particular prepaid account after
doing significant research online, and that if they are not able to see
disclosures on the products' Web sites, they cannot make an informed
acquisition decision. As discussed above, Regulation E's current
general E-Sign provision allows financial institutions to provide
disclosures electronically at their discretion; \277\ however, the
Bureau believes that, for Internet acquisitions of prepaid products, a
mandate of electronic disclosures on Web sites is more appropriate.
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\277\ See Sec. 1005.4(a)(1).
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The general Regulation E E-Sign provision also requires that
financial institutions comply with E-Sign consent provisions when
providing disclosures electronically. The Bureau is not proposing to
require such compliance for prepaid accounts that are acquired through
the Internet. Instead, the Bureau is proposing Sec.
1005.18(b)(3)(i)(B), which would state that electronic disclosures of
the short form and long forms for prepaid accounts acquired through the
Internet would only have to be provided electronically in a manner
which is reasonably expected to be accessible in light of how a
consumer acquired the prepaid account. For example, if a consumer has
acquired a prepaid account through a Web site, it is reasonable to
expect that a consumer would be able to view electronic disclosures on
a Web site and no E-Sign consent would be necessary. The Bureau notes,
however, that this alternative E-Sign requirement applies only to the
pre-acquisition disclosure of the short form and long form disclosures
for prepaid accounts acquired over the Internet and does not alter the
application of the general E-Sign provision in Regulation E to prepaid
account after acquisition, or for any other type of account.
The Bureau also proposes to add comment 18(b)(3)(i)(B)-1 which
would explain how to disclose the short and long forms electronically.
Specifically, the proposed comment would explain that a financial
institution may, at its option, provide the short and long form
disclosures on the same Web page or two different Web pages as long as
the disclosures are provided in accordance with the pre-acquisition
disclosure requirements in proposed Sec. 1005.18(b)(1)(i). The Bureau
recognizes, as several consumer advocacy group commenters to the
Prepaid ANPR stated, that disclosures provided electronically on Web
sites may be difficult for consumers to find because they are sometimes
buried several pages deep or require some form of registration or
logging on to access. To mitigate the risk of consumers having trouble
locating electronic disclosures on a Web site, the Bureau generally
believes that disclosures provided on a Web site should be easy to
locate, whether they are provided on the same Web page, or on two
separate pages. See proposed comment 18(b)(1)-2.
Proposed comment 18(b)(3)(i)(B)-2 would provide guidance around the
lack of an E-sign requirement for prepaid account pre-acquisition
disclosures. Specifically, the proposed comment would clarify that if,
for example, a consumer is acquiring a prepaid account using a
financial institution's Web site, it would be reasonable to expect that
a consumer would be able to access pre-acquisition disclosures provided
on a similar Web site.
Proposed Sec. 1005.18(b)(3)(i)(B) would also require that
disclosures provided to a consumer through a Web site as described in
proposed Sec. 1005.18 (b)(2)(i)(B)(11) would have to be made in an
electronic form using machine-readable text that is accessible via both
Web browsers and screen readers. Proposed comment 18(b)(3)(i)(B)-3
would clarify that a disclosure would not comply with this requirement
if it was not provided in a textual format that can be read
automatically by an Internet search engines or other computer systems.
This textual format could include, for example, JSON, XML, or a similar
format.
18(b)(3)(i)(C) Oral Disclosures
The Bureau is also proposing Sec. 1005.18(b)(3)(i)(C), which would
state that disclosures required by proposed Sec. 1005.18(b)(2)(i)
would have to be provided orally when a consumer acquires a prepaid
account orally by telephone as described in proposed Sec.
1005.18(b)(3)(iii). Proposed Sec. 1005.18(b)(3)(i)(C) would also state
that disclosures provided to a consumer through the telephone number
described in proposed Sec. 1005.18(b)(2)(i)(B)(11) also would have to
be made orally. The Bureau believes that when a consumer acquires a
[[Page 77171]]
prepaid account orally by telephone or when a consumer requests to hear
the long form disclosure in a retail store by calling the telephone
number disclosed on the short form pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(11), it is not practicable for a financial
institution to provide these disclosures in written form and therefore
oral disclosures could be provided.
18(b)(3)(ii) Retainable Form
Proposed Sec. 1005.18(b)(3)(ii) would require that disclosures
required by proposed Sec. 1005.18(b)(2)(i) and (ii) be provided in a
retainable form except for disclosures provided to a consumer through
the telephone number described in proposed Sec.
1005.18(b)(2)(i)(B)(11) or disclosure provided orally pursuant to
proposed Sec. 1005.18(b)(1)(iii). The Bureau notes, however, that
Regulation E does have general recordkeeping requirements. See Sec.
1005.13(b). After having acquired a prepaid account orally, a consumer
would receive the long form disclosure in the full terms and conditions
accompanying the prepaid account inside its packaging. See proposed
Sec. 1005.18(f). Further, the long form disclosure would also
presumably be available on the financial institution's Web site as part
of the full prepaid account agreement that would be required to be
posted pursuant to proposed Sec. 1005.19, discussed below, should a
consumer want to review it post-acquisition. Thus, the Bureau does not
believe it is necessary for the disclosures provided to a consumer for
a prepaid account acquired orally by telephone or the long form
disclosure that a consumer may access by telephone pre-acquisition in a
retail store to be retainable, and the Bureau does not believe it is
practicable to provide retainable forms of oral disclosures. The Bureau
does, however, believe that providing a retainable format of written
and electronic disclosures is feasible in all other contexts. Proposed
comment 18(b)(3)(ii)-1 would explain that a financial institution may
satisfy the requirement to provide electronic disclosures in a
retainable form if it provides disclosures on its Web site in a format
that would be capable of being printed, saved or emailed to a consumer.
18(b)(3)(iii) Tabular Format
18(b)(3)(iii)(A) General
The Bureau is also proposing, in proposed Sec.
1005.18(b)(3)(iii)(A), tabular form requirements that would be used to
present the short and long form disclosures. Currently, the Bureau
believes that most financial institutions use some sort of table format
to disclose prepaid account fees in their terms and conditions
documents, although each institution selects different fees to
highlight and presents them in different orders. Financial institutions
also implement a variety of formats to present fee information on
packaging material in retail stores. Thus, the burden is on consumers
to identify the fees that are most important to them in the various
tabular formats to determine the best product for their needs.
During consumer testing, however, the Bureau found that few
participants researched prepaid accounts before acquisition,
particularly in retail stores. The Bureau believes that at least part
of the reason that consumers do not do much comparison shopping is that
doing so is not straightforward. In a retail store, prepaid accounts
are often displayed behind counters, close to check-out lanes at ends
of aisles and in other areas that can often be crowded or difficult to
access, which can limit careful review of a product's terms. The Bureau
believes that financial institutions are more likely to present fee
information in a clearer and more complete format for prepaid account
products offered online, but, as mentioned above, the format used to
display this information varies, making comparisons harder. Although
some variation is inevitable because each financial institution offers
different services in connection with its prepaid accounts, the Bureau
nevertheless believes that requiring use of a standardized form to
disclose fee information can minimize some variation by maintaining a
consistent format and, in the case of the short form, also keeping many
of the fee types that are listed constant.
The Bureau therefore is proposing that, except as provided in
proposed Sec. 1005.18(b)(3)(iii)(B), short form disclosures required
by proposed Sec. 1005.18(b)(2)(i) that are provided in writing or
electronically shall be in the form of a table substantially similar to
proposed Model Forms A-10(a) through (d), as applicable. Long form
disclosures required by proposed Sec. 1005.18(b)(2)(ii)(A) through (E)
that are provided in writing or electronically would have to be in a
form of a table substantially similar to proposed Sample Form A-
10(e).\278\ The Bureau is proposing a sample form for the long form
disclosure instead of a model form, as is proposed for the short form
disclosure, because the Bureau believes the long form disclosures could
vary depending on the number of fees included in the form and the
extent of relevant conditions that would have to be disclosed in
connection with each fee. Nevertheless the Bureau solicits comment on
whether it should provide a model form for the long form disclosure.
---------------------------------------------------------------------------
\278\ The Bureau notes that the explanatory text used in the
model long form disclosure is meant only to serve as an example, as
the Bureau is proposing only formatting requirements for the long
form disclosure, and not specific language.
---------------------------------------------------------------------------
18(b)(3)(iii)(B) Disclosures for Prepaid Account Products Offering
Multiple Service Plans
As an exception to proposed Sec. 1005.18(b)(3)(iii)(A) (which
applies to products with a single fee schedule), proposed Sec.
1005.18(b)(3)(iii)(B) would set forth tabular form requirements for
prepaid products offering multiple service plans. Specifically,
proposed Sec. 1005.18(b)(3)(iii)(B)(1) would state that when a
financial institution offers multiple service plans for a particular
prepaid account product and each plan has a different fee schedule, the
information required by proposed Sec. 1005.18(b)(2)(i)(B)(1) through
(7) could be provided for each service plan in the form of a table
substantially similar to the proposed Model Form A-10(f), and must
include descriptions of each service plan included in the table using
the terms, ``Pay-as-you-go plan,'' ``Monthly plan,'' ``Annual plan,''
or substantially similar terms. Proposed Sec. 1005.18(b)(3)(iii)(B)(1)
would further state when disclosing multiple service plans on one short
form, the information required by proposed Sec. 1005.18(b)(2)(i)(B)(8)
must only be disclosed once in the table. Alternatively, proposed Sec.
1005.18(b)(3)(iii)(B)(1) would permit a financial institution to
disclose just the information required by proposed Sec.
1005.18(b)(2)(i) for only the service plan in which a consumer is
enrolled automatically by default upon acquiring the prepaid account,
in the form of a table substantially similar to proposed Model Form A-
10(c) or (d). Finally, proposed Sec. 1005.18(b)(3)(iii)(B)(1) would
state that regardless of whether a financial institution discloses all
service plans on one form or chooses only to disclose the service plan
in which a consumer is automatically enrolled by default, the
disclosures required by proposed Sec. 1005.18(b)(2)(i)(B)(9) through
(14) would only have to be disclosed once.
As discussed above, the Bureau believes that it is important for
short and long form disclosures to have a standardized format in order
to facilitate consumers' comparison of multiple
[[Page 77172]]
products and their ability to understand key fee and service
information about a prepaid product. The Bureau also recognizes,
however, that financial institutions offering multiple service plans on
one prepaid account need flexibility to disclose information about
multiple plans to a consumer. The Bureau therefore is proposing that
financial institutions may use one short form table that discloses the
information required by proposed Sec. 1005.18(b)(2)(i) for each of the
service plans to highlight for a consumer that such plans exist. At its
option, a financial institution could also choose to only disclose the
service plan in which a consumer is enrolled upon acquiring the prepaid
account using the tabular format described in proposed Sec.
1005.18(b)(3)(iii)(A) and note elsewhere on the packaging material or
on its Web site the other service plans it offers. The Bureau believes
that these options will give financial institutions the flexibility to
accommodate disclosure of multiple service plans, while also
maintaining the simplicity of the short and long form table designs to
facilitate consumers' comparison shopping. In consumer testing, some
participants were confused by short forms that included multiple
service plans similar to the one proposed in Model Form A-10(f). The
Bureau therefore also considered proposing that financial institutions
must disclose each service plan in a separate short form table instead
of allowing financial institutions to disclose all of the plans on one
short form. Some testing participants also were unsure of which service
plan applied upon purchase when seeing multiple service plans on one
short form, an issue that the Bureau believes may be resolved if a
financial institution only discloses the fee schedule for the plan that
applies upon a consumer's acquisition of the account. The Bureau thus
seeks comment on the best way to accommodate prepaid accounts products
offering multiple service plans on the short form disclosure while
providing accurate and sufficient information to consumers.
The Bureau also acknowledges that only disclosing the service plan
in which a consumer is automatically enrolled by default upon acquiring
the prepaid account could potentially conflict with the Bureau's
proposed requirement in proposed Sec. 1005.18(b)(2)(i)(C) that
financial institutions would have to disclose the most expensive fee
for each fee type required to be disclosed in the short form. For
example, a ``pay-as-you-go'' plan in which a consumer is enrolled upon
acquisition might not impose a periodic fee, and thus, could disclose
``$0'' in the top-line of the short form where the periodic fee
disclosure would be required. Under such a plan, if a consumer were to
opt into a monthly plan, however, they could be charged a periodic fee
higher than $0. The Bureau therefore also seeks comment on whether the
disclosure of only the default plan on the short form would be clear or
if the Bureau should require that financial institutions always
disclose multiple service plans on the short form.
Proposed Sec. 1005.18(b)(3)(iii)(B)(2) would state that the
information required to be disclosed in the long form by proposed Sec.
1005.18(b)(2)(ii) must be presented for all service plans in the form
of a table substantially similar to proposed Sample Form A-10(g). The
Bureau believes the long form disclosure should include all fee
information about a prepaid account product, and therefore it should
contain the fee schedule for every possible service plan.
Additionally, the Bureau proposes to add comment 18(b)(3)(iii)(B)-1
which would provide additional guidance on its proposed definition of
multiple service plans. Specifically, proposed comment 18(b)(3)(iii)(B)
would state that the multiple service plan disclosure provisions in
proposed Sec. 1005.18(b)(3)(iii)(B) apply when a financial institution
offers more than one service plan for a particular prepaid account
product, and each plan has a different fee schedule. For example, a
financial institution might offer a prepaid account product with one
service plan where a consumer pays no periodic fee but instead pays a
fee for each transaction, and another plan that includes a monthly fee
but no per transaction fee. The proposed comment would also state that
a financial institution could also offer a prepaid account product with
one service plan for consumers who utilize another one of a financial
institution's non-prepaid services (e.g., a mobile phone service) and a
different plan for consumers who only utilize a financial institution's
prepaid account products. Each of these plans would be considered a
``service plan'' for purposes of proposed Sec. 1005.18(b)(3)(iii).
18(b)(4) Specific Formatting Requirements
18(b)(4)(i) Grouping
18(b)(4)(i)(A) Short Form Disclosures
Proposed Sec. 1005.18(b)(4)(i)(A) would contain several formatting
requirements for the short form disclosure. First, proposed Sec.
1005.18(b)(4)(i)(A) would state that the information required by
proposed Sec. 1005.18(b)(2)(i)(A) or proposed Sec. 1005.15(c)(2),
when applicable, would have to be grouped together. Proposed Sec.
1005.18(b)(4)(i)(A) would further state that the information required
by proposed Sec. 1005.18(b)(2)(i)(B)(1) through (4) would have to be
generally grouped together and appear in the order of the Model Forms
in appendix A-10(a) through (d) of this part. As discussed above, the
Bureau believes that grouping the fees required to be disclosed by
proposed Sec. 1005.18(b)(2)(i)(B)(1) through (4) in the top-line will
more effectively direct consumers' attention to these fees, which the
Bureau believes are the most important fees. The Bureau also believes
that, when it is applicable, the payroll card account or government
benefit account notice banner should appear at the top of the short
form to ensure consumers understand that they do not have to accept
such an account. Finally, proposed Sec. 1005.18(b)(4)(i)(A) would
further state that the information required by proposed Sec.
1005.18(b)(2)(i)(B)(5) through (9) would have to be generally grouped
together and appear in the order of the Model Forms in appendix A-10(a)
through (d). The Bureau also proposes, in proposed Sec.
1005.18(b)(4)(i)(A), that the textual information required by proposed
Sec. 1005.18(b)(2)(i)(B)(10) through (14) must be grouped together on
the short form disclosure and in the order they appear in proposed
Model Forms A-10(c) and (d). The Bureau recognizes that some consumers
may focus only on fee information and not review textual information.
Indeed, in testing, many consumers did not notice some of the textual
information included on model forms until the facilitator pointed it
out to them. The Bureau therefore seeks comment on whether there is a
better way to group the textual information on the short form
disclosure to increase the likelihood that consumers will read it.
The Bureau further proposes in Sec. 1005.18(b)(4)(i)(A) that the
URL of the Web site disclosed pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(11) would not be permitted to exceed twenty-two
characters, and that it must be meaningfully named. By meaningfully
named, the Bureau means a URL that uses real words or phrases,
particularly those related to the actual prepaid account product. The
Bureau believes twenty-two characters is the maximum length of a URL
that can fit legibly on a short form disclosure that would fit on most
existing retail packaging material.
[[Page 77173]]
The Bureau believes these parameters will ensure that a consumer can
easily enter the URL of the Web site listed on the short form into a
mobile device when shopping in a retail store in order to access the
long form. Using a meaningfully named URL will also ensure that it is
easy for a consumer to understand, which the Bureau believes will
increase the likelihood that a consumer would utilize the URL to seek
out more information about a prepaid account product.
Nevertheless the Bureau seeks comment on all aspects of this part
of the proposal. Specifically, the Bureau solicits comment on whether a
requirement that the URL be meaningfully named could make it more
challenging for financial institutions to use shortened URLs or other
mechanisms on the short form to facilitate accessibility of the long
form in retail locations.
18(b)(4)(i)(B) Long Form Disclosures
The Bureau proposes in Sec. 1005.18(b)(4)(i)(B) that all fees that
may be imposed by the financial institution in connection with a
prepaid account that proposed Sec. 1005.18(b)(2)(ii)(A) would require
to be disclosed in the long form must be generally grouped together and
organized by categories of function for which a consumer would utilize
the service associated with each fee. The Bureau believes that
disclosing fees in categories will aid consumers' navigation of the
long form disclosure, which would include all of a prepaid account's
fees and could be much longer than the short form disclosure. Proposed
Sec. 1005.18(b)(4)(i)(B) would also require that text describing the
conditions under which a fee could be imposed would have to appear in
the table directly to the right of the numeric fee amount disclosed.
The Bureau also proposes, in Sec. 1005.18(b)(4)(i)(B), that the
telephone number, Web site and mailing address, the statement regarding
FDIC insurance, if applicable, and the CFPB Web site and telephone
number, as required to be disclosed by proposed Sec.
1005.18(b)(2)(ii)(C) through (E) must be generally grouped together.
Proposed Sec. 1005.18(b)(4)(i)(B) would also require that the
information required by Sec. 1005.18(b)(2)(ii)(B) would have to be
generally grouped together.
18(b)(4)(i)(C) Multiple Service Plan Disclosures
The Bureau proposes in Sec. 1005.18(b)(4)(i)(C) that when a
financial institution provides disclosures in compliance with proposed
Sec. 1005.18(b)(3)(iii)(B)(1) and discloses the fee schedules of
multiple service plans together on one short form, the fees required to
be listed pursuant proposed Sec. 1005.18 (b)(2)(i)(B)(1) through (7)
that vary among service plans must be generally grouped together, the
fees that are the same across all service plans must be grouped
together, as set forth in proposed appendix A-10(f). Proposed Sec.
1005.18(b)(4)(i)(C) would further state that if the periodic fee varies
between service plans, the financial institution must use the term
``plan fee,'' or a substantially similar term when disclosing the
periodic fee for each service plan. The Bureau believes that, when a
financial institution chooses to disclose multiple service plans
together on one short form, it is most useful for a consumer to see all
the fees that vary among plans grouped together to more easily compare
the different plans. The Bureau seeks comment on whether this grouping
distinction for short forms that include multiple service plans makes
sense.
Proposed Sec. 1005.18(b)(4)(i)(C) would also state that the
incidence-based fees disclosed pursuant to proposed Sec. 1005.18
(b)(2)(i)(B)(8) must be grouped with the fees that are the same across
all service plans as set forth in proposed Model Form A-10(f). The
Bureau believes that since a financial institution would have to
consider total incidence across all plans when determining its
incidence-based fee disclosure to comply with proposed Sec.
1005.18(b)(2)(i)(B)(8), it makes sense that these fees would be grouped
with the fees that are the same across all service plans. See proposed
comment 18(b)(2)(i)(B)(8)-1.
18(b)(4)(ii) Prominence and Size
Proposed Sec. 1005.18(b)(4)(iii) would set forth the prominence
and size requirements for the short form and long form disclosures.
Generally, the Bureau believes that the information provided to
consumers in the short and long form disclosure should appear in a
large enough font size to ensure that consumers can easily read the
information. Further, in its testing, the Bureau found that some
participants had to use reading glasses or otherwise struggled to read
existing prepaid account disclosures. Also, many participants reported
a preference for larger font sizes to facilitate their ability both to
read and to understand disclosures. Thus, as discussed below, the
Bureau has proposed minimum font size requirements for both the short
form and long form disclosures in order to ensure that consumers can
easily read the disclosures. In addition, the Bureau believes that the
relative font sizes of the disclosures made on the short form should
ensure that consumers' attention is quickly drawn to the most important
information about a prepaid account. As described in more detail below,
the Bureau is therefore also proposing certain minimum font sizes for
the short form disclosure requirements described in proposed Sec.
1005.18(b)(2)(i) in addition to the requirement that the top-line fees
(i.e., periodic fee, per purchase fees, ATM withdrawal fees, and cash
reload fee) appear more prominently than all of the other information
included on the short form to create a visual hierarchy of information.
Proposed Sec. 1005.18(b)(4)(ii)(A) would require that all text
used to disclose the information pursuant to proposed Sec.
1005.18(b)(2) must be in a single, easy-to-read type face. Proposed
Sec. 1005.18(b)(4)(ii)(A) would also state that all text included in
the tables that would be required to be disclosed by proposed Sec.
1005.18(b)(3)(iii) would have to be all black or one color type and
printed on a white or other neutral contrasting background whenever
practical. The Bureau believes that contrasting colors for the text and
the background of the short form and long form disclosures will make it
easier for consumers to read the disclosure. The Bureau believes that
using a black color for the text and a white color for the background
of the form is the most clear presentation, but the Bureau also
recognizes that other similarly dark colors for text with a neutral
background color could just as clearly present the information. For
example, when including the payroll card account notice banner at the
top of the short form, a financial institution could use a grey
background if the background of the rest of the short form is white.
The Bureau believes this type of distinction would make it easier for a
consumer to see that banner.
Proposed Sec. 1005.18(b)(4)(ii)(B)(1) would require that the
information required to be disclosed by proposed Sec.
1005.18(b)(2)(i)(A) and proposed Sec. 1005.15(c)(2) for the payroll
card account or government benefit account notices banners would have
to appear in a minimum eight-point font or the corresponding pixel size
and appear in no larger a font than what is used for the information
required to be disclosed by proposed Sec. 1005.18(b)(2)(i)(B)(1)
through (4) in the top-line portion of the short form. Proposed Sec.
1005.18(b)(4)(ii)(B)(2) would require that the top-line fees required
to be disclosed by proposed Sec. 1005.18(b)(2)(i)(B)(1) through (4) be
more prominent than the other parts of
[[Page 77174]]
the disclosure required by proposed Sec. 1005.18(b)(2)(i) and appear
in a minimum 11 point font or the corresponding pixel size.
As discussed above, the Bureau believes that consumers commonly
incur these top-line fees when a financial institution imposes charges
for these services. In the Bureau's consumer testing, participants
reported that these fee disclosures were the most important to them. As
discussed in the section-by-section analysis of proposed Sec.
1005.18(b)(2)(i)(B)(1) through (4), the Bureau recognizes that a
financial institution may not charge a fee for all of these services.
For example, a financial institution might not charge any per purchase
fees when it imposes a monthly fee. The Bureau, however, still believes
that such fees should be disclosed in a more prominent and larger font
size than other information on the short form disclosure in order to
draw consumers' attention to this information before acquiring a
prepaid account. In proposed Model Form A-10(f), the amounts of these
fees appear in bold to make them more prominent than the other
information on the short form. The Bureau is also proposing pixel sizes
because it acknowledges that font sizes could vary when applied in
electronic contexts. Though the font sizes may differ, the relative
sizes of the components of the short form would have to remain
consistent to maintain the visual hierarchy of information included in
the form.
Additionally, the Bureau proposes in Sec. 1005.18(b)(4)(ii)(B)(2)
that the fee disclosures required by proposed Sec.
1005.18(b)(2)(i)(B)(5) through (9), namely, the ATM balance inquiry
fees, inactivity fee, and incidence-based fees, must appear in a
minimum eight-point font or the corresponding pixel size and appear in
no larger a font than what is used to disclose the information required
by proposed Sec. 1005.18(b)(2)(i)(B)(1) through (4). As discussed
earlier, while the Bureau believes that these fees are important for a
consumer to know pre-acquisition, the Bureau believes that these fees
are less likely to drive most consumers' acquisition decisions when
shopping among prepaid accounts and thus should be disclosed using a
smaller font size.
Proposed Sec. 1005.18(b)(4)(ii)(B)(2) would also require that the
textual information disclosed on the short form pursuant to proposed
Sec. 1005.18(b)(2)(ii)(10) through (14) must appear in a minimum
seven-point font or corresponding pixel size and must appear in no
larger a font than what is used to disclose the ATM balance inquiry
fees, inactivity fee, and incidence-based fees that would have to be
disclosed by proposed Sec. 1005.18(b)(2)(i)(B)(5) through (9).
The Bureau notes that the proposed minimum font sizes are likely
also the maximum sizes that could be used on the short form to ensure
that it will still fit on most packaging material currently used in
retail locations. In other acquisition scenarios, however, when space
constraints are not as much of an issue, the Bureau expects that
financial institutions would use larger versions of the short form. For
example, when distributing disclosures for payroll card accounts in
printed form, financial institutions could use 8.5 by 11 inch pieces of
paper to present a larger version of the short form, as long as the
form maintains the visual hierarchy of having the information on the
short form gradually decrease in size from top to bottom. The Bureau
further proposes in Sec. 1005.18(b)(4)(ii)(B)(2) that the statement
disclosed pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(10), and the
telephone number and URL disclosed pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(11) must be more prominent than the information
disclosed pursuant to proposed Sec. 1005.18(b)(2)(i)(B)(12) through
(14) and proposed Sec. 1005.18(b)(2)(i)(C). The Bureau believes that
it is particularly important for a consumer to see this information on
the short form, and that making it more prominent than the other
textual language on the short form could help to draw consumers'
attention to these disclosures.
Proposed Sec. 1005.18(b)(4)(ii)(B)(2) would also state that text
used to distinguish each of the two fees that are required to be
disclosed by proposed Sec. 1005.18(b)(2)(i)(B)(2), (3) and (5), or to
explain the duration of inactivity that triggers a financial
institution to impose an inactivity fee pursuant to proposed Sec.
1005.18(b)(2)(i)(B)(7) would have to appear in at least six-point font
or corresponding pixel size and appear in no larger a font than what is
used for information required to be disclosed by Sec.
1005.18(b)(2)(i)(B)(9) through (12). The Bureau believes that this
descriptive information is less important than the actual fee
information and therefore should be in a smaller font or pixel size.
Finally, proposed Sec. 1005.18(b)(4)(ii)(B)(3) would require that
the explanatory text disclosed pursuant to proposed Sec.
1005.18(b)(2)(i)(C) when any of the fees included on the short form
could vary would have to be in a minimum seven-point font and appear in
no larger the font than what is used to disclose the fees not in the
top-line as required by proposed Sec. 1005.18(b)(2)(i)(B)(5) through
(8). The Bureau believes that this explanatory text should be in the
same font size as the rest of the textual information included on the
short form.
The Bureau is proposing Sec. 1005.18(b)(4)(ii)(C) to require that
the fees and other information required to be disclosed in the long
form by proposed Sec. 1005.18(b)(2)(ii) would have to appear in at
least eight-point font or the corresponding pixel size. The Bureau
believes that the long form, which will list all of a prepaid account's
fees, need only appear in a font that is clear enough for consumers to
read. The Bureau does not believe any part of the long form should be
more prominent than another part. Thus, the Bureau is not proposing any
rules regarding the relative font size of information disclosed in the
long form.
The Bureau is proposing in Sec. 1005.18(b)(4)(ii)(D) that when
providing disclosures in compliance with proposed Sec.
1005.18(b)(3)(iii)(B)(1) and disclosing the fee schedules of multiple
service plans together on one form, disclosures required by proposed
Sec. 1005.18(b)(2)(i)(B)(1) through (9) must appear in a minimum
seven-point font or the corresponding pixel size. Proposed Sec.
1005.18(b)(4)(ii)(D) would also require the disclosures required by
proposed Sec. 1005.18(b)(2)(i)(B)(10) through (14) to appear in the
font sizes set forth in proposed Sec. 1005.18(b)(4)(ii)(B)(2).
18(b)(5) Segregation
Proposed Sec. 1005.18(b)(5) would explain that disclosures
required under this section that are provided in writing or
electronically would have to be segregated from everything else and
could contain only information that is directly related to the
disclosures required under this section. The Bureau believes it is
important that only the information it would require to be disclosed be
included on the short form and long form disclosures. As noted,
financial institutions (or whatever entity is responsible for marketing
the prepaid account) could use the remainder of a prepaid account's
packaging material or Web site to disclose other information to a
consumer, but the Bureau believes it is important to limit the amount
of information permitted in its required disclosures to protect the
integrity of forms' design.
18(b)(6) Prepaid Accounts Acquired in Foreign Languages
Regulation E generally permits, but does not require, that
disclosures be made in a language other than English, provided that
where foreign language
[[Page 77175]]
disclosures are provided the disclosures are made available in English
upon a consumer's request. See Sec. 1005.4(a)(2). When it issued
regulations on remittance transfers, the Bureau altered Regulation E's
general requirement for foreign language disclosures to require
disclosures be made in English in addition to a foreign language if
that foreign language is used principally by the remittance transfer
provider to advertise, solicit, or market remittance transfer services
at the office in which the sender conducts a transaction or asserts an
error. (Sec. 1005.31(g)(1)(i)). The Bureau amended Regulation E in
this way pursuant to a statutory mandate in Section 1073 of the Dodd-
Frank Act.
The Bureau proposes also to modify the general Regulation E foreign
language requirement for prepaid accounts such that proposed Sec.
1005.18(b)(6) would require that if a financial institution principally
uses a foreign language on prepaid account packaging material, by
telephone, in person, or on the Web site a consumer utilizes to acquire
a prepaid account, the short form and long form disclosures made
pursuant to proposed Sec. 1005.18(b)(2)(i) and (ii) would have to be
provided in that same foreign language. A financial institution would
also have to provide the long form required to be disclosed by proposed
Sec. 1005.18(b)(2)(ii) in English upon a consumer's request and on any
part of the Web site where it provides the long form disclosure in a
foreign language.
As noted above, this proposal is made pursuant to the Bureau's
authority under EFTA sections 904(a) and (c), 905(a), and Dodd-Frank
Act section 1032(a). The Bureau notes that this proposed approach to
foreign language disclosures applies only to prepaid accounts and would
not alter the application of the general Regulation E provision for any
other type of account. The Bureau believes that if a financial
institution is primarily using a foreign language on the interface that
a consumer sees or uses to initiate the process of acquiring a prepaid
account, consumers should receive pre-acquisition disclosures in that
foreign language to ensure that they are able to understand them. The
Bureau also believes that such a consumer might benefit from receiving
the long form disclosure in both the foreign language and English in
case a consumer is comfortable speaking the language, but may only read
English, or if a family member who speaks English assists a consumer
with managing their prepaid account.
The Bureau recognizes, however, that requiring financial
institutions to provide short form disclosures in two languages could
be burdensome. The Bureau therefore seeks comment on whether it is
feasible for financial institutions in all acquisition scenarios to
provide the long form disclosure in English in addition to in the
foreign language in which the account is marketed, and whether
financial institutions typically already provide disclosures in both
languages. The Bureau also solicits comment on whether financial
institutions should also provide the short form disclosure in English
in all cases. Proposed comment 18(b)(6)-1 would provide several
examples as to when financial institutions would have to provide the
short form and long form disclosures in a foreign language.
Specifically, the proposed comment would clarify that if, for example,
a financial institution uses mostly Spanish on the packaging material
of a prepaid account sold in a retail store, even though a few words
appear in English, then the short form and, if accessed by the
consumer, long form disclosure provided to a consumer must also be in
Spanish. Proposed comment 18(b)(6)-1 would also clarify that if the
homepage of the Web site a consumer visits to acquire a prepaid account
is mostly in Spanish, the short form and long form disclosure a
consumer receives pre-acquisition must also be in Spanish.
Additionally, the proposed comment would clarify that a consumer who
calls a telephone number to acquire a prepaid account and either speaks
to a customer service agent in Spanish or interacts with an IVR system
in Spanish must also receive the short form and long form information
in Spanish in accordance with proposed Sec. 1005.18(b)(2)(ii).
Finally, the proposed comment would clarify that if a consumer speaks
with a customer service agent in a foreign language in a bank or credit
union branch location, this would be considered ``in person,'' and a
consumer would have to receive the short form and long form disclosures
in that foreign language to comply with proposed Sec. 1005.18(b)(6).
18(b)(7) Disclosures on Prepaid Account Access Devices
Proposed Sec. 1005.18(b)(7) would require that certain disclosures
be made on the actual prepaid account access device itself.
Specifically, the Bureau proposes that financial institutions must
disclose the name of the financial institution, the URL of a Web site,
and a telephone number that a consumer can use to access information
about a prepaid account. Proposed Sec. 1005.18(b)(7) would also state
that if a financial institution does not provide a physical access
device in connection with a prepaid account, the Bureau is proposing
that the disclosure must appear at the URL or other entry point a
consumer must visit to access the prepaid account electronically. The
Bureau further proposes that disclosure made on an accompanying
document, such as a terms and conditions document, on packaging
material surrounding an access device, or on a sticker or other label
affixed to an access device would not constitute a disclosure on the
access device. Proposed comment 18(b)(7)-1 would clarify that a
consumer might use this information disclosed on the access device to
contact a financial institution with a question about a prepaid
account's terms and conditions, or to report when an unauthorized
transaction has occurred involving a prepaid account.
The Bureau believes it is important for a consumer to be able to
access fee information, as well as check an account's balance, and have
a means for reporting unauthorized transactions, even after a consumer
has acquired a prepaid account. Disclosing telephone numbers on an
access device will allow consumers to access this information if they
are not in the location where they have retained the disclosures or are
not able to access disclosures via the internet.
18(c) Access to Prepaid Account Information
EFTA section 906(c) requires that a financial institution provide
each consumer with a periodic statement for each account of such
consumer that may be accessed by means of an electronic fund transfer.
Section 1005.9(b), which implements EFTA section 906(c), generally
requires a periodic statement for each monthly cycle in which an
electronic fund transfer occurred or, if there are no such transfers, a
periodic statement at least quarterly.\279\ Financial institutions must
deliver periodic statements in writing and in a form that the consumer
can keep, unless consent is received for electronic delivery or unless
Regulation E provides otherwise. See Sec. Sec. 1005.4(a)(1) and
1005.9(b).
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\279\ The periodic statement must include transaction
information for each EFT, the account number, the amount of any fees
assessed, the beginning and ending account balance, the financial
institution's address and telephone number for inquiries, and a
telephone number for preauthorized transfers. Sec. 1005.9(b).
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In the Payroll Card Rule, the Board modified the periodic statement
requirement for payroll card accounts similar to what it had done
previously for government benefit accounts under Sec. 1005.15.
Pursuant to existing
[[Page 77176]]
Sec. 1005.18(b), financial institutions can provide periodic
statements that comply with the general provisions in Regulation E, or
alternatively, the institution must make available to the consumer: (1)
The account balance, through a readily available telephone line; (2) an
electronic history of account transactions that covers at least 60 days
(including all the information required in periodic statements by Sec.
1005.9(b)); and (3) a written history of account transactions that is
provided promptly in response to an oral or written request and that
covers at least 60 days (including all the information required in
periodic statements by Sec. 1005.9(b)).
The Bureau is proposing new Sec. 1005.18(c)(1) and (2) to apply
Regulation E's periodic statement requirement to prepaid accounts, and
an alternative that would allow financial institutions to instead
provide access to account balance by telephone, at least 18 months of
transaction history online, and at least 18 months written transaction
history upon request. Proposed Sec. 1005.18(c)(3) would require
financial institutions to disclose all fees assessed against the
account, in any electronic or written account histories and periodic
statements. In addition, the Bureau proposes in Sec. 1005.18(c)(4) to
require financial institutions to disclose, in any electronic or
written account histories and periodic statements, monthly and annual
summary total of the amount of all fees imposed on a prepaid account,
and the total amounts of deposits to and debits from a prepaid account.
As discussed below in the section-by-section analysis of proposed
Sec. 1005.18(c)(1), (3), and (4), to further the purposes of EFTA to
provide a framework to establish the rights, liabilities, and
responsibilities of prepaid account consumers, the Bureau believes it
is necessary and proper to exercise its authority under EFTA section
904(c) to propose an exception to the periodic statement requirements
of EFTA section 906(c) and to modify the periodic statement
requirements of EFTA section 906(c) to require inclusion of all fees
charged and a summary total of both monthly and annual fees. These
proposed revisions will assist consumers' understanding of their
prepaid account activity. In addition, the Bureau is also using its
disclosure authority pursuant to the Dodd-Frank Act section 1032(a)
because the Bureau believes that disclosure of fee and account activity
summaries ensures that the features of prepaid accounts, over the term
of the product or service, are fully, accurately, and effectively
disclosed to consumers in a manner that permits consumers to understand
the costs, benefits, and risks associated with prepaid accounts.
18(c)(1) Periodic Statement Alternative
As discussed above, financial institutions that issue payroll cards
can provide periodic statements that comply with the general provisions
in Regulation E, or alternatively, the institution must make available
to the consumer: (1) The account balance, through a readily available
telephone line; (2) an electronic history of account transactions that
covers at least 60 days (including all the information required in
periodic statements by Sec. 1005.9(b)); and (3) a written history of
account transactions that is provided promptly in response to an oral
or written request and that covers at least 60 days (including all the
information required in periodic statements by Sec. 1005.9(b)). See
existing Sec. 1005.18(b).
Relatedly, the FMS Rule requires a prepaid card receiving a Federal
payment (such as Social Security benefits, Federal tax refunds, or
Federal government wages) to satisfy several conditions, including that
the card issuer must comply with all of the requirements of, and
provide the cardholder with all of the consumer protections that apply
to, a payroll card account under Regulation E. See 31 CFR 210.5(b)(5).
By virtue of the FMS Rule, the Bureau believes that a majority of
prepaid account programs are presently complying with Regulation E's
periodic statement alternative for payroll card accounts. Indeed, in
its Study of Prepaid Account Agreements, the Bureau found that almost
all prepaid account agreements reviewed (including 99.03 percent of
agreements reviewed for GPR card programs) provide electronic access to
account information; \280\ a majority of programs reviewed (including
73.91 percent of agreements for GPR card programs) explicitly provide
that transactional history is available for at least 60 days (which is
consistent with the payroll card account alternative in existing Sec.
1005.18(b)); \281\ and most programs reviewed (including 88.41 percent
of agreements for GPR card programs) make clear that paper statements
or paper account histories are available upon request.\282\
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\280\ See Study of Prepaid Account Agreements, at 18 tbl. 5.
\281\ See id. at 19 tbl. 6.
\282\ See id. at 21 tbl. 8.
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This is consistent with what other studies of the prepaid industry
have found. For example, the Center for Financial Services Innovation
(CFSI) found in its review of 18 GPR card programs,\283\ representing
an estimated 90 percent of the GPR card marketplace, that all card
programs reviewed allowed cardholders to obtain balance information
online, by calling customer service, by text message, or via mobile app
or mobile-enabled Web site. CFSI found that eleven out of fifteen cards
for which information was available (representing about 60 percent of
the market sampled) provided at least two years of transactional data
online, three provided one year of data, and one card provided six
months of data.\284\ CFSI also found that fifteen cards (representing
approximately 75 percent of the market sampled) allowed cardholders to
make one-time requests for paper statements, and nine cards (about 40
percent of the market sampled) allowed cardholders to receive ongoing
monthly statements, typically for a fee ranging between $1 and $3.\285\
In a recent review of 66 GPR card programs, the Pew Charitable Trusts
found that 45 cards (68 percent) disclosed a paper statement fee
ranging from 99 cents to $10, with a median fee of $2.95; seven cards
(11 percent) disclosed that paper statements were free, and 14 cards
(21 percent) did not disclose any fee (or lack thereof) for paper
statements. Pew also found that 65 cards (98 percent) disclosed that
transaction information is provided online for free.\286\
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\283\ Programs reviewed by CFSI included ``cards issued by the
largest program managers in the marketplace, as well as a selection
of smaller program managers that have particularly innovative
cards.'' Ctr. for Fin. Services Innovation, Prepaid Industry
Scorecard, Assessing Quality in the Prepaid Industry with CFSI's
Compass Principles, at 6 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf.
\284\ Id. at 12. The CFSI study did not note, however, whether
any prepaid programs might charge fees for these methods of
accessing account information.
\285\ Id. at 13.
\286\ 2014 Pew Study, at 19-20.
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In its Prepaid ANPR, the Bureau sought comment on whether it was
appropriate to modify Regulation E's general requirements for prepaid
cards and, as an example, asked whether it was necessary to extend the
requirement to provide periodic paper statements to prepaid cards. In
response, most industry and trade association commenters recommended
that the Bureau extend to prepaid cards the Payroll Card Rule's
alternative method of complying with Regulation E's periodic statement
requirement. Many of these commenters argued that paper statements are
not a viable alternative for prepaid cards and that electronic access
to account information--as
[[Page 77177]]
provided under the Payroll Card Rule--is more consistent with current
consumer needs and expectations. They explained that consumers have
shown little interest in receiving paper statements for prepaid
accounts and that consumers prefer to have access to current and
historical account information online. In addition, information
contained on a monthly paper statement may be considered by consumers
to be ``stale'' by the time it arrives. These commenters also cited the
fact that prepaid card users are often transient which results in paper
statements often being returned as undeliverable. Finally, industry
commenters expressed concern that a paper statement requirement would
be cost prohibitive and would ultimately result in fee increases.
Consumer groups' comments regarding whether the Bureau should
require written periodic statements were mixed. Some groups urged that
paper statements be provided by default for all prepaid accounts unless
the consumer explicitly opts out. One group argued this was necessary
because, based on its research, many cards do not provide account
history information sufficient to determine whether an unauthorized
transaction occurred. Several groups argued that prepaid accounts
should be exempt from the paper statement requirement only if they
offer no credit or overdraft features and the underlying funds are held
in an account with deposit insurance. Other groups suggested that it is
appropriate to forego paper statements for prepaid accounts so long as
consumers are able to receive ad hoc paper statements upon request.
The Bureau conducted additional outreach to industry regarding the
usage of written statements by consumers and the cost to financial
institutions of providing such statements. Based on this outreach, the
Bureau believes that there may be significant costs in providing
monthly paper statements for all prepaid accounts. Beyond the costs of
printing and mailing statements, the Bureau also understands, based on
industry outreach, that there could be a high incidence of returned
mail due to the transient nature of some prepaid account users if paper
periodic statements were required for all prepaid accounts. Further, in
its focus groups and consumer testing, the Bureau asked participants if
they were satisfied with the information they have about their account
and whether they would value a monthly electronic or paper statement.
The Bureau notes that almost no participants said that they would want
to receive a monthly paper statement that they had not requested.
Instead, almost all participants stated that free access to account
information online and by telephone provided by prepaid issuers and
program managers largely met their needs.
Based on its analysis, the Bureau is proposing to extend to prepaid
accounts the Payroll Card Rule's alternative to providing periodic
statements (existing Sec. 1005.18(c)(1)), with certain modifications
that would be applicable to payroll card accounts as well as to prepaid
accounts, as described below. The Bureau believes that the methods of
access to account information in the Payroll Card Rule generally strike
the appropriate balance between providing consumers the transactional
history they need without unnecessarily burdening financial
institutions. The Bureau believes that requiring written monthly
statements to all prepaid card consumers could increase cost and
burden. Thus, the Bureau is proposing to extend the Payroll Card Rule's
provisions regarding access to account information to prepaid accounts,
with certain modifications as described below. As noted above, this
proposed revision is authorized under EFTA section 904(c) and section
1032(a) of the Dodd-Frank Act. As with the Payroll Card Rule, financial
institutions would generally be able to provide traditional periodic
statements for prepaid accounts, whether in paper form or
electronically with E-Sign consent,\287\ in lieu of the alternative in
Sec. 1005.18(c)(1) discussed below, but consistent with proposed Sec.
1005.18(c)(3) and (4) below.
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\287\ As explained above in the section-by-section analysis of
proposed Sec. 1005.18(b)(3)(i), the E-Sign Act generally allows the
use of electronic records to satisfy any statute, regulation, or
rule of law requiring that such information be provided in writing,
if a consumer has affirmatively consented to such use and has not
withdrawn such consent, and certain format of delivery requirements
are met.
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18(c)(1)(i)
As discussed above, a financial institution need not furnish
periodic statements pursuant to Sec. 1005.9(b) if it instead follows
the periodic statement alternative for payroll card accounts. See
existing Sec. 1005.18(b)(1). The first part of that alternative, Sec.
1005.18(b)(1)(i), currently requires a financial institution to provide
access to the consumer's account balance through a readily available
telephone line. The Bureau is proposing to extend this requirement in
Sec. 1005.18(b)(1)(i), renumbered as Sec. 1005.18(c)(1)(i), to all
prepaid accounts. The Bureau reminds financial institutions that, when
providing balance information by telephone as part of the alternative
to the Sec. 1005.9(b) periodic statement requirement, neither they nor
their service providers would be permitted to charge consumers for
accessing this information required to be provided pursuant to proposed
Sec. 1005.18(c)(1)(i).
As the Board explained in the supplementary information to the
Payroll Card Rule, a readily available telephone line for providing
balance information must be a local or toll-free telephone line that,
at a minimum, is available during standard business hours. The Board
noted that it expected that, in most cases, institutions would provide
24-hour access to balance information through an automated line, which
would ensure that consumers could access balance information at their
convenience. Because the Board believed that it might be operationally
difficult for some institutions to provide information about 60 days'
worth of transactions through a telephone system, the Payroll Card Rule
did not require institutions to provide information about specific
transactions by telephone.\288\ For substantially similar reasons, the
Bureau believes it is appropriate to propose extending existing Sec.
1005.18(b)(1)(i), renumbered as new Sec. 1005.18(c)(1)(i), to all
prepaid accounts.
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\288\ See 71 FR 51437, 51443 (Aug. 30, 2006).
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As discussed above in the section-by-section analysis of proposed
Sec. 1005.15(d)(1)(i), the periodic statement alternative for
government benefit accounts (both currently and as proposed) requires
access to balance information through a readily available telephone
line as well as at a terminal (such as by providing balance information
at a balance-inquiry terminal or providing it, routinely or upon
request, on a terminal receipt at the time of an electronic fund
transfer). The Bureau seeks comment on whether a similar requirement to
provide balance information at a terminal should be added to the
requirements of proposed Sec. 1005.18(c)(1)(i) for prepaid accounts
generally. As noted above, the Bureau is also requesting comment on
whether, alternatively, the requirement to provide balance information
for government benefit accounts at a terminal should be eliminated from
Sec. 1005.15 given the other enhancements proposed therein and for
parity with proposed Sec. 1005.18.
18(c)(1)(ii)
The second part of the periodic statement alternative for payroll
card accounts, Sec. 1005.18(b)(1)(ii), currently requires financial
institutions to provide an electronic history of the consumer's account
transactions, such as through a Web site, that covers at least 60 days
[[Page 77178]]
preceding the date the consumer electronically accesses the account.
Based on the Bureau's Study of Prepaid Account Agreements, other public
studies, and outreach, the Bureau believes that virtually all prepaid
account providers make available some form of free electronic access to
balance and transaction history information \289\ and that at least 60
days of account history is typically provided.\290\ Further, the Bureau
believes that, based on its outreach to industry stakeholders and
recent public studies, many prepaid programs provide more extensive
online account history information than is currently required by the
Payroll Card Rule (60 days).\291\ Some prepaid account providers also
offer periodic (e.g., monthly) electronic statements at no charge in
addition to account history.\292\
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\289\ As noted above, in its Study of Prepaid Account
Agreements, the Bureau found that 97.85 percent of all prepaid
account agreements reviewed indicated that electronic access to
account information was available; the remaining 2.15 percent of
agreements were unclear as to whether such access was available. See
Study of Prepaid Account Agreements, at 18 tbl. 5.
\290\ The majority of account agreements reviewed in the Study
of Prepaid Account Agreements that addressed access to account
information with any specificity simply stated that account
information would be available for at least the past 60 days (66.15
percent of all agreements reviewed), a small portion explicitly
provided for a longer period (7.40 percent), and the remainder were
unclear as to the time period (26.46 percent). See id. at 19 tbl. 6.
\291\ See, e.g., Ctr. for Fin. Services Innovation, Prepaid
Industry Scorecard, Assessing Quality in the Prepaid Industry with
CFSI's Compass Principles, at 12 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf (finding that about 60
percent of the market sampled, which is estimated to represent
approximately 90 percent of the GPR card marketplace, allowed
cardholders to access at least two years of transactional data
online; the remaining products provided six months or one year of
data).
\292\ The Study of Prepaid Accounts found that 57.54 percent of
agreements reviewed specifically stated that electronic periodic
statements (rather than just electronic access to account history)
are available. See Study of Prepaid Account Agreements, at 20 tbl.
7.
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The Bureau is proposing to extend this requirement in existing
Sec. 1005.18(b)(1)(ii) to prepaid accounts, renumbered as new Sec.
1005.18(c)(1)(ii), and to expand the length of time that online access
must cover from 60 days to 18 months. The Bureau is proposing to extend
this time period because it believes that based on how consumers are
currently using prepaid accounts, more than 60 days of account history
may be, in many cases, beneficial for consumers. While recent account
history is important for consumers tracking balances or monitoring for
unauthorized transactions, a longer available account history serves a
variety of potential purposes. For example, some consumers might need
to demonstrate on-time bill payment or to compile year-end data for tax
preparation purposes. The Bureau also believes that a consumer may
realize during any given year that he needs financial records from the
prior calendar year and that access to 18 months of prepaid account
history will give the consumer six months into the next calendar year
to make such a request. In addition, based on outreach to prepaid
account providers and recent publicly available studies, as discussed
above, the Bureau believes that many prepaid accounts provide at least
12 months of account history and that, even if they do not, the cost of
extending existing online histories to 18 months should be minimal. The
Bureau reminds financial institutions that, when providing electronic
access to account information as part of the alternative to the Sec.
1005.9(b) periodic statement requirement, neither they nor their
service providers would be permitted to charge consumers for providing
access to account information required pursuant to proposed Sec.
1005.18(c)(1)(ii).
Alternative Approaches Considered by the Bureau
The Bureau considered other alternatives to the Payroll Card Rule's
approach regarding access to account information. Among them, the
Bureau considered proposing to require electronic periodic statements
for all prepaid accounts, in addition to ongoing electronic access to
account information. An electronic periodic statement requirement would
require providers to deliver electronic periodic statements to
consumers, even if the provider did not have the consumer's E-Sign
consent. The Bureau viewed this as a potential, less-costly alternative
to written statements. However, the Bureau questions whether the
benefit of providing electronic periodic statements would justify the
cost given that the existing Payroll Card Rule and this proposal
require that electronic and written histories of account transactions
provided as an alternative to Sec. 1005.9(b) contain the information
set forth in Sec. 1005.9(b) for periodic statements generally. See
section-by-section analysis of proposed Sec. 1005.18(c)(2).
The Bureau additionally considered proposing to require financial
institutions that do not provide periodic statements pursuant to Sec.
1005.9(b) to periodically send an informational email or text message
notification to consumers, for example, noting the prepaid account's
remaining balance. The Bureau similarly considered requiring financial
institutions to contact consumers by email or text message each time an
inactivity, dormancy, or similar fee is assessed on the consumer's
prepaid account. Such requirements would help remind consumers of the
existence of prepaid accounts that they may have forgotten or have
otherwise left dormant with unused balances. The Bureau considered that
such requirements likely would be limited to those prepaid accounts for
which consumers provided email addresses or mobile phone numbers and
consented to receive such communications from the financial
institution. The Bureau ultimately concluded, however, not to include
such a requirement in this Proposed Rule because such a requirement may
be overly burdensome given that consumers would have other access to
account balance and transactional history under the proposal. The
Bureau solicits comments on periodic statement alternatives on prepaid
accounts.
In the context of overdraft and other credit features on prepaid
accounts, discussed in more detail below, the Bureau has considered the
possibility of requiring additional real-time notifications of
transactions triggering an overdraft or the accessing of a linked
credit feature, or requiring real-time opt-in by consumers in order to
approve each overdraft or other credit transaction in addition to what
it proposes herein (and not in lieu of what Sec. 1005.17 requires for
deposit accounts). The Bureau understands that there may be
technological, operational, and procedural challenges to the timing and
delivery of such a notice or compliance with such an opt-in
requirement, particularly in the point of sale retail environment. The
Bureau is unsure at this time whether such a procedure could be
implemented given that notifications and/or consent might require
multiple communications among financial institutions, card networks,
and merchants. To the extent such real-time notification and consent
could be provided or obtained by mobile device or other means, the
Bureau continues to monitor developments with respect to real-time opt-
in. Accordingly, the Bureau is not proposing any requirements related
to real-time notification or opt-in, but solicits comment on possible
options and suggestions for what it might require in this regard for
prepaid accounts.
18(c)(1)(iii)
The third part of the periodic statement alternative for payroll
card accounts, Sec. 1005.18(b)(1)(iii), currently requires financial
institutions to provide
[[Page 77179]]
a written history of the consumer's account transactions promptly in
response to an oral or written request, which covers at least 60 days
preceding the date the financial institution receives the consumer's
request. Similar to electronic account access above, the Bureau is
proposing to extend this requirement in current Sec.
1005.18(b)(1)(iii) to all prepaid accounts, renumbered as proposed
Sec. 1005.18(c)(1)(iii), and to expand the length of time for which
written history must be provided from 60 days to 18 months.
In its Study of Prepaid Account Agreements, the Bureau found that
most of the agreements reviewed indicate that paper account histories
or paper statements are made available upon request.\293\ For those
agreements that indicate fees are charged for providing paper account
histories or statements,\294\ the amount of the fee varied widely
(ranging from $0.75 to $10).\295\ As discussed previously, CFSI found
15 out of 18 GPR cards it reviewed (representing approximately 75
percent of the market sampled) allowed cardholders to make one-time
requests for paper statements, and nine cards (about 40 percent of the
market sampled) allowed cardholders to receive ongoing monthly
statements, typically for a fee ranging between $1 and $3.\296\
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\293\ The Study of Prepaid Account Agreements found that, across
all agreements reviewed, 89.23 percent stated that paper statements
or account histories are available. For payroll card programs, 96
percent of agreements reviewed stated that paper statements or
account histories were available, and 100 percent for government
benefit cards. For GPR cards, 88.41 percent of agreements, and 64.29
percent of agreements for all other types of programs stated that
paper statements or account histories were available. See Study of
Prepaid Account Agreements, at 21 tbl. 8.
\294\ The Study of Prepaid Account Agreements found that, across
all agreements reviewed that indicated a paper statement or account
history is available, 32.41 percent do not charge a fee; 46.90
percent specifically state a fee; 8.62 percent indicated that a fee
would be charged but did not list the amount; and for 12.07 percent
of agreements the Bureau was unable to find fee information for the
programs generally. See id. at 22 tbl. 9.
\295\ The Study of Prepaid Account Agreements found that, across
all agreement reviewed, the average fee charged in the 136
agreements that specified a non-zero fee amount was $3.54 and the
median fee was $2.98. See id. at 23 tbl. 10.
\296\ See Ctr. for Fin. Services Innovation, Prepaid Industry
Scorecard, Assessing Quality in the Prepaid Industry with CFSI's
Compass Principles, at 13 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/_Prepaid_Industry_Scorecard_2014.pdf.
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As discussed above, the Bureau understands from outreach to
industry and its own consumer research that consumer utilization of
written account histories is very low, regardless of whether a fee is
charged to obtain such information. Of those prepaid account providers
that shared specific statistics with the Bureau, none had greater than
one percent of active customers requesting written histories for GPR
cards on a regular basis, regardless of whether the entity made
electronic statements available as well. The Bureau also observed
during its consumer focus groups that participant receipt of or desire
for written account histories was very low.
The Bureau is proposing to extend existing comment 18(b)-1, which
requires that the history of transactions provided under existing Sec.
1005.18(b)(1)(ii) and (iii) reflect transactions once they have been
posted to the account, and comment 18(b)-2 regarding retainability of
electronic account history, to all prepaid accounts as new comments
18(c)-1 and -2, and revise the internal paragraph references to conform
with other numbering changes the Bureau is proposing, but otherwise
leave these two comments unchanged.
As the Board explained in the Payroll Card Rule, it anticipated
that, in general, written account histories would be sent the next
business day or soon after an institution receives the consumer's oral
or written request. The Board explained that institutions also may
designate a specific telephone number for consumers to call and a
specific address for consumers to write to request a written copy of
account transactions. The Board also noted that, although Sec. 1005.18
does not address the issue, it believed that charging fees to consumers
who make occasional requests for written histories could have a
chilling effect on consumers' ability to obtain information about
transactions and, thus, to exercise their error resolution rights.\297\
The Bureau shares these concerns.
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\297\ See 71 FR 51437, 51444 (Aug. 30, 2006).
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The Bureau reminds financial institutions that, when providing
written account histories upon request as part of the alternative to
the Sec. 1005.9(b) periodic statement requirement, generally, neither
they nor their service providers would be permitted charge consumers
for providing this required information pursuant to proposed Sec.
1005.18(c)(1)(iii). During the Bureau's outreach, many industry
participants indicated that consumers very rarely make these types of
requests, so the Bureau does not anticipate that this requirement would
pose a significant burden.
The Bureau recognizes, however, that in certain situations
consumers' requests for written account information may exceed what
would be required under the proposal; therefore, the Bureau is
proposing to clarify in new comment 18(c)-3 those instances where a
financial institution would be permitted to charge a fee for providing
such information. Proposed comment 18(c)-3 would include several
examples of requests that exceed the requirements of proposed Sec.
1005.18(c)(1) for providing account information and for which a
financial institution would be permitted to charge a fee. A financial
institution may assess a fee or charge to a consumer for responding to
subsequent requests for written account information made in a single
calendar month. For example, if a consumer makes a request for 18
months of written account transaction history on June 1 and makes a
request for 18 months of written history on August 5, the financial
institution may not assess a fee or charge to the consumer for
responding to either request. However, if the consumer requests 18
months of written history on June 1 and then makes the same request on
June 15, the financial institution may assess a fee or charge to the
consumer for responding to the request made on June 15, as this is the
second request in the same month. If a financial institution maintains
more than 18 months of account transaction history, it may assess a fee
or charge to the consumer for providing a written history of the
consumer's account information for transactions occurring more than 18
months prior to the date the institution receives the consumer's
request, provided the consumer specifically requests the account
transaction history for that time period. If a financial institution
offers a consumer the ability to request automatic mailings of written
history on a monthly or other periodic basis, it may, at its option,
assess a fee or charge for such automatic mailings but not for account
history requested pursuant to proposed Sec. 1005.18(c)(1)(iii).
Proposed comment 18(c)-4 would explain that a financial institution
may provide fewer than 18 months of written account transaction history
if the consumer requests a shorter period of time. If a prepaid account
has been open for fewer than 18 months, the financial institution need
only provide account information pursuant to proposed Sec.
1005.18(c)(1)(ii) and (iii) since the time of account opening. If a
prepaid account is closed or becomes inactive, as defined by the
financial institution, the financial institution must continue to
provide at least 18 months of account transaction information from the
date
[[Page 77180]]
the request is received. When a prepaid account has been closed or
inactive for 18 months, the financial institution is no longer required
to make available any account or transaction information available. The
proposed comment references existing comment 9(b)-3, which provides
that, with respect to written periodic statements, a financial
institution need not send statements to consumers whose accounts are
inactive as defined by the institution. The Bureau expects that for
purposes of proposed comment 18(c)-4, a financial institution would
similarly define for itself the threshold for when it considers a
prepaid account inactive, consistent with existing comment 9(b)-3.
The Bureau requests comment on all aspects of proposed Sec.
1005.18(c)(1) regarding access to prepaid account information and
commentary related thereto. In particular, the Bureau seeks comment on
the methods of access consumers need to their account information, and
the time period needed for such access. Additionally, the Bureau
requests comment on other alternatives for providing access to account
information, as well as potential changes to what is proposed herein.
18(c)(2) Information Included on Electronic or Written Histories
Section 1005.18(b)(2) currently states that the history of account
transactions provided under Sec. 1005.18(b)(1)(ii) and (iii) must
include the information set forth in Sec. 1005.9(b). Section 1005.9(b)
lists the various items that must be included in periodic statements,
including, but not limited to, detailed transaction information and
fees assessed. The Bureau proposes to renumber existing Sec.
1005.18(b)(2) as new Sec. 1005.18(c)(2) and revise the cross-
references to correspond with proposed Sec. 1005.18(c)(1)(ii) and
(iii), but otherwise leave this requirement unchanged. The Bureau
solicits comment on this proposed approach.
18(c)(3) Inclusion of All Fees Charged
The Bureau is proposing to require in new Sec. 1005.18(c)(3) that
a periodic statement furnished pursuant to Sec. 1005.9(b) for a
prepaid account, an electronic history of account transactions whether
provided under proposed Sec. 1005.18(c)(1)(ii) or otherwise, and a
written history of account transactions provided under proposed Sec.
1005.18(c)(1)(iii) must disclose the amount of any fees assessed
against a prepaid account, whether for electronic fund transfers or
otherwise.
EFTA section 906(c), generally implemented in Sec. 1005.9(b),
provides that, among other things, a periodic statement must include
the amount of any fees assessed against an account for electronic fund
transfers or account maintenance. The Bureau notes that Regulation DD
requires that periodic statements disclose all fees debited to accounts
covered by that regulation. Sec. 1030.6(a)(3). Regulation DD defines
``account'' to mean ``a deposit account at a depository institution
that is held by or offered to a consumer. It includes time, demand,
savings, and negotiable order of withdrawal accounts.'' Sec.
1030.2(a). Because some prepaid accounts, as proposed herein to be
defined under Regulation E, may not also constitute accounts as defined
under Regulation DD, the Bureau is proposing new Sec. 1005.18(c)(3) to
ensure that periodic statements and histories of account transactions
for all prepaid accounts include all fees, not just those related to
electronic fund transfers and account maintenance. As noted above, this
proposed revision is authorized under EFTA section 904(c) and section
1032(a) of the Dodd-Frank Act.
The Bureau solicits comment on this portion of the proposal. In
addition, the Bureau seeks comment on whether any other specific
protections of Regulation DD, which may not apply to prepaid accounts
provided by financial institutions (as defined in Regulation E) that
are not depository institutions (as defined in Regulation DD), could be
addressed for all prepaid accounts to ensure consistent protections for
prepaid accounts regardless of who is providing the account.
18(c)(4) Summary Totals of Fees, Deposits, and Debits
The Bureau is proposing new Sec. 1005.18(c)(4) to require that
financial institutions provide a summary total of the amount of all
fees assessed against the consumer's prepaid account, the total amount
of all deposits to the account, and the total amount of all debits from
the account, for the prior calendar month and for the calendar year to
date. This information would be disclosed on any periodic statement
provided pursuant to Sec. 1005.9(b), in any electronic history of
account transactions whether provided pursuant to proposed Sec.
1005.18(c)(ii)or otherwise, and on any written history of account
transactions provided pursuant to proposed Sec. 1005.18(c)(iii). As
discussed above, the Bureau is concerned that disclosure of a single
``all-in'' estimation of fees on a prepaid product's packaging or
elsewhere in pre-acquisition disclosures would not be feasible and
ultimately would not provide useful information to consumers. The
Bureau believes, however, that providing summary information about
actual account usage (including fees incurred) would be useful to
consumers in understanding their actual costs in using a particular
prepaid account. As noted above, this proposed revision is authorized
under EFTA section 904(c) and Dodd-Frank Act 1032(a). This summary
total of fees proposal is similar to the requirement to disclose fees
and interest in open end credit plans under Regulation Z. See 12 CFR
1026.7(b)(6).
The summary total of fees would include all fees assessed against
the prepaid account in each calendar month, as well as a total for the
year-to-date. The summary totals of both monthly and annual fees paid,
and the totals of deposits to and debits from the account on a monthly
and annual basis, would be updated on an ongoing basis for each month
and each year in the prepaid account's online transaction history, and
would be disclosed in any ad hoc written transaction history provided
in response to a consumer's request or in a periodic statement.
Proposed comment 18(c)-5 would explain that if a financial
institution provides periodic statements pursuant to Sec. 1005.9(b),
total fees, deposits, and debits may be disclosed for each statement
period rather than each calendar month, if different. Proposed comment
18(c)-5 would also explain that the fees that must be included in the
summary total include those that are required to be disclosed pursuant
to Sec. 1005.18(b)(2)(ii)(A). For example, an institution must include
the fee it charges a consumer for using an out-of-network ATM in the
summary total of fees, but it need not include any fee charged by an
ATM operator with whom the institution has no relationship for the
consumer's use of that operator's ATM.
In addition, proposed comment 18(c)-5 would explain that the
summary total of fees should be net of any fee reversals. The total
amount of all debits from the account should be exclusive of fees
assessed against the account. Finally, proposed comment 18(c)-5 would
explain that the total deposits and total debits must include all
deposits to and debits from the prepaid account, not just those
deposits and debits that are the result of electronic fund transfers.
The Bureau solicits comment on this portion of its proposal. In
particular, the Bureau seeks comment on whether financial institutions
are able to discern the amount of third party fees charged to a
consumer's prepaid account (such as fees imposed by an ATM operator
where the financial institution has no
[[Page 77181]]
relationship with the operator) and whether it would therefore be
feasible for financial institutions to include such third party fees in
this summary total of fees. The Bureau also seeks comment on whether
and how credit accessed by a prepaid account, and the fees and finance
charges related thereto, should be reflected in these proposed summary
totals of fees, deposits and debits for the prepaid account.
18(d) Modified Disclosure Requirements
The Bureau is proposing to extend the requirements in existing
Sec. 1005.18(c)(1) related to initial disclosures regarding access to
account information and error resolution, and in existing Sec.
1005.18(c)(2) regarding annual error resolution notices, to all prepaid
accounts. The Bureau proposes to renumber existing Sec. 1005.18(c)(1)
and (2) as new Sec. 1005.18(d)(1) and (2) for organizational purposes
and to separate the modified requirements related to disclosures in
existing Sec. 1005.18(c)(1) and (2) from the modifications for
limitations on liability and error resolution requirements in existing
Sec. 1005.18(c)(3) and (4). See section-by-section analysis of
proposed Sec. 1005.18(e). The Bureau proposes to adjust the internal
cross-references in new Sec. 1005.18(d) in light of the various
paragraph numbering changes and other revisions proposed throughout
Sec. 1005.18.
EFTA section 905(a)(7) requires financial institutions to provide
consumers with an annual error resolution notice. The annual error
resolution notice provision for payroll card accounts in existing Sec.
1005.18(c)(2) permits a financial institution, in lieu of providing an
annual notice concerning error resolution, to include an abbreviated
error resolution notice on or with each electronic and written history
provided in accordance with existing Sec. 1005.18(b)(1). Financial
institutions providing periodic statements are similarly permitted to
provide an abbreviated error resolution notice on or with each periodic
statement pursuant to Sec. 1005.8(b). The Bureau considered limiting
the requirement to provide annual error resolution notices to only
active and registered prepaid accounts, but given this existing
alternative for providing an abbreviated notice with electronic and
written history, the Bureau does not believe such a modification is
necessary. To further the purposes of EFTA to provide a framework to
establish the rights, liabilities, and responsibilities of prepaid
account users, the Bureau believes it is necessary and proper to
exercise its authority under EFTA section 904(c) to propose an
adjustment to the error resolution notice requirement of EFTA section
905(a)(7), to permit notices for prepaid accounts as described in
proposed Sec. 1005.18(d)(2), in order to facilitate compliance with
error resolution requirements.
The Bureau requests comment on the application of these provisions
for initial disclosures regarding access to account information and
error resolution, and annual error resolution notices, to all prepaid
accounts. Specifically, the Bureau seeks comment on whether financial
institutions would face particular challenges in providing annual error
resolution notices to all consumers using prepaid accounts, as well as
whether it should require that annual error resolution notices be sent
for prepaid accounts in certain circumstances, such as those accounts
for which a consumer has not accessed an electronic history or
requested in written history in an entire calendar year and thus would
not have received any error resolution notice during the course of the
year.
18(e) Modified Limitations on Liability and Error Resolution
Requirements
EFTA section 908 governs the timing and other requirements for
consumers and financial institutions pertaining to error resolution,
including provisional credit. EFTA section 909 governs consumer
liability for unauthorized electronic fund transfers. The Bureau is
proposing to extend the Payroll Card Rule's limited liability
provisions and error resolution provisions, including provisional
credit, to all prepaid accounts. The Bureau also proposes to reorganize
existing Sec. 1005.18(c)(3) and (4) into proposed Sec. 1005.18(e)(1)
and (2) and to revise the paragraph headings for proposed Sec.
1005.18(e), (e)(1) and (e)(2). Similar to the reorganization of
existing Sec. 1005.18(c)(1) and (2) above, these changes are proposed
to simplify the organization of proposed Sec. 1005.18 generally and to
separate the modified requirements related to limited liability and
error resolution from other modifications made for prepaid accounts.
As discussed below in the section-by-section analysis of proposed
Sec. 1005.18(e)(1), (2), and (3), the Bureau proposes to modify
Regulation E's limited liability and error resolution timing
requirements for prepaid accounts to accommodate how account
information would be delivered by financial institutions choosing to
follow the periodic statement alternative in proposed Sec.
1005.18(c)(1) discussed above, and to exempt unverified prepaid
accounts from the limited liability and error resolution requirements.
To further the purposes of EFTA to provide a framework to establish the
rights, liabilities, and responsibilities of prepaid account users and
to facilitate compliance with its provisions, the Bureau believes it is
necessary and proper to exercise its authority pursuant to EFTA section
904(c) to modify the timing requirements of EFTA section 909(a) and to
except unverified prepaid accounts from the error resolution and
limited liability requirements of EFTA sections 908 and 909 to the
extent such accounts remain unverified.
18(e)(1) Modified Limitations on Liability Requirements
EFTA section 909 addresses consumer liability and is implemented in
Sec. 1005.6. For accounts under Regulation E generally, including
payroll card accounts, Sec. 1005.6(a) provides that a consumer may be
held liable for an unauthorized electronic fund transfer resulting from
the loss or theft of an access device only if the financial institution
has provided certain required disclosures and other conditions are
met.\298\ If the consumer provides timely notice to the financial
institution within two business days of learning of the loss or theft
of the access device, the consumer's liability is the lesser of $50 or
the amount of unauthorized transfers made before giving notice. Sec.
1005.6(b)(1). If timely notice is not given, the consumer's liability
is the lesser of $500 or the sum of (1) the lesser of $50 or the amount
of unauthorized transfers occurring within two business days of
learning of the loss/theft and (2) the amount of unauthorized transfers
that occur after two business days but before notice is given to the
financial institution. Sec. 1005.6(b)(2). Section 1005.6(b)(3)
provides, in part, that a consumer must report an unauthorized
electronic fund transfer that appears on a periodic statement within 60
days of the financial institution's transmittal of the statement in
order to avoid liability for subsequent transfers.
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\298\ The required disclosures for this purpose include a
summary of the consumer's liability under Sec. 1005.6, or under
State law or other applicable law or agreement, for unauthorized
electronic fund transfers; the telephone number and address of the
person or office to be notified when the consumer believes an
unauthorized transfer has been or may be made; and the financial
institution's business days. See Sec. Sec. 1005.6(a) and
1005.7(b)(1) through (3).
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Existing Sec. 1005.18(c)(3)(i) provides that, for payroll card
accounts following the periodic statement alternative in existing Sec.
1005.18(b), the 60-day period in Sec. 1005.6(b)(3) for reporting
[[Page 77182]]
unauthorized transfers begins on the earlier of (1) the date the
consumer electronically accesses his account under Sec.
1005.18(b)(1)(ii), provided that the electronic history reflects the
transfer, or (2) the date the financial institution sends a written
history of the consumer's account transactions requested by the
consumer under Sec. 1005.18(b)(1)(iii) in which the unauthorized
transfer is first reflected. Alternatively, existing Sec.
1005.18(c)(3)(ii) provides that a financial institution may comply with
the requirements of Sec. 1005.18(c)(3)(i) by limiting a consumer's
liability for an unauthorized transfer as provided under Sec.
1005.6(b)(3) for any transfer reported by the consumer within 120 days
after the transfer was credited or debited to the consumer's account.
The Bureau notes that this provision only modifies the 60-day period
for consumers to report an unauthorized transfer and does not alter any
other provision of Sec. 1005.6.
In response to the Prepaid ANPR, the Bureau received few comments
specifically regarding limited liability requirements. Most industry,
trade association, and consumer advocacy group commenters suggested
that GPR cards should generally be treated the same as payroll card
accounts under Regulation E (except with respect to access to account
information, discussed above, and provisional credit, discussed below).
A few commenters, however, urged against extending protections for lost
or stolen cards, arguing that there is a potential for abuse by some
consumers, or suggested that modified liability provisions are needed
to account for the increased risks they claimed are associated with
prepaid products.
The Bureau's Study of Prepaid Account Agreements found that the
vast majority of programs reviewed limit consumer liability in
accordance with existing Regulation E provisions.\299\ Similarly, CFSI
found that all 18 programs in its review (representing an estimated 90
percent of the GPR card marketplace) had adopted the Payroll Card
Rule's version of Regulation E error resolution and limited liability
protections.\300\
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\299\ The Study of Prepaid Account Agreements found that across
all prepaid account agreements reviewed, 88.92 percent provided full
limited liability; 8.31 percent partially limited consumers'
liability; and 2.77 percent did not appear to provide consumers with
any limited liability protections. Excluding agreements for payroll
card and government benefit card programs (100 percent of each
provided full limited liability protections), 88.02 percent of
agreements for GPR card programs and 64.28 percent of all other
programs' agreements provide full limited liability protections to
consumers. See Study of Prepaid Account Agreements, at 16 tbl. 4.
\300\ Ctr. for Fin. Services Innovation, Prepaid Industry
Scorecard, Assessing Quality in the Prepaid Industry with CFSI's
Compass Principles, at 12 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf.
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The Bureau is proposing to extend to all prepaid accounts the
existing limited liability provisions of Regulation E with
modifications to the Sec. 1005.6(b)(3) timing requirements in proposed
Sec. 1005.18(e)(1) for financial institutions following the periodic
statement alternative in proposed Sec. 1005.18(c)(1).\301\ The text of
proposed Sec. 1005.18(e)(1) would update internal paragraph citations
to reflect other numbering changes made in this proposal and add the
word ``unauthorized'' to refer to the transfer discussed in proposed
Sec. 1005.18(e)(1)(i)(A) for consistency with usage elsewhere in
proposed Sec. 1005.18(e)(1), but otherwise would remain unchanged from
existing Sec. 1005.18(c)(3). Related commentary is discussed below in
the section-by-section analysis of proposed Sec. 1005.18(e)(2). The
Bureau notes that this proposal does not modify the requirement to
comply with existing Sec. 1005.6(b)(4), regarding an extension of time
limits if a consumer's delay in notifying the financial institution was
due to extenuating circumstances, nor any other provisions of Sec.
1005.6. As discussed above, this proposed revision is authorized under
EFTA section 904(c). The Bureau seeks comments on all aspects of this
part of the proposal.
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\301\ The Bureau is proposing an additional modification in
proposed Sec. 1005.18(e)(3), discussed below, to provide an
exception to the requirement to provide limited liability protection
when a financial institution has not completed collection of
consumer identifying information and identity verification for a
prepaid account, assuming notice of the risk of not registering the
prepaid account has been provided to the consumer.
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18(e)(2) Modified Error Resolution Requirements
Overview of Existing Requirements
EFTA section 908 governs the timing and other requirements for
consumers and financial institutions on error resolution, including
provisional credit, and is implemented for accounts under Regulation E
generally, including payroll card accounts, in Sec. 1005.11. Section
1005.11(c)(1) and (3)(i) requires that a financial institution, after
receiving notice that a consumer believes an electronic fund transfer
from the consumer's account was not authorized, must investigate
promptly and determine whether an error occurred (i.e., whether the
transfer was unauthorized), within ten business days (20 business days
if the electronic fund transfer occurred within 30 days of the first
deposit to the account). Upon completion of the investigation, the
financial institution must report the investigation's results to the
consumer within three business days. After determining that an error
occurred, the financial institution must correct an error within one
business day. See Sec. 1005.11(c)(1). Under EFTA section 909(b), the
burden of proof is on the financial institution to show that an alleged
error was in fact an authorized transaction; if the financial
institution cannot establish proof of valid authorization, the
financial institution must credit the consumer's account.
Existing Sec. 1005.11(c)(2) provides that if the financial
institution is unable to complete the investigation within ten business
days, its investigation may take up to 45 days if it provisionally
credits the amount of the alleged error back to the consumer's account
within ten business days of receiving the error notice.\302\
Provisional credit is not required if the financial institution
requires but does not receive written confirmation within 10 business
days of an oral notice by the consumer. Sec. 1005.11(c)(2)(i)(A). If
the investigation establishes proof that the transaction was, in fact,
authorized, the financial institution may reverse any provisional
credit previously extended (assuming there are still available funds in
the account). Sec. 1005.11(d)(2).
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\302\ The financial institution has 90 days (instead of 45) if
the claimed unauthorized electronic fund transfer was not initiated
in a state, resulted from a point-of-sale debit card transaction, or
occurred within 30 days after the first deposit to the account was
made. Sec. 1005.11(c)(3)(ii).
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Existing Sec. 1005.18(c)(4) provides that, for payroll card
accounts following the periodic statement alternative in existing Sec.
1005.18(b), the period for reporting an unauthorized transaction is
tied, in part, to the date the consumer electronically accesses the
consumer's account pursuant to existing Sec. 1005.18(b)(1)(ii),
provided that the electronic account history reflects the transfer at
that time, or the date the financial institution sends a written
history of the consumer's account transactions requested by the
consumer pursuant to existing Sec. 1005.18(b)(1)(iii) in which the
unauthorized transfer is first reflected. The Bureau notes that this
provision only modifies the 60-day period for consumers to report an
error and does not alter any other provision of Sec. 1005.11.
As discussed above, the FMS Rule requires that the issuer of a
prepaid card that receives a Federal payment must
[[Page 77183]]
comply with the error resolution and provisional credit requirements
for payroll cards accounts in Regulation E. See 31 CFR 210.5(b)(5). The
Bureau understands that prepaid cards that receive Federal payments
and, as discussed previously, by extension many other prepaid cards
that are eligible to receive Federal payments if the consumer so
chooses, already comply with these provisions.
Comments Received and Other Industry Outreach
In response to the Prepaid ANPR, industry, trade associations, and
consumer groups were nearly unanimous in their support for extending
Regulation E error resolution requirements to prepaid cards. Those
industry commenters that disagreed suggested, however, that the Bureau
should not extend Regulation E limited liability and error resolution
provisions to prepaid products, arguing that consumers should assume
some liability for fraud or stolen PINs in certain situations where the
consumer acted negligently. One credit union argued that increasing
protections for prepaid cards decreases the incentive for consumers to
establish checking and savings accounts. Other commenters suggested
that, if prepaid cards were covered under Regulation E at all, the
Regulation should be modified to generally match existing industry
practices rather than requiring financial institutions to change
products in ways that commenters said could cause fees to increase,
thus making these products more expensive for consumers.
Several industry and trade association commenters requested that
the Bureau shorten any time frame for consumers to report unauthorized
transactions to 60 days from the date the transaction is posted to the
consumer's account, arguing that a longer period is not necessary given
consumers' readily available access to online account information.
These parties also pointed out that, when consumers significantly delay
reporting unauthorized transactions to their financial institution, it
can be costly and difficult for the institution to investigate. Others
argued that ten business days is too short a period in which to
investigate errors before extending provisional credit and that time
period should be extended to at least 20 business days or longer.
Commenters were varied in their suggested approaches with respect
to provisional credit. Some program managers, in comment letters
responding to the Bureau's Prepaid ANPR as well as in other outreach
conducted by the Bureau, have expressed concern about extending
provisional credit to all prepaid card accounts, asserting that the
potential fraud losses would be unsustainable. Specifically, they
contend that cardholders intending to take advantage of the rules can
make a purchase or withdraw cash at an ATM, assert that an error has
occurred, obtain provisional credit (because many claims take most
providers more than ten or even 20 business days to resolve), spend
down those funds, and abandon the card before the provider is able to
complete its investigation. Industry commenters argued that prepaid
cards may have higher incidences of fraudulently-asserted errors than
other types of accounts for a number of reasons, including that prepaid
cards are often purchased anonymously; prepaid cards are easier to
abandon and are more often abandoned (by quickly spending down the
balance and discarding the card); consumers may not have any other
ongoing relationship with the issuing bank or program manager; and
fraud is less likely when a consumer's paycheck or employer is
implicated (e.g., in accounts receiving direct deposit), whether those
funds are being sent to a prepaid account, payroll card account, or
other consumer asset account under Regulation E. As noted above, EFTA
places the burden of proof on the financial institution to show that an
alleged error was, in fact, an authorized transaction.
Nevertheless, consumer advocates and some industry commenters
argued that many prepaid accounts are used in substantially similar
ways as traditional consumer asset accounts and thus consumers using
prepaid accounts should receive protections for funds lost due to
unauthorized use in the same timeframe as holders of other accounts
covered by Regulation E. Consumer advocates repeatedly emphasized how
important provisional credit can be for consumers, noting that many
consumers who use prepaid cards have limited liquid assets and may put
a substantial portion of those assets on their prepaid cards. Without
provisional credit, if those funds are lost due to an unauthorized
transfer, a consumer could be without those funds--most of their
assets--for the duration of the financial institution's investigation
(up to 45 days, or 90 days in certain circumstances). Consumer
advocates contended that provisional credit may be particularly
important to prepaid account users because they may be less likely to
have access to other funds.
Study of Prepaid Account Agreements Regarding Error Resolution and
Provisional Credit
As discussed previously, the Bureau conducted its Study of Prepaid
Account Agreements to better understand how providers of prepaid
accounts would be affected by a requirement they offer error resolution
with provisional credit. In this Study, the Bureau analyzed prepaid
account terms and conditions to determine current industry practices in
a number of areas, including with respect to error resolution and
provisional credit. The Bureau found that across all agreements
reviewed, 77.85 percent provided full error resolution with provisional
credit protections, 12.31 percent provided error resolution with
limitations on provisional credit; 9.23 percent provided error
resolution without provisional credit; and 0.62 provided no error
resolution protections.\303\ Because these statistics weight all
agreements equally, and thus do not reflect individual programs' or
providers' market shares, the Bureau also specifically analyzed the 22
agreements for GPR card programs in the Study that belong to five of
the largest program managers in the GPR card market (which together
constituted 81 percent of the market by load volume and 72.2 percent
market share based on number of active cards as of late 2012 \304\).
The Bureau found that 17 of these agreements provide full error
resolution protections with provisional credit, three provide error
resolution with limitations on provisional credit, and two provide
error resolution without provisional credit.\305\
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\303\ See The Study of Prepaid Account Agreements, at 13 tbl. 3.
\304\ Aite Group LLC, The Contenders: Prepaid Debit and Payroll
Cards Reach Ubiquity, at 17, 23 (Nov. 2012).
\305\ See The Study of Prepaid Account Agreements, at 13 tbl. 3.
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Similarly, as noted above, CFSI found that all cards reviewed,
representing an estimated 90 percent of the GPR card marketplace, had
adopted the Payroll Card Rule's version of Regulation E's error
resolution and limited liability protections.\306\
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\306\ Ctr. for Fin. Services Innovation, Prepaid Industry
Scorecard, Assessing Quality in the Prepaid Industry with CFSI's
Compass Principles, at 12 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf.
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Apart from the relevant provisions in Regulation E, the Bureau
notes that the four major payment card networks' rules all impose some
form of zero liability protections for cardholders in certain
circumstances. At least one network, for
[[Page 77184]]
example, requires provisional credit to be given after five days
(rather than ten) for unauthorized transactions occurring over its
network, unless certain exceptions apply.
Proposal
The Bureau is proposing to extend to all prepaid accounts the error
resolution provisions of Regulation E, including provisional credit,
with modifications to the Sec. 1005.11 timing requirements in proposed
Sec. 1005.18(e)(2) for financial institutions following the periodic
statement alternative in proposed Sec. 1005.18(c)(1).\307\ The text of
proposed Sec. 1005.18(e)(2) updates internal paragraph citations to
reflect other numbering changes made in this proposal, but otherwise
remains unchanged from existing Sec. 1005.18(c)(4). As discussed
above, EFTA section 904(c) authorizes this proposed revision.
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\307\ The Bureau is proposing an additional modification in
proposed Sec. 1005.18(e)(3), discussed below, to provide an
exception to the requirement to provide error resolution when a
financial institution has not completed collection of consumer
identifying information and identity verification for a prepaid
account, assuming appropriate notice of the risk of not registering
the prepaid account has been provided to the consumer.
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The Bureau is proposing to extend to all prepaid accounts existing
comment 18(c)-1 regarding the error resolution safe harbor provision,
renumbered as new comment 18(e)-1 and with references to payroll card
accounts changed to prepaid accounts. The Bureau is also proposing to
extend existing comment 18(c)-2 to all prepaid accounts, with one
substantive modification, renumbered as new comment 18(e)-2, and with
the reference to payroll card account changed to prepaid account. This
comment currently provides, in part, that a consumer is deemed to have
accessed a payroll card account electronically when the consumer enters
a user identification code or password or otherwise complies with a
security procedure used by an institution to verify the consumer's
identity. The Bureau proposes to add language to the comment to make
clear that access to account information via a mobile application, as
well as through a web browser, would constitute electronic access to an
account for purposes of the timing provisions in proposed Sec.
1005.18(e)(1) and (2). The existing comment also explains that an
institution is not required to determine whether a consumer has in fact
accessed information about specific transactions to trigger the
beginning of the 60-day periods for liability limits and error
resolution under Sec. Sec. 1005.6 and 1005.11. To further clarify
this, the Bureau proposes to add an additional sentence to the end of
proposed comment 18(e)-2 to explain that a consumer is not deemed to
have accessed a prepaid account electronically when the consumer
receives an automated text message or other automated account alert, or
checks the account balance by telephone.
The Bureau is proposing to extend existing comment 18(c)-3,
regarding untimely notice of error by a consumer, to all prepaid
accounts, renumbered as new comment 18(e)-3 and with internal paragraph
citations updated to reflect other numbering changes made in this
proposal. The last sentence of the comment currently provides that
where the consumer's assertion of error involves an unauthorized EFT,
the institution must comply with Sec. 1005.6 before it may impose any
liability on the consumer. The Bureau is proposing to specifically note
that compliance with Sec. 1005.6 includes compliance with the
extension of time limits provided in Sec. 1005.6(b)(4).
The Bureau seeks comments on all aspects of its proposal for new
Sec. 1005.18(e)(2) and related commentary. In particular, the Bureau
requests comment on whether there is an alternative approach to error
resolution that the Bureau should adopt for prepaid accounts. The
Bureau also seeks comment on whether error resolution with provisional
credit is appropriate for all, or only certain, prepaid accounts, and
whether there are any indicators that financial institutions use that
might adequately predict the validity of a particular error claim,
which might inform the Bureau's application of error resolution
requirements to all prepaid accounts.
The Bureau also seeks comment on whether there might be any other
consequences to extending the requirement for error resolution with
provisional credit to all prepaid accounts. In particular, the Bureau
seeks comment on what impact the concern for increased fraud losses (or
the potential therefor) might have on financial institutions'
eligibility requirements and initial screening processes for new
prepaid accountholders. The Bureau also seeks comment on whether
institutions might become more apt to close accounts that have asserted
error claims, and whether and how these factors might result in
decreased access to financial products for consumers.
Alternative Approaches Considered by the Bureau
In light of the various concerns raised in comment letters received
in response to the Prepaid ANPR and during the Bureau's outreach to
industry and consumer groups, the Bureau recognizes that provisional
credit can be important to consumers, but also that there could be an
increased risk of fraud by cardholders who might be unscrupulous and
might be able to take advantage of a comprehensive provisional credit
rule. Thus, the Bureau considered a number of alternatives to extending
full provisional credit to all prepaid accounts. For example, the
Bureau considered whether provisional credit should be limited only to
prepaid accounts receiving payroll or government payments, those that
have received some form of direct deposit within a certain period, such
as 30 days, those that have been opened for a certain amount of time,
or those that maintained a balance over a certain threshold prior to
the alleged error, among other things.
Any of these factors could potentially limit provisional credit
fraud, although each has drawbacks. For example, even though providers
indicated that a claim for an unauthorized transaction in the first few
days after account opening is more likely to be fraudulent than claims
on older accounts, consumers seeking to commit fraud could simply wait
the designated period of time before asserting an error claim and
seeking provisional credit if the Bureau were to require provisional
credit only for prepaid accounts of a certain age. At the same time,
honest consumers would be without key protections during that time
period. Another approach would be to limit provisional credit to
prepaid accounts that receive some form of direct deposit because
consumers who receive wage or benefit payments on a card may be less
likely to risk that payment to commit fraud. Ultimately, however, the
Bureau believes the protection offered by this approach would
potentially be too narrow because many consumers using prepaid accounts
receive wages in forms other than direct deposit (such as those that
receive their wages or tips in cash) and would not be able to receive
provisional credit under such a standard. It would similarly leave
consumers who do not receive any wage or benefit payments into their
prepaid accounts unprotected.
The Bureau seeks comment on whether there are any other
alternatives to or potential limits on provisional credit that might
contain fraud losses for
[[Page 77185]]
institutions while adequately protecting consumers from harm.
18(e)(3) Limitations on Liability and Error Resolution for Unverified
Accounts
To further the purposes of EFTA, the Bureau believes it is
necessary and proper to propose to use its exceptions authority under
EFTA section 904(c) to add new section Sec. 1005.18(e)(3). This
proposed provision would provide that for prepaid accounts that are not
payroll card accounts or government benefit accounts, if a financial
institution discloses to the consumer the risks of not registering a
prepaid account using a notice that is substantially similar to the
proposed notice contained in paragraph (c) of appendix A-7, a financial
institution is not required to comply with the liability limits and
error resolution requirements under Sec. Sec. 1005.6 and 1005.11 for
any prepaid account for which it has not completed it collection of
consumer identifying information and identity verification.\308\
However, once the consumer's identity has been verified, a financial
institution must limit the consumer's liability for unauthorized EFTs
and resolve any errors that occurred prior to verification subject to
the timing requirements of existing Sec. Sec. 1005.6 or 1005.11, or
the modified timing requirements in proposed Sec. 1005.18(e), as
applicable.
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\308\ Relatedly, the Bureau is proposing to require that
financial institutions include on the short form disclosure for all
prepaid accounts a statement emphasizing the importance of
registering the prepaid account. See section-by-section analysis of
proposed Sec. 1005.18(b)(2)(i)(B)(12).
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Proposed comment 18(e)-4 would explain that for the purpose of
compliance with proposed Sec. 1005.18(e)(3), consumer identifying
information may include the consumer's full name, address, date of
birth, and Social Security number or other government-issued
identification number. Comment 18(e)-4 would also explain that for an
unauthorized transfer or an error asserted on a previously unverified
prepaid account, whether a consumer has timely reported the
unauthorized transfer or alleged error is based on the date the
consumer contacts the financial institution to report the unauthorized
transfer or alleged error, not the date the financial institution
completes its customer identification and verification process. Comment
18(e)-4 would further explain that for an error asserted on a
previously unverified prepaid account, the time limits for a financial
institution's investigation of errors pursuant to Sec. 1005.11(c)
begin on the day following the date the financial institution completed
its customer identification and verification process. A financial
institution may not delay completing its customer identification and
verification process, or refuse to verify a consumer's identity, based
on the consumer's assertion of an error.
The Bureau understands that financial institutions often conduct
customer identification and verification at the onset of a relationship
with a consumer, such as at the time a consumer signs up to receive
wages via a payroll card account or when a consumer requests a GPR card
online. For GPR cards purchased at retail stores, the financial
institution may--but does not always--obtain customer-identifying
information and perform verification at the time the consumer calls or
goes online to activate the card. Because of restrictions imposed by
FinCEN's Prepaid Access Rule (31 CFR 1022.210(d)(1)(v)) and the payment
card networks' operating rules, among other things, the Bureau
understands that customer identification and verification is almost
always performed before a card can be reloaded, used to make cash
withdrawals, or used to receive cash back at the point of sale. The
Bureau believes that providers thus have an incentive to encourage
consumers to register their cards to increase the functionality and
thus the longevity of the consumer's use of the account.
Collection of consumer identifying information and verification of
identity under proposed Sec. 1005.18(e)(3) would include information
collected, and identities verified, by a financial institution directly
as well as by a service provider or agent of the institution. Thus, the
Bureau expects that financial institutions providing prepaid accounts
for purposes such as student financial aid disbursements or property or
casualty insurance payments would likely not be able to avail
themselves of the exclusion in Sec. 1005.18(e)(3) because consumer
identifying information is collected and consumers' identities verified
by the financial institution, or a service provider or agent of the
institution, prior to distribution of such prepaid accounts. The Bureau
solicits comment on the proposed exclusion and on what other types of
prepaid account products might be eligible for it, and whether the
exclusion should be applied more broadly or limited only to certain
types of prepaid account products such as those sold anonymously at
retail locations.
The Bureau is proposing to adopt this exemption because it
understands that financial institutions may face difficulties in
determining whether an unauthorized transaction occurred if it does not
know a prepaid accountholder's identity. For example, a financial
institution might have a video recording provided by a merchant or ATM
operator showing the card user, but without having identified the
accountholder, it would have no way of knowing if the individual
conducting the transaction is authorized to do so.
The Bureau believes that financial institutions would follow the
customer identification and verification requirements set forth in
FinCEN's customer identification program requirements for banks in 31
CFR 1020.220 or for providers and sellers of prepaid access in 31 CFR
1022.210(d)(1)(iv).
The Bureau anticipates that when a consumer calls to assert an
error on an unverified account, the financial institution would inform
the consumer of its policy regarding error resolution on unverified
accounts and would begin the customer identification and verification
process at that time. As noted previously, the Bureau believes that
providers have an incentive to encourage consumers to register their
cards to increase the functionality and thus the longevity of the
consumer's use of the account.
The Bureau seeks comment on all aspects of this part of its
proposal, including whether FinCEN's regulations, as discussed above,
are the appropriate standard to use for identification and verification
of prepaid accountholders, or whether some other standard should be
used. The Bureau also seeks comment on whether error resolution should
be required even for unidentified or unverified accounts or whether,
for such accounts, the Bureau should exercise its exceptions authority
under EFTA to change the burden of proof from the financial institution
to the accountholder in such circumstances rather than eliminate error
resolution rights altogether. Such a change might add protections for
consumers in particular circumstances, such as if their initial cash
load amount does not match the amount actually credited to their
prepaid account. (For example, if the consumer were to load $100 cash,
but their online account balance shows only $10.) The Bureau seeks
comment on the proportion of prepaid accounts for which customer
identification and verification is either never performed or is
attempted but cannot be completed. The Bureau also seeks comment on
whether such accounts should receive error resolution protections but
without requiring financial institutions to grant provisional credit.
[[Page 77186]]
The Bureau believes that it is unlikely that a financial
institution would seek to avoid completion of the identification and
verification process in order to refuse to address an error asserted by
a consumer given the potential benefits to the institution associated
with having a consumer complete the identification and verification
process. However, the Bureau seeks comment on whether such evasion is
likely to occur and whether the Bureau should impose a time limit for
completion of the customer identification and verification process.
18(f) Initial Disclosure of Fees and Other Key Information
The Bureau is proposing Sec. 1005.18(f), which would modify the
initial disclosure of fees requirement in Sec. 1005.7(b)(5) for
prepaid accounts. EFTA section 905(a)(4) requires financial
institutions to disclose to consumers, as part of the account's terms
and conditions, any charges for electronic fund transfers or for the
right to make such transfers. Existing Sec. 1005.7(b)(5) implements
this requirement by stating that, as part of the initial disclosures,
any fees imposed by a financial institution for electronic fund
transfers or for the right to make transfers must be disclosed.
Existing comment 7(b)(5)-1 further clarifies that other fees (for
example, minimum-balance fees, stop-payment fees, or account
overdrafts) may, but need not, be disclosed. The Bureau believes that
for prepaid accounts, however, it is important that the initial account
disclosures provided to consumers list all fees that may be imposed in
connection with the prepaid account. The Bureau believes that because
these disclosures are what consumers will likely reference throughout
their ongoing use of their prepaid accounts, it is important that these
disclosures include all relevant fee information, not just those fees
related to electronic fund transfers.
Thus, to further the purposes of EFTA to provide a framework to
establish the rights, liabilities, and responsibilities of prepaid
account users, the Bureau believes it is necessary and proper to
exercise its authority under EFTA section 904(c) to propose an
adjustment of the requirement in EFTA section 905(a)(4), which is
implemented in existing Sec. 1005.7(b)(5), for prepaid accounts. In
addition, the Bureau believes that disclosure of all fees for prepaid
accounts will, consistent with Dodd-Frank Act section 1032(a), ensure
that the features of prepaid accounts are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers
to understand the costs, benefits, and risks associated with a prepaid
account. Specifically, the Bureau is proposing Sec. 1005.18(f), which
would require that in addition to disclosing any fees imposed by a
financial institution for electronic fund transfers or the right to
make such transfers, the financial institution must also include in its
initial disclosures given pursuant to Sec. 1005.7(b)(5) all other fees
imposed by the financial institution in connection with a prepaid
account. For each fee, a financial institution must disclose the amount
of the fee, the conditions, if any, under which the fee may be imposed,
waived, or reduced, and, to the extent known, whether any third party
fees may apply.
The Bureau believes that most providers are already disclosing all
fees in the terms and conditions accompanying prepaid accounts.
Further, the Bureau notes that Regulation DD, which implements TISA,
requires that initial disclosures for deposit accounts include the
amount of any fee that may be imposed in connection with the account
(or an explanation of how the fee will be determined) and the
conditions under which the fee may be imposed. Sec. 1030.4(b)(4).
The Bureau is further proposing that these disclosures pursuant to
proposed Sec. 1005.18(f) include all of the information required to be
disclosed pursuant to Sec. 1005.18(b)(2)(ii)(B) and must be provided
in a form substantially similar to Sample Form A-10(e). The Bureau
believes that for consistency purposes and to facilitate consumer
understanding of a prepaid account's terms, it is useful for the fee
disclosure provided pursuant to Sec. 1005.7(b)(5), as modified by
proposed Sec. 1005.18(f), to be in the same format of the long form
disclosure requirement of proposed Sec. 1005.18(b)(2)(ii)(A).
The Bureau seeks comment on this portion of the proposal.
18(g) Credit Card Plans Linked to Prepaid Accounts
Proposed Sec. 1005.18(g)(1) would set forth timing rules related
to when a credit card plan under Regulation Z could be linked to a
prepaid account. Proposed Sec. 1005.18(g)(2) would set forth rules
related to the terms applicable to the prepaid account when a credit
card plan is linked to a prepaid account.
18(g)(1) Prohibitions
Proposed Sec. 1005.18(g)(1) generally would restrict financial
institutions that establish or hold prepaid accounts from linking a
credit card plan under Regulation Z to a prepaid account, or allowing
the prepaid account to be linked to such a credit card plan, until 30
calendar days after the prepaid account has been registered. Proposed
Sec. 1005.18(g)(1)(i) would restrict financial institutions that
establish or hold prepaid accounts from providing solicitations or
applications to holders of prepaid accounts to open credit card
accounts subject to Regulation Z, prior to 30 calendar days after the
prepaid accounts have been registered. For purposes of proposed Sec.
1005.18(g)(1), the term solicitation would mean an offer by the person
to open a credit or charge card account subject to Regulation Z that
does not require the consumer to complete an application. A ``firm
offer of credit'' as defined in section 603(l) of the Fair Credit
Reporting Act (15 U.S.C. 1681a(l)) for a credit or charge card would be
a solicitation for purposes of proposed Sec. 1005.18(g)(1).
Proposed Sec. 1005.18(g)(1)(ii) would restrict financial
institutions that establish or hold prepaid accounts of consumers from
allowing prepaid access devices to access credit card plans subject to
Regulation Z that would make the prepaid access devices into credit
cards at any time prior to 30 calendar days after the prepaid accounts
have been registered. Proposed Sec. 1005.18(g)(1)(iii) would restrict
financial institutions that establish or hold prepaid accounts of
consumers from allowing credit extensions from credit card plans
subject to Regulation Z to be deposited in prepaid accounts, where the
credit plans are accessed by account numbers that are credit cards
under Regulation Z where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor, prior to 30 calendar days after the prepaid account has
been registered. Proposed Sec. 1005.18(g)(1)(iii) is intended to
address situations where (1) a separate line of credit is linked to a
prepaid account where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor, (2) the consumer requests an advance on the open-end
account using an account number only, and (3) the advance is deposited
into the prepaid account. Proposed comment 18(g)-1 would cross
reference provisions in Regulation Z that would provide guidance on
when a program constitutes a credit plan (see proposed Sec.
1026.2(a)(20) and comment 2(a)(20)-2.ii) and would provide guidance on
when an access device for a prepaid account is a credit card and when
an account number is a credit card where extensions of credit are
[[Page 77187]]
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor (see Sec. 1026.2(a)(15)(i),
proposed Sec. 1026.2(a)(15)(vii), and proposed comment 2(a)(15)-2.i.F
and .G).
Proposed Sec. 1005.18(g)(1) would complement a similar proposed
provision in Regulation Z, proposed Sec. 1026.12(h), which would
require credit card issuers to wait at least 30 calendar days after the
prepaid account has been registered before the card issuer may provide
a solicitation or an application to the holder of the prepaid account
to open a credit or charge card account that will be accessed by the
prepaid card that is a credit card under Regulation Z, or by an account
number that is a credit card under Regulation Z where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor.
The Bureau is proposing Sec. 1005.18(g)(1) pursuant to its
authority under sections 904(a), 904(c), and 905(a) of EFTA (15 U.S.C.
1693b) and Dodd-Frank Act section 1032(a). The Bureau believes that
proposed Sec. 1005.18(g)(1) is necessary and proper to effectuate the
express purposes of EFTA to provide a framework to establish the
rights, liabilities and responsibilities of prepaid account users by
helping consumers understand the terms of their prepaid accounts and
that credit card plans linked to the prepaid accounts are optional.
Under the Bureau's proposal and as discussed above, a consumer's
registration of a prepaid account would be a critical step for
obtaining Regulation E's consumer rights and protections with respect
to the account, and the Bureau's proposal to restrict financial
institutions from offering credit features to holders of prepaid
accounts until 30 days after the accounts have been registered seeks,
in part, to ensure that consumers understand that they are not required
to request any credit feature in order to register and use a prepaid
account.
The Bureau is also proposing to adopt this provision because a
consumer's decision of which prepaid account to purchase, register, and
use is itself a complex decision involving several variables, including
the consumer's finances and purchasing habits. If the consumer makes a
choice that does not ultimately prove to be a good fit, it is
relatively easy for that consumer to acquire a different prepaid
account (to the extent that account does not have a credit feature).
The Bureau believes that this dynamic has fostered a competitive
market, and it is concerned that combining decisions on prepaid
accounts and credit features would tend to undermine that in at least
two ways. First, it makes the acquisition of the prepaid account even
more complex by adding more variables to consider; as noted previously,
consumers may spend little time shopping for a prepaid card. Second,
the presence of a credit feature may make it harder for consumers to
terminate their account relationships if consumers can incur
significant debts before having a chance to determine how the prepaid
account itself is performing.
The Bureau's proposal seeks to keep that decision separate from a
consumer's decision whether to add a credit feature to the prepaid
account, which involves numerous additional variables that the consumer
should consider. The two decisions in combination could cause consumers
to make incorrect or suboptimal decisions. The Bureau is particularly
concerned that the events of purchasing, registering, and adding a
credit feature to a prepaid account could become conflated for prepaid
accounts that consumers obtain on the Internet, because in that context
the events could occur close together in time. In particular, the
Bureau believes that the proposed 30-day waiting period would,
consistent with Dodd-Frank section 1032(a), ensure that the features of
the prepaid account and any credit card feature that might become
connected to it are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the account. The Bureau believes
that a consumer should have the opportunity to assess the features of a
prepaid account by means of actually using it before being offered a
credit feature that might make it more difficult for the consumer to
terminate the prepaid account relationship due to outstanding credit
balances.
As discussed in the section-by-section analysis of Regulation Z
Sec. 1026.12(a)(1), under the proposal, a credit card feature may be
added to a previously issued prepaid card only upon the consumer's
specific request and only in compliance with proposed Sec. 1026.12(h).
Proposed Sec. 1026.12(h) would require credit card issuers to wait at
least 30 calendar days after the prepaid account has been registered
before the card issuer may open a credit card account for the holder of
a prepaid account, or may provide a solicitation or an application to
the holder of the prepaid account to open a credit or charge card
account, that will be accessed by the prepaid card that is a credit
card under Regulation Z or by an account number that is a credit card
under Regulation Z where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor.
The Bureau believes that Regulation E proposed Sec. 1005.18(g)(1)
and Regulation Z proposed Sec. 1026.12(h), taken together, would
promote the informed use of the prepaid account and the credit card
account by separating the decision to purchase and register a prepaid
account from the decision to accept an offer to link a credit card
account to that prepaid account. By separating these decisions, Sec.
1005.18(g)(1) would better allow consumers to focus on the terms and
conditions that apply to the prepaid account at the time of purchase
and registration which may enable the consumer to better understand
those terms and conditions, consistent with EFTA section 905(a) which
requires financial institutions to disclose the terms and conditions of
electronic fund transfers involving a consumer's account. The Bureau
also believes that requiring at least 30 calendar days to elapse
between the registration of a prepaid account and any offer of a linked
credit or charge card account would enhance consumer understanding of
the terms of the prepaid account and would help consumers to make more
informed decisions regarding linking a credit or charge card account
the prepaid account. Otherwise, the Bureau fears that consumers could
believe that they are required to request that the credit or charge
card account be linked to the prepaid account in order to register or
access the prepaid account.
The Bureau recognizes that this provision would be unique to
prepaid accounts. Compare existing 1005.17(c). Nevertheless and for the
reasons discussed above, the Bureau believes that it is particularly
important to separate these two decisions for prepaid accounts and
related overdraft services and credit features. The Bureau solicits
comment on this provision. The Bureau also solicits comment on the 30
day time frame, and whether a shorter or longer time frame would better
accomplish the goals of the provision.
The Bureau notes that proposed Sec. 1005.18(g)(1) and Regulation Z
Sec. 1026.12(h) would overlap in cases where the credit card plan is
accessed by a prepaid card or the credit card plan is being offered by
a financial institution that holds the prepaid account and is accessed
by an account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. In those cases, the financial
[[Page 77188]]
institution would be a ``card issuer'' under Regulation Z Sec.
1026.2(a)(7) \309\ and the Bureau is proposing that both the
requirements of proposed Regulation Z Sec. 1026.12(h) and proposed
Regulation E Sec. 1005.18(g)(1) would apply to the financial
institution who also is a card issuer. Nonetheless, the Bureau intends
proposed Regulation E Sec. 1005.18(g)(1) and Regulation Z Sec.
1026.12(h) to impose the same restrictions in those situations. In
cases where the credit card account is being offered by a person other
than the person who holds the prepaid account and is being accessed by
an account number as described above, the person issuing the account
number that is a credit card (i.e., card issuer) must comply with
proposed Regulation Z Sec. 1026.12(h). In addition, the financial
institution that holds the prepaid account must comply with Regulation
E Sec. 1026.18(g)(1). The Bureau believes that imposing complementary
restrictions on both the card issuer that is offering the credit card
account and the financial institution that holds the prepaid account
would prevent circumvention of the prohibition, and help ensure that
consumers' decisions whether to open a credit card account linked to
the prepaid account are separate from when the prepaid account is
purchased or registered, in order to enable consumers to understand
better the terms and conditions that apply to the prepaid account,
consistent with EFTA section 905(a) which requires financial
institutions to disclose the terms and conditions of electronic fund
transfers involving a consumer's account.
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\309\ Under the proposal, with respect to a prepaid card that is
a credit card where the card accesses a credit plan that is offered
by a third party, a person offering the credit plan that is accessed
by the prepaid card would be an agent of the person issuing the
prepaid card and thus, would be a card issuer with respect to the
prepaid card that is a credit card. See Regulation Z proposed
comment 2(a)(7)-1.ii. In this case, both the person offering the
credit plan and the financial institution issuing the prepaid card
would be card issuers under Regulation Z Sec. 1026.2(a)(7).
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18(g)(2) Requirements
Proposed Sec. 1005.18(g)(2) would set forth rules related to the
terms applicable to the prepaid account when a credit card plan is
linked to a prepaid account. Specifically, proposed Sec. 1005.18(g)(2)
would provide that where a credit card plan subject to Regulation Z may
be offered at any point to the consumer with respect to a prepaid
account that is accessed by an access device for the prepaid account
where the access device is a credit card under Regulation Z or is
accessed by an account number that is a credit card under Regulation Z
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor, a financial
institution that establishes or holds such a prepaid account may not
apply different terms and conditions to a consumer's account that do
not relate to an extension of credit, carrying a credit balance, or
credit availability, depending on whether the consumer elects to link
such a credit card plan to the prepaid account.
Proposed comment 18(g)-2.i would provide guidance on the
applicability of the restriction in proposed Sec. 1005.18(g)(2).
Specifically, proposed comment 18(g)-2.i would explain that a financial
institution may offer different terms on different prepaid account
products, where the terms may differ between a prepaid account product
where a credit card plan subject to Regulation Z cannot be linked to
the prepaid account, and a prepaid account product where a credit card
plan subject to Regulation Z can be linked to the prepaid account.
Nonetheless, on the prepaid account product where a credit card plan
subject to Regulation Z may be offered at any point to the consumer
that is accessed by an access device for the prepaid account that is a
credit card under Regulation Z or is accessed by an account number that
is a credit card under Regulation Z where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, a financial institution that
establishes or holds such a prepaid account may not apply different
terms and conditions to a consumer's account that do not relate to an
extension of credit, carrying a credit balance, or credit availability,
depending on whether the consumer elects to link such a credit card
plan to the prepaid account. Proposed comment 18(g)-2.ii explains that
Sec. 1005.18(g)(2) prevents a financial institution from waiving fees
or reducing the amount of fees that do not relate to an extension of
credit, carrying a credit balance, or credit availability if the
consumer elects to link the prepaid account to a credit card plan.
Proposed comment 18(g)-2.ii would provide examples of account terms
and conditions that would be subject to the restrictions in proposed
Sec. 1005.18(g)(2). The proposed examples in comment 18(g)-2.ii
include fees assessed on the prepaid account that do not relate to an
extension of credit, carrying a credit balance, or credit availability,
including any transaction fees for transactions that are completely
funded by the prepaid account and any one-time or periodic fees imposed
for opening or holding a prepaid account. The proposed comment also
would cross reference Regulation Z proposed Sec. 1026.4(b)(2) and
comment 4(b)(2)-1.iii and .iv, which provide additional guidance on
fees that relate to an extension of credit, carrying a credit balance
or credit availability. Proposed comment 18(g)-2.iii also would provide
examples of account terms and conditions that are not subject to the
restrictions in proposed Sec. 1005.18(g)(2) because these terms and
conditions would relate to an extension of credit, carrying a credit
balance, or credit availability. The proposed examples would include
(1) fees or charges assessed on the prepaid account applicable to
transactions that access the credit card plan subject to Regulation Z,
including transaction fees for transactions that either access just the
credit card plan, or access both the prepaid account and the credit
card plan; and (2) any one-time or periodic fees imposed for the
issuance or availability of the credit card plan subject to Regulation
Z. Proposed comment 18(g)-2.iv provides examples that illustrate the
prohibition in proposed Sec. 1005.18(g)(2).
The Bureau is proposing Sec. 1005.18(g)(2) pursuant to its
authority under EFTA sections 904(a) and (c). In implementing its
overdraft opt-in rule under Sec. 1005.17, the Board required that
``[a] financial institution shall provide to consumers who do not
affirmatively consent to the institution's overdraft service for ATM
and one-time debit card transactions the same account terms,
conditions, and features that it provides to consumers who
affirmatively consent, except for the overdraft service for ATM and
one-time debit card transactions.'' Sec. 1005.17(b)(3). The Board
recognized that without this requirement, ``some institutions could
otherwise effectively compel the consumer to provide affirmative
consent to the institution's payment of overdrafts for ATM and onetime
debit card transactions by providing consumers who do not opt in with
less favorable terms, conditions, or features than consumers who do opt
in.'' \310\ The Bureau believes that the same requirement should be
extended here for the same reasons. As discussed in the section-by-
section analysis of Regulation Z Sec. 1026.12(a)(1), under the
proposal, a credit card feature may be added to a previously issued
prepaid card only upon the consumer's specific request and only in
compliance with proposed Sec. 1026.12(h), which would require credit
card issuers to wait at least 30 calendar days after the prepaid
account has been registered before the
[[Page 77189]]
card issuer may open a credit or charge card account, or provide a
solicitation or an application to the holder of the prepaid account to
open a credit or charge card account, that will be accessed by the
prepaid card that is a credit card under Regulation Z or an account
number that is a credit card under Regulation Z where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor.
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\310\ 74 FR 59033, 59044 (Nov. 17, 2009).
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The Bureau believes some institutions could otherwise effectively
compel the consumer to request a credit card plan be linked to the
prepaid account as described above by providing consumers who do not
make such a request with less favorable terms, conditions, or features
than consumers who do make such requests. For example, an institution
could waive the monthly fee for holding a prepaid account for consumers
who request that the credit card plan be linked to the prepaid account,
but not waive the monthly fee for consumers who do not make such a
request.
18(h) Compliance Dates
The Bureau is proposing that all prepaid accounts comply with the
requirements of EFTA and Regulation E, as modified by proposed Sec.
1005.18, within nine months of publication of the Bureau's final rule
in the Federal Register. This nine month effective date would apply to
disclosures for newly-manufactured prepaid account materials and
disclosures or other information delivered to consumers online or by
telephone. The Bureau is proposing a delayed effective date for prepaid
account packaging, access devices, and other printed materials that
were created prior to the nine-month effective date, so that immediate
removal or destruction of unsold or undistributed prepaid account
packaging, access devices, or other physical materials created prior to
the nine month effective date would not be mandated. However, within 12
months of publication of the Bureau's final rule in the Federal
Register, all prepaid accounts would have to comply fully with the
requirements of the rule including its disclosure requirements,
regardless of when the physical packaging, access devices, or other
physical materials on which such disclosures appear were created.
The Bureau addresses its proposed effective date in two places. The
effective date for proposed Sec. 1005.18 is discussed in this section
(a cross-reference to the proposed Sec. 1005.18(h) effective date
appears in proposed Sec. 1005.15(c) for pre-acquisition disclosure
requirements for government benefit accounts) while the effective date
for the rest of this proposal is discussed in the Effective Date
section at the conclusion of the section-by-section analysis.
Comments Received and Stakeholder Outreach Regarding Effective Date
In determining the appropriate effective date to propose for this
rule, the Bureau considered comments submitted in response to the
Prepaid ANPR and also conducted further outreach and research. In the
Prepaid ANPR, the Bureau stated that one of its goals was to be mindful
of avoiding any unnecessary burden on industry. The Bureau also asked a
series of specific questions related to how market participants manage
their prepaid product inventory: (1) Through what methods, and under
what circumstances, do market participants communicate a change of
contract terms, or other information, to cardholders?; (2) Are there
inventory replacement cycles that drive the printing of cards to stock
distribution outlets?; (3) Do market participants conduct periodic
maintenance of systems during which updating compliance systems would
impose less of a burden? If so, how often does this maintenance occur?;
and (4) Are there other issues with respect to the cost of regulatory
compliance about which the Bureau should be aware? \311\
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\311\ See 77 FR 30923, 30925 (May 24, 2012).
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In response, a number of industry commenters noted that mandating
too short an implementation transition period to comply with new
disclosure requirements would result in financial institutions having
to remove, replace, and destroy existing inventory. These commenters
contended that such logistical procedures would be quite burdensome and
costly. Some commenters also noted the potential adverse environmental
impact that could stem from a short implementation period resulting in
the destruction of large quantities of unused products rendered
unsaleable or undistributable by virtue of new rules.
Industry commenters instead urged the Bureau to provide for an
implementation period long enough to allow for the exhaustion of
existing card inventories through ordinary sales, a process most
commenters generally estimated would span 12 to 18 months, although a
few suggested even longer. Under such an approach, industry commenters
argued, financial institutions would be able to introduce newly-printed
and compliant prepaid account product packages gradually so that they
could avoid excessive expenses without needing to destroy a large
number of non-compliant packages. Consumer advocacy groups and other
commenters generally did not address this issue.
Few industry commenters addressed the potential time needed for the
implementation of changes related to other potential issues to be
addressed by the proposed rule, such as error resolution procedures,
access to account information, or other provisions in Regulation E.
Commenters who did address these changes requested that financial
institutions be given between 12 and 24 months of time to implement any
systems-related updates. One commenter noted that such regulatory
changes generally require making changes to systems, sales processes
and training tools; conducting tests to ensure that changes are
properly implemented without disruption to cardholders; and
communicating changes to cardholders. These commenters further noted
that systems-related updates are typically undertaken at predetermined
biannual intervals and that regulatory deadlines resulting in systems-
related updates at previously unscheduled times would be particularly
costly and disruptive.
Proposal
The Bureau is proposing, in general, a nine month effective date
for the requirements of new Sec. 1005.18. Proposed Sec. 1005.18(h)(1)
would state that, except as provided in proposed Sec. 1005.18(h)(2),
the requirements of EFTA and Regulation E, as modified by proposed
Sec. 1005.18, apply to prepaid accounts nine months following the
publication of the Bureau's final rule in the Federal Register. The
disclosure requirements in proposed Sec. 1005.18(b) and (f)(2) would
apply to prepaid account packaging, access devices, and other physical
materials that are manufactured, printed, or otherwise prepared in
connection with a prepaid account on or after nine months. Thus,
proposed Sec. 1005.18(h)(1) would generally make applicable to all
prepaid accounts the requirements of EFTA and Regulation E, as modified
by proposed Sec. 1005.18's proposed provisions including those
governing disclosures, access to prepaid account information, limited
liability and error resolution, among others, after nine months.
However, this first proposed effective date would not require
destruction of previously-printed materials because it would only
require packages, cards and other materials printed on or after the
nine month date to comply with the rule's disclosure requirements in
[[Page 77190]]
proposed Sec. 1005.18(b) and (f)(2). These disclosure requirements
would apply after nine months, however, for prepaid account disclosures
and other information made available to consumers online or by
telephone.
For prepaid account packaging, access devices, and other printed
materials created prior to this first effective date, the Bureau
believes that nothing proposed herein would mandate a change-in-terms
notice insofar as the proposal would not require increased fees,
liability, or fewer types of available electronic fund transfers for
consumers. See Sec. 1005.8(a) and 12 CFR 1030.5(a)(1). If, however,
financial institutions wish to avail themselves of the more limited
error resolution or limited liability requirements for existing
unregistered prepaid accounts and their existing terms provide greater
protections, then a change-in-terms notice may be required.
Of course, if financial institutions wish to make substantive
changes to prepaid account fees or terms, they would, as always, be
required to remove from retail stores and other distribution channels
prepaid account packaging, access devices, and other printed materials
that their changes render inaccurate, and to provide notice of those
changes to consumers with existing prepaid accounts. The Bureau
believes that such legal requirements exist independent of the proposed
rule under operative state consumer protection and contract laws.
The Bureau understands that it may take some financial institutions
longer than nine months to fully redesign prepaid account packaging,
access devices, and other printed materials, and to begin printing new
products. The Bureau is not proposing to mandate that financial
institutions start manufacturing new materials exactly at the nine
month mark. Rather, the Bureau is proposing to require that at whatever
point after the nine month date a financial institution does decide to
print new materials, those materials be in compliance with the
requirements of proposed Sec. 1005.18.
Other than disclosure-related issues discussed in proposed Sec.
1005.18(h)(2), the Bureau believes nine months is an appropriate
implementation period for the provisions proposed herein. The Bureau
seeks to ensure that consumers receive the benefit of the protections
proposed herein as soon as possible. As noted in the previous
discussions of the Bureau's Study of Prepaid Account Agreements, a
majority of providers are already complying with a majority of the
proposed requirements. To the extent entities do need to make changes,
the Bureau believes that they can be accomplished within a nine month
period. Nevertheless, the Bureau seeks comment on whether nine months
is appropriate or whether a longer or shorter period should be adopted
for these parts of the proposal.
The Bureau is also proposing a delayed effective date for certain
packaging-related changes, which would be 12 months following the
publication of the final rule in the Federal Register. This second
date, in proposed Sec. 1005.18(h)(2), would require full compliance
with the rule's disclosure requirements and prohibit the offering, sale
or otherwise making available of prepaid accounts and related
packaging, access devices, or other printed materials without such
disclosures. As a result, by 12 months, financial institutions and
their third party distribution agents would have to remove from retail
store shelves and other distribution channels any prepaid accounts with
disclosures not fully in compliance with the rule. As noted above, the
Bureau believes that 12 months is an appropriate period after which
products with old disclosures should not be sold. As noted, industry
representatives have indicated to the Bureau that typically, prepaid
product restocking cycles occur at least every 12 to 18 months, if not
more frequently, although it could take as long as 24 months to sell
out all existing product on retail shelves. By allowing financial
institutions time to prepare, the Bureau expects its proposal to
minimize, even if it may not entirely eliminate, destruction of prepaid
product packaging. The Bureau notes that not all existing inventories
will be exhausted after 12 months as part of normal restocking cycles.
However, the Bureau believes that after 12 months, such inventories
will be sufficiently exhausted such that to permit the sale of non-
compliant packages should no longer be permitted. Further, the Bureau
notes so long as it proposed a fixed end-date for the sale of non-
compliant packages, prepaid providers will always have to incur certain
fixed costs involved in confirming that non-compliant product is
removed from retail stock. Thus, even if the Bureau adopted the longest
period suggested by Prepaid ANPR commenters, providers still would need
to incur costs in confirming that they and their retail partners are no
longer offering non-compliant products for sale.
The Bureau seeks comment on its proposed implementation timeframes
for this proposed rule as set forth in proposed Sec. 1005.18(h), as
well as possible alternative approaches. In particular, the Bureau
seeks comment and supporting data on the costs to industry and benefits
to consumers that might be expected from the Bureau's proposed
effective dates and from any alternative approaches. Of particular
interest to the Bureau is whether and to what extent the proposed
timeframes would require financial institutions to remove, replace, and
destroy portions of their product inventories and, if so, what the
costs of doing so would be at various time intervals, including those
proposed herein. The Bureau solicits comment both on the potential
costs of alternate implementation timelines and on possible logistical
constraints, such as the expected amount of time needed for third
parties to print and deliver new prepaid account packages and other
materials to financial institutions or those institutions' distribution
networks or other service providers, and the expected amount of time
needed for financial institutions to update their systems to comply
with the proposed disclosure requirements and other requirements of
Regulation E generally.
In addition, the Bureau specifically requests comment on whether an
effective date longer than 9 months would be needed for financial
institutions to comply with the access to account information
requirements proposed in Sec. 1005.18(c) and, if so, what an
appropriate effective date for this portion of the proposal might be.
The Bureau understands that many financial institutions currently
provide prepaid account consumers with access to more than 60 days of
account history and, additionally, that financial institutions
generally have obligations to retain prepaid account transactional
records outside the context of Regulation E for far longer than 60
days. The Bureau specifically seeks comment on the amount of prepaid
account transactional records financial institutions currently retain
now and any difficulties financial institutions would face in using
such transactional records to comply with proposed Sec. 1005.18(c).
The Bureau is not proposing a longer effective date for
implementation of the disclosures on prepaid access devices in proposed
Sec. 1005.18(b)(7) for access devices that were sold or delivered to
consumers prior to the effective date of the final rule. The Bureau
understands that prepaid cards generally already list the financial
institution's name, telephone number and URL of a Web site on the back
of the card, and thus no changes to consumers' access devices would
need to be made as a result of this proposal. The Bureau requests
comment, however, on whether there may be prepaid cards that currently
do
[[Page 77191]]
not list this information and, if so, whether the Bureau should allow
financial institutions longer than nine months to replace those cards.
The Bureau also seeks comments on whether it should adopt an
alternative approach to the effective date of this proposal or whether
it should adopt a single effective date for all proposed provisions.
Section 1005.19 Internet Posting of Prepaid Account Agreements
The Bureau is proposing new Sec. 1005.19 to require prepaid card
issuers to submit agreements for prepaid accounts to the Bureau for
posting on a publicly-available Web site established and maintained by
the Bureau. The Bureau is also proposing to require issuers to make
prepaid account agreements available to the public on the issuers' own
Web sites or, in certain limited circumstances, provide agreements
directly to consumers holding prepaid accounts via a restricted Web
site or in writing upon request. These new provisions in proposed Sec.
1005.19 would be similar to existing requirements in Regulation Z 12
CFR 1026.58 for open-end consumer credit card plans.
The Bureau is proposing Sec. 1005.19 pursuant to its disclosure
authority in EFTA section 905(a), its adjustment authority in EFTA
section 904(c), and its authority in section 1032(a) of the Dodd-Frank
Act. The Bureau believes collection and disclosure of the agreements
allows for clear and accessible disclosure of the terms and conditions
of prepaid accounts, and is necessary and proper to effectuate the
purposes of EFTA to provide a framework to establish the rights,
liabilities, and responsibilities of prepaid account consumers, because
the proposed rule will assist consumers' understanding of and shopping
for prepaid accounts based on the terms and conditions of those
accounts. In addition, collection and disclosure of the agreements
would, consistent with Dodd-Frank Act section 1032(a), permit the
Bureau to prescribe rules to ensure that the features of any consumer
financial product or service, both initially and over the term of the
product or service, are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances. The Bureau is also proposing Sec. 1005.19
pursuant to its authority in section 1022(c)(4) of the Dodd-Frank Act,
which permits it to gather information from time to time regarding the
organization, business conduct, markets, and activities of covered
persons and service providers. Specifically, the Bureau is proposing to
receive prepaid account agreements submitted by issuers on a quarterly
basis, subject to certain exceptions, and to post those agreements on
its Web site in order to aid the Bureau's monitoring for risks to
consumers in the offering or provision of consumer financial products
or services under section 1022(c)(1) and (4) of the Dodd-Frank Act.
In 2009, section 204 of the Credit CARD Act added new TILA section
122(d) to require creditors to post agreements for open-end consumer
credit card plans on the creditor's Web sites and to submit those
agreements to the Board for posting on a publicly-available Web site
established and maintained by the Board. 15 U.S.C. 1632(d). The Board
implemented these provisions in what is now 12 CFR 1026.58. The
Bureau's receipt of credit card agreements pursuant to Sec. 1026.58
has aided the Bureau in its market monitoring functions, and the
Bureau's posting of those credit card agreements on its Web site may,
among other things, enable consumers to more effectively compare credit
cards.
The Bureau is proposing Sec. 1005.19 for substantially the same
reasons with respect to prepaid accounts. The Bureau expects to use the
prepaid account agreements it receives from issuers pursuant to
proposed Sec. 1005.19 to assist in its market monitoring efforts. In
addition, the Bureau's posting of prepaid account agreements on its Web
site would allow consumers to more easily compare terms of prepaid
accounts currently in the marketplace as well as facilitate third
parties' analysis of prepaid accounts and the development of online
shopping tools. Consumers would also benefit from having access to
their prepaid account agreements available through the issuers' Web
sites (or available upon request in limited instances).
The specific requirements in proposed Sec. 1005.19 largely mirror
existing provisions in Sec. 1026.58 and the Bureau expects these rules
to generally function in the same manner, albeit with certain
modifications made in proposed Sec. 1005.19 to address differences
between the credit card and prepaid account markets.
19(a) Definitions
The Bureau is proposing in Sec. 1005.19(a) certain definitions
specific to proposed Sec. 1005.19.
19(a)(1) Agreement
The Bureau is proposing Sec. 1005.19(a)(1) to define ``agreement''
or ``prepaid account agreement'' for purposes of proposed Sec. 1005.19
as the written document or documents evidencing the terms of the legal
obligation, or prospective legal obligation, between a prepaid account
issuer and a consumer for a prepaid account. An agreement or prepaid
account agreement also includes fee information, as defined in proposed
Sec. 1005.19(a)(3), which is discussed below. Proposed Sec.
1005.19(a)(1) mirrors the definition of ``agreement'' or ``credit card
agreement'' in Sec. 1026.58(b)(1) in Regulation Z.
Proposed comment 19(a)(1)-1 would explain that an agreement may
consist of several documents that, taken together, define the legal
obligation between the issuer and the consumer. The Bureau has not
included the second part of Regulation Z comment 58(b)(1)-2, which
gives the example of provisions that mandate arbitration or allow an
issuer to unilaterally alter the terms of the card issuer's or
consumer's obligation are part of the agreement even if they are
provided to the consumer in a document separate from the basic credit
contract. The Bureau does not believe that prepaid account agreements
contain arbitration clauses or provisions allowing the issuer to
unilaterally alter contract terms in documents separate from the main
agreement, and therefore does not believe such examples are necessary
to include in proposed comment 19(a)(1)-1. The Bureau also has not
included a comment similar to Regulation Z comment 58(b)(1)-1, which
addresses inclusion of certain pricing information in a credit card
agreement, as the Bureau does not believe such a comment is relevant to
prepaid accounts.
19(a)(2) Amends
The Bureau is proposing Sec. 1005.19(a)(2) to provide that for
purposes of proposed Sec. 1005.19, an issuer ``amends'' an agreement
if it makes a substantive change (an ``amendment'') to the agreement. A
change is substantive if it alters the rights or obligations of the
issuer or the consumer under the agreement. Any change in the fee
information, as defined in proposed Sec. 1005.19(a)(3), discussed
below, is deemed to be substantive. Proposed Sec. 1005.19(a)(2)
mirrors the definition of the term amends in Sec. 1026.58(b)(2).
With respect to Sec. 1026.58, the Board determined that requiring
resubmission
[[Page 77192]]
of credit card agreements following minor, technical changes would
impose a significant administrative burden with no corresponding
benefit of increased transparency.\312\ The Bureau believes the same
would be true for prepaid account issuers and therefore proposes a
similar definition here.
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\312\ 75 FR 7658, 7760 (Feb. 22, 2010).
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Proposed comment 19(a)(2)-1, which mirrors Regulation Z comment
58(b)(2)-1, would give examples of changes, other than changes to fee
information, that generally would be considered substantive, including:
(i) Addition or deletion of a provision giving the issuer or consumer a
right under the agreement, such as a clause that allows an issuer to
unilaterally change the terms of an agreement; (ii) addition or
deletion of a provision giving the issuer or consumer an obligation
under the agreement, such as a clause requiring the consumer to pay an
additional fee; (iii) changes that may affect the cost of the prepaid
account to the consumer, such as changes in a provision describing how
the prepaid account's monthly fee will be calculated; (iv) changes that
may affect how the terms of the agreement are construed or applied,
such as changes in a choice-of-law provision; and (v) changes that may
affect the parties to whom the agreement may apply, such as provisions
regarding authorized users or assignment of the agreement.
Proposed comment 19(a)(2)-2, which mirrors Regulation Z comment
58(b)(2)-2, would give examples of changes that generally would not be
considered substantive, such as: (i) Correction of typographical errors
that do not affect the meaning of any terms of the agreement; (ii)
changes to the issuer's corporate name, logo, or tagline; (iii) changes
to the format of the agreement, such as conversion to a booklet from a
full-sheet format, changes in font, or changes in margins; (iv) changes
to the name of the prepaid account to which the program applies; (v)
reordering sections of the agreement without affecting the meaning of
any terms of the agreement; (vi) adding, removing, or modifying a table
of contents or index; and (vii) changes to titles, headings, section
numbers, or captions.
The Bureau requests comment, however, on whether certain changes,
such as to an issuer's corporate name or to the name of the prepaid
account to which the program applies, should be considered substantive
for purposes of proposed Sec. 1005.19. The Bureau questions whether
such changes, if not reflected in agreements posted to the Bureau's or
the issuer's Web site, might inhibit a consumer's ability to locate an
agreement for an existing prepaid account or to effectively comparison
shop for a new prepaid account.
19(a)(3) Fee Information
The Bureau is proposing Sec. 1005.19(a)(3) to define ``fee
information'' for purposes of proposed Sec. 1005.19 as the information
listed for the long form fee disclosure in proposed Sec.
1005.18(b)(2)(ii). The Bureau believes that to enable consumers to shop
for prepaid accounts and to compare information about various prepaid
accounts in an effective manner, it is necessary that the agreements
posted on the Bureau's Web site include fees and other pricing
information. The Bureau expects that most issuers will include the long
form disclosure required by proposed Sec. 1005.18(b)(2)(ii) directly
in their prepaid account agreements. Others may perhaps maintain the
long form disclosure as an addendum or other supplement to their
prepaid account agreements.
Proposed Sec. 1005.19(a)(3) is similar to the definition of
pricing information in Sec. 1026.58(b)(7), but omits the exclusion for
temporary or promotional rates and terms or rates and terms that apply
only to protected balances, as the Bureau does not believe there is
currently an equivalent to such rates and terms for prepaid accounts.
The Bureau requests comment on whether it should also require that
the short form disclosure that would be required by proposed Sec.
1005.18(b)(2)(i) also be included in the definition of fee information
for purposes of proposed Sec. 1005.19 and thus generally required to
be submitted to the Bureau and posted on the issuer's Web site, as
discussed below. The Bureau also solicits comment on whether, in light
of the revisions proposed herein regarding credit accessed by prepaid
accounts, an exclusion is needed for temporary rates and terms or rates
and terms that apply only to protected balances similar to the
exclusion in Sec. 1026.58(b)(7).
19(a)(4) Issuer
The Bureau is proposing Sec. 1005.19(a)(4) to define ``issuer'' or
``prepaid account issuer'' for purposes of proposed Sec. 1005.19 as
the entity to which a consumer is legally obligated, or would be
legally obligated, under the terms of a prepaid account agreement.
Proposed Sec. 1005.19(a)(4) mirrors the definition of card issuer in
Sec. 1026.58(b)(4).
As discussed in more detail above, the Bureau understands that, in
some cases, more than one financial institution is involved in the
administration of a prepaid program. For example, a smaller bank may
partner with a larger bank to market prepaid accounts to the smaller
bank's customers, or a bank may partner with a program manager to offer
prepaid accounts. The Bureau also understands that the terms of the
arrangements can vary, for example with respect to which party uses its
name and brand in marketing materials, sets fees and terms, conducts
customer identification and verification, provides access to account
information, holds the pooled account, and absorbs the risk of default
or fraud.
The Board believed that with respect to the definition of card
issuer in what is now Sec. 1026.58(b)(4), without a bright-line rule
defining which institution is the issuer, institutions might find it
difficult to determine their obligations under Sec. 1026.58.\313\
Similarly, absent clarification from the Bureau, it may be difficult to
determine which entity would be responsible for compliance with
proposed Sec. 1005.19 for a particular prepaid account. For example,
if two financial institutions are involved in issuing a prepaid
program, one may have fewer than 3,000 open accounts while the other
has more than 3,000 open accounts. It may be difficult to determine
whether, for example, the de minimis exception (see proposed Sec.
1005.19(b)(4)) applies in such cases. In addition, it may be unclear
which institution is obligated to post and maintain the agreements on
its Web site pursuant to proposed Sec. 1005.19(c) or (d)(1)(i) or
respond to telephone requests for copies of agreements pursuant to
proposed Sec. 1005.19(d)(1)(ii), discussed below. The Bureau therefore
believes it would be beneficial to clarify which institution would be
the prepaid account issuer for purposes of proposed Sec. 1005.19.
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\313\ See 76 FR 22948, 22987 (Apr. 25, 2011).
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The Bureau is thus proposing to define issuer, in proposed Sec.
1005.19(a)(4), with respect to a particular agreement as the entity to
which a consumer is legally obligated, or would be legally obligated,
under the terms of that agreement. The Bureau is proposing this
approach for several reasons.
First, the proposed definition would create a bright-line rule that
would enable institutions involved in issuing prepaid accounts to
determine their obligations under proposed Sec. 1005.19. Second, the
proposed definition would be consistent with the actual legal
relationship into which a consumer enters under a prepaid account
agreement. Third, the Bureau believes that the institution to which the
consumer is legally obligated under the
[[Page 77193]]
agreement may be in the best position to provide accurate, up-to-date
agreements to both the Bureau and consumers.
Fourth, the Bureau understands that an institution that partners
with multiple other entities to issue prepaid accounts, such as in the
payroll card account context, will in many cases use the same agreement
for all the prepaid accounts issued in connection with those
arrangements. Therefore, while the number of prepaid accounts issued
with a given partner may be small, the total number of consumers
subject to the corresponding agreement may be quite large. The Bureau
believes it would be beneficial to have such agreements submitted to
the Bureau for posting on the Bureau's Web site.
The Bureau believes that in some cases consumers may be unsure
about which institution issues their prepaid account. For example, a
consumer may apply for a prepaid account through a link on the Web site
of a bank with which the consumer has a pre-existing relationship, and
the face of the prepaid card may prominently display that bank's logo.
In some such cases, the consumer may assume that the card is issued by
that bank, even though Web site disclaimers, the prepaid account
agreement, the back of the prepaid card, and other materials explain
that the card is issued by another institution. The Bureau believes,
however, that institutions can take steps to alleviate this confusion,
for example by disclosing the identity of the other institution and
providing contact information for the other institution or a link to
the other institution's Web site. The Bureau also believes that
consumers would benefit from having a clearer understanding of to which
institution they are legally obligated under a prepaid account
agreement.
Proposed comment 19(a)(4)-1, which mirrors Regulation Z comment
58(b)(4)-1, would provide the following example of how the definition
of issuer would apply. Bank X and Bank Y work together to issue prepaid
accounts. A consumer that obtains a prepaid account issued pursuant to
this arrangement between Bank X and Bank Y is subject to an agreement
that states ``This is an agreement between you, the consumer, and Bank
X that governs the terms of your Bank Y Prepaid Account.'' The prepaid
account issuer in this example is Bank X, because the agreement creates
a legally enforceable obligation between the consumer and Bank X. Bank
X is the issuer even if the consumer applied for the prepaid account
through a link on Bank Y's Web site and the cards prominently feature
the Bank Y logo on the front of the card.
Proposed comment 19(a)(4)-2, which mirrors Regulation Z comment
58(b)(4)-2, would explain that while an issuer has a legal obligation
to comply with the requirements of proposed Sec. 1005.19, it generally
may use a third-party service provider to satisfy its obligations under
proposed Sec. 1005.19, provided that the issuer acts in accordance
with regulatory guidance regarding use of third-party service providers
and other applicable regulatory guidance. In some cases, an issuer may
wish to arrange for the entity with which it partners to issue prepaid
accounts to fulfill the requirements of proposed Sec. 1005.19 on the
issuer's behalf. For example, Program Manager and Bank work together to
issue prepaid accounts. Under the proposed Sec. 1005.19(a)(4)
definition, Bank is the prepaid account issuer for purposes of proposed
Sec. 1005.19. However, Program Manager services the prepaid accounts,
including mailing account opening materials and periodic statements to
consumers. While Bank is responsible for ensuring compliance with
proposed Sec. 1005.19, Bank may arrange for Program Manager (or
another appropriate third-party service provider) to submit prepaid
account agreements to the Bureau under proposed Sec. 1005.19 on Bank's
behalf. Bank must comply with regulatory guidance regarding use of
third-party service providers and other applicable regulatory guidance.
Proposed comment 19(a)(4)-3, which mirrors Regulation Z comment
58(b)(4)-3.i, would note that, as explained in proposed comment 19(c)-
2, if an issuer provides consumers with access to specific information
about their individual accounts, such as providing electronic history
of consumers' account transactions pursuant to Sec. 1005.18(c)(1)(ii),
through a third-party Web site, the issuer is deemed to maintain that
Web site for purposes of proposed Sec. 1005.19. Such a Web site is
deemed to be maintained by the issuer for purposes of proposed Sec.
1005.19 even where, for example, an unaffiliated entity designs the Web
site and owns and maintains the information technology infrastructure
that supports the Web site, consumers with prepaid accounts from
multiple issuers can access individual account information through the
same Web site, and the Web site is not labeled, branded, or otherwise
held out to the public as belonging to the issuer. A partner
institution's Web site is an example of a third-party Web site that may
be deemed to be maintained by the issuer for purposes of proposed Sec.
1005.19. For example, Program Manager and Bank work together to issue
prepaid accounts. Under the proposed Sec. 1005.19(a)(4) definition,
Bank is the issuer that issues these prepaid accounts for purposes of
proposed Sec. 1005.19. Bank does not maintain a Web site specifically
related to its prepaid accounts. However, consumers can access
information about their individual accounts, such as an electronic
history of their account transactions, through a Web site maintained by
Program Manager. Program Manager designs the Web site and owns and
maintains the information technology infrastructure that supports the
Web site. The Web site is branded and held out to the public as
belonging to Program Manager. Because consumers can access information
about their individual accounts through this Web site, the Web site is
deemed to be maintained by Bank for purposes of proposed Sec. 1005.19.
Bank therefore may comply with proposed Sec. 1005.19(c) or (d)(1)(i)
by ensuring that agreements offered to the public are posted on Program
Manager's Web site in accordance with proposed Sec. 1005.19(c) or
(d)(1)(i), respectively. Bank need not create and maintain a Web site
branded and held out to the public as belonging to Bank in order to
comply with proposed Sec. 1005.19(c) and (d)(1)(i) as long as Bank
ensures that Program Manager's Web site complies with these sections.
The Bureau is not proposing a comment similar to that of Regulation
Z comment 58(b)(4)-3.ii which addresses Web site posting of private
label credit card plans, as the Bureau does not believe such a comment
is relevant for prepaid accounts, as discussed below.
The Bureau solicits comment on its proposed definition of issuer,
whether additional guidance would be helpful, and on whether there are
preferable alternative approaches to defining issuer for purposes of
proposed Sec. 1005.19. Additionally, the Bureau is aware that some
program managers offer prepaid accounts in conjunction with multiple
issuers, where the terms of the prepaid account agreements are largely
similar. The Bureau also solicits comment on whether submission of a
separate agreement for each issuer is the best approach in this
situation or whether such agreements should be submitted in some other
manner.
19(a)(5) Offers
The Bureau is proposing Sec. 1005.19(a)(5) to provide that for
purposes of proposed Sec. 1005.19, an issuer ``offers,'' or ``offers
to the public,'' a prepaid account agreement if the issuer solicits
applications for or
[[Page 77194]]
otherwise makes available prepaid accounts that would be subject to
that agreement.
Proposed comment 19(a)(5)-1 would explain that an issuer is deemed
to offer a prepaid account agreement to the public even if the issuer
solicits applications for or otherwise makes available prepaid accounts
only to a limited group of persons. For example, an issuer may market
affinity cards to students and alumni of a particular institution of
higher education, or may solicit only residents of a specific
geographic location for a particular prepaid account; in these cases,
the agreement would be considered to be offered to the public.
Similarly, agreements for prepaid accounts issued by a credit union are
considered to be offered to the public even though such prepaid
accounts are available only to credit union members. Agreements for
payroll card accounts, government benefit accounts, or for prepaid
accounts used to distribute student financial aid disbursements, or
property and casualty insurance payouts, and other similar programs are
also considered to be offered to the public.
Proposed Sec. 1005.19(a)(5) is similar to the definition of the
term ``offers'' in Sec. 1026.58(b)(5). Section 1026.58(b)(5) provides
that an issuer ``offers'' or ``offers to the public'' an agreement if
the issuer is soliciting or accepting applications for accounts that
would be subject to that agreement. The Bureau does not believe that
prepaid account issuers solicit or accept applications for prepaid
accounts in the same manner as credit card issuers do for credit card
accounts, and thus has modified this language for purposes of proposed
Sec. 1005.19(a)(5). Proposed comment 19(a)(5)-1 is similar to
Regulation Z comment 58(b)(5)-1, but includes several additional
examples of prepaid accounts offered to the public. The Bureau is not
proposing an equivalent comment to Regulation Z's comment 58(b)(5)-2,
which provides that a card issuer is deemed to offer a credit card
agreement to the public even if the terms of that agreement are changed
immediately upon opening to terms not offered to the public, as the
Bureau does not believe that prepaid account terms are modified in this
manner.
19(a)(6) Open Account
The Bureau is proposing Sec. 1005.19(a)(6) to provide that for
purposes of proposed Sec. 1005.19, a prepaid account is an ``open
account,'' or ``open prepaid account,'' if (i) there is an outstanding
balance in the prepaid account; (ii) if the consumer can load funds to
the account even if the account does not currently hold a balance; or
(iii) the consumer can access credit through a credit plan that would
be a credit card account under Regulation Z, 12 CFR part 1026 that is
offered in connection with a prepaid account. A prepaid account that
has been suspended temporarily (for example, due to a report by the
consumer of unauthorized use of the card) is considered an open account
or open prepaid account.
Proposed comment 19(a)(5)-1 would explain that a prepaid account
that meets any of the criteria set forth in proposed Sec.
1005.19(a)(5) is considered open even if the issuer considers the
account inactive. The term open account is used in the provisions
regarding the de minimis and product testing exceptions in proposed
Sec. 1005.19(b)(4) and (5) and the requirements in proposed Sec.
1005.19(d) for agreements not submitted to the Bureau, discussed below.
Proposed Sec. 1005.19(a)(6) is similar to the definition of open
account or open credit card account in Sec. 1026.58(b)(6). While Sec.
1026.58(b)(6) defines an open credit card account as one in which the
cardholder can obtain extensions of credit on the account, or there is
an outstanding balance on the account that has not been charged off,
the Bureau has modified the definition to better reflect what it
believes constitutes an open account in the prepaid context. Proposed
Sec. 1005.19(a)(6) includes the explanation used in Sec.
1026.58(b)(6), which provides that an account that has been suspended
temporarily (for example, due to a report by the consumer of
unauthorized use of the card) is nonetheless considered an open
account. Proposed comment 19(a)(6)-1 is similar to Regulation Z comment
58(b)(6)-1, with modifications to reflect the terms of proposed Sec.
1005.19(a)(6).
19(a)(7) Prepaid Account
The Bureau is proposing Sec. 1005.19(a)(7) to provide that for
purposes of proposed Sec. 1005.19, ``prepaid account'' means a prepaid
account as defined in proposed Sec. 1005.2(b)(3). Proposed comment
19(a)(7)-1 would explain that for purposes of proposed Sec. 1005.19, a
prepaid account includes, among other things, a payroll card account as
defined in proposed Sec. 1005.2(b)(3)(iii) and a government benefit
account as defined proposed Sec. Sec. 1005.2(b)(3)(iv) and
1005.15(a)(2).
The Bureau solicits comment on whether there are any types of
prepaid accounts as defined in proposed Sec. 1005.2(b)(3) that should
be excluded from the definition of prepaid account for purposes of this
section or that should be excluded from certain of the requirements of
this section.
The Bureau expects that issuers offering prepaid accounts with
overdraft services or other credit features proposed to be governed as
credit cards under Regulation Z, as discussed below, would submit to
the Bureau pursuant to proposed Sec. 1005.19 both the initial prepaid
account agreement (including the disclosures required by proposed Sec.
1005.18(b)(2)(ii)(B) as part of the fee information pursuant to
proposed Sec. 1005.19(a)(3)) and the subsequent prepaid account
agreement disclosing overdraft or credit terms, and also submit the
latter agreement to the Bureau as a credit card agreement pursuant to
Sec. 1026.58. The Bureau does not believe this approach would impose
significant burden on prepaid account issuers, but nonetheless solicits
comment on this approach.
Private Label Credit Cards
The Board defined the term ``private label credit card account'' in
what is now Sec. 1026.58(b)(8)(i) as a credit card account under an
open-end (not home secured) consumer credit plan with a credit card
that can be used to make purchases only at a single merchant or an
affiliated group of merchants. The term ``private label credit card
plan'' in Sec. 1026.58(b)(8)(ii) is similarly defined as all of the
private label credit card accounts issued by a particular issuer with
credit cards usable at the same single merchant or affiliated group of
merchants. Regulation Z contains an exception and other specific
provisions tailored specifically to private label credit card accounts
and plans. See, e.g., Sec. 1026.58(b)(8), (c)(6); comments 58(b)(8)-1
through -4; comments 58(c)(6)-1 through -6; and comment 58(d)-3.
The Bureau does not believe that equivalent provisions are
necessary or appropriate for proposed Sec. 1005.19, as the equivalent
of a private label credit card in the prepaid context would be a
closed-loop gift card. Such gift cards are outside the scope of the
term prepaid account, as defined in proposed Sec. Sec. 1005.2(b)(3)
and 1005.19(a)(7).
19(b) Submission of Agreements to the Bureau
Proposed Sec. 1005.19(b) would require each issuer to
electronically submit to the Bureau prepaid account agreements offered
by the issuer on a quarterly basis. The Bureau will post the prepaid
account agreements it receives on its Web site pursuant to proposed
Sec. 1005.19(b)(7), discussed below.
[[Page 77195]]
19(b)(1) Quarterly Submissions
The Bureau is proposing Sec. 1005.19(b)(1) to require issuers to
make quarterly submissions of prepaid account agreements to the Bureau,
in the form and manner specified by the Bureau. Such quarterly
submissions would be required to be sent to the Bureau no later than
the first business day on or after January 31, April 30, July 31, and
October 31 of each year. Proposed comment 19(b)(1)-1 would refer to
Regulation Z comment 58(c)(1)-1 for additional guidance as to the
quarterly submission timing requirement.
Regulation Z's Sec. 1026.58(b)(3) defines the term ``business
day,'' for purposes of Sec. 1026.58, to mean a day on which the
creditor's offices are open to the public for carrying on substantially
all of its business functions. Section 1005.2(d) contains a similar
definition of the term business day (any day on which the offices of
the consumer's financial institution are open to the public for
carrying on substantially all business functions). Insofar as that
definition applies generally in subpart A and the Bureau believes it is
appropriate for use in proposed Sec. 1005.19, the Bureau believes it
is unnecessary to define the term again within proposed Sec. 1005.19.
Proposed Sec. 1005.19(b)(1) would require that each quarterly
submission contain the following four items. First, a quarterly
submission must contain identifying information about the issuer and
the agreements submitted, including the issuer's name, address, and
identifying number (such as an RSSD ID number or tax identification
number), and the name of the program manager, if any, for each
agreement.
Second, the quarterly submission must contain the prepaid account
agreements that the issuer offered to the public as of the last
business day of the preceding calendar quarter that the issuer has not
previously submitted to the Bureau.
Third, the quarterly submission must contain any prepaid account
agreement previously submitted to the Bureau that was amended during
the previous calendar quarter and that the issuer offered to the public
as of the last business day of the preceding calendar quarter, as
described in proposed Sec. 1005.19(b)(2) discussed below.
Finally, the quarterly submission must contain notification
regarding any prepaid account agreement previously submitted to the
Bureau that the issuer is withdrawing, as described in proposed Sec.
1005.19(b)(3), (4)(iii), and (5)(iii) discussed below.
Proposed comment 19(b)(1)-2.i would explain that an issuer is not
required to make any submission to the Bureau at a particular quarterly
submission deadline if, during the previous calendar quarter, the
issuer did not take any of the following actions: (A) Offering a new
prepaid account agreement that was not submitted to the Bureau
previously; (B) amending an agreement previously submitted to the
Bureau; and (C) ceasing to offer an agreement previously submitted to
the Bureau. Proposed comment 19(b)(1)-2.ii would refer to Regulation Z
comment 58(c)(1)-2.ii for additional guidance as to when a quarterly
submission is not required.
Proposed comment 19(b)(1)-3 would explain that proposed Sec.
1005.19(b)(1) permits an issuer to submit to the Bureau on a quarterly
basis a complete, updated set of the prepaid account agreements the
issuer offers to the public. Proposed comment 19(b)(1)-3 would also
refer to Regulation Z comment 58(c)(1)-3 for additional guidance
regarding quarterly submission of a complete set of updated agreements.
Proposed Sec. 1005.19(b)(1) generally mirrors Sec. 1026.58(c)(1),
except for the addition of the program manager's name into proposed
Sec. 1005.19(b)(1)(i). Proposed comments 19(b)(1)-1, -2, and -3 are
similar to Regulation Z comments 58(c)(1)-1, -2, and -3 except that
proposed comments 19(b)(1)-1, -2.ii and -3 have been shortened to
cross-reference the parallel comments in Regulation Z for specific
examples regarding quarterly submission of agreements as the Bureau
intends that these provisions would function the same for prepaid
accounts as they do for credit card accounts.
Proposed Sec. 1005.19(b) would require submission to the Bureau of
agreements for all prepaid accounts offered to the public, unless one
or more of the exceptions discussed below are met for withdrawn
agreements (proposed Sec. 1005.19(b)(3)), issuers that qualify for the
de minimis exception (proposed Sec. 1005.19(b)(4)), or agreements
offered as part of a product test (proposed Sec. 1005.19(b)(5)). The
Bureau solicits comment, however, on whether it should instead require
submission of agreements for all open prepaid accounts (rather than
only for agreements that are currently offered to the public), unless
the de minimis or product testing exceptions are met. The Bureau
believes that, in many instances, when a prepaid account issuer decides
to cease offering a specific prepaid account program to the public, it
also closes all existing accounts under that program after a period of
time. The Bureau requests comment on whether this practice is
widespread, or whether prepaid account issuers may have large numbers
of open prepaid accounts under programs that are no longer offered to
the public. If there are such programs, the Bureau believes there may
be benefits to consumers in being able to locate agreements for such
programs via the Bureau's Web site even if those programs are no longer
being offered to the public.
In addition, the Bureau solicits comment on whether submission of
agreements on a quarterly basis is appropriate, or whether a shorter
period, or a longer period such as semi-annually or annually, should be
used. The Bureau also solicits comment on whether, alternatively, it
should require issuers to submit revised agreements whenever agreements
are revised, and whether such a requirement would impose a lower burden
on issuers than would a set submission schedule.
As discussed above, proposed Sec. 1005.19(b)(1) would require
quarterly submission of agreements for all prepaid accounts offered to
the public, unless one or more exceptions are met and proposed comment
19(b)(1)-3 would explain an issuer is permitted to submit a complete,
updated set of the prepaid account agreements each quarter. The Bureau
solicits comment on whether, alternatively, it should instead require
issuers to resubmit all agreements on a quarterly (or other) basis.
19(b)(2) Amended Agreements
The Bureau is proposing Sec. 1005.19(b)(2) to provide that if a
prepaid account agreement has been submitted to the Bureau, the
agreement has not been amended, and the issuer continues to offer the
agreement to the public, no additional submission regarding that
agreement is required. Proposed comment 19(b)(2)-1 would refer to
Regulation Z comment 58(c)(3)-1 for additional guidance regarding no
requirement to resubmit agreements that have not been amended.
Proposed Sec. 1005.19(b)(2) would also require that if a prepaid
account agreement that previously has been submitted to the Bureau is
amended, and the issuer offered the amended agreement to the public as
of the last business day of the calendar quarter in which the change
became effective, the issuer must submit the entire amended agreement
to the Bureau, in the form and manner specified by the Bureau, by the
first quarterly submission deadline after the last day of the calendar
quarter in which the change became effective. Proposed comment
19(b)(2)-2 would
[[Page 77196]]
further explain that the issuer is required to submit the amended
agreement to the Bureau only if the issuer offered the amended
agreement to the public as of the last business day of the calendar
quarter in which the change became effective and would refer to
Regulation Z comment 58(c)(3)-2 for additional guidance regarding the
submission of amended agreements. Proposed comment 19(b)(2)-3 would
reiterate that agreements that are not offered to the public as of the
last day of the calendar quarter should not be submitted to the Bureau
and would refer to Regulation Z comment 58(c)(3)-3 for additional
guidance on agreements that have been amended but are no longer offered
to the public.
Finally, proposed comment 19(b)(2)-4 would explain that an issuer
may not fulfill the requirement in proposed Sec. 1005.19(b)(2) to
submit the entire amended agreement to the Bureau by submitting a
change-in-terms or similar notice covering only the terms that have
changed. In addition, amendments must be integrated into the text of
the agreement (or the optional addendum described in proposed Sec.
1005.19(b)(6)), not provided as separate riders. Proposed comment
19(b)(2)-4 would also refer to Regulation Z comment 58(c)(3)-4 for
additional guidance as to the submission of revised agreements.
The Bureau believes that permitting issuers to submit change-in-
terms notices or riders containing amendments or revisions would make
it difficult to determine a prepaid account's current fees and terms.
Consumers could be required to sift through change-in-terms notices and
riders in an attempt to assemble a coherent picture of the terms
currently offered. The Bureau believes that issuers are better placed
than consumers to assemble this information and that prepaid issuers
customarily incorporate revised terms into their prepaid account
agreements on a regular basis rather than only issue separate riders or
notices.
The Bureau solicits comment on whether it should require that other
specific information be submitted regarding the prepaid account program
or programs to which a specific agreement applies. For example, for
payroll card accounts, the Bureau could require submission of the name
of each employer that offers a payroll card account under a specific
agreement, to assist consumers in identifying on the Bureau's or the
issuer's Web site the agreement to which their payroll card account is
subject.
The Bureau also seeks comment on the possible format or formats in
which it might require issuers to submit prepaid account agreements.
For example, proposed Sec. 1005.19(c)(4), discussed below, would
require issuers to post agreements on their Web sites in any electronic
format that is readily usable by the general public. The Bureau
requests comment on whether it should adopt a similar standard for
agreements that are provided to it pursuant to proposed Sec.
1005.19(b), or whether it should instead (or additionally) require
issuers to provide agreements (or a portion of the agreement, such as
the long form disclosure) using, for example, a machine-readable text
format such as JSON, XML, or similar format that could be used by the
Bureau or third parties to more easily create comparison shopping
tools. See proposed comment 18(b)(3)(i)(B)-3 (discussing machine-
readable text).
The Bureau expects to provide additional details regarding the
electronic submission process in connection with the release of its
final rule on this subject. Issuers will have no submission obligations
until the Bureau has issued technical specifications addressing the
form and manner for submission of agreements. The Bureau intends for
the streamlined electronic submission process to be operational before
proposed Sec. 1005.19(b) becomes effective.
Proposed Sec. 1005.19(b)(2) mirrors the Regulation Z provisions
regarding submission of amended agreements in Sec. 1026.58(c)(3).
Proposed comments 19(b)(2)-1 through -4 mirror Regulation Z comments
58(c)(3)-1 through -4, although the proposed 19(b)(2) comments have
been shortened to cross-reference the parallel comments in Regulation Z
for specific examples of submission of amended agreements as the Bureau
intends that these provisions would function the same for prepaid
accounts as they do for credit card accounts.
19(b)(3) Withdrawal of Agreements
The Bureau is proposing Sec. 1005.19(b)(3) to provide that if an
issuer no longer offers to the public a prepaid account agreement that
previously has been submitted to the Bureau, the issuer must notify the
Bureau, in the form and manner specified by the Bureau, by the first
quarterly submission deadline after the last day of the calendar
quarter in which the issuer ceased to offer the agreement. Proposed
Sec. 1005.19(b)(3) mirrors the Regulation Z provisions regarding
withdrawal of agreements previously submitted to the Bureau in Sec.
1026.58(c)(4). Proposed comment 19(b)(3)-1 cross-references Regulation
Z comment 58(c)(4)-1 for a specific example regarding withdrawal of
submitted agreements as the Bureau intends that this provision would
function the same for prepaid accounts as it does for credit card
accounts.
With respect to credit cards, the Board found that the number of
credit card agreements currently in effect but no longer offered to the
public was extremely large, and thus providing such agreements to the
Board would have posed a significant burden on industry as well as
diluted the active agreements posted on the Board's Web site to such an
extent that they might no longer be useful to consumers.\314\ The
Bureau does not believe that prepaid issuers have open prepaid accounts
subject to agreements no longer offered to the public the same way that
credit card issuers do. However, the Bureau believes that the primary
benefit of making prepaid account agreements available on the Bureau's
Web site would be to assist consumers in comparing prepaid account
agreements offered by various issuers when shopping for a new prepaid
account. Including agreements that are no longer offered to the public
would not facilitate comparison shopping by consumers because consumers
could not obtain the accounts subject to these agreements. Thus, the
Bureau is proposing that an issuer only submit to the Bureau under
proposed Sec. 1005.19(b) those agreements that the issuer currently
offers to the public.
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\314\ 74 FR 54124, 54189 (Oct. 21, 2009).
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19(b)(4) De Minimis Exception
The Bureau is proposing Sec. 1005.19(b)(4) to provide a de minimis
exception for the requirement to submit prepaid account agreements to
the Bureau. Proposed Sec. 1005.19(b)(4)(i) would state that an issuer
is not required to submit any prepaid account agreements to the Bureau
if the issuer had fewer than 3,000 open prepaid accounts as of the last
business day of the calendar quarter. As in Regulation Z, this de
minimis exception would apply to all open prepaid accounts of the
issuer, not to each of the issuer's prepaid account programs
separately.
For Regulation Z, the Board was not aware of a way to define a
``credit card plan'' that would not divide issuers' portfolios into
such small units that large numbers of credit card agreements could
fall under the de minimis exception.\315\ The Board therefore
established a de minimis exception based on an issuer's total number of
[[Page 77197]]
open accounts. Sec. 1026.58(c)(5). The Bureau believes that the same
issues apply in attempting to define a ``prepaid account program'' for
purposes of a de minimis threshold, and therefore similarly proposes to
adopt a de minimis threshold that applies to all of an issuer's prepaid
programs, rather than on a program-by-program basis.
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\315\ 74 FR 54124, 54191 (Oct. 21, 2009).
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The Bureau is proposing to use a lower de minimis threshold of
3,000 open prepaid accounts, in place of the 10,000 open accounts
threshold used in Regulation Z. The prepaid accounts market is smaller
than the credit card market (based on number of open accounts) and
there are some indications that smaller issuers (i.e., with small
numbers of open accounts rather than small based on entity size) may
account for more of the prepaid market than do smaller issuers in the
credit card market. The Bureau seeks to create a de minimis threshold
that would exempt a similar portion of open prepaid accounts from this
requirement as are exempted by the current analogous requirement for
credit cards. However, the Bureau lacks specific data that would permit
it to accurately determine a comparable threshold for prepaid accounts.
Public data indicate that none of the top 100 Visa and MasterCard
credit card issuers (ranked by dollar amount of outstandings, and which
covers both consumer and commercial credit cards) come close to falling
below the 10,000 Regulation Z de minimis threshold, even as those
issuers (when combined with Discover and American Express, which are
the two largest U.S. issuers that are not MasterCard or Visa issuers)
amount to more than 92 percent of total general purpose credit card
loans outstanding.\316\ The smallest credit card issuers in this top-
100 list, based on total accounts and total active accounts, exceed the
de minimis threshold by a factor of between two (for active accounts)
and nearly four (for total accounts).
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\316\ HSN Consultants, Inc., The Nilson Report, Issue 1035 at 8,
10-11 (Feb. 2014), and The Nilson Report, Issue 1038 at 10-11 (Apr.
2014). Public data for the next tranche of credit card issuers does
not include account volume, but it does include outstandings volume.
The lowest outstandings for an issuer in the third 50 cohort are
more than 60 percent of the outstandings for the smallest issuer by
total account volume in the top-100. See The Nilson Report, Issue
1042 at 11 (June 2014). As the smallest issuer by total account
volume in the top-100 exceeded the de minimis threshold by several
factors, the available indications are that the third 50 cohort
would not fall below the de minimis threshold either.
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In comparison, the same public source indicates that three of the
top 50 Visa and MasterCard prepaid account issuers would fall below a
10,000 threshold, and one of these is right at the proposed 3,000
threshold.\317\ Furthermore, the data in this report include a number
of types of other prepaid products beyond commercial cards that are
outside the proposed definition of prepaid account, such as consumer
gift, healthcare, and rebates/rewards, creating the likelihood that
additional top-50 prepaid issuers could fall below a de minimis
threshold of 10,000 open prepaid accounts.\318\ Although it is not
straightforward to calculate exactly how much of the market these top-
50 prepaid issuers represent, available indications are that it is
significantly below the 92 percent accounted for by the top-100 credit
card issuers.\319\
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\317\ HSN Consultants, Inc., The Nilson Report, Issue 1043 at 10
(June 2014). One issuer had 9,000 cards in circulation, another had
8,000, and a third had only 3,000.
\318\ One issuer was reported to have 14,000 cards in
circulation, another had 16,000, and a third had 18,000.
\319\ Nilson reports that the top-50 prepaid issuers accounted
for some $118 billion in purchase volume in 2013. The Nilson Report,
Issue 1043 at 1 (June 2014). One leading consultancy has estimated
load on open-loop prepaid products for that year at over $242
billion. Mercator Advisory Grp., Eleventh Annual U.S. Prepaid Cards
Market Forecasts, 2014-2017 (Nov. 2014).
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The Bureau solicits comment on its proposed adoption of a 3,000
open accounts threshold for the de minimis exception. In addition, the
Bureau recognizes that the proposed de minimis exception would not
alleviate the administrative burden on large issuers of submitting
agreements for prepaid account programs with a very small number of
open accounts. The Bureau solicits comment on whether it should create
a de minimis exception applicable to a prepaid account program offered
by an issuer of any size and, if so, how the Bureau should define
``prepaid account program'' for purposes of such an exception.
Proposed comment 19(b)(4)-1 would explain that the de minimis
exception in proposed Sec. 1005.19(b)(4) is distinct from the product
testing exception in proposed Sec. 1005.19(b)(5). The de minimis
exception provides that an issuer with fewer than 3,000 open prepaid
accounts is not required to submit any agreements to the Bureau,
regardless of whether those agreements qualify for the product testing
exception. In contrast, the product testing exception provides that an
issuer is not required to submit to the Bureau agreements offered
solely in connection with certain types of prepaid account programs
with fewer than 3,000 open accounts, regardless of the financial
institution's total number of open accounts. Proposed comment 19(b)(4)-
2 would refer to Regulation Z comment 58(c)(5)-2 for additional
guidance on the de minimis exception.
Proposed Sec. 1005.19(b)(4)(ii) would state that if an issuer that
previously qualified for the de minimis exception ceases to qualify,
the issuer must begin making quarterly submissions to the Bureau no
later than the first quarterly submission deadline after the date as of
which the issuer ceased to qualify. Proposed comment 19(b)(4)-3 would
refer to Regulation Z comment 58(c)(5)-3 for additional guidance on the
date for determining whether an issuer qualifies for the de minimis
exception. Proposed comment 19(b)(4)-4 would refer to Regulation Z
comment 58(c)(5)-4 for additional guidance on the date for determining
whether an issuer ceases to qualify for the de minimis exception.
Finally, proposed Sec. 1005.19(b)(4)(iii) would state that if an
issuer that did not previously qualify for the de minimis exception
newly qualifies for the de minimis exception, the issuer must continue
to make quarterly submissions to the Bureau until the issuer notifies
the Bureau that it is withdrawing all agreements it previously
submitted to the Bureau. Proposed comment 19(b)(4)-5 would refer to
Regulation Z comment 58(c)(5)-5 for additional guidance on an issuer's
option to withdraw its agreements submitted to the Bureau.
Proposed Sec. 1005.19(b)(4) mirrors the Regulation Z provisions
regarding the de minimis exception in Sec. 1026.58(c)(5), except for
the lower proposed de minimis threshold figure. Proposed comments
19(b)(4)-1 to -5 mirror Regulation Z comments 58(c)(5)-1 to -5,
although proposed comments 19(b)(1)-2 to -5 have been shortened to
cross-reference the parallel comments in Regulation Z for specific
examples regarding the de minimis exception as the Bureau intends that
these provisions would function the same for prepaid accounts as they
do for credit card accounts. In addition, the references to the private
label credit card exception in Regulation Z comment 58(c)(5)-1 have
been removed as the Bureau does not believe that exception is relevant
in the prepaid card context, as discussed above.
19(b)(5) Product Testing Exception
The Bureau is proposing Sec. 1005.19(b)(5) to provide a product
testing exception to the requirement to submit prepaid account
agreements to the Bureau. Proposed Sec. 1005.19(b)(5) mirrors the
Regulation Z provisions regarding the product testing exception in
Sec. 1026.58(c)(7).
[[Page 77198]]
Proposed Sec. 1005.19(b)(5)(i) would provide that an issuer is not
required to submit to the Bureau a prepaid account agreement if, as of
the last business day of the calendar quarter, the agreement: (A) Is
offered as part of a product test offered to only a limited group of
consumers for a limited period of time; (B) is used for fewer than
3,000 open prepaid accounts; and (C) is not offered to the public other
than in connection with such a product test.
Proposed Sec. 1005.19(b)(5)(ii) would provide that if an agreement
that previously qualified for the product testing exception ceases to
qualify, the issuer must submit the agreement to the Bureau no later
than the first quarterly submission deadline after the date as of which
the agreement ceased to qualify. Finally, proposed Sec.
1005.19(b)(5)(iii) would provide that if an agreement that did not
previously qualify for the product testing exception newly qualifies
for the exception, the issuer must continue to make quarterly
submissions to the Bureau with respect to that agreement until the
issuer notifies the Bureau that the agreement is being withdrawn.
The Bureau believes that the administrative burden on issuers of
preparing and submitting to the Bureau agreements used for a small
number of prepaid accounts in connection with a product test by an
issuer outweighs the benefit of increased transparency of including
these agreements on the Bureau's Web site. The Bureau understands that
issuers often test new prepaid account strategies and products by
offering prepaid accounts to discrete, targeted groups of consumers for
a limited time. Posting these agreements on the Bureau's and issuers'
Web sites would not facilitate comparison shopping by consumers, as
these terms are offered only to a limited group of consumers for a
short period of time. Including these agreements could mislead
consumers into believing that these terms are available more generally.
In addition, posting these agreements could make issuer testing
strategies transparent to competitors.
The Bureau seeks comment on whether it should impose a time limit
on how long an issuer can avail itself of the product testing
exception, and if so, what that time limit might be, or whether the
Bureau should adopt other conditions on use of the product testing
exception. The Bureau is concerned about possible circumvention of the
proposed requirements in Sec. 1005.19(b) via the product testing
exception. For example, the Bureau is concerned about the possibility
that issuers might deem small payroll card account programs part of a
product test, even when all or substantially all of a particular
employer's employees are enrolled in the payroll card account program.
The Bureau seeks comment on whether it should specify that if all, or
substantially all, of a company's employees are enrolled in a payroll
card account program (excluding programs for the employees of the
issuer or a service provider to the issuer, such as a program manager),
that program does not qualify for the product testing exception.
19(b)(6) Form and Content of Agreements Submitted to the Bureau
Proposed Sec. 1005.19(b)(6) would set forth the form and content
requirements for prepaid account agreements submitted to the Bureau.
19(b)(6)(i) Form and Content Generally
The Bureau is proposing Sec. 1005.19(b)(6)(i) to provide that each
prepaid account agreement must contain the provisions of the agreement
and the fee information in effect as of the last business day of the
preceding calendar quarter. Proposed comment 19(b)(6)-1 would provide
the following example to aid in determining the ``as of'' date of an
agreement: On June 1, an issuer decides to decrease the out-of-network
ATM withdrawal fee associated with one of the agreements it offers to
the public. The change in that fee will become effective on August 1.
If the issuer submits the agreement to the Bureau on July 31 (for
example, because the agreement has been otherwise amended), the
agreement submitted should not include the new lower out-of-network ATM
withdrawal fee because that lower fee was not in effect on June 30, the
last business day of the preceding calendar quarter. Proposed comment
19(b)(6)-1 is similar to Regulation Z comment 58(c)(8)-1.
Proposed Sec. 1005.19(b)(6)(i) would also state that agreements
must not include any personally identifiable information relating to
any consumer, such as name, address, telephone number, or account
number. Further, as explained in proposed Sec. 1005.19(b)(6)(i), the
following would not be deemed to be part of the agreement for purposes
of proposed Sec. 1005.19, and therefore are not required to be
included in submissions to the Bureau: (1) Ancillary disclosures
required by State or Federal law, such as affiliate marketing notices,
privacy policies, or disclosures under the E-Sign Act; (2) solicitation
or marketing materials; (3) periodic statements; and (4) documents that
may be sent to the consumer along with the prepaid account or prepaid
account agreement such as a cover letter, a validation sticker on the
card, or other information about card security. Finally, proposed Sec.
1005.19(b)(6)(i) would state that agreements must be presented in a
clear and legible font.
Proposed Sec. 1005.19(b)(6)(i) generally mirrors the Regulation Z
provisions in Sec. 1026.58(c)(8)(i) regarding the form and content of
agreements that would be submitted to the Bureau. This paragraph
excludes, however, two additional items listed in Sec.
1026.58(c)(8)(i)(C) that are not deemed to be part of a credit card
agreement--ancillary agreements between the issuer and the consumer,
such as debt cancellation contracts or debt suspension agreements, and
offers for credit insurance or other optional products and other
similar advertisement--because the Bureau does not believe these items
are relevant in the prepaid account context. Proposed Sec.
1005.19(b)(6)(i) is not intended to provide an exhaustive list of the
ancillary State and Federal law disclosures that are not deemed to be
part of an agreement under proposed Sec. 1005.19. As indicated by the
use of the phrase ``such as,'' the listed disclosures are merely
examples of ``ancillary disclosures required by Federal or State law.''
The Bureau does not believe it is feasible to include in this paragraph
a comprehensive list of all such disclosures, as such a list would be
extensive and would change as State and Federal laws and regulations
are amended. The Bureau notes that an issuer would not be prohibited by
this or any other provision of proposed Sec. 1005.19 from choosing to
include these items in submitted agreements.
19(b)(6)(ii) Fee Information
The Bureau is proposing Sec. 1005.19(b)(6)(ii) to provide that fee
information must be set forth either in the prepaid account agreement
or in a single addendum to that agreement. The agreement or addendum
thereto must contain all of the fee information, which is defined by
proposed Sec. 1005.19(a)(3) as the information listed for the long-
form fee disclosure in proposed Sec. 1005.18(b)(2)(ii), as discussed
above.
Proposed Sec. 1005.19(b)(6)(ii) deviates from the provisions
governing pricing information in Sec. 1026.58(c)(8)(ii) in that the
proposed language permits, but does not require, prepaid account fee
information to be provided in an addendum to the prepaid account
agreement. The Bureau requests comment on whether it should require,
rather than permit, prepaid account fee information in an addendum to
the agreement and whether such a requirement might aid consumers in
[[Page 77199]]
more easily locating fee information in prepaid account agreements.
Proposed Sec. 1005.19(b)(6)(ii) also omits the provisions
contained in Sec. 1026.58(c)(8)(ii)(B) and (C) that address how to
disclose pricing information that varies from one cardholder to another
(such as annual percentage rates) and how to disclose variable rates
and margins. Because prepaid account fees and terms currently do not
vary between consumers based on creditworthiness or other factors in
the same way that credit card account pricing and other terms do, the
Bureau does not believe these provisions are either applicable or
necessary with respect to prepaid account agreements. The Bureau
likewise has not proposed an equivalent to Sec. 1026.58(c)(8)(iii)
which allows for an optional variable terms addendum that allows
provisions other than those related to pricing information that may
vary from one cardholder to another depending on the cardholder's
creditworthiness, State of residence or other factors to be set forth
in a single addendum separate from the pricing information addendum.
The Bureau has likewise not proposed a comment equivalent to that of
58(c)(8)-2 regarding pricing information, nor that of 58(c)(8)-4
regarding the optional variable terms addendum. The Bureau solicits
comment on whether, in light of the revisions proposed herein regarding
credit accessed by prepaid accounts, it should incorporate provisions
similar to Sec. 1026.58(c)(8)(ii)(B), (8)(ii)(C), (8)(iii) or comments
58(c)(8)-2 or 58(c)(8)-4 into proposed Sec. 1005.19.
With credit cards, issuers offer a range of terms and conditions
and issuers may make those terms and conditions available in a variety
of different combinations, particularly with respect to items included
in the pricing information. In Regulation Z, pricing information is
required to be set out in a separate pricing information addendum,
regardless of whether pricing information is also contained in the main
text of the agreement. The Board concluded that it could be difficult
for consumers to find pricing information if it is integrated into the
text of the credit card agreement. The Board believed that requiring
pricing information to be attached as a separate addendum would ensure
that this information is easily accessible to consumers.\320\ The
Bureau does not believe that prepaid account agreements vary in the
same manner. The Bureau also believes that if prepaid account
agreements contain the long form fee disclosure required by proposed
Sec. 1005.18(b)(2)(ii) (see Sample Form A-10(e)), consumers would be
able to easily locate such fee information within a prepaid account
agreement and to compare fee information across agreements.
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\320\ 75 FR 7658, 7769 (Feb. 22, 2010).
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Proposed comment 19(b)(6)-2, which is largely similar to Regulation
Z comment 58(c)(8)-3, would explain that fee agreement variations do
not constitute separate agreements. Fee information that may vary from
one consumer to another depending on the consumer's State of residence
or other factors must be disclosed by setting forth all the possible
variations or by providing a range of possible variations. Two
agreements that differ only with respect to variations in the fee
information would not constitute separate agreements for purposes of
proposed Sec. 1005.19. For example, an issuer offers two types of
prepaid accounts that differ only with respect to the monthly fee. The
monthly fee for one type of account is $4.95, while the monthly fee for
the other type of account is $0 if the consumer regularly receives
direct deposit to the prepaid account. The provisions of the agreement
and fee information for the two types of accounts are otherwise
identical. The issuer should not submit to the Bureau one agreement
with fee information listing a $4.95 monthly fee and another agreement
with fee information listing a $0 monthly fee. Instead, the issuer
should submit to the Bureau one agreement with fee information listing
possible monthly fees of $4.95 or $0, including the explanation that
the latter fee is dependent upon the consumer regularly receiving
direct deposit.
19(b)(6)(iii) Integrated Agreement
The Bureau is proposing Sec. 1005.19(b)(6)(iii) to prohibit
issuers from providing provisions of the agreement or fee information
to the Bureau in the form of change-in-terms notices or riders (other
than the optional fee information addendum). Changes in provisions or
fee information must be integrated into the text of the agreement, or
the optional fee information addendum, as appropriate. Proposed comment
19(b)(6)-3 would provide the following example illustrating this
requirement: It would be impermissible for an issuer to submit to the
Bureau an agreement in the form of a terms and conditions document
dated January 1, 2015, four subsequent change in terms notices, and two
addenda showing variations in fee information. Instead, the issuer must
submit a document that integrates the changes made by each of the
change in terms notices into the body of the original terms and
conditions document and a single optional addendum displaying
variations in fee information.
Proposed Sec. 1005.19(b)(6)(iii) is similar to Sec.
1026.58(c)(8)(iv) in that they both prohibit providing agreements and
fee (or pricing) information to the Bureau in the form of change-in-
terms notice or riders, but the proposed language has been modified to
reflect that prepaid account fee information may, but is not required
to be, provided in an optional fee information addendum. Proposed
comment 19(b)(6)-3 is similar to Regulation Z comment 58(b)-5.
As discussed previously, the Bureau believes that permitting
issuers to submit agreements that include change-in-terms notices or
riders containing amendments and revisions would be confusing for
consumers and would greatly lessen the usefulness of the agreements
posted on the Bureau's Web site. In addition, the Bureau believes that
prepaid account issuers customarily incorporate revised terms into
their prepaid account agreements on a regular basis.
The Board believed that there could potentially be significant
burden on issuers for updating credit card agreements following changes
in terms because of the potential variety in terms offered under a
single agreement.\321\ The Bureau does not believe a similar burden
exists for prepaid account agreements because a single prepaid account
agreement would not contain a variety of variable terms predicated on
the consumer's credit worthiness or other factors. In addition, the
Bureau does not believe that prepaid account issuers modify the terms
of prepaid account agreements as frequently as credit card issuers do.
The Bureau nonetheless seeks comment on this aspect of the proposal.
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\321\ See 75 FR 7658, 7770 (Feb. 22, 2010).
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19(b)(7) Bureau Posting of Prepaid Account Agreements
The Bureau is proposing Sec. 1005.19(b)(7) to provide that the
Bureau shall receive prepaid account agreements submitted by prepaid
account issuers pursuant to proposed Sec. 1005.19(b), and shall post
such agreements on a publicly-available Web site established and
maintained by the Bureau. There is no equivalent to proposed Sec.
1005.19(b)(7) in Sec. 1026.58 as the Bureau's posting of credit card
agreements it receives is directed by TILA section 122(d). 15 U.S.C.
1632(d).
[[Page 77200]]
19(c) Posting of Agreements Offered to the Public
The Bureau is proposing Sec. 1005.19(c) to require an issuer to
post and maintain on its publicly available Web site the prepaid
account agreements that the issuer would be required to submit to the
Bureau under proposed Sec. 1005.19(b). Agreements posted pursuant to
proposed Sec. 1005.19(c) must conform to the form and content
requirements for agreements submitted to the Bureau specified in
proposed Sec. 1005.19(b)(6)(i)(B) through (D) and may be posted in any
electronic format that is readily usable by the general public.
Agreements posted pursuant to proposed Sec. 1005.19(c) must be
accurate and updated whenever changes are made. Agreements must be
placed in a location that is prominent and readily accessible by the
public and must be accessible without submission of personally
identifiable information.
Section 1026.58(d)(1) requires credit card issuers to update the
agreements posted on their Web sites at least as frequently as the
quarterly schedule required for submission of agreements to the Bureau,
but permits an issuer to update its agreements more frequently if it so
chooses. For Regulation Z, the Board considered a consumer group
comment requesting that the online agreement be updated within a
specific period of time no greater than 72 hours. The Board declined to
adopt such a requirement because it believed that the burden to card
issuers of updating agreements in such a short time would outweigh the
benefit. In addition, the Board noted that if a consumer applies or is
solicited for a credit card, the consumer will receive the updated
disclosure under existing rules in Regulation Z subpart B.\322\ The
Bureau believes that prepaid account issuers generally update their
agreements posted online as changes are made. The Bureau does not
believe that prepaid account issuers face the same burdens as credit
card issuers in updating prepaid account agreements posted online
because the terms of such agreements do not vary in the same manner as
credit card agreement terms, which may offer a variety of rates and
fees depending on the creditworthiness of the consumer. Thus, for
prepaid account agreements, the Bureau is proposing in Sec.
1005.19(c)(3) that prepaid account agreements posted only be accurate
and that issuers update their agreements whenever changes are made. The
Bureau seeks comment on whether this portion of the proposal aligns
with current industry practice and whether the Bureau should
nonetheless specify a specific timeframe for updating prepaid account
agreements posted online.
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\322\ 75 FR 7658, 7772 (Feb. 22, 2010).
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Proposed comment 19(c)-1 would explain that an issuer's obligation
to post and maintain prepaid account agreements on its Web site
pursuant to proposed Sec. 1005.19(c) is distinct from that of Sec.
1005.7, which requires an issuer to provide certain disclosures at the
time a consumer contracts for an electronic fund transfer service or
before the first electronic fund transfer is made involving the
consumer's account, as well as the change in terms notice required
under Sec. 1005.8(a). This requirement is also distinct from that of
proposed Sec. 1005.18(b)(2)(ii), which would require issuers to make
the long form disclosure available to consumers prior to prepaid
account acquisition and which, depending on the methods an issuer
offers prepaid accounts to consumers, may require posting of the long
form disclosure on the issuer's Web site. If, for example, an issuer is
not required to submit any agreements to the Bureau because the issuer
qualifies for the de minimis exception under proposed Sec.
1005.19(b)(4), the issuer is not required to post and maintain any
agreements on its Web site under proposed Sec. 1005.19(c). The issuer
would still be required to provide each individual consumer with access
to his or her specific prepaid account agreement under proposed Sec.
1005.19(d), discussed below, by posting and maintaining the agreement
on the issuer's Web site or by providing a copy of the agreement upon
the consumer's request. The issuer may also be required to post the
long form disclosure required by proposed Sec. 1005.18(b)(2)(ii)
online as well, depending on the methods by which the issuer offers
prepaid accounts to consumers.
Proposed comment 19(c)-2 would explain that if an issuer provides
consumers with access to specific information about their individual
accounts, such as balance information or copies of statements, through
a third-party Web site, the issuer is considered to maintain that Web
site for purposes of proposed Sec. 1005.19. Such a third-party Web
site is deemed to be maintained by the issuer for purposes of proposed
Sec. 1005.19(c) even where, for example, an unaffiliated entity
designs the Web site and owns and maintains the information technology
infrastructure that supports the Web site, consumers with prepaid
accounts from multiple issuers can access individual account
information through the same Web site, and the Web site is not labeled,
branded, or otherwise held out to the public as belonging to the
issuer. Therefore, issuers that provide consumers with access to
account-specific information through a third-party Web site can comply
with proposed Sec. 1005.19(c) by ensuring that the agreements the
issuer submits to the Bureau are posted on the third-party Web site in
accordance with proposed Sec. 1005.19(c).
Proposed Sec. 1005.19(c) is similar to Sec. 1026.58(d), but does
not include provisions regarding private label credit cards, as
discussed above. Specifically, the Bureau is not proposing an
equivalent to the provision addressing the Web site to be used for
posting private label credit card agreements in Sec. 1026.58(d)(1) as
well as Sec. 1026.58(d)(4) requiring quarterly updates of credit card
agreements posted on card issuers' Web sites, as discussed above.
Proposed comment 19(c)-1 is similar to Regulation Z comment 58(d)-1,
although it has been modified to distinguish the requirement in
proposed Sec. 1005.19(c) from other disclosure-related obligations in
Regulation E. Proposed comment 19(c)-2 mirrors Regulation Z comment
58(d)-2, although both it and proposed comment 19(c)-1 have been
modified and to remove the portions discussing the private label credit
card exception. An equivalent to Regulation Z comment 58(d)-3,
regarding private label credit card plans, has likewise been omitted.
19(d) Agreements for All Open Accounts
19(d)(1) Availability of Individual Consumer's Prepaid Account
Agreement
The Bureau is proposing Sec. 1005.19(d)(1) to state that, with
respect to any open prepaid account, unless the prepaid account
agreement is provided to the Bureau pursuant to proposed Sec.
1005.19(b) and posted to the issuer's publicly available Web site
pursuant to proposed Sec. 1005.19(c), an issuer must either post and
maintain the consumer's agreement on its Web site, or promptly provide
a copy of the consumer's agreement to the consumer upon the consumer's
request. Unlike agreements posted pursuant to proposed Sec.
1005.19(c), which must be maintained on an issuer's publicly available
Web site, agreements posted pursuant to proposed Sec. 1005.19(d) may
be housed on a portion of the issuer's Web site that is available to
consumers once they have logged into their accounts. If the issuer
makes an agreement available upon request, the issuer must provide the
consumer with the ability to request a copy of the agreement by
telephone. The issuer must send to the consumer
[[Page 77201]]
a copy of the consumer's prepaid account agreement no later than five
business days after the issuer receives the consumer's request.
Proposed comment 19(d)-1, which is similar to Regulation Z comment
58(e)-1, would provide examples illustrating the requirements of
proposed Sec. 1005.19(d)(1). An issuer that is not required to submit
agreements to the Bureau because it qualifies for the de minimis
exception under proposed Sec. 1005.19(b)(4) would still be required to
provide consumers with access to their specific agreements under
proposed Sec. 1005.19(d). Similarly, an agreement that is no longer
offered to the public would not be required to be submitted to the
Bureau under proposed Sec. 1005.19(b), but would still need to be
provided to the consumer to whom it applies under proposed Sec.
1005.19(d).
The Bureau does not believe it would be appropriate to apply the de
minimis exception, the product testing exception, or the exception for
accounts not currently offered to the public to the requirement that
issuers provide consumers with access to their specific prepaid account
agreement through the issuer's Web site. In addition, the Bureau
believes that, for the reasons discussed above, posting prepaid account
agreements that are not currently offered to the public on the Bureau's
Web site would not be beneficial to consumers. However, the Bureau
believes that the benefit of increased transparency of providing an
individual cardholder access to his or her specific prepaid account
agreement is substantial regardless of whether the cardholder's
agreement continues to be offered by the issuer. The Bureau believes
that this benefit outweighs the administrative burden on issuers of
providing such access, and the Bureau therefore is not proposing to
exempt agreements that are not offered to the public from the
requirements of proposed Sec. 1005.19(d)(1). Similarly, the proposal
requires that prepaid account issuers with fewer than 3,000 open
prepaid accounts would not be required to submit agreements to the
Bureau. However, the Bureau believes that the benefit of increased
transparency associated with providing an individual cardholder with
access to his or her specific prepaid account agreement is substantial
regardless of the number of the issuer's open accounts. The Bureau
believes that this benefit of increased transparency for consumers
outweighs the administrative burden on issuers of providing such
access, and the Bureau therefore is not proposing to apply the de
minimis exception to the requirements in proposed Sec. 1005.19(d)(1).
The Board believed that the administrative burden associated with
posting each cardholder's credit card agreement on the issuer's Web
site might be substantial for some issuers, particularly smaller
institutions with limited information technology resources, and thus
gave issuers the option of providing copies of agreements in response
to cardholders' requests. The ability to provide agreements in response
to a request made via telephone or Web site would ensure that
cardholders still be able to obtain copies of their credit card
agreements promptly.\323\
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\323\ See 74 FR 54124, 54192 (Oct. 21, 2009).
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The Bureau does not know whether similar challenges are faced by
prepaid account issuers, particularly for issuers that would qualify
for the de minimis or product testing exceptions. The Bureau is thus
proposing to similarly allow prepaid account issuers to satisfy the
requirements of proposed Sec. 1005.19(d)(1) by providing a copy of a
consumer's prepaid account agreement to the consumer upon the
consumer's request. The Bureau requests comment on whether this
allowance is necessary or if prepaid account issuers should all be
required to post agreements on their Web sites. The Bureau also
requests comment on whether issuers should be required by this
regulation to provide copies of prepaid account agreements to all
consumers upon request, regardless of whether the agreements are also
posted online.
Section 1026.58(e)(1) requires a credit card issuer to accept
cardholders' requests for copies of their credit card agreements via
the issuer's Web site as well as by telephone. The Bureau believes that
prepaid account issuers will generally post prepaid account agreements
to their Web sites pursuant to proposed Sec. 1005.19(d)(1)(i), even if
the agreement is posted in a location that is only accessible to
prepaid account consumers after they have logged in to their accounts.
The Bureau thus expects that few, if any, issuers would be required to
provide agreements in response to a consumer's request pursuant to
proposed Sec. 1005.19(d)(1)(ii). The Bureau therefore does not believe
it is necessary to require issuers to receive requests via the issuers'
Web sites, although issuers could certainly allow consumers to make
requests in that manner if they so choose.
Section 1026.58(e)(1)(ii) also requires credit card issuers to
allow cardholders to request copies of their agreements by calling a
readily available telephone line the number for which is displayed on
the issuer's Web site and clearly identified as to its purpose.
Regulation Z comment 58(e)-2 provides additional clarification as to
what is required to satisfy the ``readily available telephone line''
standard. Because the Bureau is proposing to require prepaid account
issuers to provide telephone numbers for a variety of other
purposes,\324\ the Bureau does not believe it is necessary to provide
the same level of specificity regarding the telephone number to be used
to request a copy of a prepaid account agreement pursuant to proposed
Sec. 1005.19(d)(1)(ii) nor to provide a comment equivalent to that of
Regulation Z comment 58(e)-2.
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\324\ See, e.g., proposed Sec. 1005.18(b)(7) (requiring
disclosure of a telephone number on the prepaid account access
device, to be used to contact the financial institution about the
prepaid account).
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Section 1026.58(e)(1) also allows a credit card issuer, in response
to such a cardholder's request for a copy of the cardholder's
agreement, to provide that agreement to the cardholder electronically,
such as by posting a copy of the agreement to its Web site in a
location that is accessible by the cardholder. Because the Bureau
expects that few, if any, issuers would be required to provide
agreements upon request pursuant to proposed Sec. 1005.19(d)(1)(ii),
as discussed above, it does not appear to be necessary or useful to
allow an issuer to post a prepaid account agreement to a consumer's
online account in response to a consumer's request. The Bureau is thus
not proposing to permit issuers to provide copies of prepaid account
agreements electronically in response to consumers' requests, except as
permitted in proposed Sec. 1005.19(d)(2)(vi), discussed below. In
addition, a provision corresponding to Sec. 1026.58(e)(2), containing
a special provision for issuers without interactive Web sites, has not
been included in proposed Sec. 1005.19, as the Bureau is not aware of
any prepaid issuers that do not maintain Web sites (or do not use a
third-party service provider to maintain such a Web site) from which
consumers can access specific information about their individual
prepaid accounts and thus does not believe such a provision is
necessary for prepaid accounts. The Bureau is not proposing an
equivalent to Regulation Z comment 58(e)-3, which provides examples
regarding the deadline for providing copies of requested agreements, as
the Bureau does not believe such examples are necessary given the more
limited ways that issuers are permitted to respond to
[[Page 77202]]
requests under proposed Sec. 1005.19(d)(1)(ii).
Section 1026.58(e)(ii) provides that the card issuer must send to
the cardholder or otherwise make available to the cardholder a copy of
the cardholder's agreement in electronic or paper form no later than 30
days after the issuer receives the cardholder's request. The Board
originally proposed requiring issuers to respond to such a request
within 10 business days, but some commenters contended that 10 business
days would not provide sufficient time to respond to a request. The
commenters noted that they would be required to integrate changes in
terms into the agreement and providing pricing information, which,
particularly for older agreements that may have had many changes in
terms over the years, could require more time. The Board believed it
would be reasonable to provide more time for an issuer to respond to a
cardholder's request for a copy of the credit card agreement, and thus
allowed for 30 days in the final rule.\325\
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\325\ 75 FR 7658, 7773 (Feb. 22, 2010).
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The Bureau does not believe that issuers would face the same
challenges in integrating changes in terms into prepaid account
agreements in the same manner as with credit card agreements. The
Bureau believes that requiring issuers to provide prepaid account
agreements within five business days gives issuers adequate time to
respond to requests while providing consumers with prompt access to
their prepaid account agreements. The Bureau solicits comment regarding
whether this period should be shorter or longer.
19(d)(2) Form and Content of Agreements
The Bureau is proposing Sec. 1005.19(d)(2) to address the form and
content requirements for agreements provided to consumers pursuant to
proposed Sec. 1005.19(d)(1). Proposed Sec. 1005.19(d)(2)(i) would
state that, except as otherwise provided in proposed Sec. 1005.19(d),
agreements posted on the issuer's Web site pursuant to proposed Sec.
1005.19(d)(1)(i) or sent to the consumer upon the consumer's request
pursuant to proposed Sec. 1005.19(d)(1)(ii) must conform to the form
and content requirements for agreements submitted to the Bureau as
specified in proposed Sec. 1005.19(b)(6). Proposed Sec.
1005.19(d)(2)(ii) provides that if the issuer posts an agreement on its
Web site pursuant to proposed Sec. 1005.19(d)(1)(i), the agreement may
be posted in any electronic format that is readily usable by the
general public and must be placed in a location that is prominent and
readily accessible to the consumer. Proposed Sec. 1005.19(d)(2)(iii)
would state that agreements posted or otherwise provided pursuant to
proposed Sec. 1005.19(d) may contain personally identifiable
information relating to the consumer, such as name, address, telephone
number, or account number, provided that the issuer takes appropriate
measures to make the agreement accessible only to the consumer or other
authorized persons.
Proposed Sec. 1005.19(d)(2)(iv) would state that agreements posted
or otherwise provided pursuant to proposed Sec. 1005.19(d) must set
forth the specific provisions and fee information applicable to the
particular consumer. Proposed Sec. 1005.19(d)(2)(v) would provide that
agreements posted pursuant to proposed Sec. 1005.19(d)(1)(i) must be
accurate and updated whenever changes are made. Agreements provided
upon consumer request pursuant to proposed Sec. 1005.19 (d)(1)(ii)
must be accurate as of the date the agreement is mailed or
electronically delivered to the consumer. Proposed Sec.
1005.19(d)(2)(vi) would state that agreements provided upon consumer
request pursuant to proposed Sec. 1005.19(d)(1)(ii) must be provided
by the issuer in paper form, unless the consumer agrees to receive the
agreement electronically.
Proposed Sec. 1005.19(d)(2) is generally similar to Sec.
1026.58(e)(3), except that it contains modifications to reflect the
changes in proposed Sec. 1005.19(d)(1) regarding the methods in which
prepaid account agreements may be provided to consumers pursuant to
proposed Sec. 1005.19(d). Proposed Sec. 1005.19(d)(2) does not,
however, include the provision contained in Sec. 1026.58(e)(3)(iv)
that requires agreements for all open prepaid accounts that are posted
to a card issuer's Web site or otherwise provided to consumers to
contain complete and accurate provisions and pricing information as of
a date no more than 60 days prior to the date on which the agreement is
posted to the card issuer's Web site pursuant to Sec. 1026.58(e)(1)(i)
or the date the cardholder's request is received under Sec.
1026.58(e)(1)(ii) or (e)(2). As described above, the Bureau does not
believe that updating prepaid account agreements is as complex as for
credit card agreements, nor that prepaid account agreements are
modified as frequently as credit card agreements may be. Therefore, the
Bureau does not believe that prepaid account issuers should be
permitted to provide agreements to consumers that are as much as 60
days out of date. Instead, pursuant to proposed Sec. 1005.19(d)(2)(v),
the Bureau is proposing to require that agreements posted online be
accurate and updated when changes are made, and that agreements
provided upon consumer request be accurate as of the date the agreement
is mailed or electronically delivered to the consumer.
19(e) E-Sign Act Requirements
The Bureau is proposing Sec. 1005.19(e) to state that, except as
otherwise provided in proposed Sec. 1005.19, issuers may provide
prepaid account agreements in electronic form under proposed Sec.
1005.19(c) and (d) without regard to the consumer notice and consent
requirements of section 101(c) of the Electronic Signatures in Global
and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
Because TILA section 122(d) specifies that a credit card issuer must
provide access to cardholder agreements on the issuer's Web site, the
Board did not believe that the requirements of the E-Sign Act applied
to the regulations now contained at Sec. 1026.58.\326\ The Bureau is
proposing Sec. 1005.19(e) for ease of administration of these
requirements and for consistency with Sec. 1026.58(f).
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\326\ See 74 FR 54124, 54193 (Oct. 21, 2009).
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The Bureau requests comment on proposed Sec. 1005.19 generally,
including whether it should require submission and posting of
agreements at all and whether the procedures proposed herein are
appropriate.
Other Regulation E Subpart A Provisions Applicable to Prepaid Accounts
Because the Bureau is proposing to bring prepaid accounts within
the definition of account generally under Regulation E, the
requirements of Regulation E would apply to prepaid accounts except as
modified or supplemented by this proposal. Except as otherwise
addressed by this proposal, the Bureau envisions that such provisions
would extend to prepaid accounts in the same manner they currently
apply to payroll card accounts. Such requirements include, but are not
limited to, Sec. 1005.5 regarding the issuance of access devices,
Sec. 1005.8(a) regarding change in terms notices, Sec. 1005.10(a)
through (d) regarding preauthorized transfers to and from consumers'
accounts, and Sec. 1005.14 regarding electronic fund transfer service
providers that do not hold consumers' accounts.
The Bureau requests comment generally on the extension of these and
other provisions in Regulation E to prepaid accounts. The Bureau also
seeks
[[Page 77203]]
comment on whether any of these or other provisions in Regulation E
provisions warrant specific modification for prepaid accounts.
Appendix A-5 Model Clauses for Government Benefit Accounts (Sec.
1005.15(e)(1) and (2))
Existing appendix A-5 provides model language for government
agencies that offer accounts for distributing government benefits to
consumers electronically; this model language reflects the
modifications made to certain Regulation E provisions by existing Sec.
1005.15. The Bureau is proposing to relabel appendix A-5 as Model
Clauses for Government Benefit Accounts (Sec. 1005.15(e)(1) and (2))
and to revise the heading of paragraph (a) for clarity. The Bureau is
also proposing to revise the text of paragraph (a) of appendix A-5,
which currently explains to consumers how to obtain information about
account balances and account histories, to note that the consumer's
balance information, along with an 18 month history of the consumer's
account transactions, is available online. The Bureau also proposes to
revise the paragraph regarding a written transaction summary to
correspond with the proposed revised language for prepaid accounts in
paragraph (a) of appendix A-7, to state that the consumer has a right
to at least 18 months of written history of account transactions by
calling or writing to the agency (or its designee). The paragraph also
states that the consumer will not be charged a fee for such information
unless the consumer requests it more than once per month. The paragraph
retains the existing optional bracketed language stating that the
consumer may also request such a history by contacting his or her
caseworker.
The Bureau is similarly proposing to revise paragraph (b) of
appendix A-5, which sets forth model clauses regarding disclosure of
error resolution procedures for government agencies that provide
alternative means of obtaining account information. The Bureau is
proposing to revise the section citation in the paragraph heading, and
to revise the first paragraph of paragraph (b) to correspond with the
proposed revised language for prepaid accounts in paragraph (b) of
appendix A-7. Specifically, the Bureau proposes to remove the sentence
stating that the agency must hear from the consumer no later than 60
days after the consumer learns of the error, and to add language
stating that the agency must allow the consumer to report an error
until 60 days after the earlier of the date the consumer electronically
accesses his or her account, if the error could be viewed in the
electronic history, or the date the agency sent the first written
history on which the error appeared. The paragraph would also state
that the consumer may request a written transaction history at any time
by calling or writing, or optionally by contacting the consumer's
caseworker.
The Bureau requests comment on these proposed modifications to
appendix A-5 and whether any additional modifications should be made.
In particular, the Bureau solicits comment on whether it is necessary
to retain the optional bracketed language that currently appears in
paragraph (a) of appendix A-5, and that is mirrored in paragraph (b),
directing consumers to request a written summary of transactional
history by contacting the consumer's caseworker. The Bureau is
particularly interested in whether any government benefit account
programs use this optional language in their disclosures and whether
inclusion of such language reduces consumer confidence in government
benefit accounts or the privacy of consumers' account histories.
Appendix A-7 Model Clauses for Financial Institutions Offering Prepaid
Accounts (Sec. 1005.18(d) and (e)(3))
Existing appendix A-7 provides model clauses for financial
institutions that offer payroll card accounts; these clauses reflect
the modifications made by the Payroll Card Rule to certain Regulation E
provisions in existing Sec. 1005.18. To reflect the proposed expansion
of Sec. 1005.18 to cover prepaid accounts, the Bureau is proposing to
revise the heading for appendix A-7 as well as the heading for
paragraph (a) of appendix A-7. The Bureau is also proposing to revise
paragraph (a) of appendix A-7, which explains to consumers how to
obtain account information for payroll card accounts, to change the
term payroll card account to prepaid account, and to provide that at
least 18 months of electronic and written account transaction history
is available to the consumer, rather than 60 days, as proposed in Sec.
1005.18(c)(1)(ii) and (iii). The Bureau also proposes to add a sentence
at the end of paragraph (a) of appendix A-7 to inform consumers that
they cannot be charged for requesting such written account transaction
history, unless requests are made more than once per month. As
discussed above, the Bureau is proposing to allow financial
institutions to assess a fee or charge for subsequent requests for
written account information made in a single calendar month, in
proposed comment 18(c)-3.i.
The Bureau is similarly proposing to revise the heading of
paragraph (b), and to revise the text of paragraph (b) of appendix A-7,
which sets forth model clauses regarding disclosure of error resolution
procedures for financial institutions that provide alternative means of
obtaining payroll card account information, to change the term payroll
card account to prepaid account and to renumber the section citation in
the heading.
The Bureau is also proposing to add a new paragraph (c) at the end
of appendix A-7, for use by a financial institution that chooses, as
explained in proposed comment 18(e)-4, not to comply with the liability
limits and error resolution requirements in Sec. Sec. 1005.6 and
1005.11 for prepaid accounts which it has not completed its collection
of consumer identifying information and identity verification.
This model language would state that it is important for consumers
to register their prepaid accounts as soon as possible and that until a
consumer registers his or her prepaid account, the financial
institution is not required to research or resolve errors regarding the
consumer's account. To register an account, the consumer is directed to
a Web site and telephone number. The model language explains that the
financial institution will ask for identifying information about the
consumer (including full name, address, date of birth, and Social
Security Number or government-issued identification number), so that it
can verify the consumer's identity. Once the financial institution has
done so, it will address the consumer's complaint or question as
described earlier in appendix A-7.\327\
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\327\ The Bureau tested a version of this proposed model
language with consumers. See ICF Report, at 23.
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Appendix A-10 Model Forms and Sample Forms for Financial Institutions
Offering Prepaid Accounts (Sec. 1005.15(c)(2) and Sec. 1005.18(b))
The Bureau is proposing Model Forms A-10(a) through (d) and (f) and
Sample Forms A-10(e) and (g) in appendix A in relation to the
disclosure requirements set forth in proposed Sec. 1005.15(c)(2) and
proposed Sec. 1005.18(b). Proposed Model Form A-10(a)would set forth
the short form disclosure for government benefit accounts as described
in proposed Sec. 1005.15(c)(2). Proposed Model Form A-10(b) would set
forth the short form disclosure for payroll card accounts as described
in proposed Sec. 1005.18(b)(2)(i)(A). Proposed Model Form A-10(c)
would set forth the short
[[Page 77204]]
form disclosure for prepaid accounts that could offer an overdraft
service or other credit feature as described in proposed Sec.
1005.18(b)(2)(i)(B)(9). Proposed Model Form A-10(d) would set forth the
short form disclosure for prepaid accounts that would not offer an
overdraft service or other credit feature as described in proposed
Sec. 1005.18(b)(2)(i)(B)(9). Proposed Model Form A-10(f) would set
forth the short form disclosure for prepaid accounts that offer
multiple service plans and choose to disclose them on one short form
disclosure as described in proposed Sec. 1005.18(b)(3)(iii)(B)(1).
Proposed Sample Form A-10(e) would set forth the long form
disclosure for prepaid accounts as described in proposed Sec.
1005.18(b)(3)(iii)(A). Proposed Sample Form A-10(g) would set forth the
long form disclosure for prepaid accounts that offer multiple service
plans as described in proposed Sec. 1005.18(b)(3)(iii)(B)(2).
Subpart B--Requirements for Remittance Transfers
Section 1073 of the Dodd-Frank Act added section 919 to EFTA to
establish consumer protections for remittance transfers sent by
consumers in the United States to individuals and businesses in foreign
countries. Among other things, EFTA section 919 requires the following
protections for covered transactions sent by remittance transfer
providers: (i) The provision of disclosures prior to and at the time of
payment by the sender of the transfer; (ii) cancellation and refund
rights; and (iii) the investigation and remedy of errors by providers.
It also establishes liability standards for providers for the acts of
their agents. On February 7, 2012, the Bureau published a final rule
implementing these provisions largely in new subpart B of Regulation
E.\328\
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\328\ 77 FR 6194 (Feb. 7, 2012). This final rule was
subsequently amended. See 77 FR 40459 (July 10, 2012), 77 FR 50244
(Aug. 20, 2012), 78 FR 6025 (Jan. 29, 2013), 78 FR 30662 (May 22,
2013), 78 FR 49365 (Aug. 14, 2013), and 79 FR 55970 (Sept. 18, 2014)
(collectively, the Remittance Rule).
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The Remittance Rule only applies to those entities that are
remittance transfer providers. A remittance transfer provider is any
person that provides remittance transfers for a consumer in the normal
course of its business, regardless of whether the consumer holds an
account with such person. Sec. 1005.30(f). A remittance transfer is
the electronic transfer of funds requested by a sender to a designated
recipient that is sent by a remittance transfer provider. Sec.
1005.30(e)(1). The term remittance transfer applies regardless of
whether the sender holds an account with the provider, and regardless
of whether the transaction is also an electronic fund transfer, as
defined in Sec. 1005.3(b). The Remittance Rule applies to remittance
transfers sent to and from prepaid products. See generally, Sec.
1005.30(c) and (e), and comments 30(c)-2.iii, 30(e)-2.ii, 30(e)-3.i.C,
and 30(h)(3).
Section 1005.30 Remittance Transfer Definitions
30(g) Sender
The Bureau proposes to make a conforming change to comment 30(g)-3.
Currently, the comment contains a reference to an exception from the
definition of account for bona fide trust accounts. As discussed
earlier in this section-by-section analysis, the Bureau is proposing to
renumber the exception for bona fide trust accounts as Sec.
1005.2(b)(2). Accordingly, the Bureau is proposing conforming change to
comment 30(g)-3 to reflect the proposed renumbering.
As discussed above, the Remittance Rule applies to remittance
transfers sent to and from prepaid products. The Bureau does not intend
this proposed rule to alter the applicability of the Remittance Rule to
transfers sent to and from prepaid products. At the same time, the
Bureau welcomes comment on the proposed rule's potential implications
for the Remittance Rule. As discussed in the section-by-section
analysis above, with certain exceptions such as payroll card accounts,
accounts for the receipt of certain government benefits, and gift cards
(or certain other types of limited purpose cards), prepaid products
generally have not been covered under current subpart A of Regulation
E. In proposing to expand the current definition of account in
Regulation E, additional prepaid products such as GPR cards and certain
digital wallets would fall within the definition of account under
Regulation E. Accordingly, the Bureau seeks comment on whether
additional clarification or guidance is necessary with respect to the
Remittance Rule.
Regulation Z
Overview of Bureau's Approach to Its Regulation Z Proposal
In developing this proposal, the Bureau has considered whether and
how to regulate credit accessed through a prepaid account.
Specifically, the Bureau has considered potential transactions where
financial institutions allow consumers to overdraw their prepaid
accounts through an overdraft service, a draw from a linked line of
credit, or by pushing credit onto a specified prepaid account to cover
transactions for which there are insufficient or unavailable funds. As
is explained in detail below, the Bureau proposes to treat most credit
plans for which finance charges are imposed as ``open-end (not-home
secured) credit plans'' accessed by a ``credit card'' under Regulation
Z, and thus subject to credit card protections. In addition and as is
explained above, the Bureau is also proposing to revise provisions in
Regulation E regarding compulsory use (proposed Sec. 1005.10(e)(1))
and to adopt other rules specific to prepaid accounts that offer credit
features (proposed Sec. Sec. 1005.12(a) and 1005.18(b)(2)(i)(B)(9),
(b)(2)(ii)(B) and (g)) to provide consumers with greater control over
how they enroll in a credit feature and pay any credit balances
associated with their prepaid accounts, and also to prevent evasion of
the Regulation Z protections.
In its evaluation of credit features offered in connection with
prepaid accounts, the Bureau has carefully considered a variety of
information and factors, including existing relevant consumer
protection regulations governing overdraft services and a range of
credit products subject to Regulation Z; consumers' use of those
features to the extent offered in today's market, consumer
expectations, and understanding of prepaid accounts and credit features
offered in connection with prepaid accounts (including through
discussion in the Bureau's consumer testing); review of comments
received from industry, consumers, and consumer advocacy groups in
response to the Prepaid ANPR; analysis of data from the Bureau's
overdraft research on deposit accounts and other available research;
further outreach to industry, consumer advocacy, and other groups; and
ongoing market analysis.
The bulk of the feedback the Bureau has received has focused
specifically on the permissibility of overdraft services on prepaid
accounts. In the Prepaid ANPR, the Bureau noted that while most GPR
cards do not offer overdraft features, some do allow cardholders to opt
in to an overdraft program in which the issuer may authorize overdrafts
and charge an overdraft transaction fee.\329\ The Bureau then sought
public input on the costs, benefits, and consumer protection issues
related to any credit features that financial institutions may offer on
GPR cards.
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\329\ 77 FR 30923, 30925 (May 24, 2012).
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The Bureau received a significant number of comments on the issue
of credit features and prepaid accounts. Most industry commenters
encouraged the Bureau not to adopt regulations that
[[Page 77205]]
would limit these credit features. In particular, commenters stated
that overdraft for prepaid accounts should function as it does for
accounts with linked debit cards--i.e., subject to the current
Regulation E opt-in framework for overdraft. Commenters argued that to
the extent the Bureau wants to treat prepaid accounts as transaction
account substitutes, they should be subject to the same regulatory
requirements (and exceptions) as those accounts, including opt-in
requirements for overdraft services. One trade association argued that
it would be unfair for the Bureau to prohibit overdraft on prepaid
cards while such features remain permitted on checking accounts. Some
industry commenters argued that their customers want--or even need--
access to short-term credit in connection with their GPR cards. Several
other trade associations similarly argued that consumers want access to
credit features on prepaid cards. They urged the Bureau to ensure that
consumers understand such features, and they argued that the Bureau
should conform regulations for such products to those that now exist
for traditional deposit accounts in Regulations E, Z, and DD.
However, some industry commenters urged the Bureau not to permit
credit features in connection with prepaid products. For example, one
credit union stated that, in its opinion, only the funds loaded onto a
prepaid card should be made available for transactions. A large
financial institution similarly stated that, in its opinion, GPR cards
should remain ``prepaid,'' without being linked or having access to
overdraft services. A community bank stated that it was its practice to
urge prepaid card customers who wanted overdraft services to transition
into checking accounts, where it had systems in place to deal with the
credit risk, and that it would not permit overdrafts on its prepaid
products.
Most consumer advocates that commented also urged that the Bureau
ban overdraft services in connection with prepaid products, because the
overdraft fees and accumulating debt can be harmful. They argued that
prepaid consumers are often more vulnerable or do not anticipate having
to deal with credit on their prepaid accounts. These commenters
explained that prepaid cards are marketed to and used by a variety of
vulnerable groups, including low-income consumers, consumers with
blemished credit histories, unbanked and underbanked consumers with
limited access to traditional accounts, young consumers and students,
undereducated consumers, public benefit recipients, and consumers who
are trying to control their spending. Many of these vulnerable groups
have, historically, struggled with credit products, including
overdraft. Additionally, at least one consumer advocacy group commenter
urged the Bureau to subject overdraft services on prepaid accounts to
Regulation Z's rules for credit cards. Consumer group commenters
further argued that permitting credit features on prepaid cards could
eviscerate State payday and usury laws as well as protections for
servicemembers, such as the MLA. Consumer advocacy group commenters
also argued that application of existing opt-in overdraft rules, which
currently apply to deposit accounts and payroll card accounts, would
not prevent harm to consumers who use prepaid cards because opt-in does
not, in the opinion of the commenters, protect vulnerable consumers
from predatory lending. In addition, the consumer advocacy group
commenters contended that credit features on prepaid products are
unnecessary because less vulnerable consumers who can access credit
will still have access to credit cards, deposit accounts that offer
overdraft services, lines of credit, and other credit products.
The Bureau also received a number of comments from consumers who
use prepaid products currently offering overdraft services. Most of
these consumers voiced support for such services, stating that the
overdraft fee charged by their prepaid products was less than the
overdraft fees charged by banks, allowing them to bridge cash
shortfalls between paychecks and fulfill other short-term credit needs.
Most participants in the Bureau's consumer testing, however, expressed
concern about overdraft programs and explained that they preferred
prepaid products because they did not allow them to spend more than
what was loaded onto the card.\330\
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\330\ ICF Report at 6.
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Since the close of the comment period for the Prepaid ANPR, the
Bureau has continued its evaluation of prepaid products and related
credit features, received additional feedback on this issue from
interested parties, and the Bureau has also collected relevant data. In
various forms, parties have submitted studies, additional comment, and
other evidence to advocate for different approaches to regulating
overdraft services and credit features on prepaid accounts. The Bureau
has also reviewed data gathered by third parties and reported on by
non-profit organizations and other government agencies.
As explained in more detail below, the Bureau has concluded that
the most appropriate approach is to propose to treat a broad range of
credit features that financial institutions could offer in connection
with prepaid accounts as subject to the rules governing credit cards
under TILA, EFTA, and their implementing regulations. This includes
programs structured as overdraft services; the Bureau is declining to
extend existing exemptions under Regulation Z and Regulation E's
compulsory use provision for overdraft services on deposit accounts to
prepaid accounts. In this overview, the Bureau first addresses the
application of Regulation Z's rules for open-end (not home-secured)
credit plans and for credit cards to overdraft services and other
credit features offered on prepaid accounts. Next, the Bureau discusses
the benefits of applying these rules to all credit features offered on
prepaid accounts. Finally, the Bureau provides section-by-section
analysis of its specific proposed revisions to Regulation Z.
Credit Offered in Connection With Prepaid Cards--Including Overdraft
Services--Satisfies TILA's Definition of Open-End Credit
The Bureau believes that a range of credit features offered in
connection with prepaid accounts--including those features structured
as overdraft services--should be subject to regulation as credit cards
under TILA, EFTA, and their implementing regulations. Specifically, the
Bureau believes that overdraft lines of credit, overdraft services, and
similar credit features offered in connection with a prepaid account
satisfy the definitions of (1) credit; (2) open-end (not home-secured)
credit plan; and (3) credit cards under TILA and Regulation Z. Although
the Board had chosen to exempt overdraft services (but not other forms
of credit) offered in connection with traditional deposit accounts from
Regulation Z, the Bureau chooses not to exercise its exception
authority to expand further the scope of the existing exemptions to
prepaid accounts.
As described above, TILA defines credit broadly as the right
granted by a creditor to a debtor to defer payment of debt or to incur
debt and defer its payment. 15 U.S.C. 1602(f). Under the statute and
Regulation Z, open-end credit exists where there is a plan in which the
creditor reasonably contemplates repeated transactions; the creditor
may impose a finance charge from time to time on an outstanding unpaid
balance, and the credit is generally replenished to the extent that
[[Page 77206]]
any outstanding balance is repaid. Sec. 1026.2(a)(20). Closed-end
credit is credit that does not meet the definition of open-end credit.
Sec. 1026.2(a)(10).
The Board subjected overdraft lines of credit in connection with
traditional deposit accounts to Regulation Z requirements for open-end
credit, but carved overdraft services on traditional deposit accounts
out from Regulation Z through operation of the definitions of the terms
``creditor'' and ``finance charge.'' A creditor is generally defined
under Regulation Z to mean a person who regularly extends consumer
credit that is subject to a finance charge or is payable by written
agreement in more than four installments (not including a down
payment), and to whom the obligation is initially payable, either on
the face of the note or contract, or by agreement when there is no note
or contract. See Sec. 1026.2(a)(17)(i).\331\ In 1969, however, the
Board adopted an exclusion to the definition of finance charge for
``charges imposed by a financial institution for paying items that
overdraw an account, unless the payment of such items and the
imposition of the charge were previously agreed upon in writing.'' See
Sec. 1026.4(c)(3). Thus, the Board created an exception for financial
institutions that offer overdraft services in connection with
traditional deposit accounts if they do not agree in writing to pay the
items and do not structure the repayment of the credit by written
agreement in more than four installments. Under the exception, the fees
charged for the overdrafts are not ``finance charges'' under Regulation
Z, and thus a financial institution extending credit is not a
``creditor'' under Regulation Z because it is not charging a finance
charge and is not structuring the repayment of the credit by written
agreement in more than four installments. As discussed further below,
the Bureau declines to extend this exception to include prepaid
accounts. Absent this exception, the Bureau believes that overdraft
services, like overdraft lines of credit and similar credit features
that could be offered in connection with prepaid accounts, will meet
the definitions of credit and open-end credit under TILA and Regulation
Z if interest rates, transaction fees, or other types of finance
charges are imposed in connection with the credit services.
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\331\ The term ``creditor'' also includes a card issuer, which
is a person that issues credit cards, when that person extends
credit accessed by the credit card. See Sec. 1026.2(a)(17)(iii) and
(iv). Regulation Z defines the term ``credit card'' to mean any
card, plate, or other single credit device that may be used from
time to time to obtain credit. See Sec. 1026.2(a)(15). A charge
card is a credit card on an account for which no periodic rate is
used to compute a finance charge. See Sec. 1026.2(a)(15)(iii). In
addition to being creditors under TILA and Regulation Z, card
issuers also generally must comply with the credit card rules in the
FCBA and in the Credit CARD Act (if the card accesses an open-end
credit plan), as implemented in Regulation Z subparts B and G. See
generally Sec. Sec. 1026.5(b)(2)(ii), 1026.7(b)(11), 1026.12 and
1026.51 through .1026.60.
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Finance Charge
The Bureau analyzed whether it was reasonable to interpret
``credit'' to include when overdrafts are paid in relation to prepaid
accounts. The Bureau believes it is because, in accordance with TILA's
definition of credit, the payment of an overdraft represents the right
granted by a creditor to a debtor to defer payment of debt or to incur
debt and defer its payment. 15 U.S.C. 1602(f).
In its analysis, the Bureau examined whether a fee charged for an
overdraft service (or other credit feature on a prepaid product)
qualifies as a finance charge. TILA section 106(a) defines finance
charge as the sum of all charges, payable directly or indirectly by the
person to whom the credit is extended, and imposed directly or
indirectly by the creditor as an incident to the extension of credit.
15 U.S.C. 1605(a). The plain language of the definition of credit in
TILA section 103(e) covers situations in which a consumer makes a
transaction which exceeds the funds in the consumer's account, and the
bank elects to cover the transaction by advancing funds to the consumer
which the consumer must repay. 15 U.S.C. 1602(f). This statutory
language does not exempt overdraft services, including those that may
be offered in connection with prepaid accounts.\332\ The Bureau
believes that fees levied for overdraft services or other credit
features on prepaid accounts--such as interest charges, transaction
charges, service charges, and annual or other periodic fees to
participate in the credit program--generally represent finance charges.
See section-by-section analysis of proposed Sec. 1026.4(a), (b)(2),
(c)(3) and (c)(4). Regulation Z defines ``finance charge'' as the cost
of consumer credit as a dollar amount. The term includes any charge
payable directly or indirectly by the consumer and imposed directly or
indirectly by the creditor as an incident to or a condition of the
extension of credit. Sec. 1026.4(a). The Bureau believes that fees
that are levied for overdraft services are thus ``finance charges''
because they are directly payable by the consumer and imposed directly
by the creditor as a condition of the extension of credit, which would
be funds advanced to cover the consumer's overdraft.
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\332\ See also OCC 2001 Guidance; Joint Guidance (noting that
overdraft satisfies the definition of ``credit'' in TILA).
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Open-End (Not Home-Secured) Credit Plan
Having determined that fees for overdraft services and other types
of credit products in connection with prepaid accounts can be finance
charges, the Bureau then examined the question of whether the programs
themselves are open-end (not home-secured) credit plans. As discussed
below, the Bureau believes that overdraft lines of credit, overdraft
services, and similar products that could be offered in connection with
prepaid accounts can be regulated by Regulation Z as ``open-end
credit'' where a financial institution routinely extends credit to
cover transactions for which there are insufficient funds in the
account (even if the institution retains, by contract, the discretion
not to pay the transactions) and obligates the consumer contractually
to repay the debt, and may impose finance charges from time to time on
an outstanding unpaid balance. The Bureau recognizes (as noted above)
that a line of credit where there is a written agreement to pay
overdrafts and impose finance charges is already covered by Regulation
Z as ``open-end credit,'' whether it is associated with a prepaid or
checking account; pursuant to this proposal and as discussed further
below, overdraft services for prepaid accounts would now be treated
similarly to such lines of credit, with certain proposed modifications.
TILA section 103(j) defines an open-end credit plan as ``a plan
under which the creditor reasonably contemplates repeated transactions,
which prescribes the terms of such transactions, and which provides for
a finance charge which may be computed from time to time on the
outstanding unpaid balance.'' 15 U.S.C. 1602(j). Regulation Z defines
``open-end credit'' to mean consumer credit extended by a creditor
under a plan in which (1) the creditor reasonably contemplates repeated
transactions; (2) the creditor may impose a ``finance charge'' from
time to time on an outstanding unpaid balance; and (3) the amount of
credit that may be extended to the consumer during the term of the plan
(up to any limit set by the creditor) is generally made available to
the extent that any outstanding balance is repaid. Regulation Z
explains that for there to be an open-end credit plan, there must first
be a plan. Comment 2(a)(20)-2 explains that a plan
[[Page 77207]]
connotes a contractual arrangement between the creditor and the
consumer. For a plan to be an open-end credit plan, it must then
satisfy the three requirements noted above. See Sec. 1026.2(a)(20).
The Bureau understands that financial institutions offering
automated overdraft services include in their account agreements
details about how the overdraft service will operate and information
about overdraft fees. These terms and conditions documents explain that
consumers using overdraft programs must agree to repay the debt created
by an overdraft and the related fee, indicating that a contractual
arrangement between the creditor and the consumer exists. Although
these agreements typically note that the financial institution retains
discretion to authorize or decline any particular overdraft, as a
practical matter financial institutions operating automated overdraft
programs exercise limited if any discretion in authorizing particular
transactions so long as the overdraft transaction is within the
overdraft limit that the institution previously established.\333\ The
Bureau understands that financial institutions have historically argued
(in connection with deposit account overdraft services) that an
overdraft service is not an open-end credit plan subject to TILA
because, in the account agreement, they typically reserve discretion
not to pay overdrafts.\334\ In practice, the Bureau believes that this
discretion is typically limited; automated overdraft systems for
prepaid accounts are typically programmed to approve all would-be
overdrafts that are within a predetermined credit limit. Furthermore,
the Bureau believes that the contractual reservation of discretion is
no different from credit card issuers' standard practice of reserving
discretion to decline a credit card transaction without prior notice,
notwithstanding that the transaction is within the credit limit.\335\
Thus, the Bureau believes that simply labeling an overdraft service as
discretionary is insufficient to negate the existence of a credit plan.
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\333\ As noted above, the nature of such an arrangement also
establishes an arrangement between the institution and the consumer
to pay certain overdrafts.
\334\ Several commenters to the Prepaid ANPR also made this
point.
\335\ Bureau staff reviewed many agreements in the Bureau's
database. See generally http://www.consumerfinance.gov/credit-cards/agreements/.
---------------------------------------------------------------------------
The FDIC reached a similar conclusion in its guidance on automated
overdraft payment programs, noting a distinction between ad hoc
overdraft services, which typically involve irregular and infrequent
occasions on which a bank employee exercises discretion in a specific
instance about whether to pay an item (so a customer can avoid an NSF
fee that the payee may impose), and ``risks posed by automated
overdraft payment programs.'' According to the FDIC guidance, such
programs ``are established programs [that] are often partially or fully
computerized, that are used by institutions to determine whether [NSF]
transactions qualify for overdraft coverage based on pre-determined
criteria.'' \336\ The Bureau believes the latter formulation is how
established prepaid overdraft services function and thus that a plan
exists in these cases.
---------------------------------------------------------------------------
\336\ FDIC Overdraft Payment Supervisory Guidance at 3.
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Having determined that a plan exists, the Bureau evaluated whether
such a plan satisfies the three prongs necessary to establish the plan
as an open-end (not home-secured) credit plan. The first prong asks
whether overdraft services, including those offered in connection with
prepaid accounts, can be plans under which the creditor reasonably
contemplates repeated transactions. Particularly to the extent that
prepaid and deposit account overdraft services are automated, the
Bureau believes that overdraft programs typically contemplate and
approve repeated transactions.\337\ Indeed, every prepaid overdraft
service that charges a fee of which the Bureau is aware contemplates
and approves repeated transactions.
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\337\ As is discussed below, the Bureau intends to exclude
overdrafts for which no finance charge as defined in Sec. 1026.4
and no fee described in Sec. 1026.4(c) is charged and repayment is
not expected by written agreement in more than four installments.
---------------------------------------------------------------------------
The Bureau then examined the second prong of the definition of
``open-end credit'' to determine whether the creditor may impose a
finance charge from time to time on an outstanding unpaid balance. See
Sec. 1026.2(a)(20)(ii). As noted above, the Bureau believes that
overdraft service fees and charges on other credit features easily meet
the general definition of finance charge. With regard to the element
focusing on whether a finance charge may be computed and imposed from
time to time on an outstanding balance, the Official Interpretations to
Regulation Z explain that this provision simply means that there is no
specific amount financed for the plan for which the finance charge,
total of payments, and payment schedule can be calculated in advance of
the usage of the plan. See comment 2(a)(20)-4 (explaining that the
requirement that a finance charge may be computed and imposed from time
to time on the outstanding balance means there is no specific amount
financed for the plan for which the finance charge, total of payments,
and payment schedule can be calculated and that a plan may meet the
definition of open-end credit even though a finance charge is not
normally imposed, provided the creditor has the right, under the plan,
to impose a finance charge from time to time on the outstanding
balance). For a credit plan where credit is replenishing, an amount
financed cannot be calculated for the plan. Such credit plans will meet
this element if a finance charge may be imposed on the plan. Indeed, a
plan may meet the definition of open-end credit even though a finance
charge is not normally imposed, provided the creditor reserves the
right, under the plan, to impose a finance charge from time to time on
an outstanding balance. See comment 2(a)(20)-4.
The Bureau does not anticipate that there will be a specific amount
financed for a prepaid overdraft service at the time it is established;
instead, credit extensions may be added from time to time to the
outstanding balance for the plan, and fees or other finance charges may
be imposed from time to time in connection with the usage of the plan,
thus satisfying this criterion. To the extent that such a plan involves
finance charges but no periodic rate, it may be a charge card, which is
specifically subject to coverage under Regulation Z. See, e.g.,
1026.2(a)(15)(iii) (defining a ``charge card'' as ``a credit card on an
account for which no periodic rate is used to compute a finance
charge'').
Lastly, the Bureau anticipates that automated overdraft services
for prepaid accounts generally will be structured such that the credit
line for the plan will generally replenish to the extent that any
outstanding balance is repaid, thus satisfying the final prong of the
definition of open-end credit, that the amount of credit that may be
extended is generally made available to the extent that any outstanding
balance is repaid. Comment 2(a)(20)-5 currently provides that this
criterion means that the total amount of credit that may be extended
during the existence of an open-end plan is unlimited because available
credit is generally replenished as earlier advances are repaid. This
unlimited credit distinguishes open-end credit from a series of
advances made pursuant to a closed-end credit loan commitment, but it
does not mean that the creditor must establish a specific credit limit
for the line of credit or that the credit plan must always be
replenished to its original amount. The creditor may
[[Page 77208]]
reduce a credit limit or refuse to extend new credit in a particular
case due to changes in the creditor's financial condition or the
consumer's creditworthiness, if permitted by Regulation Z; indeed, the
Bureau believes that this is a quite common practice with respect to
credit cards. While consumers should have a reasonable expectation of
obtaining credit as long as they remain current and within any preset
credit limits, further extensions of credit need not be an absolute
right in order for the plan to meet the self-replenishing criterion.
The Bureau believes that overdraft services linked to prepaid accounts
generally are and will be structured to meet this criterion. Insofar as
the Bureau has determined that the three prongs of an open-end credit
plan are met, it finds that an overdraft service on a prepaid account
is an open-end credit plan much like an overdraft line of credit or
other similar products linked to prepaid accounts.
Overdraft Services and Other Credit Features on Prepaid Accounts and
TILA's Definition of a Credit Card
Having determined that overdraft services, overdraft lines of
credit, or other similar products linked to prepaid accounts can be
open-end (not home-secured) credit plans, the Bureau evaluated whether
such arrangements involve use of a ``credit card'' under Regulation Z.
TILA section 103(k) defines the term credit card to mean any card,
plate, coupon book or other credit device existing for the purpose of
obtaining money, property, labor, or services on credit. 15 U.S.C.
1602(l). In turn, Sec. 1026.2(a)(15)(i) defines credit card to mean
any card, plate, or other single credit device that may be used from
time to time to obtain credit.
The Bureau believes that prepaid accounts that access overdraft
services, overdraft lines of credit, or similar products generally meet
the definition of ``credit card'' and, absent an exemption, generally
would be subject to the rules in Regulation Z applicable to credit
cards. As is noted above in the discussion of Regulation E proposed
1005.2(a)(3), the definition of prepaid account includes certain access
devices that may not be a physical card. Specifically, the term prepaid
account would include cards, codes, or other devices capable of being
loaded with funds and usable at a wide variety of unaffiliated
merchants or for person-to-person transfers. See proposed Regulation E
1005.2(b)(3). Thus, the proposed Regulation E definition would include
physical cards--such as a GPR card--but also would include access
devices that are solely online or on a mobile phone. With respect to
Regulation Z, the Bureau similarly intends for ``card, code, or other
device'' to apply to the panoply of different access devices in
addition to physical cards on which credit may be extended including
``hybrid'' cards that may function as both a prepaid account and a
credit card.
The Bureau proposes not to extend the exclusions for debit cards
and account numbers to prepaid accounts. The commentary to the
definition of ``credit card'' explains that a debit card is not a
credit card unless there is a credit feature or agreement to extend
credit, even if the creditor occasionally honors an inadvertent
overdraft. The Board adopted this commentary to exclude bounce
protection plans from becoming subject to Regulation Z when they are
accessed by a debit card, consistent with the exclusion for overdraft
charges from the definition of finance charge where there is no written
agreement to extend credit and charge a fee, as described above.\338\
With regard to overdraft lines of credit and other open-end (not home-
secured) plans where there is an agreement to extend credit, a debit
card that can access the credit is a credit card and is subject to the
credit card provisions in Regulation Z subpart B that implement the
FCBA, such as the no-offset provision. However, the Board used its TILA
exception authority to exempt debit cards that access open-end
overdraft lines of credit from the Credit CARD Act provisions,
generally set forth in subpart G, because it determined that the
protections in Regulation E generally apply to debit cards that access
an overdraft line of credit. In addition, the Board noted that
overdraft lines of credit were not, at that time, in wide use and that
creditors issuing such lines of credit generally did not engage in the
practices addressed by the Credit CARD Act.\339\
---------------------------------------------------------------------------
\338\ 46 FR 50288, 50293 (Oct. 9, 1981).
\339\ See 75 FR 7657, 7664 (Feb. 22, 2010); see also Sec.
1026.2(a)(15)(ii).
---------------------------------------------------------------------------
The existing commentary to the definition of ``credit card'' also
excludes an account number (where there is no physical device) from the
definition of credit card, unless the account number can access an
open-end line of credit to purchase goods or services. For example, if
a creditor provides a consumer with an open-end line of credit that can
be accessed by an account number in order to transfer funds into
another account (such as an asset account with the same creditor), the
account number is not a credit card for purposes of Regulation Z.
However, if the account number can also access the line of credit to
purchase goods or services (such as an account number that can be used
to purchase goods or services on the internet), the account number is a
credit card for purposes of Regulation Z. Relatedly, the commentary
explains that a ``hybrid'' card--a card that accesses both a credit and
an asset account (that is, a debit-credit card)--is considered a credit
card. See comment 2(a)(15)-2.i.B. Thus, there is a scenario in existing
Regulation Z when the same number (the number of the debit-credit card)
can access both the credit and the asset account.
Rather than expanding this existing patchwork approach, the Bureau
is proposing to treat all credit offered on or in connection with a
particular prepaid account in the same way (to the extent that the
credit plan imposes a finance charge or a fee described in Sec.
1026.4(c) and is not payable in more than four installments)--subject
to the specific credit card protections in subparts B and G. As is
noted above, in addition to overdraft services, prepaid accounts may
also be offered with other types of credit features such as linked
lines of credit. Although a line of credit accessed by an account
number that pushes credit into a checking account would not be
considered a credit card under Regulation Z if the account number
cannot be used to access an open-end line of credit to purchase goods
or services, the Bureau believes it is appropriate to treat all lines
of credit linked to prepaid accounts as credit cards when they are
linked to a prepaid account.
Relatedly, the Bureau also believes it appropriate to include as
credit cards products involving a range of access devices. For example,
the Bureau intends its proposal to apply if the provider offers a
credit product in which the consumer has an account number that can
access the line of credit, and the credit can be deposited directly
only into the prepaid account (even if there was no physical device to
access the line of credit).
The Bureau believes that this is appropriate because of the
increased protections offered by the credit card rules, discussed
below, and the unique nature of prepaid accounts. While the existence
of linked lines of credit and ``push'' credit products associated with
prepaid accounts today may be limited, the Bureau is concerned that
were such products not covered by the proposed provisions governing
credit, they would be offered as a means of evading the requirements
articulated in this proposal. Thus, as is discussed in more
[[Page 77209]]
detail below, the Bureau's proposal also would cover such credit plans.
Specifically, the proposal would generally provide that prepaid
accounts are credit cards under Regulation Z, except where a prepaid
account can only access credit that is not subject to any finance
charge or fee described in Sec. 1026.4(c) (such as an application fee
to apply for credit, late payment fee, over the credit limit fee or
returned payment fee) and repayment is not expected by written
agreement in more than four installments. To the extent no periodic
rate is imposed, such as if an overdraft service charges a flat per
transaction fee, then the credit product linked to a prepaid account
would be a charge card. See Sec. 1026.2(a)(15)(iii).
The Bureau believes that the proposal would provide consumers with
stronger and more consistent protections than would apply if the Bureau
extended exemptions for overdraft services on prepaid accounts that
would exempt them entirely from Regulation Z but did not subject lines
of credit and products that push credit onto the prepaid account as
credit cards. Thus, under the proposal, prepaid accounts generally
would be credit cards when they access a credit feature, and generally
would be subject to the rules in Regulation Z applicable to credit
cards. The proposal also would add additional, unique protections to
Regulation Z for prepaid accounts that are credit cards that access
overdraft services or credit features.
Where applicable, the extension of credit card provisions to
prepaid accounts would mean that a variety of Regulation Z provisions
would apply, such as enhanced protections for credit cardholders
pursuant to the FCBA and the Credit CARD Act. Those requirements, in
tandem with the proposed application of TILA's no-offset provision
(TILA section 169) to prepaid accounts subject to these credit card
provisions, and corresponding proposed changes to the compulsory use
provision in Regulation E Sec. 1005.10(e)(1), would allow consumers to
retain control over the funds in their prepaid accounts if a credit
card feature becomes associated with those accounts because they will
be able to control when and how debts are repaid. See Sec.
1026.12(d).\340\
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\340\ This provision implements TILA section 169, which Congress
added to TILA when it enacted the FCBA. The provision prohibits card
issuers from taking any action to offset a cardholder's indebtedness
arising from a consumer credit card transaction against the
cardholder's funds held with the issuer, unless such action was
previously authorized in writing by the cardholder in accordance
with a plan whereby the cardholder agrees to permit the issuer
periodically to deduct the debt from the cardholder's deposit
account.
---------------------------------------------------------------------------
Specifically, proposing to apply TILA's timing and due date
requirements for periodic statements and the no-offset provision and
proposing to amend Regulation E's compulsory use provision would,
respectively, mean that card issuers would have several restrictions.
First, they would be required to adopt reasonable procedures designed
to ensure that periodic statements are mailed or delivered at least 21
days prior to the payment due date disclosed on the periodic statement
and the due date disclosed must be the same day of the month for each
billing cycle. Second, card issuers could only move funds automatically
from an asset account held by the card issuer to the credit card
account held by the card issuer to pay some or all of the credit card
debt no more frequently than once per month, such as on the payment due
date, and only pursuant to the consumer's signed, written agreement
that the issuer may do so. Third, card issuers must offer consumers a
means to repay their outstanding credit balances other than automatic
repayment (such as by means of a transfer of funds from the prepaid
asset account to the credit account that the consumer affirmatively
initiates on the prepaid account's online banking Web site).
In addition, the Bureau proposes that by virtue of treating credit
features offered on prepaid accounts as open-end credit accessed by a
credit card, other protections of the Credit CARD Act, mostly
implemented in subpart G of Regulation Z, would also apply.\341\ Among
other things, these requirements would require such credit card issuers
to perform underwriting when opening a credit card account for
consumers in accordance with the Credit CARD Act's ability-to-pay
requirements. See Sec. 1026.51(a). Such issuers would also generally
be required to limit fees (as opposed to periodic interest rates) to 25
percent of the credit limit during the first year after the consumer
opens the credit card account (i.e., the credit account linked to the
consumer's prepaid account could be opened no earlier than thirty
calendar days after the consumer registered the prepaid account). See
section-by-section analysis of Sec. 1026.52(a). This limit would apply
to any per-transaction fees--such as the prototypical ``overdraft
fee''--that issuers might assess each time they authorize a prepaid
transaction that accesses the credit account.
---------------------------------------------------------------------------
\341\ As noted above, under the proposal, a prepaid account
would not be a credit card if it only accesses credit that is not
subject to any finance charge as defined in Sec. 1026.4 or any fee
described in Sec. 1026.4(c) and repayment is not expected in more
than four installments and thus the provisions discussed herein
would not apply.
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Consideration of Extension of Existing Exemptions for Overdraft
Services on Prepaid Accounts
In this rulemaking, the Bureau considered the alternative of
preserving the existing bifurcation in regulatory treatment between
overdraft services for traditional deposit accounts and other forms of
credit that may be associated with such accounts, but extending
traditional deposit account treatment to prepaid accounts. The Bureau
believes instead that invoking TILA and Regulation Z protections
prepaid consumers that may use prepaid account overdraft services and
other credit features is appropriate for several reasons.
First, the Bureau believes that covering overdraft services offered
in connection with prepaid accounts under Regulation Z aligns with
TILA's purpose (TILA section 102(a))--to ``assure a meaningful
disclosure of credit terms so that the consumer will be able to compare
more readily the various credit terms available to him and avoid the
uninformed use of credit, and to protect the consumer against
inaccurate and unfair credit billing and credit card practices.'' 15
U.S.C. 1601(a). In addition and as discussed above, the provisions of
the FCBA and the Credit CARD Act would offer additional protections to
consumers who use overdraft services and other forms of credit offered
in connection with prepaid accounts. In addition to the application of
the FCBA and Credit CARD Act credit card provisions to overdraft
services accessed by prepaid accounts that would be considered credit
cards under the proposal, the Bureau believes that regulation of
prepaid account overdraft services as open-end (not home-secured)
credit would serve to accomplish the stated purpose of TILA by
requiring creditors and other persons to explain the terms of overdraft
services to consumers in the context of Regulation Z, protect consumers
from high fees during the first year (through Regulation Z's fee
harvester provision) and from harms arising from various billing and
improper credit card practices, and give consumers strong tools to
manage their credit relationships.
Second, the Bureau believes the Board's justification of the
existing regulatory approach is much less convincing as applied to
prepaid accounts, both because the historical justification for
checking account overdraft services does not apply to
[[Page 77210]]
prepaid accounts and because there are notable differences between how
prepaid accounts and checking accounts function. In constructing the
exemption, the Board relied in part on the fact that at that time
overdraft in the checking account context was determined to be a
``courtesy'' that enabled consumers to avoid both the embarrassment of
bouncing checks and the attendant costs. The Board also relied on the
fact that, at the time, overdraft decisions were made on an ad hoc
basis; that is no longer true of automated overdraft programs. At the
time the Board established the Regulation Z exemption, bounce-
protection programs (as overdraft services were known) were necessarily
check-based because checks and cash were--at that time--consumers' only
ways of accessing funds in their deposit accounts. Further, a financial
institution's decision whether to pay a given check that triggered an
overdraft was at that time necessarily manual, or ad-hoc, because
computers (and automated credit decision-making) were only in their
infancy. Typically, a consumer's institution (the ``paying bank,''
which is equivalent to the card-issuing bank in a card transaction)
cannot authorize or decline a purchase by check when the consumer seeks
to make payment (i.e., while at the merchant). As the Board noted in
2009, institutions that historically provided overdraft coverage for
check transactions on an ad-hoc basis often provided a benefit to
consumers, insofar as paying the check was often a preferable outcome
to a bounced, returned check or NSF fee; additional fees imposed by
merchants; and even potential criminal liability for passing bad
checks.\342\
---------------------------------------------------------------------------
\342\ 77 FR 59033, 59033 (Nov. 17, 2009); see also generally
FDIC Overdraft Payment Supervisory Guidance.
---------------------------------------------------------------------------
However, the account structure and logistics for prepaid accounts
have never matched those for checking accounts that existed in 1969,
because overdraft services in the prepaid account context are not
structured by institutions or considered by consumers to be an
occasional courtesy to avoid a bounced check. Checking accounts, by
definition, allow consumers to write checks and present them to payees
without first receiving authorization from their financial institution.
Checking accounts also allow incoming debit ACH transactions without
preauthorization. These types of transactions are relevant because the
exact timing of the check clearance and incoming ACH process can be
difficult for the consumer to predict. For instance because sometimes
it may take several days or longer for a check to be presented and
funds to be withdrawn from the consumer's account, while other times
checks may be presented faster. Uncertainty around the timing of check
and ACH presentment and the substantial negative consequences of
rejected transactions may lead to overdrafts for traditional accounts,
but are extremely unlikely for prepaid accounts.
Indeed, by contrast, virtually all prepaid account transactions are
preauthorized, which means that the merchant seeks authorization from
the financial institution before providing goods or services to the
consumer.\343\ In such cases, the consumer is not at risk of having a
payment rejected after a transaction has already occurred and the
consumer will not be subjected to NSF and merchant fees; rather, the
financial institution can simply reject the transaction before the
purchase occurs if there are insufficient funds in the account.\344\
This is true for point-of-sale transactions as well as online bill pay
transactions completed via ACH initiated from the prepaid account to
the biller (or even with mailed, pre-debited checks). Thus, a consumer
using a prepaid account is less like the checking account customer that
the Board focused on in creating the exemption for overdraft--a
consumer being extended a courtesy in order to avoid potentially
harsher repercussions--and instead is like any other consumer using
credit to purchase goods or services. To the extent offered, financial
institutions' ongoing and routine decisions to pay prepaid account
transactions that will result in the creation of a debt and the
deferment of payment on that debt function as if they are an extension
of credit and constitute a credit plan (unless exempted from Regulation
Z). Insofar as this is how most prepaid cards work, they have been
distinguishable from traditional checking accounts.
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\343\ An exception is third-party ACH debits, which could be
sent without prior authorization. However, an informal review by the
Bureau of major GPR card programs indicates that most will not
accept incoming ACH debits or that, by contract, cardholders are not
permitted to establish them. The Bureau notes that, as currently
structured, most prepaid products do not allow consumers to write
checks that are not preauthorized.
\344\ The Bureau is aware that, in some instances, a transaction
will be authorized when the account balance is positive but will
ultimately settle when the account balance is negative, because for
some types of transactions the final settlement amount may be higher
than the authorization amount (e.g., at restaurants because tips are
sometimes added after authorization). However, the Bureau believes
that such occurrences are rare and generally only for marginal
amounts rather than full transactions.
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Third, the Bureau believes that treating prepaid overdraft services
as open-end credit plans acting as credit cards would provide stronger
protections that are more closely calibrated to how the industry has
broadly marketed prepaid products to consumers and how consumers, in
turn, expect to be able to use the products. As noted above, financial
institutions deliberately market prepaid accounts to consumers as
products that are safer and easier to use than comparable products with
credit features, in particular checking accounts with overdraft.
Specifically, many companies market prepaid accounts to consumers as
products that increase consumers' financial control by preventing
overspending and the incurring of debt.\345\ By control, the Bureau
believes that these companies mean that prepaid account users can exert
control by limiting expenditures to the funds loaded onto the prepaid
account and cannot spend funds they do not have. Financial institutions
often market prepaid cards as requiring no credit checks, not reporting
to credit bureaus unpaid debts (of which there are rarely any), and not
including any credit features. Underscoring this marketing approach,
many industry commenters to the Bureau's ANPR repeatedly emphasized
these unique features of prepaid products as a primary reason behind
their growth in popularity.
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\345\ See, e.g., NBCPA, What are Prepaid Cards?, http://www.nbpca.com/en/What-Are-Prepaid-Cards/Prepaid-Card-Benefits.aspx
(last visited Oct. 28, 2014) (``For many Americans, prepaid cards
serve as a tool with which to more effectively budget their
spending. With a prepaid card, consumers avoid the risk of over-
spending or overdraft, thus avoiding the interest, fees and
potential negative credit score implications of traditional credit
cards. And for parents, prepaid cards provide tools to maintain
control over their teens' or college students' spending.''); see
also Examining Issues in the Prepaid Card Market: Hearing before the
Subcomm. On Fin. Inst. and Consumer Prot., S. Comm. on Banking,
Housing and Urban Affairs, 112th Cong. 2 (2012) (Remarks of Dan
Henry, Chief Executive Officer, NetSpend Holdings, Inc.) (``Our
customers are typically working Americans who want control . . .'').
---------------------------------------------------------------------------
Many consumers have chosen prepaid cards specifically because the
cards offer greater spending control in general and do not typically
offer overdraft services of the same type as commonly found on checking
accounts in particular. Thus, the prepaid industry has attracted a
large number of both voluntary and involuntary former checking account
customers who had their checking account closed. Many prepaid consumers
previously had a checking account and either lost that
[[Page 77211]]
account or gave up that account due to failure to repay debts or
related issues.\346\ The Bureau believes that many of these consumers
lost their checking accounts because they could not handle repeated
overdraft fees. Those who left voluntarily may also have done so due to
their difficulty in managing to avoid overdraft fees. Relatedly, the
Bureau also believes that many of these consumers, and even many
consumers who continue to maintain separate checking accounts, chose to
purchase prepaid products because of their promise to allow consumers
to control their spending. Indeed, many participants in the Bureau's
consumer testing emphasized control as a primary reason they used
prepaid cards.\347\ Participants explained that did not want a product
with overdraft services because they were afraid they would be tempted
to use such a service and incur debt and fees beyond what they could
control. As noted above, other studies have similarly found that a
primary reason consumers use prepaid cards is that they want increased
control over their finances and want to avoid incurring debt and
related fees.\348\
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\346\ 2014 Pew Survey, at 7-8 (Noting both that ``Most prepaid
card users who have had a checking account in the past have paid
associated overdraft fees for debit card usage'' and that ``Among
those prepaid card users who have ever had a bank account, 41
percent of them say they have closed or lost a checking account
because of overdraft or bounced check fees.'').
\347\ See ICF Report at 5.
\348\ See Bretton Woods, Inc., A Comparative Cost Analysis of
Prepaid Cards, Basic Checking Accounts and Check Cashing, at 4
(February 2012), available at http://bretton-woods.com/media/3e145204f3688479ffff832affffd524.pdf (noting that 74 percent of
prepaid users like the fact they cannot overspend or overdraft the
most about prepaid cards); 2014 Pew Survey, at 14 ex.12 (noting that
the top two reasons consumers claim to use prepaid cards related to
avoiding credit card debt (67 percent) and helping them not spend
more money than they actually have (66 percent)).
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Thus, to prevent erosion of what the Bureau believes is a clear
distinction regarding overdraft services in the current market and in
the minds of consumers between prepaid accounts and checking accounts
that offer overdraft services, and to ensure that credit products that
are associated with prepaid accounts receive consistent treatment
regardless of their particular structures, the Bureau is proposing to
adopt stronger protections that would treat various credit features
associated with prepaid accounts as an open-end credit card product
subject to Regulation Z. By doing so, the Bureau believes that
consumers will more clearly know and understand when they are accessing
credit using a prepaid account and also will benefit from increased
protections not available for checking accounts. The Bureau is also
concerned that were the Bureau to permit overdraft services without the
proposed protections, the approach of marketing prepaid accounts as a
safe alternative to checking accounts could be confusing to consumers.
To the extent that the issuer of a prepaid account wants to veer from
current norms by offering overdraft services or other credit features,
the Bureau believes that requiring appropriate markers and full
protections for credit card products, including the Bureau's proposed
overdraft disclosure requirements in proposed Sec. 1005.18(b) will
help consumers recognize that they are taking this extra, and for
prepaid products, perhaps unusual step of accessing credit and to treat
that credit with appropriate caution. This is in contrast to the
historical treatment of checking accounts, where overdraft services
have been common across almost all such accounts and consumers expect
such services to be offered in connection with checking accounts.
By labeling overdraft services offered on prepaid products as
credit subject to the disclosure requirements of Regulation Z, the
Bureau believes that the resulting product will be better understood
and managed as credit by consumers to the extent that some prepaid
accountholders decide they want to access such credit. In addition, by
not permitting financial institutions to accept applications for an
overdraft service until 30 calendar days after registration of the
prepaid account, see proposed Sec. 1005.18(g)(1) and Sec.
1026.12(h)(1), the Bureau believes it will prevent consumers from being
pressured to make a decision on overdraft or credit when acquiring the
prepaid account, such as when they buy a GPR card in a retail store. It
would also allow consumers time to decide whether the basic prepaid
card is a good fit for them before deciding whether to layer on a
credit relationship that may be more difficult to walk away from.
Fourth, there is evidence that a significant portion of consumers
with prepaid accounts would particularly benefit from the stronger
protections that Regulation Z provides. More clearly defined credit
features will be beneficial in part because of the marketing dynamics
discussed above and because some consumers have experienced difficult
managing overdraft services on traditional checking accounts.\349\ In
general, prepaid consumers are disproportionately unbanked or
underbanked,\350\ often have limited education, and are often
unemployed or recipients of public benefits.\351\ Although the size of
this group is not clear, the Bureau believes that some users of prepaid
products do vary, in some degree, from users of traditional deposit
accounts. Thus, the Bureau believes that they may be seeking or
expecting different features from that of a traditional checking
account when they use prepaid cards. Moreover, because the costs to buy
prepaid accounts are lower than for checking accounts--they are often
easily bought in retail stores for a small sum--the Bureau believes
that it is likely that this product may continue to attract consumers
who are relatively new to the financial system over time.\352\
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\349\ 2014 Pew Survey, at 7-8 (noting both that ``Most prepaid
card users who have had a checking account in the past have paid
associated overdraft fees for debit card usage'' and that ``Among
those prepaid card users who have ever had a bank account, 41
percent of them say they have closed or lost a checking account
because of overdraft or bounced check fees.''). Separately, one
large program manager estimates that 80 percent of its GPR card
customers earn less than $50,000. See Kate Fitzgerald, Green Dot
Chief Sees Prepaid Mobile Payments As Company's Next Challenge (May
7, 2012) http://www.isoandagent.com/news/Green-Dot-Chief-Sees-Prepaid-Mobile-Payments-As-Companys-Next-Challenge-3010590-1.html
(explaining that ``single mothers in their late 30s and early 40s
comprise 55 percent of [one major prepaid card company's] target
market, with most of them earning less than $50,000 annually.''),
while one study found that 84 percent of GPR card users had incomes
below the nationwide median. Similarly, others have informed Bureau
staff that the average credit score of prepaid account users is far
below average.
\350\ In its report on unbanked and underbanked consumers, the
FDIC explained that households are identified as ``unbanked'' if
they answered ``no'' to the question, ``Do you or does anyone in
your household currently have a checking or savings account?.'' The
FDIC further explained that ``underbanked households are defined as
those households that have a checking and/or a savings account and
had used non-bank money orders, non-bank check cashing services,
non-bank remittances, payday loans, rent-to-own services, pawn
shops, or refund anticipation loans (RALs) in the past 12 months.''
See FDIC, 2011 FDIC National Survey of Unbanked and Underbanked
Households (2011) available at https://www.fdic.gov/householdsurvey/2012_unbankedreport.pdf. For discussion of prepaid consumers'
background, see Kansas City Fed Study, at 12-13 (although the report
also notes no correlation due to income or education; possibly due
to the different types of use by prepaid consumers); available at
https://www.kansascityfed.org/publicat/reswkpap/pdf/rwp14-01.pdf.
\351\ 2011 FDIC Survey, at 16, 18, 40; see also Nat'l Council of
La Raza, Perspectives on Prepaid Cards from Low-Income Hispanic Tax
Filers at 1-2 (2011) available at http://www.nclr.org/images/uploads/publications/perspectives_on_prepaid_cards_(3).pdf.
\352\ Relatedly, Congress has similarly sought to address such
services on prepaid accounts. EFTA section 920(a), as implemented in
Regulation II, limits interchange fees when an overdraft fee may be
charged on the prepaid card (by, as noted above, carving cards that
may impose overdraft fees out of the exception from the rule's fee
caps). While not prohibiting such services outright, the Bureau
believes that Congress, in differentiating treatment, acted out of
concern regarding overdraft services on prepaid accounts (vis-
[agrave]-vis prepaid cards that cannot impose overdraft fees).
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[[Page 77212]]
To the extent some consumers may want to take advantage of credit
features if offered in connection with their prepaid account, the
Bureau further believes that its proposed approach would provide these
consumers with stronger tools and protections that would appropriately
limit their credit exposure and reduce the risk of some of the harms
that may be associated with using prepaid accounts for which an
overdraft service is offered.
Fifth, unlike with respect to checking accounts where overdraft
services have been structured to fit a unique and separate regulatory
regime for several decades, the Bureau is proposing to regulate prepaid
credit features on a largely blank slate. As noted above, deposit
accounts and their pricing structures have evolved under compliance
frameworks that were developed in accordance with existing regulations,
exceptions to those regulations, and other agencies' guidance. The
deposit account industry would view any departure as significantly
disruptive. In contrast, very few prepaid products offer overdraft
services or other credit features. Most prepaid account programs do not
have such a feature and, as a result, providers would have to implement
a new compliance regime in any event were they to decide to add such
features.
Similarly, while many have settled expectations that if they write
a check or authorize a bill payment through a third party for which
there is insufficient funds; the transactions will be paid rather than
bounced, the Bureau does not believe that prepaid accountholders expect
similar treatment because it is so rare for check and bill payment
services to be offered absent pre-authorization. Implementation costs
for industry and the risk of disruption to expectations for all
stakeholders is thus much different in the context of prepaid accounts.
Indeed, by proposing to act now on prepaid accounts before credit
features become widespread, the Bureau expects that credit features on
prepaid accounts will evolve in a more straightforward and consumer-
friendly manner consistent with the general framework and protections
for credit.
Proposal's Treatment of Overdraft Services is Limited to Prepaid
Accounts
The Bureau is proposing to make adjustments to Regulation Z and
Regulation E that would not extend existing exemptions for overdraft
services on traditional deposit accounts to overdraft services on
prepaid accounts, but it is not proposing to alter existing provisions
that apply to deposit account overdraft, including exemptions for
overdraft services from Regulation Z and Regulation E's compulsory use
provision. As described above, the Bureau sees significant differences
in the underlying accounts and transaction types, the history of
marketing and market segmentation, and the transaction costs and other
disruptions that would be involved in shifting to a different
regulatory framework with respect to checking accounts. Indeed, the
Bureau is acting at this time to subject prepaid accounts to Regulation
Z and the compulsory use provisions of Regulation E in part because
there is no clearly established and predominant regulatory or
compliance regime applicable to such programs, such that adopting the
Bureau's proposal would not create significant upheaval in the market.
The Bureau recognizes that historical, operational and other
factors have supported a different regulatory approach with respect to
overdraft in the checking account context than with respect to prepaid
accounts. The Bureau continues to study deposit account overdraft
services and will propose any further enhancements to the existing
regulatory framework that it deems appropriate as part of that separate
endeavor in accordance with its rulemaking procedures.\353\
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\353\ See CFPB's Unified Agenda for Spring 2014, available at
http://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤tPub=true&agencyCode=&showStage=active&agencyCd=3170&Image58.x=58&Image58.y=5&Image58=Submit.
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Other Implications of the Bureau's Approach to Prepaid Credit Products
The detailed discussion below sets forth the Bureau's proposed
changes to Subparts A, B, and G of Regulation Z to effectuate the
approach to overdraft services and credit features offered in
connection with prepaid accounts. The Bureau seeks comment both on its
general approach to such credit products and to the specific changes
proposed. In addition, the Bureau seeks comment on certain potential
implications of its approach, as described immediately below:
Military Lending Act. As discussed above, the Department of Defense
(the Department) recently proposed to expand the scope of the coverage
of its regulation (32 CFR part 232) that implements the MLA to include
a broad range of open-end and closed-end credit products, including
open-end (not home secured) credit card accounts that are subject to
Regulation Z.\354\ Under the MLA, a creditor generally may not apply a
military annual percentage rate (MAPR) greater than 36 percent in
connection with an extension of consumer credit to a military service
member or dependent. For covered credit card accounts, any credit-
related charge that is a finance charge under Regulation Z (as well as
certain other charges) would be included in calculating the MAPR for a
particular billing cycle and the MAPR for that billing cycle could not
exceed 36 percent.\355\ However, the Department's proposal provides
that a credit card issuer does not have to include in the calculation
of the MAPR any charge that is a ``bona fide fee'' if the fee is
``reasonable and customary.'' \356\ The Department has proposed a safe
harbor that would determine whether fee levels are reasonable and
customary based on the average amounts charged by large credit card
issuers for substantially similar fees during the last three
years.\357\
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\354\ 79 FR 58602 (Sept. 29, 2014).
\355\ 79 FR 58602 at 58619.
\356\ 79 FR 58602 at 58638. See proposed 32 CFR 232.4(d) of the
Department's proposal, stating that the exclusion the proposal
provides for a bona fide fee applies only to the extent that the
charge by the creditor is a bona fide fee and is reasonable and
customary for that type of fee. The exclusion for bona fide fees
does not apply to periodic rates. It also does not apply to any
credit insurance premium, including charges for single premium
credit insurance, fees for debt cancellation or debt suspension
agreements, or to any fees for credit related ancillary products
sold in connection with and either at or before consummation of the
credit transaction or upon account opening, because those charges
are expressly included in the definition of ``interest'' in the
applicable statute (10 U.S.C. 987(i)(3)) and therefore must be
included in the MAPR calculation.
\357\ 79 FR 58602 at 58638. See proposed 32 CFR 232.4(d) of the
Department's proposal.
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Thus, as with fees for other types of consumer credit extended to
military service members, fees levied for credit features (including
overdraft services) on prepaid accounts held by military service
members or their dependents would, as a result of the Department and
Bureau proposals in combination (if both proposals are finalized as
proposed), generally be included in calculating the MAPR for a billing
cycle unless excluded under the bona fide fee exception. The Bureau
requests comment on the consequences, if any, from the combined effect
of the two proposals (were they to be finalized) with respect to
overdraft services and credit features on prepaid accounts held by
military service members.
[[Page 77213]]
Multipurpose Cards and Card Network Rules. The Bureau's approach to
credit features in connection with prepaid products would result in a
single plastic card or other access device functioning either as a
prepaid card or as a credit card, depending on the balance in the asset
account that the card accesses at the time of a transaction that the
consumer makes. For example, if the asset account balance is sufficient
to fund the transaction, the card could function as a prepaid card; if
not, the card could function as a credit card. The Bureau has proposed
a number of provisions and sought comment as detailed elsewhere to
promote consumer understanding, facilitate clear application of the
various potentially applicable regulatory regimes, and address other
challenges that may arise due to the multipurpose nature of the card
product. For example, the Bureau is proposing to amend the provision in
Regulation Z (Sec. 1026.13(i)) that addresses the relationship between
the Regulation E and Z error resolution regimes to clarify the
applicability of those regimes to an extension of credit incident to an
electronic fund transfer when the consumer's prepaid account is
overdrawn. See Sec. 1026.13(i) in the section-by-section analysis
below. The Bureau is also seeking comment on (but not proposing) the
possibility of requiring additional real-time notifications of
transactions triggering an overdraft or the accessing of a linked
credit feature, or requiring real-time opt-in by consumers in order to
approve each overdraft or other credit transaction. See Sec.
1005.18(c) in the Regulation E section-by-section analysis above.
The Bureau seeks comment on these specific amendments and whether
further amendments or guidance would be appropriate. For instance,
while there is regulatory precedent for similar multipurpose debit/
credit card products, these cards do not appear to be in wide use
today. See, e.g., comment Sec. 1026.12(a)(1)-7 (stating that a credit
feature may be added to a previously issued non-credit card only upon
the consumer's specific request).\358\ The Bureau also seeks comment on
consumer and industry experiences with similar multipurpose products
historically, and whether they may yield useful lessons for further
refining the Bureau's proposal with regard to prepaid cards.
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\358\ When the Board amended comment 12(a)(1)-7 in 1999, it
stated that the revisions clarified the comment's applicability to
then-recent programs where unsolicited cards were marketed from the
outset as both stored-value cards and credit cards. See 64 FR 16614,
16615 (Apr. 6, 1999).
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Finally, the Bureau notes that card network rules may treat a card
differently depending on whether it accesses an asset account or a
credit account. The Bureau's proposal could result in an increase in
the number of cards that can access both an asset account and a credit
account, and the Bureau requests comment on any card network rule
issues that might arise from its proposal to treat most credit plans
accessed by prepaid cards, for which finance charges are imposed, as
open-end credit accessed by a credit card under Regulation Z.
Subpart A
Section 1026.2 Definitions and Rules of Construction
2(a) Definitions
Overview of Proposed Changes to Definitions
As discussed above in the Overview of Regulation Z Proposal section
and below in the section-by-section analysis of Sec. 1026.4, the
Bureau proposes several amendments to the definition of ``finance
charge,'' and commentary for the definitions of ``open-end plan'' and
``credit card.'' As a result of these proposed changes, a person that
offers credit plans accessed by prepaid cards, such as overdraft
services, or certain other credit plans linked to prepaid accounts that
are accessed by account numbers, where the person charges a finance
charge for the credit, generally would be extending ``open-end credit''
that is accessed by a ``credit card'' and thus would be covered by
Regulation Z's open-end (not home-secured) rules and credit card rules
in subparts B and G.\359\ (The term ``prepaid card'' is defined in the
proposal to mean any card, code, or other device that can be used to
access a prepaid account as defined under Regulation E, see proposed
Sec. 1026.2(a)(15)(v) and (vi).) The open-end (not-home secured) rules
in subpart B include account-opening disclosures, periodic statement
disclosures, change-in-terms notices, provisions on promptly crediting
payments, and billing error resolution procedures. The credit card
rules in subpart B include provisions that restrict the unsolicited
issuance of credit cards, limit the liability for unauthorized use of
credit cards, and prohibit the offset of the credit card debt against
funds held in asset accounts by the card issuer. The credit card rules
in subpart G include provisions that prohibit credit card issuers from
extending credit without assessing the consumer's ability to pay and
restrict the amount of required fees that an issuer can charge during
the first year after a credit card account is opened. Application of
the particular rules is discussed further below.
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\359\ As discussed in more detail in the section-by-section
analysis of Sec. 1026.2(a)(20), with respect to credit accessed by
a prepaid card or an account number where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the person, a person would not be a creditor
that is extending open-end credit where the person is not charging a
finance charge for the credit. Nonetheless, as discussed in more
detail in the section-by-section analysis of Sec. 1026.2(a)(17),
such persons may still be subject to Regulation Z in certain
circumstances.
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The proposal would cover credit plans, including overdraft services
and lines of credit, directly accessed by a prepaid card. This would
apply where credit is being ``pulled'' by a prepaid card, such as when
the consumer uses the prepaid card at point of sale to access an
overdraft plan to fund a purchase. The proposal also would cover credit
plans that are not accessed directly by a prepaid card but are
structured as a ``push'' account. Under such a credit plan, a person
would provide credit accessed by an account number where such
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the person, and cannot be
deposited directly into another asset account, such as a deposit
account. For example, such a credit plan may allow a consumer to use an
account number to request an extension of credit be deposited directly
into a particular prepaid account specified by the creditor when the
consumer does not have adequate funds in the prepaid account to cover
the full amount of a transaction using the prepaid card and the
consumer is contractually obligated to repay the credit. A credit plan
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the person would mean
that the credit plan allows deposits directly into particular prepaid
accounts specified by the creditor but does not allow the consumer to
deposit directly extensions of credit from the plan into asset accounts
other than particular prepaid accounts specified by the creditor. As
discussed in more detail below, the Bureau believes these types of
credit plans could act as substitutes for credit plans directly
accessed by a prepaid card. The Bureau is not, however, intending to
cover general purpose lines of credit where a consumer has the freedom
to choose where to deposit directly the credit funds.
Definition of finance charge. As discussed in more detail in the
section-
[[Page 77214]]
by-section analysis of Sec. 1026.4, under Regulation Z, the term
``finance charge'' generally is defined in Sec. 1026.4(a) to mean
``the cost of consumer credit as a dollar amount.'' It includes any
charge payable directly or indirectly by the consumer and imposed
directly or indirectly by the creditor as an incident to or a condition
of the extension of credit. It generally does not include any charges
of a type payable in a comparable cash transaction. Currently, certain
fees or charges are specifically excluded from the term ``finance
charge,'' such as (1) charges imposed by a financial institution for
paying items that overdraw an account, unless the payment of such items
and the imposition of the charge were previously agreed upon in
writing; and (2) fees charged for participation in a credit plan,
whether assessed on an annual or other periodic basis. See Sec.
1026.4(c)(3) and (4).
The proposal would amend Sec. 1026.4 and its commentary to provide
that these two exceptions do not apply to credit accessed by a prepaid
card or by an account number where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor. In addition, the proposal would make other
amendments to Sec. 1026.4 and its commentary to provide additional
clarification and guidance as to what types of fees and charges
constitute ``finance charges'' related to credit accessed by a prepaid
card or credit accessed by an account number where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. For such credit, any service,
transaction, activity, or carrying charges imposed on the credit
account, and any such charges imposed on a prepaid account if that
charge is related to an extension of credit, carrying a credit balance,
or credit availability, generally would be a finance charge. See Sec.
1026.4(a), (b)(2), (c)(3) and (4) and comments 4(a)-4 and 4(b)(2)-1.
Such charges would include periodic participation fees for the
credit plan, as well as transaction charges imposed in connection with
a credit extension. For example, assume a $1.50 transaction charge is
imposed on the prepaid account for each transaction that is made with
the prepaid card, including when the prepaid card is used to access
credit where the consumer has insufficient or unavailable funds in the
prepaid account at the time of authorization or at the time the
transaction is paid. The $1.50 transaction charge would be a finance
charge when the prepaid card accesses credit, notwithstanding that a
$1.50 transaction charge also is imposed on transactions that solely
access funds in the prepaid account. The proposal would provide,
however, that the term finance charge does not include transaction fees
imposed on the prepaid account where the consumer is only withdrawing
funds from the prepaid account, fees for opening or holding the prepaid
account, and other fees, such as cash reload fees and balance inquiry
fees, that are not imposed on the prepaid account because the consumer
engaged in a transaction that is funded in whole or in part by credit,
for holding a credit plan, or for carrying a credit balance.
As a result of these proposed changes to the definition of finance
charge and related commentary, a person that is offering credit
accessed by a prepaid card, or other credit plan linked to prepaid
accounts that is accessed by an account number as described above, that
is charging fees that are finance charges would be a ``creditor'' under
Regulation Z. The term ``creditor'' generally means a person who
regularly extends consumer credit that is subject to a finance charge
or is payable by written agreement in more than four installments (not
including a down payment), and to whom the obligation is initially
payable, either on the face of the note or contract, or by agreement
when there is no note or contract. See Sec. 1026.2(a)(17)(i). As
discussed above, the Bureau is declining to extend provisions that
exempt financial institutions that offer overdraft services on
traditional deposit accounts from the definition of creditor to
financial institutions that offer overdraft services on prepaid
accounts.
Definition of ``open-end credit.'' As discussed above in the
Overview of Regulation Z Proposal section and below in the section-by-
section analysis of Sec. 1026.2(a)(20), the Bureau believes that most
creditors that are offering credit plans (including overdraft services,
accessed by a prepaid card, or other credit plans linked to prepaid
accounts that are accessed by an account number as discussed above) and
that are charging finance charges for the credit would be creditors
offering ``open-end credit'' that is not home-secured. Such creditors
must comply with the open-end (not home-secured) provisions set forth
in subpart B.
The term ``open-end credit'' is defined in Sec. 1026.2(a)(20) to
mean consumer ``credit'' extended by a ``creditor'' under a ``plan'' in
which (1) the creditor reasonably contemplates repeated transactions;
(2) the creditor may impose a ``finance charge'' from time to time on
an outstanding unpaid balance; and (3) the amount of credit that may be
extended to the consumer during the term of the plan (up to any limit
set by the creditor) is generally made available to the extent that any
outstanding balance is repaid. The proposal would amend several of the
definitions of these terms and provide clarifications and commentary to
facilitate the classification of credit plans associated with prepaid
accounts.
Specifically, the proposal would provide that the term ``credit''
under Sec. 1026.2(a)(14) includes an authorized transaction on a
prepaid account where the consumer has insufficient or unavailable
funds in the prepaid account at the time of authorization. It also
would include a paid transaction on a prepaid account where the
consumer has insufficient or unavailable funds in the prepaid account
at the time the transaction is paid.
With respect to the term ``plan,'' the proposal would provide
additional guidance on when overdraft credit is considered credit
extended under a plan. In particular, the proposal would provide that
with respect to credit accessed by a prepaid card or accessed by an
account number where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor, a plan means a program where the consumer is obligated
contractually to repay any credit extended by the creditor. For
example, for credit accessed by a prepaid card, a plan includes a
program under which a creditor routinely pays transactions when a
consumer has insufficient or unavailable funds in a prepaid account and
the consumer is obligated contractually to repay those transactions.
Similarly, for credit that is accessed by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, a plan includes
a program under which a creditor routinely will extend credit that is
deposited directly into particular prepaid accounts specified by the
creditor and the consumer is obligated contractually to repay the
credit. In both cases, such programs constitute plans notwithstanding
that the creditor retains discretion not to extend credit. Except as
described below, the Bureau believes that most overdraft plans accessed
by a prepaid card, and other credit plans linked to a prepaid account
that are accessed by an account number as described above, generally
will meet the other criteria for open-end credit. See
[[Page 77215]]
the discussion in the Overview of Regulation Z Proposal section and the
section-by-section analysis of Sec. 1026.2(a)(17) and (a)(20).
As described in more detail in the section-by-section analysis of
Sec. 1026.2(a)(17), a person would not be extending open-end credit
where the person is not charging a finance charge for the credit that
is accessed by a prepaid card or accessed by an account number as
described above. Nonetheless, the person could still be subject to
certain provisions in Regulation Z in certain circumstances, as
discussed below.
Definition of ``credit card'' and ``card issuer.'' Regulation Z
defines the term ``credit card'' in Sec. 1026.2(a)(15)(i) to mean
``any card, plate, or other single credit device that may be used from
time to time to obtain credit.'' The term ``card issuer'' is defined in
Sec. 1026.2(a)(7) to defined to mean ``a person that issues a credit
card or that person's agent with respect to the card.'' Under the
proposal, certain devices related to prepaid accounts would be credit
cards under Sec. 1026.2(a)(15)(i). In particular, the proposal
provides that a prepaid card that is a single device that may be used
from time to time to access a credit plan generally is a ``credit
card'' and the person issuing the card is a ``card issuer.'' As
discussed above, a prepaid card would be accessing a credit plan when
the consumer is obligated contractually to repay the credit. The
proposal provides that a prepaid card would not be a credit card,
however, where the prepaid card only accesses credit that is not
subject to any finance charge as defined in Sec. 1026.4 or fee that is
described in Sec. 1026.4(c) and is not payable by written agreement in
more than four installments. A person that offers a credit plan that is
accessed only by prepaid cards that falls within the exclusion to the
definition of ``credit card'' would be subject solely to the
requirements under Regulation E. See section-by-section analysis of
Sec. 1026.2(a)(15)(i).
Also, as discussed in more detail in the section-by-section
analysis of Sec. 1026.2(a)(15)(i), the proposal also provides that an
account number that is not a prepaid card that may be used from time to
time to access a credit plan that allows deposits directly into
particular prepaid accounts specified by the creditor would be a credit
card under Sec. 1026.2(a)(15)(i).
Definition of ``credit card account under an open-end (not home
secured) consumer credit plan.'' Certain credit card rules in
Regulation Z, which generally are set forth in subpart G, apply to card
issuers with respect to a ``credit card account under an open-end (not
home secured) consumer credit plan.'' Sec. 1026.1(d)(7). These credit
card rules include provisions that prohibit credit card issuers from
extending credit without assessing the consumer's ability to pay and
restrict the amount of required fees that an issuer can charge during
the first year after a credit card account is opened. See, e.g.,
Sec. Sec. 1026.5(b)(2)(ii), 1026.7(b)(11), and 1026.51 through
1026.59.
Regulation Z defines the term ``credit card account under an open-
end (not home-secured) consumer credit plan'' in Sec.
1026.2(a)(15)(ii) to mean ``any open-end credit account that is
accessed by a credit card, except: (A) [a] home-equity plan subject to
the requirements of Sec. 1026.40 that is accessed by a credit card; or
(B) [a]n overdraft line of credit that is accessed by a debit card or
an account number.'' Generally, to be a ``credit card account under an
open-end (not home-secured) consumer credit plan,'' the credit must be
``open-end credit'' as defined in Sec. 1026.2(a)(20) that is not home-
secured and the credit must be accessed by a ``credit card'' as defined
in Sec. 1026.2(a)(15)(i). The Bureau also proposes to revise the
definitions of ``credit card account under an open-end (not home-
secured) consumer credit plan'' in Sec. 1026.2(a)(15)(ii) and its
commentary to include an open-end (not home-secured) credit plan
accessed by a prepaid card that is a credit card or by an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor.
2(a)(7) Card Issuer
TILA defines the term ``card issuer'' as ``any person who issues a
credit card, or the agent of such person with respect to such card.''
15 U.S.C. 1602(o). Consistent with the TILA definition, Regulation Z
defines the term ``card issuer'' in Sec. 1026.2(a)(7) as ``a person
that issues a credit card or that person's agent with respect to the
card.'' The Regulation further defines the term ``credit card'' in
Sec. 1026.2(a)(15)(i) to mean ``any card, plate, or other single
credit device that may be used from time to time to obtain credit.''
Card issuers must comply with certain provisions in Regulation Z as
applicable. See Sec. Sec. 1026.12 and .60; for card issuers offering a
``credit card account under an open-end (not home-secured) consumer
credit plan,'' see, e.g., Sec. Sec. 1026.5(b)(2)(ii), .7(b)(11), and
.51 through .59. In addition, card issuers that extend credit would be
considered creditors for purposes of Regulation Z. See Sec.
1026.2(a)(17)(iii) and (iv).
As discussed in the section-by-section analysis of proposed Sec.
1026.2(a)(15)(i), proposed comment 2(a)(15)-2.i.F would provide that
the term ``credit card'' generally includes a prepaid card (as defined
in proposed Sec. 1026.2(a)(15)(v) to mean any card, code, or other
device that can be used to access a prepaid account as that term is
proposed to be defined in Regulation E) that is a single device that
may be used from time to time to access a credit plan. A person that is
issuing a prepaid card that is a credit card would be a ``card issuer''
under Sec. 1026.2(a)(7).
Nonetheless, under proposed comment 2(a)(15)-2.i.F, the term credit
card would not include a prepaid card if the prepaid card only accesses
credit that is not subject to any finance charge as defined in Sec.
1026.4 or any fee describe in Sec. 1026.4(c) and is not payable by
written agreement in more than four installments. See section-by-
section analysis of Sec. 1026.4 for a discussion of the term ``finance
charge'' and fees described in Sec. 1026.4(c).
If the prepaid account is accessed only by a prepaid card that does
not meet the definition of credit card because the card only accesses
credit that is not subject to any finance charge as defined in Sec.
1026.4 or fee described in Sec. 1026.4(c) and is not payable by
written agreement in more than four installments, the person issuing
the card would not be a ``card issuer'' and the person would not need
to comply with the credit card rules in Regulation Z. In addition, the
person in extending credit accessed by such a card would not be a
``creditor'' under Regulation Z because the person would not be
charging a finance charge and the credit would not be payable by
written agreement in more than four installments. See Sec.
1026.2(a)(17)(i). Thus, the person would not need to comply with the
disclosure and other requirements in Regulation Z that apply to
creditors. The person would be subject, however, to the requirements
under Regulation E. See section-by-section analysis of Sec.
1026.2(a)(15)(i).
Given that no finance charges or fees described in Sec. 1026.4(c)
would be charged in connection with the credit, the Bureau anticipates
that the credit limit under such plans will be quite low, perhaps $10
or less. Given the expected-low credit limits and the fact that no
finance charge or fees described in Sec. 1026.4(c) would be charged
for this credit, the Bureau believes that it is appropriate to cover
these credit transactions under Regulation E as incidental to the
prepaid transaction and exclude prepaid cards that access only this
type of credit from the
[[Page 77216]]
definition of ``credit card'' for purposes of Regulation Z.
Consistent with the proposed definition of ``credit card,''
proposed comment 2(a)(7)-2 would explain that with respect to credit
accessed by a prepaid card, a person is not a card issuer if the card
only accesses credit that is not subject to any finance charge as
defined in Sec. 1026.4 or fee described in Sec. 1026.4(c) and is not
payable by written agreement in more than four installments. For
example, a person is not a card issuer if (1) the prepaid card only
accesses credit where the person does not impose any finance charge as
defined in Sec. 1026.4 or fee described in Sec. 1026.4(c); and (2)
the person expects repayment when funds are deposited into the prepaid
account. In this case, the prepaid card is not a credit card and the
person issuing the card is not a card issuer. See proposed comment
2(a)(15)-2.i.F.
Prepaid Card That Accesses a Credit Plan Offered by a Third Party
As noted above, under TILA and Regulation Z, the definition of
``card issuer'' means both a person who issues a credit card as well as
the person's agent with respect to the card. Comment 2(a)(7)-1
currently provides guidance on the term ``agent'' for purposes of the
definition of ``card issuer.'' Specifically, comment 2(a)(7)-1 provides
that because agency relationships are traditionally defined by contract
and by state or other applicable law, Regulation Z generally does not
define agent. Nonetheless, comment 2(a)(7)-1 provides that merely
providing services relating to the production of credit cards or data
processing for others does not make one the agent of the card issuer.
In contrast, comment 2(a)(7)-1 provides that a financial institution
may become the agent of the card issuer if an agreement between the
institution and the card issuer provides that the cardholder may use a
line of credit with the financial institution to pay obligations
incurred by use of the credit card.
The proposal would provide specific guidance on the term ``agent''
for purposes of Sec. 1026.2(a)(7) where a credit plan offered by a
third party is accessed by a prepaid card that is a credit card. This
would apply where credit is being ``pulled'' by a prepaid card that is
a credit card. In this case, the prepaid card is being used to pull
credit from a credit plan that is offered by a third party other than
the prepaid card issuer. Under the proposal, the third party offering
the credit plan that is accessed by the prepaid card would be
considered an agent of the prepaid card issuer and would be a card
issuer for purposes of Sec. 1026.2(a)(7). Specifically, proposed
comment 2(a)(7)-1.ii would build on the last sentence of the current
comment and provide that with respect to a prepaid card that is a
credit card where the card directly accesses a credit plan that is
offered by a third party, the proposal would specify that a party
offering the credit plan that is accessed by the card would be an agent
of the person issuing the prepaid card and thus, would be a card issuer
with respect to the prepaid card that is a credit card.
The Bureau notes that current comment 2(a)(7)-1 provides that a
financial institution may become the agent of the card issuer if an
agreement between the institution and the card issuer provides that the
cardholder may use a line of credit with the financial institution to
pay obligations incurred by use of the credit card. However, the Bureau
believes that it is important in this context to make clear when there
is an agent relationship to prevent circumvention of the proposed rules
applicable to credit card accounts directly accessed by a prepaid card.
The Bureau is concerned that without the proposed provision, prepaid
card issuers could structure arrangements with third parties that offer
open-end credit plans that are accessed directly by the prepaid card to
avoid an agency relationship under state law. Such a result could
frustrate the operation of certain consumer protections provided in the
proposal.
For example, Sec. 1026.51(a) provides that a card issuer must not
open a credit card account for a consumer under an open-end (not home-
secured) consumer credit plan, or increase any credit limit applicable
to such account, unless the card issuer considers the consumer's
ability to make the required minimum periodic payments under the terms
of the account based on the consumer's income or assets and the
consumer's current obligations. In a case where the issuer of the
prepaid card is not the person offering a credit card account under an
open-end (not home-secured) consumer credit plan, the responsibilities
imposed on the card issuer under Sec. 1026.51(a) might be unclear
since the card issuer will not be the person opening the credit card
account. Nonetheless, the provision applies to a ``card issuer,'' so it
is also unclear what responsibilities are imposed on the third party
given that the third party is not a card issuer. Thus, the proposal
would specify in proposed comment 2(a)(7)-1.ii that the third party
offering the credit plan that is accessed directly by the prepaid card
would be an agent of the person issuing the prepaid card and thus,
would be a card issuer with respect to that prepaid card. As a result,
in the example above related to Sec. 1026.51(a), the third party would
be a ``card issuer'' for purposes of that provision and would be
required to comply with it. The Bureau also proposes to renumber
existing comment 2(a)(7)-1 as 2(a)(7)-1.i.
2(a)(14) Credit
In TILA, the term ``credit'' is defined to mean ``the right granted
by a creditor to a debtor to defer payment of debt or to incur debt and
defer its payment.'' 15 U.S.C. 1602(f). Consistent with the definition
of credit in TILA, under Regulation Z, the term ``credit'' is defined
in Sec. 1026.2(a)(14) to mean ``the right to defer payment of debt or
to incur debt and defer its payment.'' A person is subject to certain
disclosure and other requirements in Regulation Z if the person is a
creditor. A person is a creditor if the person regularly extends
consumer ``credit'' that is subject to a finance charge or is payable
by written agreement in more than four installments (not including a
down payment), and to whom the obligation is initially payable, either
on the face of the note or contract, or by agreement when there is no
note or contract. See Sec. 1026.2(a)(17)(i). The term ``creditor''
also includes any card issuer (which is a person that issues credit
cards or the person's agent) that extends credit even if no finance
charge is imposed and repayment is not permitted in more than four
installments. See Sec. 1026.2(a)(17)(iii).
For the reasons discussed in the Overview of Regulation Z Proposal
section, the Bureau believes it is reasonable to interpret ``credit''
to include when overdrafts are paid in relation to prepaid accounts.
The proposal provides additional guidance that would express and
effectuate this interpretation. In particular, proposed comment
2(a)(14)-3 would provide that credit for purposes of Sec.
1026.2(a)(14) includes an authorized transaction on a prepaid account
where the consumer has insufficient or unavailable funds in the prepaid
account at the time of authorization. It also includes a paid
transaction on a prepaid account where the consumer has insufficient or
unavailable funds in the prepaid account at the time the transaction is
paid. Thus, the definition includes a situation where the consumer has
sufficient or available funds in the prepaid account to cover the
amount of the transaction at the time the transaction is authorized,
but insufficient or unavailable funds in the
[[Page 77217]]
prepaid account to cover the amount of the transaction at the time the
transaction is paid. As discussed in more detail in the Overview of
Regulation Z Proposal section, the Bureau believes that plain language
of the definition of ``credit'' in TILA covers the situation in that a
consumer makes a transaction which exceeds the funds in the consumer's
account and a person elects to cover the transaction by advancing funds
to the consumer which the consumer must repay. Nothing in that part of
TILA (or elsewhere in the statute) exempts overdraft services,
including those that may be offered in connection with a prepaid
account. By authorizing or paying a transaction where the consumer does
not have sufficient or available funds in the prepaid account to cover
the amount of the transaction when the transaction is authorized or
paid, the person is allowing the consumer to incur a debt with the
person where payment of that debt is not immediate.
A person that authorizes or pays such transactions would be
extending credit and would be subject to certain disclosure and other
requirements in Regulation Z if the person is a creditor. As discussed
above, a person is a creditor if the person regularly extends consumer
``credit'' that is subject to a finance charge or is payable by written
agreement in more than four installments (not including a down
payment), and to whom the obligation is initially payable, either on
the face of the note or contract, or by agreement when there is no note
or contract. See Sec. 1026.2(a)(17)(i). The term ``creditor'' also
includes any card issuer (which is a person that issues credit cards or
the person's agent) that extends credit even if no finance charge is
imposed and repayment is not permitted in more than four installments.
See Sec. 1026.2(a)(17)(iii). As discussed in more detail in the
section-by-section analysis of Sec. 1026.4, with respect to credit
accessed by a prepaid card that is a credit card, or by an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor, a person generally would be charging a
finance charge for the credit if the person imposes any service,
transaction, activity, or carrying charges on the credit account, or
imposes any such charges on a prepaid account if that charge is related
to an extension of credit, carrying a credit balance, or credit
availability. See Sec. 1026.4(a), (b)(2), (c)(3) and (4) and comments
4(a)-4 and 4(b)(2)-1. Such charges would include periodic participation
fees for the credit plan, and transaction charges imposed in connection
with a credit extension.
With respect to credit accessed by a prepaid card that is a credit
card, or by an account number that is a credit card where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, a person also would be a
creditor if the person is a card issuer that extends credit accessed by
the credit card. With respect to such credit, a person would be a card
issuer if the person issues (1) a prepaid card (including a prepaid
card that is solely an account number) that is a single device that may
be used from time to time to access a credit plan, except if that
prepaid card only accesses credit that is not subject to any finance
charge as defined in Sec. 1026.4 or any fee described in Sec.
1026.4(c) and is not payable by written agreement in more than four
installments; or (2) an account number that is not a prepaid card that
may be used from time to time to access a credit plan where extensions
of credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, but does not allow the
consumer to deposit directly extensions of credit from the plan into
asset accounts other than particular prepaid accounts specified by the
creditor.
The Bureau notes that for credit that is being accessed by a
prepaid card that is a credit card, the creditor would be required to
disclose credit extensions on the periodic statement under Sec.
1026.7(b)(2), including a transaction where there are insufficient
funds in the prepaid account at authorization to cover the amount of
the transaction. The creditor also would be restricted under the offset
provision in Sec. 1026.12(d) from automatically applying any deposit
to the prepaid account to repay the credit card balance. For example,
for a transaction that is authorized where there are insufficient funds
in the prepaid account to cover the amount of the transaction, the
creditor could not use subsequent deposits received on the same day as
the transaction to repay automatically that credit transaction on the
credit card account.
The Bureau generally solicits comment on the definition of credit
with respect to prepaid accounts. As discussed above, under the
proposal, credit includes (1) transactions that are authorized where
the consumer has insufficient or unavailable funds in the prepaid
account at the time of authorization; and (2) transactions on a prepaid
account where the consumer has insufficient or unavailable funds in the
prepaid account at the time the transaction is paid. Such transactions
are credit regardless of whether the person establishes a separate
credit account to extend the credit or whether the credit is simply
reflected as a negative balance on the prepaid account. Nonetheless,
the Bureau believes that creditors will tend to establish separate
credit accounts to extend that credit accessed by the prepaid card,
instead of having the credit balance be reflected as a negative balance
on the prepaid account, because creditors generally will find that
separate credit accounts aid compliance with the periodic statement
requirements in Sec. Sec. 1026.5(b)(2)(ii) and 1026.7(b)(11) and the
offset provisions in Sec. 1026.12(d)(3) that would apply to credit
card accounts accessed by prepaid cards. See section-by-section
analysis of Sec. Sec. 1026.5(b)(2)(ii), 1026.7(b)(11) and
1026.12(d)(3). The Bureau solicits comment on whether creditors are
likely to establish separate credit accounts, instead of having the
credit balance be reflected as a negative balance on the prepaid
account. The Bureau also solicits comment on any implications for
compliance depending on how the account is structured (i.e., whether a
separate credit account is created or whether the credit balance is
reflected as a negative balance on the prepaid account), and whether
any differentiation in regulation or guidance would be useful.
As discussed in more detail in the Overview of Regulation Z
Proposal section, with respect to overdraft services on checking
accounts, while a person that is providing overdraft services generally
would be providing credit under TILA and Regulation Z, the person
generally does not meet the definition of ``creditor'' for purposes of
Regulation Z because of certain exclusions to the definition of finance
charge. See Sec. 1026.4(c)(3). Thus, with respect to overdraft
services on checking accounts, a financial institution that does not
agree in writing to pay the items and does not structure the repayment
of the credit by written agreement in more than four installments would
not be a ``creditor'' under the general definition of creditor, even if
the institution charges a fee for paying the overdraft item because the
fee would not be a ``finance charge.'' In addition, a person does not
become a creditor by issuing a debit card to access an overdraft
service. See comment 2(a)(15)-2.ii.A (explaining that the definition of
``credit card'' provides that a debit card is not a credit card if
there
[[Page 77218]]
is no credit feature or agreement to extend credit, even if the
creditor occasionally honors an inadvertent overdraft). The Bureau is
not proposing to change how overdraft services on accounts other than
prepaid accounts are treated under Regulation Z.
2(a)(15)
2(a)(15)(i) Credit Card
In TILA, the term ``credit card'' is defined to mean ``any card,
plate, coupon book or other credit device existing for the purpose of
obtaining money, property, labor, or services on credit.'' 15 U.S.C.
1602(l). Under Regulation Z, the term ``credit card'' is defined in
Sec. 1026.2(a)(15)(i) to mean ``any card, plate, or other single
credit device that may be used from time to time to obtain credit.''
Current comment 2(a)(15)(i)-2 provides examples of devices that are
credit cards and devices that are not credit cards. A person that
issues credit cards or the person's agent is a ``card issuer'' and must
comply with certain credit card provisions in Regulation Z as
applicable. See Sec. Sec. 1026.12 and .60; for card issuers offering a
``credit card account under an open-end (not home-secured) consumer
credit plan,'' see, e.g., Sec. Sec. 1026.5(b)(2)(ii), .7(b)(11), and
.51 through .59. Any card issuer that extends credit is also a creditor
under Regulation Z and must comply with certain disclosure and other
requirements in Regulation Z, a discussed in the section-by-section
analysis of Sec. 1026.2(a)(17).
The proposal would provide guidance on when the following devices
related to prepaid accounts are ``credit cards:'' (1) Prepaid cards, as
defined in proposed Sec. 1026.2(a)(15)(v) to mean any card, code, or
other device that can be used to access a prepaid account as defined in
Regulation E; and (2) account numbers that may be used from time to
time to access a credit plan that allows deposits directly only into
particular prepaid accounts specified by the creditor but do not allow
consumers to deposit directly extensions of credit from the plan into
asset accounts other than particular prepaid accounts specified by the
creditor, as defined in Sec. 1026.2(a)(15)(vii).
Under the proposal, credit plans, including overdraft services and
overdraft lines of credit, that are directly accessed by certain
prepaid cards would be a credit card account under Regulation Z. In
particular, proposed comment 2(a)(15)-2.i.F would provide that the term
``credit card'' includes a prepaid card (including a prepaid card that
is solely an account number) that is a single device that may be used
from time to time to access a credit plan, except if that prepaid card
only accesses credit that is not subject to any finance charge as
defined in Sec. 1026.4 or any fee described in Sec. 1026.4(c) and is
not payable by written agreement in more than four installments. A
prepaid card that is solely an account number would be a credit card if
it satisfies the requirements of proposed comment 2(a)(15)-2.i.F.
With respect to overdraft services or overdraft lines of credit,
the prepaid card would be ``pulling'' credit from the credit card
account where there are insufficient funds in the prepaid account to
cover the amount of the transaction at authorization or settlement. An
account where credit is pulled from a credit card account using a
prepaid card is referred in this supplemental information as a ``pull
account.''
As discussed further below in connection with Sec.
1026.2(a)(15)(vii), the proposal also covers credit plans that are not
directly accessed by a prepaid card, but are structured as ``push''
accounts. Specifically, the proposal would address situations where a
separate credit plan is accessed by an account number where consumers
are allowed to deposit directly credit extensions taken under the plan
into particular prepaid accounts specified by the creditor but would
not be allowed to deposit directly extensions of credit from the plan
into asset accounts other than the specified prepaid accounts. Such a
credit plan would still be covered under the proposal where a consumer
could access the credit plan by use of checks or in-person withdrawals,
so long as the credit plan allows deposits directly only into
particular prepaid accounts specified by the creditor but does not
allow the consumer to deposit directly extensions of credit into an
asset account other than specified prepaid accounts. See proposed
comment 2(a)(15)-5. In referring to account numbers that access credit
plans linked to prepaid accounts as discussed above, the proposal uses
the term ``account number where extensions of credit are permitted to
be deposited directly only into particular prepaid account specified by
the creditor.'' See proposed Sec. 1026.2(a)(15)(vii). The proposal
would provide that these credit plans would be credit card accounts
under Regulation Z. See proposed comment 2(a)(15)-2.i.G.
The Bureau believes that credit plans will either be structured as
``pull'' accounts where a prepaid card is used directly to access
credit from the credit plan or structured as ``push'' accounts where an
account number is used to access credit that typically is deposited
directly into the prepaid account. For example, the Bureau does not
believe that a prepaid card account number would be used to push credit
into the prepaid account, but instead will only be used to pull credit
from the credit plan, such as when a consumer uses the prepaid card at
point of sale or at an ATM to access credit directly. Thus, under the
proposal, a prepaid card account number would not be an ``account
number where extensions of credit are permitted to be deposited
directly only into particular prepaid account specified by the
creditor,'' as that term is defined in proposed Sec.
1026.2(a)(15)(vii). Likewise, an account number as defined in proposed
Sec. 1026.2(a)(15)(vii) would not be used to access funds in the
prepaid account and thus, would not be a prepaid card under proposed
Sec. 1026.2(a)(15)(v). The Bureau solicits comment on the distinction
between a prepaid card account number that is a credit card under
proposed Sec. 1026.2(a)(15)(v) and comment 2(a)(15)-2.i.F and an
account number that is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid account
specified by the creditor as defined in proposed Sec.
1026.2(a)(15)(vii) and comment 2(a)(15)-2.i.G. The Bureau also solicits
comment on whether there could be situations where a prepaid card
account number could be viewed as pushing credit into a prepaid
account.
Generally, the proposal would treat credit card accounts that are
accessed by a prepaid card and credit card accounts that are accessed
by an account number linked to prepaid accounts as discussed above
similarly under the rules. Nonetheless, for some provisions, credit
extensions under these two types of credit card accounts would be
treated differently. See proposed comments 8(a)-2.ii, 8(b)-1.vi, 12(c)-
5, 12(c)(1)-1.i, 13(a)(3)-2.ii, 13(i)-1 and -4, 52(a)(2)-2 and -3,
60(b)(4)-3, and 60(b)(8)-4 and -5.
This proposed difference in treatment generally results from the
fact that for a credit card account that is accessed by a prepaid card,
the prepaid card can be used to directly access the credit to purchase
goods or services. For example, credit accessed by a prepaid card at
point of sale would be treated as a ``sale credit'' under Sec.
1026.8(a) because the prepaid card is directly accessing credit to
purchase goods or services. On the other hand, for a credit card
account accessed by an account number described in proposed Sec.
1026.2(a)(15)(vii), credit that is
[[Page 77219]]
extended typically would be deposited into the prepaid account. The
account number that accesses the credit is not typically viewed as
directly used to purchase goods or services with the credit. For
example, credit accessed by an account number linked to a prepaid
account would be ``nonsale credit'' under Sec. 1026.8(b) because it
would not be used directly to purchase goods or services.
The Bureau believes that these types of ``push accounts'' could be
offered as substitutes for overdraft credit plans accessed by a prepaid
card, and if they were not covered, creditors could be able to
circumvent the consumer protections set forth in the proposal.
Nonetheless, the Bureau is not attempting to cover general lines of
credit where consumers are not restricted from depositing directly
credit extensions taken under the plan into asset accounts of their
choosing, including prepaid accounts. The Bureau believes that those
types of credit plans are not acting as substitutes for overdraft
credit plans because these general lines of credit are not designed to
provide credit in connection with particular prepaid accounts. The
Bureau solicits comment on this approach, and whether the proposal
appropriately covers the types of credit plans that may act as
substitutes for overdraft credit plans accessed by prepaid cards.
The Bureau also solicits comment on whether there are alternative
ways to address credit plans that may act as substitutes for overdraft
credit plans accessed by prepaid cards. For accounts that permit
deposits directly into accounts other than prepaid accounts specified
by the creditor, and thus would not be covered above under the
proposal, the Bureau seeks comment on whether it should attempt to
cover such accounts when they are being used by agreement to push funds
to cover specific negative balance purchases. For example, should the
rule cover the following situation as a push account: where the prepaid
card issuer and a third-party creditor have an arrangement where the
prepaid card issuer will notify the consumer that there are
insufficient funds in the prepaid account to complete a transaction and
contemporaneously prompt the consumer to transfer funds to complete the
transaction. The Bureau solicits comment on whether there are other
types of account structures that the Bureau should consider covering
under the rule, and if so, whether the account structure should be
considered a ``push'' account or a ``pull account'' for purposes of the
rule, given that in some cases, different rules would apply under the
proposal depending on the how account is structured, as discussed
above.
To be a credit card, the prepaid card, or account number that
accesses an account where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor, must be a single device that may be used from time to
time to access a credit plan.\360\ Current comment 2(a)(15)-1
reiterates that a credit card must be usable from time to time. The
comment also provides that since this involves the possibility of
repeated use of a single device, checks and similar instruments that
can be used only once to obtain a single credit extension are not
credit cards.
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\360\ As discussed in the section-by-section analysis of
proposed Sec. 1026.2(a)(20), under the proposal, a person would be
extending credit pursuant to a plan where the person pays
transactions using a prepaid card where there are insufficient funds
in a prepaid account to fund the transactions and the consumer is
obligated contractually to repay the credit. In addition, a person
would be extending credit pursuant to a plan where the person
extends credit to a consumer where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor and the consumer is obligated
contractually to repay the credit.
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The proposal would revise this comment to provide additional
guidance on the treatment of preauthorized checks in relation to
prepaid accounts. As is described above, preauthorized checks are
checks where by a consumer must seek authorization before presenting
them for payment. At the time of preauthorization, funds to pay the
check are deducted from the account and held by the institution until
the check is presented. The proposal would explain in comment 2(a)(15)-
1 that with respect to a preauthorized check that is issued on a
prepaid account for which the funds are withdrawn at the time of
preauthorization using the prepaid account number, the credit would be
considered obtained using the prepaid account number and not the check.
Under the proposal, a prepaid account number typically would be a
credit card unless it qualifies for an exception, as discussed below.
Nonetheless, even if the prepaid card is a single device that may
be used from time to time to access a credit plan, the prepaid card
still would not be a credit card under Sec. 1026.2(a)(15)(i) if the
prepaid card only accesses credit that is not subject to any finance
charge as defined in Sec. 1026.4 or fee described in Sec. 1026.4(c)
and is not payable by written agreement in more than four installments.
As discussed in the section-by-section analysis of Sec. 1026.4, with
respect to credit accessed by a prepaid card or credit accessed by an
account number where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor, any service, transaction, activity, or carrying charges
imposed on the credit account, and any such charges imposed on a
prepaid account if that charge is related to an extension of credit,
carrying a credit balance, or credit availability, generally would be a
finance charge. See Sec. 1026.4(a), (b)(2), (c)(3) and (4) and
comments 4(a)-4 and 4(b)(2)-1. Fees described in Sec. 1026.4(c) that
are not finance charges include application fees to apply for credit,
late payment fees, over-the-limit fees, and returned payment fees.
To the extent that a prepaid card only accesses credit that is not
subject to any finance charge as defined in Sec. 1026.4 or fee
described in Sec. 1026.4(c) and is not payable by written agreement in
more than four installments, the prepaid card would not be a credit
card. To effectuate the purpose of TILA to promote informed use of
credit and to facilitate compliance, the Bureau believes it is
necessary and proper to exercise its exception authority under TILA
section 105(a), to propose to exclude such prepaid cards from the
definition of ``credit card'' under TILA section 103(l) and Regulation
Z Sec. 1026.2(a)(15)(i). 15 U.S.C. 1602(l). If the credit plan is
accessed only by a prepaid card that does not meet the definition of
credit card because the card only accesses credit that is not subject
to any finance charge as defined in Sec. 1026.4 or fee described in
Sec. 1026.4(c) and is not payable by written agreement in more than
four installments, the person issuing the card would not be a ``card
issuer'' and the person would not need to comply with the credit card
rules in Regulation Z. In addition, the person in extending this type
of credit would not be a ``creditor'' under Regulation Z because the
person would not be charging a finance charge and the credit would not
be payable by written agreement in more than four installments. See
Sec. 1026.2(a)(17)(i). Thus, the person would not need to comply with
the disclosure and other requirements in Regulation Z that apply to
creditors.
The proposed provision would facilitate compliance by allowing a
person who is providing such credit to comply only with Regulation E
with respect to the prepaid account and this credit, instead of also
complying with Regulation Z with respect to the overdraft credit. The
Bureau believes
[[Page 77220]]
that the term ``credit card'' was defined broadly in Regulation Z to
ensure that consumers who obtain access devices that access credit
receive certain protections, such as receiving periodic statements,
limits on liability for unauthorized use and billing error resolution
rights, even if a person in issuing the access device would not have
met the general definition of creditor in 1026.2(a)(17)(i) because no
finance charge is imposed and the credit is not payable in more than
four installments. Such access devices that are not linked to an asset
account would not receive such protections, such as limits on liability
for unauthorized use and billing error resolution rights, if the credit
accessed by these access devices were not covered by Regulation Z.
Nonetheless, for prepaid cards, the Bureau believes that the proposed
protections in Regulation E for prepaid cards would be sufficient to
protect consumers when credit extended under a credit plan accessed by
a prepaid card is not subject to any finance charge as defined in Sec.
1026.4 or fee described in Sec. 1026.4(c) and is not payable by
written agreement in more than four installments.
Given that no finance charges or fees described in Sec. 1026.4(c)
would be charged under the credit plan under this exception and that
the Bureau anticipates that the credit limit under such plans would be
quite low, perhaps $10 or less, and the credit would not be structured
to be paid over a significant amount of time, the Bureau believes that
consumers are unlikely to be become overextended in using this credit
and incurring substantial fees. Thus, to facilitate compliance, the
Bureau believes that this type of credit plan is more properly
regulated under Regulation E as credit incidental to the prepaid card
transaction. For example, as discussed in more detail in the section-
by-section analysis of Regulation E proposed Sec. 1005.12(a),
Regulation E's provisions in Sec. Sec. 1005.11 and 1005.18(e)
regarding a consumer's liability for an unauthorized electronic fund
transfer and regarding the investigation of errors would apply to
extensions of this credit. In addition, such credit extensions would be
disclosed on Regulation E periodic statements if the financial
institution elects to provide such statements under proposed Sec.
1005.18(c)(1), or alternatively, would be disclosed on the electronic
history of the consumer's prepaid account transactions, such as through
a Web site, that covers at least 18 months preceding the date the
consumer electronically accesses the account under Regulation E
proposed Sec. 1005.18(c)(1)(ii).
The Bureau also notes that the opt-in provision in Regulation E
Sec. 1005.17 would not apply to credit extended under a credit plan
accessed by a prepaid card that is not subject to any finance charge as
defined in Sec. 1026.4 or fee described in Sec. 1026.4(c) and is not
payable by written agreement in more than four installments. Section
1005.17 sets forth requirements that financial institutions must follow
in order to provide ``overdraft services'' to consumers related to
consumer's accounts. For prepaid accounts, any fees or charges for ATM
or one-time ``debit card'' transactions (as that term is used in
Regulation E to generally include prepaid cards; see proposed comment
1005.2(b)(3)(i)-8) that access an institution's overdraft service would
be considered ``finance charges'' under the proposal and thus would
exceed the scope of the proposed exception because it is limited to
credit on prepaid accounts for which no finance charges or fees
described in Sec. 1026.4(c) are imposed. The Bureau nevertheless seeks
comment on whether it should apply Regulation Z to such credit.
The Bureau notes that the proposal does not provide a similar
exception for account numbers that are not prepaid cards that may be
used from time to time to access a credit plan that allows deposits
directly into particular prepaid accounts specified by the creditor but
does not allow the consumer to deposit directly extensions of credit
from the plan into asset accounts other than particular prepaid
accounts specified by the creditor. See proposed Sec.
1026.2(a)(15)(vii) and comment 2(a)(15)-2.i.G. Such a credit plan would
be covered under the proposal even if the credit plan could be accessed
by use of checks or in-person withdrawals, so long as the credit plan
is accessed by an account number where extensions of credit are allowed
to be deposited directly into particular prepaid accounts specified by
the creditor and the consumer is not permitted to deposit directly
extensions of credit into an asset account other than particular
prepaid accounts specified by the creditor. See proposed comment
2(a)(15)-5. Under the proposal, these account numbers would be credit
cards regardless of whether credit extended under such credit plans is
subject to a finance charge or a fee described in Sec. 1026.4(c) or is
payable by written agreement in more than four installments. The Bureau
believes that an exception is not appropriate for these types of credit
plans because not all credit extensions under such credit plans would
be subject to Regulation E protections if Regulation Z did not apply.
Although Regulation E would apply to credit extensions that are
deposited in a prepaid account by use of an electronic fund transfer,
Regulation E would not apply to extensions of credit that are accessed
by check or in person withdrawals where the transaction does not
involve an electronic fund transfer to or from the prepaid account. The
Bureau also believes that an exception for this type of credit is not
necessary because creditors that establish a separate credit plan that
is accessed by an account number that is not a prepaid card typically
will charge a finance charge or fee described in Sec. 1026.4(c) for
the credit. The Bureau solicits comment on this approach.
Under the proposal, a person that issues such an account number
would be a ``card issuer'' under Sec. 1026.2(a)(7) even if the account
number only accesses credit that is not subject to a finance charge or
fee described in Sec. 1026.4(c) and is not payable by written
agreement in more than four installments. In addition, the person would
be a ``creditor'' by issuing a credit card that accesses credit that is
not subject to a finance charge and is not payable by written agreement
in more than four installments. See Sec. 1026.2(a)(17)(iii). The
person would be required to comply with rules governing open-end (not
home-secured) credit plans in subpart B and the credit card rules set
forth in subpart B. The rules implementing the Credit CARD Act,
generally set forth in subpart G, would not apply because the person
would not be charging a finance charge for the credit, and thus, would
not be extending ``open-end credit.'' For more a detailed discussion,
see the section-by-section analysis of Sec. 1026.2(a)(17).
Prepaid Cards or Account Numbers That Are Credit Cards
As discussed above, proposed comment 2(a)(15)-2.i.F would provide
that the term ``credit card'' includes a prepaid card (including a
prepaid card that is solely an account number) that is a single device
that may be used from time to time to access a credit plan, except if
that prepaid card only accesses credit that is not subject to any
finance charge as defined in Sec. 1026.4 or any fee described in Sec.
1026.4(c) and is not payable by written agreement in more than four
installments. Proposed Sec. 1026.2(a)(15)(vii) and comment 2(a)(15)-
2.i.G would provide that the term ``credit card'' includes an account
number that is not a prepaid card that may be used from time to time to
access
[[Page 77221]]
a credit plan that allows deposits directly into particular prepaid
accounts specified by the creditor but does not allow the consumer to
deposit directly extensions of credit from the plan into asset accounts
other than particular prepaid accounts specified by the creditor.
If a person issues a prepaid card or account number as described
above that is a credit card, the person would be a ``card issuer''
under Sec. 1026.2(a)(7). The person would also be a ``creditor'' if
the card issuer extends credit accessed by the prepaid card or account
number as described above. See Sec. 1026.2(a)(17)(iii) and (iv). If
the card issuer extends open-end credit, the person generally would
need to comply with the open-end (not home-secured) rules set forth in
subpart B and the credit card rules set forth in subparts B and G. As
discussed above in the Overview of Regulation Z Proposal section and
below in the section-by-section analysis of Sec. 1026.2(a)(20), the
Bureau believes that most creditors that are offering credit plans,
including overdraft credit services, accessed by a prepaid card, or
other credit plans linked to prepaid accounts that are accessed by an
account number as discussed above, that are charging finance charges
for the credit would be creditors offering ``open-end credit'' under
Regulation Z. See the section-by-section analysis of Sec.
1026.2(a)(17) for a discussion of situations in which a creditor may
not be offering open-end credit in relation to a prepaid account.
Account Numbers
Comment 2(a)(15)-2.ii.C currently provides that the term ``credit
card'' does not include an account number that accesses a credit
account, unless the account number can access an open-end line of
credit to purchase goods or services. For example, if a creditor
provides a consumer with an open-end line of credit that can be
accessed by an account number in order to transfer funds into another
account (such as an asset account with the same creditor), the account
number is not a credit card for purposes of Sec. 1026.2(a)(15)(i).
However, if the account number can also access the line of credit to
purchase goods or services (such as an account number that can be used
to purchase goods or services on the Internet), the account number is a
credit card for purposes of Sec. 1026.2(a)(15)(i), regardless of
whether the creditor treats such transactions as purchases, cash
advances, or some other type of transaction. Furthermore, if the line
of credit can also be accessed by a card (such as a debit card), that
card is a credit card for purposes of Sec. 1026.2(a)(15)(i).
In 2011, the Board adopted comment 2(a)(15)-2.ii.C as part of
implementing the Credit CARD Act provisions. In the supplemental
information to the final rule, the Board stated that because most if
not all credit accounts can be accessed in some fashion by an account
number, the Board did not believe that Congress generally intended to
treat account numbers that access a credit account as credit cards for
purposes of TILA.\361\ However, the Board was concerned that, when an
account number can be used to access an open-end line of credit to
purchase goods or services, the Board believed it would be inconsistent
with the purposes of the Credit CARD Act to exempt the line of credit
from the protections provided for credit card accounts. For example,
creditors may offer open-end credit accounts designed for online
purchases that function like a traditional credit card account but can
only be accessed using an account number. In these circumstances, the
Board believed that TILA's credit card protections should apply.
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\361\ 76 FR 22948, 22949 (Apr. 25, 2011).
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The proposal would revise comment 2(a)(15)-2.ii.C to indicate that
the comment does not apply to prepaid cards and account numbers
described in proposed comments 2(a)(15)-2.i.F and G. Comment 2(a)(15)-
2.ii.C generally would not apply to prepaid cards because such cards
generally could be used to purchase goods or services, even if the
prepaid card was solely an account number. In addition, as discussed in
the Overview of Regulation Z Proposal section, the Bureau is concerned
that if lines of credit that are accessed by an account number are not
considered credit cards when credit extensions can be deposited
directly only into particular prepaid accounts specified by the
creditor, they would be offered as a means of evading the requirements
articulated in this proposal that apply to credit cards under TILA.
Thus, the Bureau does not believe that such credit plans should be
exempted from the definition of credit card and proposes to cover such
credit plans as credit card accounts.
Technical Revisions
The proposal also provides a technical revision to accommodate the
changes discussed above. Specifically, comment 2(a)(15)-2.i.B currently
provides guidance on when a debit card is a credit card, and the
comment provides examples of credit cards that include ``a card that
accesses both a credit and an asset account (that is, a debit-credit
card).'' Proposed Sec. 1026.2(a)(15)(iv) would define the term ``debit
card'' for purposes of Regulation Z to mean ``any card, plate, or other
single device that may be used from time to time to access an asset
account other than a prepaid account.'' Because the term ``debit card''
under the proposal would not include all cards that access asset
accounts, comment 2(a)(15)-2.i.B would be revised to be consistent with
the proposed definition of debit card. No substantive changes are
intended to the current rules for when debit cards are credit cards
under Sec. 1026.2(a)(15)(i).
2(a)(15)(ii) Credit Card Account Under an Open-end (Not Home-secured)
Consumer Credit Plan
Under Regulation Z, the term ``credit card account under an open-
end (not home-secured) consumer credit plan'' is defined in Sec.
1026.2(a)(15)(ii) to mean ``any open-end credit account that is
accessed by a credit card, except: (A) [a] home-equity plan subject to
the requirements of Sec. 1026.40 that is accessed by a credit card; or
(B) [a]n overdraft line of credit that is accessed by a debit card or
an account number.'' Certain requirements in the Credit CARD Act, which
are generally set forth in subpart G, apply to card issuers offering a
credit card account under an open-end (not home-secured) consumer
credit plan. See, e.g., Sec. Sec. 1026.5(b)(2)(ii), .7(b)(11), .51 to
.59.
Generally, to be a ``credit card account under an open-end (not
home-secured) consumer credit plan,'' the credit must be ``open-end
credit'' as defined in Sec. 1026.2(a)(20) and the credit must be
accessed by a ``credit card'' as defined in Sec. 1026.2(a)(15)(i). As
discussed above in the Overview of Regulation Z Proposal section and in
the section-by-section analysis of Sec. 1026.2(a)(20), the Bureau
anticipates that most credit accessed by a prepaid card would meet the
definition of ``open-end credit'' if the creditor offering the plan may
impose a finance charge for the credit.\362\ In addition, under the
[[Page 77222]]
proposal, a prepaid card that is a single device that may be used from
time to time to access such an open-end credit plan would be a credit
card. Likewise, the Bureau anticipates that most credit that is
deposited into a prepaid account where the extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor would meet the definition of ``open-
end credit'' if the creditor offering the plan may impose a finance
charge for the credit. Also, an account number that may be used from
time to time to access such an open-end credit plan would be a credit
card. Thus, an open-end credit plan accessed by a prepaid card that is
a credit card or an account number that is a credit card (as described
above) would be a ``credit card account under an open-end (not home-
secured) consumer credit plan.''
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\362\ As discussed in more detail below in the section-by-
section analysis of Sec. 1026.2(a)(17), a person would not be a
creditor that is extending open-end credit where the person extends
credit accessed by a prepaid card but the person is not charging a
finance charge for the credit. Similarly, a person extending credit
accessed by an account number where such extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the person also would not be extending open-
end credit if the person is not charging a finance charge for the
credit. Nonetheless, as discussed in the section-by-section analysis
of Sec. 1026.2(a)(17), such persons may still be subject to certain
Regulation Z requirements under certain circumstances.
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For the reasons discussed in the Overview of Regulation Z Proposal
section, the proposal also would clarify that the exception in current
Sec. 1026.2(a)(15)(ii)(B) does not apply to open-end credit plans
accessed by a prepaid card or an account number as described above.
Currently, Sec. 1026.2(a)(15)(ii)(B) provides that the definition of
``credit card account under an open-end (not home-secured) consumer
credit plan'' does not include an ``overdraft line of credit that is
accessed by a debit card or an account number.'' The Bureau notes that
the proposed definition of ``debit card'' in Sec. 1026.15(a)(2)(iv)
would exclude a prepaid card. Thus, the exception in Sec.
1026.2(a)(15)(ii)(B) does not apply to overdraft lines of credit that
are accessed by a prepaid card. In addition, the proposal would revise
Sec. 1026.2(a)(15)(ii)(B) to only include the exception for overdraft
lines of credit accessed by a debit card. The proposal would move the
exception for overdraft lines of credit that are accessed by account
numbers from Sec. 1026.2(a)(15)(ii)(B) to proposed Sec.
1026.2(a)(15)(ii)(C). The proposal also would amend proposed Sec.
1026.2(a)(15)(ii)(C) and comment 2(a)(15)-4 to provide that the
exception does not apply to an overdraft line of credit that is
accessed by an account number where the account number is a prepaid
card that is a credit card, or the account number is a credit card
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor.
2(a)(15)(iii) Charge Card
Under Regulation Z, the term ``charge card'' is defined in Sec.
1026.15(a)(15)(iii) to mean ``a credit card on an account for which no
periodic rate is used to compute a finance charge.'' Current comment
2(a)(15)-3 provides guidance on how the term ``charge card'' is used
throughout the Regulation. In particular, the current comment provides
that generally, charge cards are cards used in connection with an
account on which outstanding balances cannot be carried from one
billing cycle to another and are payable when a periodic statement is
received. This comment also explains that under the regulation, a
reference to credit cards generally includes charge cards. In
particular, references to credit card accounts under an open-end (not
home-secured) consumer credit plan in subparts B and G generally
include charge cards. The term ``charge card'' is, however,
distinguished from ``credit card'' or ``credit card account under an
open-end (not home-secured) consumer credit plan'' in Sec. Sec.
1026.60, 1026.6(b)(2)(xiv), 1026.7(b)(11) and (b)(12), 1026.9(e) and
(f), 1026.28(d), 1026.52(b)(1)(ii)(C), and Appendices G-10 through G-
13. See also the discussion in Sec. 1026.2(a)(20) relating to charge
card accounts as open-end credit.
The Bureau proposes to revise comment 2(a)(15)-3 in a number of
ways to accommodate the proposed inclusion of some forms of prepaid
cards as charge cards. First, the existing text of the comment would be
placed in comment 2(a)(15)-3.i and a new comment 2(a)(15)-3.ii would be
added. Specifically, proposed comment 2(a)(15)-3.ii would explain that
a prepaid card is a charge card if it also is a credit card where no
periodic rate is used to compute the finance charge. Likewise, an
account number where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor would be a charge card if it is a credit card where no
periodic rate is used to compute the finance charge. This proposed
comment would also explain that unlike other charge cards, such a
prepaid card or account number that accesses a credit card account
under an open-end (not home-secured) consumer credit plan would be
subject to the requirements in Sec. 1026.7(b)(11), which implements
certain protections in the Credit CARD Act regarding periodic
statements and payment due dates. See the section-by-section analysis
of proposed Sec. 1026.7(b). Thus, under Sec. 1026.5(b)(2)(ii), for
credit card accounts under an open-end (not home-secured) consumer
credit plan, a card issuer of a prepaid card or account number that
meets the definition of a charge card because it does not impose a
finance charge structured as a periodic rate would be required to adopt
reasonable procedures designed to ensure that (1) periodic statements
are mailed or delivered at least 21 days prior to the payment due date
disclosed on the statement pursuant to Sec. 1026.7(b)(11)(i)(A), and
(2) the card issuer does not treat as late for any purposes a required
minimum periodic payment received by the card issuer within 21 days
after mailing or delivery of the periodic statement disclosing the due
date for that payment.
Under the proposal, the existing language in comment 2(a)(15)-3
(which would be redesignated as proposed comment 2(a)(15)-3.i) would be
revised to be consistent with new proposed comment 2(a)(15)-3.ii and
the definition of ``charge card.'' Currently, the first sentence of
comment 2(a)(15)-3 provides that generally, charge cards are cards used
in connection with an account on which outstanding balances cannot be
carried from one billing cycle to another and are payable when a
periodic statement is received. This sentence would be revised to be
more consistent with the definition of charge card in Sec.
1026.2(15)(iii) to state that charge cards are credit cards where no
periodic rate is used to compute the finance charge; no substantive
change is intended by this proposed revision. The Bureau notes that
while most charge cards are structured such that the outstanding
balances cannot be carried from one billing cycle to another and are
payable when a periodic statement is received, this is not a
requirement in order for a card to meet the definition of charge card
in Sec. 1026.2(a)(15)(iii). In addition, the last sentence of the
existing comment would be revised to cross reference new proposed
comment 2(a)(15)-3.ii. The Bureau seeks comment on this proposed
approach to charge cards.
2(a)(15)(iv) Debit Card, 2(a)(15)(v) Prepaid Card, and 2(a)(15)(vi)
Prepaid Account
Although Regulation Z and its commentary use the term ``debit
card,'' that term is not defined. Generally, under the existing
regulation, this term refers to a card that accesses an asset account.
See comment 2(a)(15)-2.i.B. Specifically, comment 2(a)(15)-2.i.B
provides as an example of a credit card: ``A card that accesses both a
credit and an asset account (that is, a debit-credit card).'' In
addition, comment 2(a)(15)-2.ii.A provides that the term credit card
does not include a debit card with no credit feature or agreement, even
if the creditor occasionally honors an inadvertent overdraft.
[[Page 77223]]
As discussed in the Overview of Regulation Z Proposal section,
under the proposal, different rules generally would apply in Regulation
Z depending on whether credit is accessed by a card or device that
accesses a prepaid account (which would be defined in proposed Sec.
1026.2(a)(15)(vi) to match the definition under proposed Regulation E
Sec. 1005.2(b)(3)) or one that accesses another type of asset account.
To assist compliance with the regulation, the proposal would define
``debit card'' for purposes of Regulation Z in Sec. 1026.2(a)(15)(iv)
to mean ``any card, plate, or other single device that may be used from
time to time to access an asset account other than a prepaid account.''
The proposed definition of ``debit card'' would specify that it does
not include a prepaid card. Proposed Sec. 1026.2(a)(15)(v) would
define ``prepaid card'' to mean ``any card, code, or other device that
can be used to access a prepaid account'' and would define ``prepaid
account'' in proposed Sec. 1026.2(a)(15)(vi) to mean a prepaid account
as defined in Regulation E proposed Sec. 1005.2(b)(3). Proposed
comment 2(a)(15)-6 would provide that the term ``prepaid card'' in
Sec. 1026.2(a)(15)(v) includes any card, code or other device that can
be used to access a prepaid account, including a prepaid account number
or other code. The proposed comment provides that the phrase ``credit
accessed by a prepaid card'' means any credit that is accessed by any
card, code or other device that also can be used to access a prepaid
account.
The term ``prepaid account'' as defined in proposed Regulation E
1005.2(b)(3) would not include gift cards, government benefit accounts
that are excluded under Regulation E Sec. 1005.15(a)(2), employee flex
cards, and HSA and other medical expense cards. Under current
Regulation Z and the proposal, these cards would not be credit cards
unless they were subject to a written agreement to extend credit.
Nonetheless, the Bureau solicits comment on whether gift cards,
government benefit accounts that are excluded under Regulation E Sec.
1005.15(a)(2), employee flex cards, and HSA and other medical expense
cards should be included within the definition of ``prepaid accounts''
for purposes of Regulation Z, even if those accounts would not be
considered prepaid accounts for purposes of error resolution,
disclosure, and other purposes under Regulation E. By including these
accounts into the definition of ``prepaid account'' for purposes of
Regulation Z, such a card would be a ``prepaid card'' and the card
would be a ``credit card'' if the card is a single device that may be
used from time to time to access a credit plan, except if that card
only accesses credit that is not subject to any finance charge as
defined in Sec. 1026.4 or any fee described in Sec. 1026.4(c) and is
not payable by written agreement in more than four installments.\363\
As a credit card, the person issuing the card would be a ``card
issuer'' under Regulation Z. See Sec. 1026.2(a)(7). In addition, the
person issuing the card would be a ``creditor'' under Regulation Z if
the person issuing the card extends the credit. See Sec.
1026.2(a)(17)(iii) and (iv). The specific provisions of Regulation Z
that the person would need to comply with as a ``card issuer'' and
``creditor'' would depend on the type of credit that is being extended
and the type of fees being imposed. See Sec. 1026.2(a)(17)(iii) and
(iv).
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\363\ Conforming changes also might be needed under Regulation E
if these cards became credit cards under Regulation Z.
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The Bureau is unaware of any credit features currently associated
with such cards. The Bureau solicits comment on current and potential
credit features that may be offered on these types of cards, the nature
of potential risks to consumers if credit features were offered on
these types of cards, and incentives for the industry to offer credit
features on these types of cards. The Bureau also solicits comment on
any implications of treating these products as prepaid accounts under
Regulation Z but not Regulation E.
2(a)(15)(vii) Account Numbers Where Extensions of Credit Are Permitted
To Be Deposited Directly Only Into Particular Prepaid Accounts
Specified by the Creditor
As noted above, the proposal covers credit plans that are not
accessed directly by a prepaid card, but where a separate credit plan
is accessed by an account number that is not a prepaid card that allows
deposits directly into particular prepaid accounts specified by the
creditor but does not allow the consumer to deposit directly extensions
of credit from the plan into asset accounts other than particular
prepaid accounts specified by the creditor.
A credit plan would still be covered under the proposal where a
consumer could access the credit plan by use of checks or in-person
withdrawals, so long as the credit plan allows deposits directly into
particular prepaid accounts specified by the creditor but does not
allow the consumer to deposit directly extensions of credit into an
asset account other than particular prepaid accounts specified by the
creditor. See proposed comment 2(a)(15)-5. The proposal would provide
that these credit plans would be credit card accounts under Regulation
Z.
The Bureau believes that these types of credit plans could be
offered as substitutes for overdraft credit plans accessed by a prepaid
card, and if they were not covered, creditors would be able to avoid
the consumer protections set forth in the proposal. Thus, the Bureau
believes it is reasonable to include account numbers that access these
types of credit products under the definition of credit card.
Nonetheless, the Bureau is not attempting to cover general lines of
credit where consumers generally are not restricted from depositing
directly credit extensions taken under the plan into asset accounts of
their choosing, including prepaid accounts. The Bureau believes that
those types of credit plans are not acting as substitutes for overdraft
credit plans because these general lines of credit are not designed to
provide credit in relation to particular prepaid accounts. The Bureau
solicits comment on this approach, and whether the proposal
appropriately covers the types of credit plans that may act as
substitutes for overdraft credit plans accessed by prepaid cards.
In referring to account numbers that access credit plans linked to
prepaid accounts, the proposal uses the term ``account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor.'' Proposed Sec.
1026.2(a)(15)(vii) defines this term to mean an account number that is
not a prepaid card that may be used from time to time to access a
credit plan that allows deposits directly into particular prepaid
accounts specified by the creditor but does not allow the consumer to
deposit directly extensions of credit from the plan into asset accounts
other than particular prepaid accounts specified by the creditor. As
noted above, these account numbers would be credit cards under the
proposal. See proposed Sec. 1026.2(a)(15)(vii), comments 2(a)(15)-
2.i.G and -5.
2(a)(17) Creditor
Certain disclosure requirements and other requirements in TILA and
Regulation Z generally apply to creditors. Under TILA section 103(g),
the term ``creditor'' generally is defined to mean ``a person who both
(1) regularly extends, whether in connection with loans, sales of
property or services, or otherwise, consumer
[[Page 77224]]
credit which is payable by agreement in more than four installments or
for which the payment of a finance charge is or may be required, and
(2) is the person to whom the debt arising from the consumer credit
transaction is initially payable on the face of the evidence of
indebtedness or, if there is no such evidence of indebtedness, by
agreement.'' 15 U.S.C. 1602(g). Also, for purposes of certain
disclosure provisions in TILA that relate to credit card account-
opening disclosures and periodic statement disclosures, the term
``creditor'' includes a ``card issuer[] whether or not the amount due
is payable by agreement in more than four installments or the payment
of a finance charge is or may be required.'' 15 U.S.C. 1602(g).
Consistent with TILA, under Regulation Z, the term ``creditor'' is
defined generally in Sec. 1026.2(a)(17)(i) to include a ``person who
regularly extends consumer credit that is subject to a finance charge
or is payable by written agreement in more than four installments (not
including a down payment), and to whom the obligation is initially
payable, either on the face of the note or contract, or by agreement
when there is no note or contract.'' Under Sec. 1026.2(a)(17)(v) and
comment 2(a)(17)-4, for open-end credit, a person regularly extends
consumer credit if it had more than 25 accounts outstanding in the
preceding calendar year. If a person did not meet this numerical
standard in the preceding calendar year, the numerical standards must
be applied to the current calendar year. In addition, under Sec.
1026.2(a)(17)(iii) and (iv), the term ``creditor'' includes a card
issuer (which is a person that issues a credit card or its agent) that
extends credit. For purposes of subpart B, a person also is a
``creditor'' if the person is a card issuer that extends credit that is
not subject to a finance charge and is not payable by written agreement
in more than four installments. See Sec. 1026.2(a)(17)(iii). Thus,
under Regulation Z as generally structured, card issuers that only meet
this narrow definition of creditor (i.e., extend credit that is not
subject to a finance charge and is not payable in more than four
installments) generally are subject to the open-end (not home-secured)
rules and the credit card rules in subpart B but generally need not
comply with the credit card rules in subpart G, except for the credit
card disclosures required by Sec. 1026.60.
Except as described below, the Bureau's proposal generally would
apply this existing framework to the prepaid context. Thus, a card
issuer that extends open-end credit would meet the general definition
of ``creditor'' because the person charges a finance charge and would
be subject to the rules governing open-end (not home-secured) credit
plans in subpart B and the credit card rules set forth in subparts B
and G. A card issuer that extends closed-end credit, and meets the
general definition of ``creditor'' because the person charges a finance
charge or extends credit payable by written agreement in more than four
installments generally would be subject to the closed-end provisions in
subpart C and certain open-end disclosure (not home-secured) rules and
the credit card rules in subpart B. See Sec. 1026.2(a)(17)(iv).
With respect to account numbers where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, card issuers that meet only the
special definition of ``creditor'' because they extend credit accessed
by the account number where the credit is not subject to a finance
charge and is not payable by written agreement in more than four
installments would generally be subject to the rules governing open-end
(not home-secured) credit plans in subpart B and the credit card rules
set forth in subpart B, but not the rules implementing the Credit CARD
Act, generally set forth in subpart G. Although a credit plan accessed
by such an account number would not be open-end credit because it is
not subject to a finance charge, the person generally would be subject
to the provisions in subpart B even if the credit is not subject to any
fees, including finance charges. See Sec. 1026.2(a)(17)(iii).
However, the Bureau is clarifying in proposed comment
2(a)(17)(iii)-2 that Sec. 1026.2(a)(17)(iii) does not apply to a
person that is extending credit that is accessed by a prepaid card
where the credit (1) is not subject to a finance charge, (2) is not
subject to fees described in Sec. 1026.4(c), and (3) is not payable by
written agreement in more than four installments. As discussed in the
section-by-section analysis of Sec. 1026.2(a)(15)(i), in this case,
the prepaid card is not a credit card and therefore the person issuing
the card is not a card issuer. Prepaid card issuers that satisfy this
exclusion would still be subject to Regulation E's requirements, such
as error resolution, and limits on liability for unauthorized use.
Proposed comment 2(a)(17)(iii)-2 would specify that a person is not
a creditor where a prepaid card only accesses credit that is not
subject to any finance charge as defined in Sec. 1026.4 or fee
described in Sec. 1026.4(c) and is not payable by written agreement in
more than four installments.
The Bureau notes, however, that with respect to a credit plan that
is accessed by a prepaid card, the person would be a card issuer if the
prepaid card accesses a credit plan that is subject to a fee that is
not a finance charge that is described in Sec. 1026.4(c), such as a
fee for applying for a credit plan, a late payment fee, an over-the-
limit fee, or a returned payment fee. In this case, the person would
not be extending open-end credit because the credit is not subject to a
finance charge. Nonetheless, the person would be a card issuer under
Sec. 1026.2(a)(7) and would be a creditor under Sec.
1026.2(a)(17)(iii). As a result, the person would be required to comply
generally with the rules governing open-end (not home-secured) credit
plans in subpart B and the credit card rules set forth in subpart B,
but not the rules implementing the Credit CARD Act, generally set forth
in subpart G.
2(a)(20) Open-End Credit
Under TILA section 103(j), the term ``open-end credit plan'' is
defined to mean a ``plan under which the creditor reasonably
contemplates repeated transactions, which prescribes the terms of such
transactions, and which provides for a finance charge which may be
computed from time to time on the outstanding unpaid balance.'' See 15
U.S.C. 1602(j). Under Regulation Z, the term ``open-end credit'' is
defined in Sec. 1026.2(a)(20) to mean consumer ``credit'' extended by
a ``creditor'' under a ``plan'' in which (1) the creditor reasonably
contemplates repeated transactions; (2) the creditor may impose a
``finance charge'' from time to time on an outstanding unpaid balance;
and (3) the amount of credit that may be extended to the consumer
during the term of the plan (up to any limit set by the creditor) is
generally made available to the extent that any outstanding balance is
repaid. Thus, to have open-end credit under Regulation Z, there must be
(1) consumer ``credit;'' (2) that is extended under a ``plan;'' (3)
where the person extending the credit may impose a ``finance charge''
from time to time on an outstanding unpaid balance; (4) the person
extending the credit is a ``creditor;'' (5) the person extending credit
reasonably contemplates repeated transactions; and (6) the amount of
credit that may be extended to the consumer during the term of the plan
(up to any limit set by the creditor) is generally made available to
the extent that any outstanding balance is repaid.
As discussed above in the Overview of Regulation Z Proposal
section, with narrow exceptions discussed below, the Bureau anticipates
that most credit accessed by a prepaid card will
[[Page 77225]]
constitute credit extended under a ``credit plan'' and will meet the
definition of ``open-end credit'' if the creditor offering the plan may
impose a finance charge for the credit. Likewise, the Bureau
anticipates that most credit that is deposited into a prepaid account
where the extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor will
constitute credit extended under a ``credit plan'' and will meet the
definition of ``open-end credit'' if the creditor offering the plan may
impose a finance charge for the credit.
The proposal would provide additional guidance on the meaning of
three terms used in the definition of ``open-end credit:'' (1)
``credit;'' (2) ``plan;'' and (3) ``finance charge.'' For a discussion
of the proposed revisions related to the term ``credit,'' see the
section-by-section analysis of proposed Sec. 1026.2(a)(14) above. The
term ``plan'' is discussed below. The term ``finance charge'' is
discussed below and in the section-by-section analysis of Sec. 1026.4.
Plan
The term ``plan'' currently is discussed in comment 2(a)(20)-2,
which provides in relevant part that the term ``plan'' connotes a
contractual arrangement between the creditor and the consumer. For the
reasons described in the Overview of Regulation Z Proposal section, the
proposal would revise comment 2(a)(20)-2 to provide additional guidance
on what constitutes a plan with respect to credit extended through
paying overdrafts in connection with prepaid accounts. A new comment
2(a)(20)-2.ii would be added that would provide that with respect to
credit accessed by a prepaid card, a plan would mean a program where
the consumer is obligated contractually to repay any credit extended by
the creditor. For example, a plan includes a program under which a
creditor routinely pays transactions when a consumer has insufficient
or unavailable funds in a prepaid account and the consumer is obligated
contractually to repay those transactions. Under the proposal, such a
program constitutes a plan notwithstanding that the creditor retains
discretion not to pay such transactions, the creditor does not pay
transactions once the consumer has exceeded a certain amount of credit,
or the creditor only pays transactions where there were sufficient or
available funds to cover the amount of the transaction at the time the
transaction was authorized but not sufficient or available funds to
cover the amount of the transaction at the time the transaction is
paid.
In addition, for the reasons discussed in the Overview of
Regulation Z Proposal section, a similar new proposed comment 2(a)(20)-
2.iii would be added to provide guidance on when depositing credit
proceeds into a prepaid account would be considered extending credit
under a plan. In particular, this proposed comment would provide that
with respect to credit accessed by an account number where extensions
of credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, a plan means a program
where the consumer is obligated contractually to repay any credit
extended by the creditor. For example, a plan includes a program under
which a creditor routinely will extend credit that is deposited
directly into particular prepaid accounts specified by the creditor and
the consumer is obligated contractually to repay the credit. Such a
program constitutes a plan notwithstanding that the creditor retains
discretion not to extend credit, or the creditor does not extend credit
once the consumer has exceeded a certain amount of credit. For example,
a program constitutes a plan where a creditor will routinely extend
credit that is deposited directly into a particular prepaid account
specified by the creditor when the consumer requests an extension
because the consumer does not have adequate funds in the prepaid
account to cover the full amount of a transaction using the prepaid
card.
As discussed in more detail in the Overview of Regulation Z
Proposal section, with respect to the programs described above, the
Bureau believes these programs are plans notwithstanding that the
person offering the program reserves the right not to extend credit on
individual transactions. The Bureau believes that the person's
reservation of such discretion in connection with credit extended with
respect to prepaid accounts does not connote the absence of an open-end
credit plan. Consumers using overdraft programs, or linked lines of
credit, in connection with prepaid accounts must agree to repay the
debt created by an overdraft or advance, indicating that a contractual
arrangement between the creditor and the consumer exists. The Bureau
notes that credit card issuers similarly reserve the right to reject
individual transactions, and thus the Bureau believes that automated
overdrafts services are comparable.
To accommodate the proposed changes, the proposal also would make
several technical revisions to comment 2(a)(20)-2. Specifically, the
first sentence of the existing language in comment 2(a)(20)-2 would be
moved to proposed comment 20(a)(20)-2.i, and the remaining language of
the existing comment would be moved to proposed comment 2(a)(20)-2.iv.
Finance Charge Imposed From Time to Time on an Outstanding Unpaid
Balance
In Regulation Z, credit will not meet the definition of ``open-end
credit'' unless the person extending the credit may impose a ``finance
charge'' from time to time on an outstanding unpaid balance. Comment
2(a)(20)-4 provides that the requirement that a finance charge may be
computed and imposed from time to time on the outstanding balance means
that there is no specific amount financed for the plan for which the
finance charge, total of payments, and payment schedule can be
calculated. This comment also provides that a plan may meet the
definition of open-end credit even though a finance charge is not
normally imposed, provided the creditor has the right, under the plan,
to impose a finance charge from time to time on the outstanding
balance. The term ``finance charge'' generally is defined in Sec.
1026.4 to mean ``the cost of consumer credit as a dollar amount'' and
it includes any charge payable directly or indirectly by the consumer
and imposed directly or indirectly by the creditor as an incident to or
a condition of the extension of credit. The term does not include any
charge of a type payable in a comparable cash transaction.
The proposal would add 2(a)(20)-4.ii to note that with respect to
credit accessed by a prepaid card (including a prepaid card that is
solely an account number) or credit accessed by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, any service,
transaction, activity, or carrying charges imposed on a credit account,
and any such charges imposed on a prepaid account if that charge is
related to an extension of credit, carrying a credit balance, or credit
availability, generally would be a finance charge. See Sec. 1026.4(a),
(b)(2), (c)(3) and (4) and comments 4(a)-4 and 4(b)(2)-1. In addition,
proposed comment 2(a)(20)- 4.ii would provide that with respect to that
credit, such service, transaction, activity or carrying charges would
constitute finance charges imposed from time to time on an outstanding
unpaid balance if there is no specific amount financed for the plan for
which the finance charge, total of payments, and payment schedule can
be calculated.
[[Page 77226]]
The Bureau does not anticipate that there will be a specific amount
financed for credit plans accessed by prepaid cards, or credit plans
that are linked to prepaid accounts and accessed by account numbers as
discussed above, at the time the credit plan is established. Instead,
the Bureau anticipates that the credit lines on these credit plans
generally will be replenishing. In such cases, an amount financed for
the plan could not be calculated because the creditor will not know at
the time the plan is established the amount of credit that will be
extended under the plan. Thus, to the extent that any finance charge
may be imposed on such credit plans, the credit plan will meet this
criterion.
As discussed in the section-by-section analysis of Sec. 1026.4,
the Bureau is proposing to expand the types of fees that would be
finance charges for purposes of credit linked to prepaid accounts.
Currently, certain fees or charges are specifically excluded from the
term ``finance charge,'' such as (1) charges imposed by a financial
institution for paying items that overdraw an account, unless the
payment of such items and the imposition of the charge were previously
agreed upon in writing; and (2) fees charged for participation in a
credit plan, whether assessed on an annual or other periodic basis. See
Sec. 1026.4(c)(3) and (4). The proposal would amend Sec. 1026.4 and
its commentary that relates to the definition of ``finance charge'' to
provide that these two exceptions do not apply to credit accessed by a
prepaid card or an account number where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. In addition, the proposal would
make additional amendments to Sec. 1026.4 and related commentary
related to credit accessed by a prepaid card or credit accessed by an
account number where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor. For such credit, any service, transaction, activity, or
carrying charges imposed on the credit account, and any such charges
imposed on a prepaid account if that charge is related to an extension
of credit, carrying a credit balance, or credit availability, generally
would be a finance charge. See Sec. 1026.4(a), (b)(2), (c)(3) and (4)
and comments 4(a)-4 and 4(b)(2)-1. Such charges would include periodic
participation fees for the credit plan, and transaction charges imposed
in connection with a credit extension.
As a result of the proposal to expand the definition of finance
charge for credit linked to prepaid accounts, the Bureau believes that
charge card accounts accessed by prepaid cards or account numbers as
discussed above would be open-end credit when transaction fees,
participation fees, or other finance charges may be imposed on the
account. If the Bureau were to read the criterion of open-end credit
that a finance charge may be imposed time to time on an outstanding
unpaid balance narrowly, there is a chance that some types of charge
card accounts offered in connection with prepaid accounts would
constitute closed-end credit. A person offering such a charge card
account would be required to comply with the closed-end provisions in
subpart C as well as certain open-end (not home-secured) rules and the
credit card rules in subpart B. See Sec. 1026.2(a)(17)(iv). The Bureau
believes that receiving closed-end disclosures for these types of
accounts would be confusing to consumers, because the disclosures would
be different from their other credit card accounts. Where the
transactions otherwise would seem to fit an open-end plan based on
repeated transactions and replenishing credit, the Bureau believes that
consumers would be better protected and better informed if such
transactions were treated as open-end plans in the same way as their
other credit card accounts. In addition, with respect to credit
accessed by prepaid cards, the Bureau believes that complying with the
closed-end credit rules would be difficult for card issuers (for
example, at point of sale) because closed-end disclosures specific to
each credit extension would need to be provided prior to each
transaction. Thus, the Bureau proposes to retain the current
interpretation of the finance charge criterion for the term ``open-end
credit'' which would result in most charge card accounts meeting the
definition of ``open-end credit'' if a transaction fee, participation
fee or other finance charge may be imposed on the credit plan. The
Bureau solicits comment on this approach.
The Bureau also notes that persons that offer charge card accounts
where no finance charge is imposed may still be subject to certain
Regulation Z provisions. See the section-by-section analysis of Sec.
1026.2(a)(17).
As a technical revision, the proposal would move the existing
language of comment 2(a)(20)-4 to proposed comment 20(a)(20)-4.i.
Section 1026.4 Finance Charge
Under TILA section 106(a), the term ``finance charge'' generally
provides that ``the amount of the finance charge in connection with any
consumer credit transaction shall be determined as the sum of all
charges, payable directly or indirectly by the person to whom the
credit is extended, and imposed directly or indirectly by the creditor
as an incident to the extension of credit.'' The finance charge does
not include charges of a type payable in a comparable cash transaction.
15 U.S.C. 1605(a).
Under Regulation Z, the term ``finance charge'' generally is
defined in Sec. 1026.4(a) to mean ``the cost of consumer credit as a
dollar amount.'' It includes any charge payable directly or indirectly
by the consumer and imposed directly or indirectly by the creditor as
an incident to or a condition of the extension of credit. It does not
include any charge of a type payable in a comparable cash transaction.
However, certain fee or charges are specifically excluded from the
current definition of ``finance charge,'' including (1) charges imposed
by a financial institution for paying items that overdraw an account,
unless the payment of such items and the imposition of the charge were
previously agreed upon in writing; and (2) fees charged for
participation in a credit plan, whether assessed on an annual or other
periodic basis. See Sec. 1026.4(c)(3) and (4).
The proposal would amend Sec. 1026.4 and its commentary that
relates to the definition of ``finance charge'' in two ways. First, it
would provide that the exception regarding overdrafts would not apply
to credit accessed by a prepaid card or by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, as discussed
further below and in the Overview of Regulation Z Proposal section.
Second, it would provide that the second exception regarding
participation fees does not apply to credit accessed by prepaid card or
by an account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. The proposal also would make certain other additional
amendments to Sec. 1026.4 and related commentary related to credit
accessed by a prepaid card or credit accessed by an account number
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor to clarify
which types of charges are finance charges and which are not. As
discussed below, this
[[Page 77227]]
portion of the proposal is designed to ensure proposed protections for
prepaid accounts.
4(a) Definition
Under Regulation Z, the term ``finance charge'' generally is
defined in Sec. 1026.4(a) to mean ``the cost of consumer credit as a
dollar amount.'' It includes any charge payable directly or indirectly
by the consumer and imposed directly or indirectly by the creditor as
an incident to or a condition of the extension of credit. It does not
include any charge of a type payable in a comparable cash transaction.
Comment 4(a)-4 provides guidance on when transaction charges imposed on
credit card accounts are finance charges under Sec. 1026.4(a).
(Transaction charges that are imposed on checking accounts or other
transaction accounts are discussed in the section-by-section analysis
of Sec. 1026.4(b).)
Specifically, comment 4(a)-4 provides that any transaction charge
imposed on a cardholder by a card issuer is a finance charge,
regardless of whether the issuer imposes the same, greater, or lesser
charge on withdrawals of funds from an asset account such as a checking
or savings account. For example, any charge imposed on a credit
cardholder by a card issuer for the use of an ATM to obtain a cash
advance (whether in a proprietary, shared, interchange, or other
system) is a finance charge regardless of whether the card issuer
imposes a charge on its debit cardholders for using the ATM to withdraw
cash from a consumer asset account, such as a checking or savings
account. In addition, any charge imposed on a credit cardholder for
making a purchase or obtaining a cash advance outside the United States
with a foreign merchant, or in a foreign currency, is a finance charge,
regardless of whether a charge is imposed on debit cardholders for such
transactions. This comment essentially provides that debit card
transactions are not considered ``comparable cash transactions'' to
credit card transactions with respect to transaction charges imposed by
a card issuer on a credit cardholder when those fees are imposed on the
credit card account.
In the supplemental information accompanying the rule that adopted
this comment, the Board noted the inherent complexity of seeking to
distinguish transactions that are ``comparable cash transactions'' to
credit card transactions from transactions that are not.\364\ For
example, the Board discussed the situation of a transaction fee imposed
by a card issuer on the credit card account for a cash advance through
an ATM. A transaction fee for a cash advance through an ATM would not
always be a finance charge if the ``comparable cash transaction''
exception considered fees that are imposed on debit cards offered by
the credit card issuer in determining whether a transaction fee for a
cash advance through an ATM imposed on the credit account is a finance
charge. Instead, whether this fee is a finance charge would depend on
whether the credit card issuer provides asset accounts and offers debit
cards on those accounts and whether the fee exceeds the fee imposed for
a cash advance transaction through an ATM on the asset account. The
Board believed this type of distinction is not helpful for consumers in
understanding transaction fees that are imposed on credit card
accounts. Thus, the Board adopted comment 4(a)-4, which provides that
any transaction charge imposed on a cardholder by a card issuer is a
finance charge, regardless of whether the issuer imposes the same,
greater, or lesser charge on withdrawals of funds from an asset account
such as a checking or savings account. The Board noted that it was not
revising comment 4(b)(2)-1, which states that if a checking or
transaction account charge imposed on an account with a credit feature
does not exceed the charge for an account without a credit feature, the
charge is not a finance charge. The Board further noted that comment
4(b)(2)-1 addresses different situations as comment 4(a)-1, as
discussed below in the section-by-section analysis of Sec.
1026.4(b)(2).
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\364\ 74 FR 5244, 5263 (Jan. 29, 2009).
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The Bureau proposes to add two new examples to this comment to
provide guidance on how this comment applies to prepaid cards that are
credit cards and to account numbers that are credit cards where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor. In particular,
proposed comment 4(a)-4.iii would provide that any transaction charge
imposed on a cardholder by a card issuer for credit accessed by a
prepaid card that also is a credit card is a finance charge regardless
of whether the card issuer imposes the same, greater or lesser charge
on the withdrawal of funds from a prepaid account. For example, assume
a prepaid card issuer charges $15 for each transaction accessing credit
with a prepaid card. This $15 fee would be a finance charge regardless
of whether the prepaid card issuer charges the same, greater or lesser
fee to the consumer to access funds in the prepaid account using the
prepaid card.
In addition, proposed comment 4(a)-4.iv would provide that any
transaction charge imposed on a cardholder by a card issuer for credit
accessed by an account number that is a credit card where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor is a finance charge
regardless of whether the card issuer imposes the same, greater or
lesser charge on the withdrawal of funds from a prepaid account. For
example, assume a card issuer charges a $15 fee each time a consumer
uses an account number to access credit that is deposited into a
prepaid account where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. This $15 fee is a finance charge regardless of whether
the card issuer charges the same, greater or lesser fee to the consumer
to access funds in the prepaid account using a prepaid card.
4(b) Examples of Finance Charges
4(b)(2)
Section 1026.4(b) provides examples of the types of charges that
are finance charges, except if those charges are specifically excluded
under Sec. 1026.4(c) through (e). In particular, Sec. 1026.4(b)(2)
provides that examples of finance charges generally include service,
transaction, activity, and carrying charges. However, the Board added a
partial exception to this example stating that for any charge imposed
on a checking or other transaction account, such service or transaction
account charge is only a finance charge to the extent that the charge
exceeds the charge for a similar account without a credit feature.
Comment 4(b)(2)-1 similarly provides that a checking or transaction
account charge imposed in connection with a credit feature is a finance
charge under Sec. 1026.4(b)(2) to the extent the charge exceeds the
charge for a similar account without a credit feature. If a charge for
a checking or transaction account with a credit feature does not exceed
the charge for an account without a credit feature, the charge is not a
finance charge under Sec. 1026.4(b)(2).\365\
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\365\ To illustrate: A $5 service charge is imposed on a
checking or transaction account with an overdraft line of credit
(where the institution has agreed in writing to pay an overdraft),
while a $3 service charge is imposed on an account without a credit
feature; the $2 difference is a finance charge. (If the difference
is not related to account activity, however, it may be excludable as
a participation fee. See the commentary to Sec. 1026.4(c)(4)). As
another example, assume a $5 service charge is imposed for each item
that results in an overdraft on a checking or transaction account
with an overdraft line of credit, while a $25 service charge is
imposed for paying or returning each item on a similar account
without a credit feature. The $5 charge is not a finance charge.
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[[Page 77228]]
The Bureau believes that the Board adopted this partial exception
to exclude certain overdraft lines of credit from coverage under
Regulation Z. As discussed in the Overview of Regulation Z Proposal
section, overdraft lines of credit where a financial institution agrees
in writing to pay overdrafts and impose a fee generally would be
subject to Regulation Z if the financial institution is imposing a
finance charge. Nonetheless, under Sec. 1026.4(b)(2), a person would
not be imposing a finance charge on an overdraft line of credit if the
fee for the overdraft is imposed on the checking or transaction account
and does not exceed the amount of the fee that is imposed on the
checking or transaction account if the financial institution returns
the item unpaid (NSF fee) or does not exceed the amount of the fee the
financial institution would impose if a courtesy overdraft service
applied to the account instead of an overdraft line of credit. The
Bureau believes that the Board adopted this partial exception as an
expansion of the ``comparable cash transaction'' exception to the
definition of ``finance charge,'' which excludes charges imposed
uniformly in cash and credit transactions from the definition of
``finance charge.'' See Sec. 1026.4(a) and comment 4(a)-1; see also 15
U.S.C. 1605(a).
For the reasons discussed in the Overview of Regulation Z Proposal
section, the Bureau proposes not to extend this partial exclusion to
credit extended in connection with a prepaid account. The proposal
would add proposed Sec. 1026.4(b)(2)(ii), and proposed comment
4(b)(2)-1.ii through .iv, to clarify that prepaid accounts are not
subject to this partial exception from the definition of finance
charge. Specifically, the proposed language would provide that any
charge imposed in connection with an extension of credit, for carrying
a credit balance, or for credit availability is a finance charge where
that fee is imposed on a prepaid account in connection with credit
accessed by a prepaid card or accessed by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, regardless of
whether the creditor imposes the same, greater or lesser charge on the
withdrawal of funds from the prepaid account, to have access to the
prepaid account, or when credit is not extended.
To illustrate, assume a $15 transaction charge is imposed on the
prepaid account each time a consumer uses a prepaid card or an account
number described above to access an open-end credit plan. The $15
charge is a finance charge regardless of whether the creditor imposes
the same, greater or lesser charge to withdraw funds from the prepaid
account. As another example, assume a $1.50 transaction charge is
imposed on the prepaid account for each transaction that is made with
the prepaid card, including when the prepaid card is used to access
credit where the consumer has insufficient or unavailable funds in the
prepaid account at the time of authorization or at the time the
transaction is paid. The $1.50 transaction charge is a finance charge
when the prepaid card accesses credit, notwithstanding that a $1.50
transaction charge also is imposed on transactions that solely access
funds in the prepaid account. As a third example, assume a $5 monthly
service charge is imposed on the prepaid account for the availability
of an open-end plan that is accessed by a prepaid card or an account
number described above. The $5 monthly service charge is a finance
charge regardless of whether the creditor imposes the same, greater or
lesser monthly service charge to hold the prepaid account.
Proposed comment 4(b)(2)-1.iii would provide that examples of
charges imposed on a prepaid account in connection with an extension of
credit, for carrying a credit balance, or for credit availability
include (1) transaction fees for credit extensions; (2) fees for
transferring funds from a credit account to a prepaid account; (3) a
daily, weekly, or monthly (or other periodic) fee assessed each period
a prepaid account is in ``overdraft'' status, or would be in overdraft
status but for funds supplied by a linked line of credit; (4) a daily,
weekly, or monthly (or other periodic) fee assessed each period a line
of credit accessed by a prepaid card or account number described in
Sec. 1026.4(b)(2)(ii) has an outstanding balance; and (5)
participation fees or other fees that the consumer is required to pay
for the issuance or availability of credit.
Proposed comment 4(b)(2)-1.iv would provide that proposed Sec.
1026.4(b)(2)(ii) would not apply to transaction fees imposed on the
prepaid account that are imposed only on transactions that solely
access funds in the prepaid account (and are not imposed on
transactions that either are funded in whole or in part from credit),
fees for opening or holding the prepaid account, and other fees, such
as cash reload fees and balance inquiry fees, that are not imposed on
the prepaid account because the consumer engaged in a transaction that
is funded in whole or in part by credit, for holding a credit plan, or
for carrying a credit balance. These fees would not be considered
charges imposed on a prepaid account in connection with an extension of
credit, for carrying a credit balance, or for credit availability even
if there are not sufficient funds in the prepaid account to pay the
fees at the time they are imposed on the prepaid account. Nonetheless,
any negative balance on the prepaid account, whether from fees or other
transactions would be a credit extension and if a fee is imposed for
such credit extension, the fee would be a finance charge under Sec.
1026.4(b)(2)(ii). For example, if a cash-reload fee is imposed on the
prepaid account, there are not sufficient funds in the prepaid account
to pay the fee at the time it is imposed on the prepaid account, and an
additional charge is imposed on the prepaid account for this credit
extension, the additional charge would be a transaction charge imposed
on a prepaid account in connection with an extension of credit and
would be a finance charge under Sec. 1026.4(b)(2)(ii).
The Bureau believes that this approach is most reasonable and
consistent with the general definition of finance charge because where
a prepaid account lacks sufficient funds to pay a transaction
completely, a transaction fee imposed in the course of processing the
transaction with credit funds is payable directly or indirectly by the
consumer as an incident to or condition of the extension of credit.
That is why comment 4(a)-4 for credit card transactions covers
transaction charges, regardless of whether the issuer imposes the same,
greater, or lesser charges on withdrawals on funds from an asset
account.
As discussed above, the Bureau believes that the Board based the
partial exemption in Sec. 1026.4(b)(2) on the comparable cash
transaction exception, which excludes charges imposed uniformly in cash
and credit transactions from the definition of ``finance charge.'' The
Bureau believes that the Board expanded this exception in connection
with asset accounts to include situations where a consumer is using a
cash-like product, such as a debit card that is accessing an asset
account. The Bureau further believes that it is reasonable not to
expand the comparable cash transaction exception in connection with
prepaid accounts, for the reasons discussed below. In retail
transactions, the comparable cash
[[Page 77229]]
transaction to which the credit transaction is compared could only
include retail transactions where the goods or services are paid for
with ``cash'' as opposed to being paid for by a check or a prepaid card
that accesses funds in a checking or transaction account. When a
consumer pays for goods or services with ``cash,'' the consumer does
not pay these fees. Therefore, the Bureau believes that the
``comparable cash'' exception is reasonably interpreted not to apply to
these types of fees that are imposed on prepaid accounts with respect
to credit extended in connection with prepaid accounts, as described
above. First, the Bureau believes that the best approach with respect
to credit extended in connection with prepaid accounts is to provide a
clear line about which fees that are imposed on the prepaid account are
finance charges, rather than basing that decision on the fees that a
prepaid card issuer charges to access the funds in the prepaid account
or to hold the account. Otherwise, the same type of fee, such as a
transaction or service charge imposed in connection with an extension
of credit, for carrying a credit balance, or for credit availability
will not always be a finance charge for each prepaid account, but
instead would depend on the other fees that are charged on that
particular prepaid account. This may make it more difficult for
compliance purposes to determine whether a fee is a finance charge.
The Bureau also believes that it is necessary to include in the
definition of finance charge fees that are imposed on the prepaid
account if those fees are in connection with an extension of credit,
for carrying a credit balance, or for credit availability. Otherwise, a
person could avoid the protections set forth in the proposal by
charging fees for credit on the prepaid account rather than on the
credit account. The Bureau believes that the proposed approach will
ease compliance and make it easier for consumers to compare total costs
of accessing credit.
The proposal would cause issuers who are trying to fit within
certain exceptions to the regime to waive certain transaction fees in
connection with overdraft transactions. For example, if a financial
institution wants to take advantage of the exception from Regulation Z
where a credit plan is accessed by a prepaid card and the credit plan
only allows extension of credit that are not subject to a finance
charge or fees subject to Sec. 1026.4(c) and are not payable by
written agreement in more than four installments, the financial
institution would need to waive transaction fees where the transaction
is funded in whole or in part by credit. For example, assume a $1.50
transaction charge is imposed on the prepaid account for each
transaction that is made with the prepaid card, including when the
prepaid card is used to access credit where the consumer has
insufficient or unavailable funds in the prepaid account at the time of
authorization or at the time the transaction is paid. The $1.50
transaction charge is a finance charge when the prepaid card accesses
credit, notwithstanding that a $1.50 transaction charge also is imposed
on transactions that solely access funds in the prepaid account. In
this case, the prepaid card issuer would need to waive the $1.50
transaction charge on any transaction that accesses credit. Otherwise,
the $1.50 transaction fee charged for a transaction that accesses
credit would be a finance charge. The Bureau believes that the cost
imposed in waiving fees would be outweighed by benefits to consumers in
understanding the costs of credit transactions.
The Bureau believes the best approach is to treat such fees
consistent with the provision in comment 4(a)-4 for transaction fees
imposed on credit card accounts. This means that fees that are imposed
to access the funds in a prepaid account or to hold the prepaid account
are not relevant in deciding whether transaction or service charges
imposed on a prepaid account for credit are ``finance charges'' under
Sec. 1026.4(a). However, the Bureau seeks comment on this approach and
its benefit and costs for consumers, industry, and alternative
approaches if any.
For the reasons discussed in the Overview of Regulation Z Proposal
section, to preserve the existing rules so that they remain applicable
to other types of credit, the Bureau proposes to move the existing rule
to Sec. 1026.4(b)(2)(i) and move the existing language in comment
4(b)(2)-1 to proposed comment 4(b)(2)-1.i.
4(c)
Section 1026.4(c) provides a list of certain charges that are
excluded from the definition of finance charge under Sec. 1026.4. The
charges listed in Sec. 1026.4(c) include (1) Application fees charged
to all applicants for credit, whether or not credit is actually
extended; (2) Charges for actual unanticipated late payment, for
exceeding a credit limit, or for delinquency, default, or a similar
occurrence; (3) Charges imposed by a financial institution for paying
items that overdraw an account, unless the payment of such items and
the imposition of the charge were previously agreed upon in writing;
and (4) Fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis. As discussed in more
detail below, the proposal would provide that the following charges are
not excluded from the definition of finance charge in connection with
credit accessed by prepaid card, or credit accessed by account numbers
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor: (1) Charges
imposed by a financial institution for paying items that overdraw an
account, unless the payment of such items and the imposition of the
charge were previously agreed upon in writing; and (2) Fees charged for
participation in a credit plan, whether assessed on an annual or other
periodic basis.
4(c)(3)
Section 1026.4(c)(3) provides that the term ``finance charge'' does
not include charges imposed by a financial institution for paying items
that overdraw an account, unless the payment of such items and the
imposition of the charge were previously agreed upon in writing. As
discussed above in the Overview of Regulation Z Proposal section, the
Board developed this exception to the term ``finance charge'' in order
to carve out fees imposed by financial institutions for checks or other
items that overdraw an account so that ad hoc overdraft plans would not
be subject to Regulation Z. As discussed in the Overview of Regulation
Z Proposal section, the Bureau intends generally that, under its
proposal, Regulation Z will apply to credit accessed by prepaid cards
or by an account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. Thus, the Bureau proposes to revise Sec. 1026.4(c)(3) to
specify that this provision does not apply to credit accessed by a
prepaid card or by an account number where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. As a result, charges imposed by a
financial institution for paying items that overdraw a prepaid account
will be finance charges even if the payment of the item and the
imposition of the charge were not previously agreed upon in writing,
and the financial institution extending the credit represented by the
overdraft will be a creditor.
[[Page 77230]]
4(c)(4)
Section 1026.4(c)(4) provides that the term ``finance charge'' does
not include fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis. Comment 4(c)(4)-1
explains that the participation fees described in Sec. 1026.4(c)(4) do
not necessarily have to be formal membership fees, nor are they limited
to credit card plans. The provision applies to any credit plan in which
payment of a fee is a condition of access to the plan itself, but it
does not apply to fees imposed separately on individual closed-end
transactions. The fee may be charged on a monthly, annual, or other
periodic basis; a one-time, non-recurring fee imposed at the time an
account is opened is not a fee that is charged on a periodic basis, and
may not be treated as a participation fee.
The Bureau proposes to amend Sec. 1026.4(c)(4) to provide that
this exception does not apply to credit accessed by a prepaid card or
to credit accessed by an account number where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. The Bureau believes that this
exception is not dictated by TILA's definition of ``finance charge.''
Rather, the Board added this exception to Sec. 1026.4(c)(4) in 1981
based on an interpretation letter that the Board has previously
issued.\366\ In the interpretation letter, the Board excluded annual
fees for membership in a credit plan from the definition of ``finance
charge'' because these fees are not imposed incident or as a condition
to any specific extension of credit.\367\ Nonetheless, the Bureau
believes that the term ``finance charge'' in TILA is broad enough to
reasonably include periodic fees for participation in a credit plan
under which a consumer may obtain credit because those fees would be
``incident to the extension of credit.'' Without paying the periodic
fees for access to the credit plan, the consumer could not use the
credit plan to access credit.
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\366\ 46 FR 20848, 20855 (Apr. 7, 1981).
\367\ 36 FR 16050 (Aug. 19, 1971).
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As discussed in the Overview of Regulation Z Proposal section, the
Bureau intends generally to cover credit accessed by a prepaid card, or
by an account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor, as ``open-end credit'' under Regulation Z. The Bureau
believes these credit plans should be ``open-end credit'' even if the
only fees charged for the plan are annual or other periodic fees for
participation in the credit plan. See the section-by-section analysis
of Sec. 1026.2(a)(20) for a discussion of the finance charge criterion
for the definition of ``open-end credit.'' The Bureau believes that
annual or other periodic fees that are charged for participation in
credit plans linked to prepaid accounts (as discussed above) could be
significant costs to consumers, even if interest or transaction fees
are not charged with respect to the plan, and thus the protections in
Regulation Z that apply to open-end credit, including those in subpart
G, should apply to credit plans linked to prepaid accounts as discussed
above that charge an annual or other periodic fee to access the plan
and otherwise meet the definition of ``open-end credit.''
The Bureau especially believes that the protections in Regulation Z
subpart G that generally apply to open-end credit that is accessed by a
credit card would be beneficial to consumers for such credit plans. For
example, Sec. 1026.51 prohibits credit card issuers from extending
credit without assessing the consumer's ability to pay, with special
rules regarding the extension of credit to persons under the age of 21.
In addition, Sec. 1026.52(a) restricts the amount of fees (including
annual or other periodic fees to access the plan) that an issuer can
charge during the first year after an account is opened, such that the
fees generally cannot exceed 25 percent of the initial credit limit.
These provisions would provide important protections to consumers to
help ensure that consumers accessing credit plans linked to prepaid
accounts as discussed above where only annual or other periodic fees
are imposed do not become overextended in using credit, and that the
periodic fees imposed during the first year generally do not exceed
more than 25 percent of the initial credit line. Thus, the Bureau would
revise Sec. 1026.4(c)(4) and comment 4(c)(4)-1 to provide that the
exception for participation fees from the definition of ``finance
charge'' does not apply to credit accessed by a prepaid card or to
credit accessed by an account number where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.
Subpart B
The provisions in subpart B generally apply to a ``creditor'' as
defined in Sec. 1026.17 that is extending ``open-end credit'' as
defined in Sec. 1026.2(a)(20). They also generally apply to card
issuers that are extending credit. See Sec. 1026.2(a)(17)(iii) and
(iv). These provisions generally require that account-opening
disclosures and periodic statement disclosures be provided, as well as
set forth rules for the treatment of payments and credit balances, and
procedures for resolving credit billing errors. While most of the
provisions in subpart B apply generally to open-end credit, as
described below, some of the provisions only apply to a ``credit card
account under an open-end (not home-secured) consumer credit plan,'' as
that term is defined in Sec. 1026.2(a)(15)(ii). In addition, subpart B
also sets forth, in Sec. 1026.12, provisions applicable to credit card
transactions; those provisions generally apply to a ``card issuer'' as
defined in Sec. 1026.2(a)(7).
As discussed above in the Overview of Regulation Z Proposal
section, the Bureau anticipates that most credit accessed by a prepaid
card, or accessed by an account number where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, will meet the definition of ``open-
end credit'' if the creditor may impose a finance charge. See the
section-by-section analysis of the definition of ``credit'' in Sec.
1026.2(a)(14), the definition of ``open-end-credit'' in proposed Sec.
1026.2(a)(20), and the definition of ``finance charge'' in Sec.
1026.4.
In addition, as discussed above in the section-by-section analysis
of Sec. 1026.2(a)(7), (a)(15)(i) and (a)(15)(ii), an open-end credit
plan accessed by a prepaid card that is a credit card, or by an account
number that is a credit card where the extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, would be a ``credit card account
under an open-end (not home-secured) consumer credit plan'' and the
person issuing the prepaid card or account number would be a ``card
issuer.'' For a discussion of card issuers that would still be subject
to certain provisions in subpart B if they are extending credit that is
not ``open-end credit,'' see the section-by-section analysis of Sec.
1026.2(a)(17).
As discussed below, the proposal would revise subpart B to provide
guidance on how certain provisions in subpart B apply to open-end
credit plans or credit card accounts that are accessed by a prepaid
card (such as overdraft credit) or to open-end credit plans or credit
card accounts where extensions of credit are deposited into a prepaid
account where the extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor.
[[Page 77231]]
Specifically, the proposal would provide additional guidance regarding:
(1) Disclosure requirements applicable to periodic statements in Sec.
1026.5, 1026.7 and 1026.8; (2) treatment of payment requirements as set
forth in Sec. 1026.10; and (3) billing error procedures in Sec.
1026.13.
The proposal also would revise certain provisions that apply to
credit card transactions in Sec. 1026.12 to provide guidance on how
those provisions apply to credit card transactions that are made using
a prepaid card that is a credit card or using an account number that is
a credit card where the extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. Specifically, the proposal would provide additional
guidance on: (1) Unsolicited issuance in Sec. 1026.12(a); (2) the
right of a cardholder to assert claims or defenses against a card
issuer in Sec. 1026.12(c); and (3) the prohibition on offsets by a
card issuer in Sec. 1026.12(d). In addition, the proposal would add a
new Sec. 1026.12(h) that would impose a new requirement on card
issuers that offer prepaid cards that are credit cards or account
numbers that are credit cards where the extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. Under proposed Sec. 1026.12(h),
these card issuers would be prevented from opening a credit card
account for, or providing a solicitation or application to open a
credit or charge card account to, a consumer who holds a prepaid card
until at least 30 days after the consumer has registered the prepaid
account.
Section 1026.5 General Disclosure Requirements
5(b) Time of Disclosures
5(b)(2) Periodic Statements
5(b)(2)(ii) Timing Requirements
TILA sections 127(b) and 163, which are implemented in Sec.
1026.5(b)(2), set forth the timing requirements for providing periodic
statements for open-end credit accounts and credit card accounts. 15
U.S.C. 1637(b) and 1666b. Section 1026.5(b)(2)(i) provides that a
creditor that extends open-end credit or credit accessed by a credit
card account generally is required to provide a periodic statement as
required by Sec. 1026.7 for each billing cycle at the end of which an
account has a debit or credit balance of more than $1 or on which a
finance charge has been imposed. Section 1026.5(b)(2)(ii)(A) provides
that for credit card accounts under an open-end (not home-secured)
consumer credit plan, a card issuer must adopt reasonable procedures
designed to ensure that:
(1) Periodic statements are mailed or delivered at least 21 days
prior to the payment due date disclosed on the statement pursuant to
Sec. 1026.7(b)(11)(i)(A); and
(2) The card issuer does not treat as late for any purpose a
required minimum periodic payment received by the card issuer within 21
days after mailing or delivery of the periodic statement disclosing the
due date for that payment. See the section-by-section analysis of Sec.
1026.2(a)(15)(ii) for a discussion of the term ``credit card accounts
under an open-end (not home-secured) consumer credit plan.''
TILA sections 127(b)(12) and (o), which are implemented in Sec.
1026.7(b)(11)(i)(A), set forth requirements related to the disclosure
of payment due dates on periodic statements in the case of a credit
card account under an open-end consumer credit plan. 15 U.S.C
1637(b)(12), (o). Section 1026.7(b)(11)(i)(A) provides that for a
credit card account under an open-end (not home-secured) consumer
credit plan, a card issuer must provide on each periodic statement the
due date for a payment. The due date disclosed must be the same day of
the month for each billing cycle.
Although TILA sections 127(b)(12) and (o) do not, on their face,
exclude charge card accounts that are accessing open-end credit, the
Board in implementing these provisions, as explained in comment
5(b)(2)(ii)-4.i, determined that the payment due date requirement in
Sec. 1026.7(b)(11)(i)(A) does not apply to periodic statements
provided solely for charge card accounts. See Sec.
1026.7(b)(11)(ii)(A). Thus, the requirement in Sec.
1026.5(b)(2)(ii)(A)(1) to adopt reasonable procedures designed to
ensure that periodic statements are mailed or delivered at least 21
days prior to the payment due date disclosed on the periodic statement
does not apply to charge card accounts. In the supplemental information
to the final rule adopting the exclusion for charge cards from the due
date disclosure requirement, the Board noted that charge cards are
typically products where outstanding balances cannot be carried over
from one billing cycle to the next and are payable when the periodic
statement is received.\368\ Therefore, the contractual payment due date
for a charge card account is the date on which the consumer receives
the periodic statement (although charge card issuers generally request
that the consumer make payment by some later date). If the due date
disclosure requirement and the 21-day rule for delivery of periodic
statements applied to charge card account, the card issuer could no
longer require payment upon delivery of the statement. Thus, the Board
concluded that it would not be appropriate to apply the payment due
date disclosure in Sec. 1026.7(b)(11)(i)(A) to periodic statements
provided solely for charge card accounts.
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\368\ 75 FR 7658 at 7672-7673, Feb. 22, 2010.
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As discussed in more detail in the section-by-section analysis of
Sec. 1026.7(b)(11), the proposal would provide that the due date
disclosure set forth in Sec. 1026.7(b)(11)(A) does apply to periodic
statements provided solely for charge card accounts where the charge
card account is accessed by a charge card that is a prepaid card; or
where the charge card account is accessed by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor. See proposed
Sec. 1026.7(b)(11)(ii)(A). Thus, as a technical revision, comment
5(b)(2)(ii)-4.i would be revised to reflect the proposed changes to
Sec. 1026.7(b)(11) that the due date requirement does apply to charge
card accounts accessed by prepaid cards or by account numbers where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor. The Bureau is
not proposing to adjust the payment due date requirement in Sec.
1026.7(b)(11)(i)(A) for charge cards that are neither prepaid cards nor
account numbers where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor.
As discussed in more detail in the section-by-section analysis of
Sec. Sec. 1026.7(b)(11) and 12(d)(3), the Bureau believes that it is
important to provide strong protections to prepaid accountholders to
ensure that they can control when and if funds are swept from their
accounts to repay previous overdrafts. In particular, the Bureau
believes that for all credit card accounts under an open-end (not home-
secured) consumer credit plan, including charge card accounts, accessed
by prepaid cards or by account numbers where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, the card issuer should be required
to adopt reasonable procedures designed to ensure that periodic
statements are mailed or delivered at least 21 days prior to the
payment due date disclosed on the statement
[[Page 77232]]
pursuant to Sec. 1026.7(b)(11)(i)(A). As discussed in more detail in
the section-by-section analysis of proposed Sec. 1026.7(b)(11) and
12(d), the Bureau believes that this requirement, along with proposed
changes to the offset prohibition in Sec. 1026.12(d), will ensure that
the due date of the credit card account is not so closely aligned with
the timing of when funds are deposited into the prepaid account that
card issuers can circumvent TILA's offset prohibition.
Section 1026.7 Periodic Statement
7(b) Rules Affecting Open-End (not Home-Secured) Plans
TILA section 127(b), implemented in Sec. 1026.7, identifies
information about an open-end account or credit card account that must
be disclosed when a creditor is required to provide periodic
statements. 15 U.S.C. 1637(b). Section 1026.7(b) sets forth the content
requirements for periodic statements given with respect to open-end
(not home-secured) plans or credit card accounts that are not home
secured. Generally, under Sec. 1026.7(b), such periodic statements
must include, among other things, information about (1) the amount of
the balance outstanding at the beginning of the billing cycle; (2) any
credit to the account during the billing cycle, such as payments; (3)
any credit transactions that occurred during a billing cycle described
in accordance with Sec. 1026.8; (4) the annual percentage rates (APRs)
that may be used to compute interest charges during the billing cycle;
(5) the amount of the balance to which an APR was applied and an
explanation of how that balance was determined; (6) the amount of
interest charges that was incurred during the billing cycle, itemized
by type of transaction, as well as the total interest charges that were
imposed during the billing cycle and year to date; (7) the amount of
each fee that was incurred during the billing cycle, itemized by type,
as well as the total fee charges that were imposed during the billing
cycle and year to date; (8) the date by which or the time period within
which the new balance or any portion of the new balance must be paid to
avoid additional finance charges; (9) the closing date of the billing
cycle and the account balance outstanding on that date; and (10) the
due date for a payment with respect to a credit card account under an
open-end (not home-secured) consumer credit plan.
As discussed in the section-by-section analysis of proposed Sec.
1026.7(b)(11), the proposal would amend the due date disclosure
requirements in Sec. 1026.7(b)(11) with respect to credit card
accounts under an open-end (not home-secured) consumer credit plan that
are accessed by a prepaid card, or by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor. See the section-
by-section analysis of Sec. 1026.2(a)(15)(ii) for a discussion of the
term ``credit card account under an open-end (not home-secured)
consumer credit plan.''
The periodic statement requirements in Sec. 1026.7(b) generally
would apply to open-end plans or credit card accounts that are accessed
by a prepaid card, or by an account number where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. The Bureau notes that under
Regulation E, periodic statements would separately be required under
Sec. 1005.9(b) to disclose non-credit transactions on the prepaid
account, but that proposed Sec. 1005.18(c) would create an exception.
Specifically, proposed Sec. 1005.18(c) would permit the financial
institution to make available to the consumer (1) the consumer's
account balance, through a readily available telephone line; (ii) an
electronic history of the consumer's account transactions, such as
through a Web site, that covers at least 18 months preceding the date
the consumer electronically accesses the account; and (iii) a written
history of the consumer's account transactions that is provided
promptly in response to an oral or written request and that covers at
least 18 months preceding the date the financial institution receives
the consumer's request.
If a financial institution elects to provide a periodic statement
under Regulation E Sec. 1005.9(b) to a holder of the prepaid account
and a periodic statement is required under Regulation Z Sec. 1026.7,
the financial institution may combine the two periodic statements, so
long as the requirements of both Regulation E and Regulation Z are met
in providing the combined statement. If a financial institution instead
elects to provide account access pursuant to Regulation E proposed
Sec. 1005.18(c), the financial institution must also provide periodic
statements pursuant to Regulation Z Sec. 1026.7. The financial
institution may provide the Regulation Z periodic statements in
electronic form, subject to compliance with the consumer consent and
other applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). See Sec.
1026.5(a)(1)(iii).
As discussed in the section-by-section analysis of Sec. Sec.
1026.8 and 1026.13(i), the Bureau recognizes that with respect to
transactions made with a prepaid card that accesses an overdraft credit
plan, a single transaction may involve both a withdrawal of funds from
the prepaid account and a credit extension. For example, assume that a
cardholder makes a $50 purchase with the prepaid card but only has $20
in funds in the prepaid account. The transaction would involve both a
withdrawal of $20 from the prepaid account and an extension of credit
of $30. For these types of transactions, the Bureau recognizes that the
part of the transaction that accesses the prepaid funds will be shown
on the periodic statement or account history under Regulation E and the
part of the transaction that accesses credit will be shown as a credit
transaction on the Regulation Z periodic statement. The Bureau solicits
comment on whether this situation currently presents itself in relation
to transactions on overdraft lines of credit accessed by debit cards
and if so, how creditors typically disclose these transactions on
periodic statements under Regulation E and Z. The Bureau also solicits
comment on whether, for these types of transactions, the Bureau should
consider a disclosure that would appear on the Regulation Z periodic
statement that would notify consumers when a particular transaction is
funded partially through the prepaid account and partially funded
through credit so that consumers would know to look at the Regulation E
periodic statement or account history for additional information
related to that transaction.
7(b)(11) Due Date; Late Payment Costs
TILA sections 127(b)(12) and (o), which are implemented in Sec.
1026.7(b)(11)(i), set forth requirements related to the disclosure of
payment due dates on periodic statements in the case of a credit card
account under an open-end consumer credit plan. 15 U.S.C. 1637(b)(12),
(o). Under Sec. 1026.7(b)(11)(i), for a credit card account under an
open-end (not home-secured) consumer credit plan, a card issuer
generally must provide on each periodic statement: (1) The due date for
a payment and the due date disclosed must be the same day of the month
for each billing cycle; and (2) The amount of any late payment fee and
any increased periodic rate(s) (expressed as an APR(s)) that may be
imposed on the account as a result of a late payment. Section
1026.7(b)(11)(ii) provides, however, that the requirements of Sec.
1026.(b)(11)(i) do not apply to the following: (1) Periodic statements
[[Page 77233]]
provided solely for charge card accounts; and (2) Periodic statements
provided for a charged-off account where payment of the entire account
balance is due immediately.
As also noted in the section-by-section analysis of proposed Sec.
1026.5(b)(2)(ii), although TILA sections 127(b)(12) and (o) do not, on
their face, exclude charge card accounts that are accessing open-end
credit from the requirement to disclose the due date on each periodic
statement, the Board in implementing these provisions determined that
the payment due date requirement in Sec. 1026.7(b)(11)(i)(A) does not
apply to periodic statements provided solely for charge card accounts.
See Sec. 1026.7(b)(11)(ii)(A). In the supplemental information to the
final rule adopting the exclusion for charge cards from the due date
disclosure requirement, the Board noted that charge cards are typically
products where outstanding balances cannot be carried over from one
billing cycle to the next and are payable when the periodic statement
is received.\369\ Therefore, the contractual payment due date for a
charge card account is the date on which the consumer receives the
periodic statement (although charge card issuers generally request that
the consumer make payment by some later date). If the due date
disclosure requirement and the 21-day rule for delivery of periodic
statements applied to charge card accounts, the card issuer could no
longer require payment upon delivery of the statement. Thus, the Board
concluded that it would not be appropriate to apply the payment due
date disclosure in Sec. 1026.7(b)(11)(i)(A) to periodic statements
provided solely for charge card accounts.
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\369\ 75 FR 7658 at 7672-7673, Feb. 22, 2010.
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The proposal would amend Sec. 1026.7(b)(11)(ii)(A) to provide that
the due date disclosure does apply to periodic statements provided
solely for charge card accounts where the charge card account is
accessed by a charge card that is a prepaid card; or where the charge
card account is accessed by an account number where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor. Thus, the due date
disclosure in Sec. 1026.7(b)(11)(i)(A) would apply to periodic
statements provided for a credit card account under an open-end (not
home-secured) consumer credit plan, including a charge card account,
where the account is accessed by a charge card that is a prepaid card;
or where the charge card account is accessed by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor.
As discussed in more detail in the section-by-section analysis of
Sec. Sec. 1026.5(b)(2)(ii) and 12(d)(3), the Bureau believes that it
is important to provide strong protections to prepaid accountholders to
ensure that they can control when and if funds are swept from their
accounts to repay previous overdrafts. In particular, as discussed in
the section-by-section analysis of proposed Sec. 1026.5(b)(2)(ii), by
requiring the due date in these instances, the card issuer would be
required under Sec. 1026.5(b)(2)(ii)(A) to adopt reasonable procedures
designed to ensure that periodic statements are mailed or delivered at
least 21 days prior to the payment due date disclosed on the statement
pursuant to Sec. 1026.7(b)(11)(i)(A). As discussed in more detail in
the section-by-section analysis of proposed Sec. 1026.12(d), the
Bureau believes that this proposed requirement, along with proposed
changes to the timing requirement for a periodic statement in Sec.
1026.5(b)(2)(ii), the offset prohibition in Sec. 1026.12(d) and the
compulsory-use provisions in Regulation E (proposed Sec.
1005.10(e)(1)), would allow consumers to retain control over the funds
in their prepaid accounts even when a credit card feature becomes
associated with that account, which is consistent with the prohibition
on offsets.
The Bureau believes that this proposed requirement, the proposed
requirement in Sec. 1026.5(b)(2)(ii) and the proposed changes to the
offset prohibition in Sec. 1026.12(d), will ensure that the due date
of the credit card account is not so closely aligned with the timing of
when funds are deposited into the prepaid account that card issuers can
circumvent the offset prohibition. As discussed in more detail in the
section-by-section analysis of proposed Sec. 1026.12(d)(3), the Bureau
is concerned that, with respect to credit card accounts that are
accessed by prepaid cards or by account numbers where extensions of
credit are permitted to be deposited directly only in particular
prepaid accounts specified by the creditor, some card issuers may
attempt to circumvent the prohibition on offsets by specifying that
each transaction on the credit card account linked to the prepaid
account (as described above) is due on the date on which funds are
subsequently deposited into the account, and obtaining a consumer's
written authorization to deduct all or part of the cardholder's credit
card debt when deposits are received into the prepaid account to help
ensure that the debt is repaid. The Bureau believes that card issuers
that offer credit card accounts linked to a prepaid account may rely
significantly on obtaining a consumer's written authorization of daily
or weekly debits to the prepaid account to repay the credit card debt
given the overall creditworthiness of prepaid accountholders. The
Bureau also believes that card issuers that offer credit card accounts
linked to a prepaid account may be able to obtain a consumer's written
authorization to debit the prepaid account for the credit card debt
more easily than for other types of credit card accounts because
consumers may believe that, in order to obtain credit, they have no
alternative but to provide written authorization to allow a card issuer
to deduct all or part of the cardholder's credit card debt from the
linked prepaid account.
The proposed revisions to Sec. 1026.7(b)(11), along with the
proposed changes to Sec. 1026.5(b)(2)(ii), to the Sec. 1026.12(d)
offset prohibition and to the compulsory-use provisions in Regulation E
(proposed Sec. 1005.10(e)(1)), would mean, respectively, that with
respect to credit card accounts related to prepaid accounts as
discussed above, card issuers (1) would be required to adopt reasonable
procedures designed to ensure that periodic statements are mailed or
delivered at least 21 days prior to the payment due date disclosed on
the periodic statement and the due date disclosed must be the same day
of the month for each billing cycle; (2) could move funds automatically
from the asset account held by the card issuer to the credit card
account held by the card issuer to pay some or all of the credit card
debt no more frequently than once per month, such as on the payment due
date, (pursuant to the consumer's signed, written agreement that the
issuer may do so), and (3) would be required to offer consumers a means
to repay their outstanding credit balances other than automatic
repayment (such as by means of a transfer of funds from the asset
account to the credit account that the consumer initiates on the
prepaid account's online banking Web site following a cash reload to
the asset account).
Section 1026.8 Identifying Transactions on Periodic Statements
TILA section 127(b)(2) requires creditors to identify on periodic
statements credit extensions that occurred during a billing cycle. 15
U.S.C. 1637(b)(2). The statute calls for the Bureau to implement
requirements that are sufficient to identify the
[[Page 77234]]
transaction or to relate the credit extension to sales vouchers or
similar instruments previously furnished.
Section 1026.8 sets forth the requirements for how issuers must
describe each credit transaction on the periodic statement. Section
1026.8 generally provides that a creditor must identify credit
transactions on or with the first periodic statement that reflects the
transaction by furnishing certain information. Section 1026.8(a) sets
forth the requirements for describing a ``sale credit'' transaction on
the periodic statement. A ``sale credit'' generally means a credit
transaction involving the sale of property or services. Section
1026.8(b) sets forth the requirements for describing a ``nonsale
credit'' transaction on the periodic statement. A ``nonsale credit''
transaction generally means a credit transaction that does not involve
the sale of property or services.
The proposal would provide guidance on how creditors may comply
with the requirements in Sec. Sec. 1026.8(a) and (b) with respect to
open-end credit plans or credit card accounts accessed by prepaid cards
or by account numbers where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor.
8(a) Sale Credit
Section 1026.8(a) provides that for each credit transaction
involving the sale of property or services, the creditor generally must
disclose the amount and date of the transaction, and either: (i) A
brief identification of the property or services purchased, for
creditors and sellers that are the same or related; or (ii) The
seller's name; and the city and state or foreign country where the
transaction took place. The creditor may omit the address or provide
any suitable designation that helps the consumer to identify the
transaction when the transaction took place at a location that is not
fixed; took place in the consumer's home; or was a mail, Internet, or
telephone order. Comment 8(a)-1 provides that the term ``sale credit''
refers to a purchase in which the consumer uses a credit card, or
otherwise directly accesses an open-end line of credit to obtain goods
or services from a merchant, whether or not the merchant is the card
issuer or creditor. Thus, under comment 8(a)-1, sale credit would
include credit transactions where a prepaid card that is a credit card
is used to obtain goods or services from a merchant.
Comment 8(a)-2 provides guidance on how to disclose the amount of
the credit transaction if sale transactions are not billed in full on
any single statement. The proposal would move the existing language of
comment 8(a)-2 to proposed comment 8(a)-2.i. The proposal also would
add comment 8(a)-2.ii to provide guidance on how to disclose the amount
of the credit transaction for purposes of certain prepaid transactions.
First, it would explain that the term ``sale credit'' includes a
purchase in which the consumer uses a prepaid card that is a credit
card to obtain goods or services from a merchant and the transaction is
wholly or partially funded by credit, regardless of whether the
merchant is the card issuer or creditor. Proposed comment 8(a)-2.ii
also would provide that if a prepaid card that is a credit card is used
to obtain goods or services from a merchant and the transaction is
partially funded by the consumer's prepaid account, and partially
funded by credit, the amount to be disclosed under Sec. 1026.8(a) is
the amount of the credit extension, not the total amount of the
purchase transaction. Because Sec. 1026.7(b)(2) requires that credit
transactions be disclosed on periodic statements in accordance with
Sec. 1026.8, the Bureau believes it is appropriate to only consider
the credit portion of the transaction as ``sale credit'' that would be
disclosed on the Regulation Z periodic statement. Under the Regulation
E proposal, as discussed in the section-by-section analysis of
Regulation E proposed Sec. 1005.18(c), the amount of the transaction
that is funded from the prepaid account would be disclosed either on
the Regulation E periodic statement if the financial institution elects
to provide one under Regulation E proposed Sec. 1005.18(c)(1), or
alternatively, on the electronic history of the consumer's prepaid
account transactions, such as through a Web site, that covers at least
18 months preceding the date the consumer electronically accesses the
account under Regulation E proposed Sec. 1005.18(c)(1)(ii). For a
discussion of issues related to disclosures of these transactions on
periodic statements under Regulation Z and E, see the section-by-
section analysis of Sec. 1026.7(b).
The Bureau recognizes that for purchases of goods or services that
involve overdrafts on asset accounts that are executed via debit cards,
the credit transaction may be disclosed as nonsale credit. In
particular, comment 8(b)-1.iii provides that nonsale credit includes
the use of the overdraft credit plan accessed by a debit card, even if
such use is in connection with a purchase of goods or services. In a
1981 rulemaking implementing the Truth in Lending Simplification and
Reform Act, the Board indicated that several commenters asked the Board
to clarify whether a creditor should identify a transaction as sale or
nonsale credit when a consumer uses a debit card with an overdraft
feature to purchase goods, and in doing so, activates the overdraft.
The Board expressed its belief that the credit portions of such
transactions could be viewed as cash advances, and therefore permitted
them to be disclosed as nonsale credit at the creditor's option even
though a purchase is involved.\370\ As discussed in the Overview of
Regulation Z Proposal section, the Bureau is not intending to revise
rules in Regulation Z that apply to overdraft plans accessed by debit
cards. Nonetheless, for credit plans accessed by prepaid cards that are
credit cards, the Bureau believes that disclosing the credit
transaction as sale credit would be more helpful to consumers than
disclosing the transaction as nonsale credit because the consumer would
receive the seller's name, and the city and state or foreign country
where the transaction took place. If the credit transaction were
treated as a nonsale credit, the consumer would not receive the
information about the seller's name and address. The Bureau believes
that the information about the seller's name and address may be useful
to consumers in identifying the credit transactions where a prepaid
card that is a credit card is used to obtain goods or services from a
merchant. The Bureau also notes that under Regulation E, on the
periodic statement, or the alternative account history, a transaction
that involves a withdrawal from the prepaid account at point of sale
must include the merchant's name and location. See Regulation E Sec.
1005.9(b)(1)(iv) and (v) and proposed Sec. 1005.18(c)(2). Thus, with
respect to a single transaction that involves both a withdrawal from
the prepaid account and an extension of credit, disclosing such credit
transaction as a sale credit when the prepaid card accesses credit at
point of sale also could help consumers match up the part of the
transaction that appears on the Regulation Z periodic statement with
the part of the transaction that appears on the Regulation E periodic
statement or account history.
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\370\ 46 FR 20848, 20861 (Apr. 7, 1981).
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Comment 8(a)-2.ii also would set forth guidance on how to disclose
a transaction at point of sale where credit is accessed by a prepaid
card that is a credit card, and that transaction partially involves the
purchase of goods or services and partially involves other credit such
as cash back given to the
[[Page 77235]]
cardholder. In this situation, new proposed comment 8(b)-1.vi provides
that the creditor must disclose the amount of credit as ``sale credit''
under Sec. 1026.8(a), including the portion of the transaction that
involves credit that is not for a purchase of goods or services. The
Bureau understands that creditors may not be able to identify the
amount of the credit transaction the relates to the purchase of goods
or services at a merchant and the amount of the credit transaction that
relates to other types of credit, such as cash back given to the
cardholder. In this case, the card issuer may only be able to determine
the total amount of credit extended for that transaction. To ensure
that consumers are more able to recognize credit transactions disclosed
on periodic statements, the proposal would require a creditor to
disclose the entire amount of the credit transaction as ``sale credit''
under Sec. 1026.8(a). When using this proposed approach, a creditor
would disclose the entire amount of the credit transaction, the date of
the transaction, the seller's name, and the city and state or foreign
country where the transaction took place. The Bureau believes such
information would be sufficient to allow a consumer to identify a
transaction, even where part of the amount of the transaction was for
cash back or other forms of credit given to the cardholder at point of
sale. For these types of transactions, the Bureau anticipates that the
cardholder will associate the entire credit transaction, including the
cash back portion of the credit, with the seller's name. The Bureau
solicits comment on this approach.
8(b) Nonsale Credit
Section 1026.8(b) provides that for each credit transaction not
involving the sale of property or services, the creditor generally must
disclose a brief identification of the transaction; the amount of the
transaction; and at least one of the following dates: (1) The date of
the transaction; (2) the date the transaction was debited to the
consumer's account; or (3) if the consumer signed the credit document,
the date appearing on the document. Comment 8(b)-1 provides that the
term ``nonsale credit'' refers to any form of loan credit including,
for example: (1) A cash advance; (2) an advance on a credit plan that
is accessed by overdrafts on a checking account; (3) the use of a
``supplemental credit device'' in the form of a check or draft or the
use of the overdraft credit plan accessed by a debit card, even if such
use is in connection with a purchase of goods or services; and (4)
miscellaneous debits to remedy mispostings, returned checks, and
similar entries.
The proposal would add two additional examples to comment 8(b)-1 to
provide guidance on when credit transactions are ``nonsale credit''
when credit is accessed by a prepaid card. First, new proposed comment
8(b)-1.v would explain that ``nonsale credit'' includes an advance at
an ATM on a credit plan that is accessed by a prepaid card that is a
credit card. This proposed comment also would clarify that if a prepaid
card that is a credit card is used to obtain an advance at an ATM and
the transaction is partially funded by the consumer's prepaid account,
and partially funded by a credit extension, the amount to be disclosed
under Sec. 1026.8(b) is the amount of the credit extension, not the
total amount of the ATM transaction.
The proposal would also add a new comment 8(b)-1.vi to explain that
``nonsale credit' includes an advance on a credit plan accessed by an
account number where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor. This example is designed to address situations where (1) a
separate line of credit is linked to a prepaid account where extensions
of credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor; (2) the consumer requests
an advance on the account using an account number; and (3) the advance
is deposited into the prepaid account. In this situation, the advance
taken on the line of credit would be ``nonsale credit'' even if the
consumer subsequently uses the deposited funds to purchase goods or
services at a merchant. This provision would not apply to open-end
credit or a credit card account that is accessed directly by a prepaid
card. As discussed above, the ``sale credit'' rules in Sec. 1026.8(a)
would apply where a prepaid card accesses credit to obtain goods or
services from a merchant.
The proposal also would make technical revisions to two comments--
comment 8(b)-1.ii and comment 8(b)-2--which provide guidance regarding
overdraft credit plans in order to make clear that these comments do
not apply to overdraft credit plans related to a prepaid accounts.
Section 1026.10 Payments
10(a) General Rule
TILA section 164(a), which is implemented in Sec. 1026.10(a),
provides that payments received from an obligor under an open-end
consumer credit plan or a credit card account by the creditor shall be
posted promptly to the obligor's account as specified in regulations of
the Bureau. 15 U.S.C. 1666c. Section 1026.10(a) generally provides that
a creditor for open-end credit or a credit card account shall credit a
payment to the consumer's account as of the date of receipt, except
when a delay in crediting does not result in a finance or other charge
or except as provided in Sec. 1026.10(b). Comment 10(a)-2 provides
guidance on the term ``date of receipt'' as used in Sec. 1026.10(a).
Specifically, comment 10(a)-2 provides that the ``date of receipt'' is
the date that the payment instrument or other means of completing the
payment reaches the creditor. Comment 10(a)-2.ii provides an example
illustrating when the date of receipt is for payments related to
payroll deduction plans. Specifically, comment 10(a)-2.ii provides that
in a payroll deduction plan in which funds are deposited to an asset
account held by the creditor, and from which payments are made
periodically to an open-end credit account, payment is received on the
date when it is debited to the asset account (rather than on the date
of the deposit), provided the payroll deduction method is voluntary and
the consumer retains use of the funds until the contractual payment
date.
The proposal would amend this comment to reference proposed changes
that would be added to Sec. 1026.12(d) related to the prohibition on
offsets. As discussed in more detail in the section-by-section analysis
of Sec. 1026.12(d), Sec. 1026.12(d)(1) provides that a card issuer
may not take any action, either before or after termination of credit
card privileges, to offset a cardholder's indebtedness arising from a
consumer credit transaction under the relevant credit card plan against
funds of the cardholder held on deposit with the card issuer.
Nonetheless, Sec. 1026.12(d)(3) provides that the prohibition on
offsets does not prohibit a plan, if authorized in writing by the
cardholder, under which the card issuer may periodically deduct all or
part of the cardholder's credit card debt from a deposit account held
with the card issuer (subject to the limitations in Sec.
1026.13(d)(1)). With respect to credit cards that are also prepaid
cards or credit cards that are also account numbers where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, the proposal would add
Sec. 1026.12(d)(3)(ii) to define ``periodically'' to mean no more
frequently than once per calendar month. Thus, under proposed Sec.
1026.12(d)(3), with respect to such
[[Page 77236]]
credit card accounts linked to a prepaid account, a card issuer may
deduct automatically all or a part of the cardholder's credit card debt
from the prepaid account or other deposit account held by the card
issuer no more frequently than once per month, pursuant to a signed,
written authorization by the cardholder to do so.
The proposal would revise comment 10(a)-2.ii to explain that Sec.
1026.12(d)(3)(ii) prevents card issuers, with respect to credit card
accounts accessed by prepaid cards that are credit cards or for account
numbers that are credit cards where the extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, from automatically deducting credit
card account payments from a prepaid account or other deposit account
held by the card issuer more frequently than once per calendar month.
In a payroll deduction plan in which funds are deposited to a prepaid
account held by the creditor, and from which payments are made on a
monthly basis to a credit card account accessed by a prepaid card that
is a credit card, or by account numbers that are credit cards where the
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, payment is
received on the date when it is debited to the prepaid account (rather
than on the date of the deposit), provided the payroll deduction method
is voluntary and the consumer retains use of the funds until the
contractual payment date.
Section 1026.12 Special Credit Card Provisions
Section 1026.12 contains special rules applicable to credit cards
and credit card accounts, including conditions under which a credit
card may be issued, liability of cardholders for unauthorized use,
cardholder rights to assert merchant claims and defenses against the
card issuer, and the prohibition on offsets by issuers.
The proposal would revise certain provisions that apply to credit
card transactions in Sec. 1026.12 to provide guidance on how those
provisions apply to credit card transactions that are made using a
prepaid card that is a credit card, or using an account number that is
a credit card where the extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. Specifically, the proposal would provide additional
guidance on: (1) Unsolicited issuance in Sec. 1026.12(a); (2) the
right of a cardholder to assert claims or defenses against a card
issuer in Sec. 1026.12(c); and (3) the prohibition on offsets by a
card issuer in Sec. 1026.12(d).
In addition, the proposal would add a new provision to Sec.
1026.12(h) that would impose a new requirement on card issuers that
offer prepaid cards that are credit cards, or account numbers that are
credit cards where the extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. Under proposed Sec. 1026.12(h), these card issuers would
be prevented from opening a credit card account for, or providing a
solicitation or application to open a credit or charge card account to,
a consumer who holds a prepaid card until at least 30 calendar days
after the consumer has registered the prepaid account.
12(a) Issuance of Credit Cards
TILA section 132, which is implemented by Sec. 1026.12(a) of
Regulation Z, generally prohibits creditors from issuing credit cards
except in response to a request or application. Section 132 explicitly
exempts from this prohibition credit cards issued as renewals of or
substitutes for previously accepted credit cards. 15 U.S.C. 1642.
Section 1026.12(a) provides that regardless of the purpose for
which a credit card is to be used, including business, commercial, or
agricultural use, no credit card shall be issued to any person except:
(1) In response to an oral or written request or application for the
card; or (2) As a renewal of, or substitute for, an accepted credit
card. The proposal would provide guidance on how the prohibition on
issuing unsolicited credit cards applies to prepaid cards that are
credit cards, and account numbers that are credit cards where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor.
12(a)(1)
Addition of a Credit Feature
Under current Sec. 1026.12(a), a prepaid card cannot access
automatically a credit card feature at the time the card is purchased
by the consumer at point of sale. A card issuer could add a credit card
feature to a prepaid card only in response to a consumer's explicit
request or application.
Comment 12(a)(1)-2 would be modified specifically to explain that
the addition of a credit card feature to an existing prepaid card
constitutes ``issuance'' for purposes of unsolicited issuance under
Sec. 1026.12(a). Specifically, the existing comment 12(a)(1)-2
provides that if the consumer has a non-credit card, the addition of
credit features to the card (for example, the granting of overdraft
privileges on a checking account when the consumer already has a check
guarantee card) constitutes issuance of a credit card. The proposal
would revise comment 12(a)(1)-2 to provide guidance relating to prepaid
cards. Specifically, proposed comment 12(a)(1)-2 would provide that if
the consumer has a non-credit card, including a prepaid card, the
addition of a credit feature or plan to the card that would make the
card into a credit card under Sec. 1026.2(a)(15)(i) constitutes
issuance of a credit card. The proposal also adds an example related to
prepaid cards. Specifically, the proposal would add proposed comment
12(a)(1)-2.ii to provide that allowing a prepaid card to access a
credit plan that would make the card into a credit card under Sec.
1026.2(a)(15)(i) would constitute issuance of a credit card. The
existing example relating to check guarantee cards would be moved to
proposed comment 12(a)(1)-2.i.
In addition, as discussed in more detail in the section-by-section
analysis of proposed Sec. 1026.12(h), the Bureau is proposing to
require a card issuer to wait at least 30 calendar days after the
prepaid account has been registered before the card issuer may open a
credit card account for the holder of the prepaid account, or provide a
solicitation or an application to the holder of the prepaid account to
open a credit or charge card account, that will be accessed by the
prepaid card.
Issuance of a Non-Credit Card
Comment 12(a)(1)-7.i explains that a non-credit card may be sent on
an unsolicited basis by an issuer that does not propose to connect the
card to any credit plan.\371\ The comment notes that a credit feature
may be added to a previously issued non-credit card only upon the
consumer's specific request. Comment 12(a)(1)-7.ii provides as an
example, that a purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the
card to any credit plan. The comment further explains that an issuer
demonstrates that it proposes to connect the card to a credit plan by,
for example, including promotional materials about credit features or
account agreements and disclosures required by Sec. 1026.6. The
comment also states that the issuer
[[Page 77237]]
violates the rule against unsolicited issuance if, for example, at the
time the card is sent a credit plan can be accessed by the card or the
recipient of the unsolicited card has been preapproved for credit that
the recipient can access by contacting the issuer and activating the
card.
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\371\ The Bureau notes that a prepaid card would be an access
device under Regulation E, as that term is defined in Regulation E
Sec. 1005.2(a)(1), and would be subject to the issuance rules set
forth in Regulation E Sec. 1005.5 when it is issued.
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Under the proposal, the current language of comment 12(a)(1)-7.i
and .ii would be moved to proposed comment 12(a)(1)-7.i.A and .B
respectively and would be limited to the issuance of non-credit cards
that are not prepaid cards. The proposal also would add a new comment
12(a)(1)-7.ii to provide guidance on when the issuance of a prepaid
card would be viewed as the issuance of a credit card. The proposal
would add proposed comment 12(a)(1)-7.ii to provide that Sec.
1026.12(a)(1) would not apply to the issuance of a prepaid card where
an issuer does not connect the card to any credit plan that would make
the prepaid card into a credit card at the time the card is issued and
only opens a credit card account, or provides an application or
solicitation, to open a credit or charge card account, that would be
accessed by that card in compliance with proposed Sec. 1026.12(h). As
discussed in more detail in the section-by-section analysis of proposed
Sec. 1026.12(h), the Bureau is proposing to require a card issuer to
wait at least 30 calendar days after the prepaid account has been
registered before the card issuer may open a credit card account for
the holder of the prepaid account, or provide a solicitation or an
application to the holder of the prepaid account, to open a credit or
charge card account that will be accessed by the prepaid card. Proposed
comment 12(a)(1)-7.ii also would explain that a credit feature may be
added to a previously issued prepaid card only upon the consumer's
specific request and only in compliance with Sec. 1026.12(h).
Proposed comment 12(a)(1)-7.ii further explains, however, that an
issuer does not connect a prepaid card to a credit plan that would make
the card into a credit card simply by providing the disclosures
required by Regulation E Sec. 1005.18(b)(2)(i)(B)(9) and
18(b)(2)(ii)(B) with the prepaid card. As discussed above under the
Regulation E section-by-section analysis of proposed Sec. 1005.18(b),
a financial institution would be required to provide certain
disclosures about credit card accounts that may be offered in
connection with prepaid accounts. As discussed in more detail in the
section-by-section analysis of Regulation E Sec. 1005.18(b), a
financial institution would be required to disclose in the short and
long form disclosures provided in connection with the prepaid card
information about any credit plan that may be offered at any point to
the holder of the prepaid account where the credit plan would be
accessed by a credit card that also is a prepaid card, or the credit
plan would be accessed by an account number that is a credit card where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor offering the
plan. These disclosures would be provided to consumers so that they can
shop more effectively for prepaid cards by informing them whether a
credit card account may be offered in connection with the prepaid
account and some of the terms of the credit card account that may be
offered. The Bureau is proposing to provide guidance that providing
these disclosures does not violate the rule against unsolicited
issuance of a credit card because, otherwise, the inclusion of these
required disclosures with the prepaid card would make it a violation of
Regulation Z to sell such cards in retail locations or otherwise
provide them on an unsolicited basis to consumers. The Bureau notes
that the issuance rules set forth in Regulation E Sec. 1005.5 would
apply to the issuance of a prepaid card that does not access a credit
card account when issued.
The proposal also would make two technical revisions to comment
12(a)(1)-7. First, the current language of comment 12(a)(1)-7.i and .ii
would be moved to proposed comment 12(a)(1)-7.i.A and .B respectively.
Second, the language in proposed comment 12(a)(1)-7.i also would be
revised to indicate that it applies only to the issuance of non-credit
cards other than prepaid cards.
12(a)(2)
Section 1026.12(a) provides that regardless of the purpose for
which a credit card is to be used, including business, commercial, or
agricultural use, no credit card shall be issued to any person except:
(1) In response to an oral or written request or application for the
card; or (2) As a renewal of, or substitute for, an accepted credit
card. Comments 12(a)(2)-5 and -6 provide guidance on the exception to
the unsolicited issuance rule when a card is issued as a renewal of, or
substitute for, an accepted credit card.
Specifically, comment 12(a)(2)-5 (the so-called ``one for one''
rule) provides that an accepted card generally may be replaced by no
more than one renewal or substitute card. For example, the card issuer
may not replace a credit card permitting purchases and cash advances
with two cards, one for the purchases and another for the cash
advances. Comment 12(a)(2)-6 provides, however, two exceptions to this
general ``one for one'' rule. First, comment 12(a)(2)-6.i provides that
the unsolicited issuance rule in Sec. 1026.12(a) does not prohibit the
card issuer from replacing a debit/credit card with a credit card and
another card with only debit functions (or debit functions plus an
associated overdraft capability), since the latter card could be issued
on an unsolicited basis under Regulation E. Comment 12(a)(2)-6.ii also
provides that Sec. 1026.12(a) does not prohibit a card issuer from
replacing an accepted card with more than one renewal or substitute
card, provided that (1) no replacement card accesses any account not
accessed by the accepted card; (2) for terms and conditions required to
be disclosed in account-opening disclosures under Sec. 1026.6, all
replacement cards are issued subject to the same terms and conditions,
except that a creditor may vary terms for which no change in terms
notice is required under Sec. 1026.9(c); and (3) under the account's
terms the consumer's total liability for unauthorized use with respect
to the account does not increase.
Under the proposal, the example in existing comment 12(a)(2)-6.ii
would be moved to proposed comment 12(a)(2)-6.iii. The proposal also
would add new proposed comment 12(a)(2)-6.ii to explain that the one-
for-one rule would not prevent an issuer from replacing a single card
that is both a prepaid card and a credit card with a credit card and a
separate prepaid card where the latter card is not a credit card. The
Bureau notes that the issuance rules set forth in Regulation E Sec.
1005.5 would apply to the issuance of a prepaid card that does not
access a credit card account when issued. For example, the one-for-one
rule would not prevent a card issuer from replacing a prepaid card that
is a credit card (for example, where the prepaid card accesses an
overdraft feature) with a prepaid card that is not a credit card (where
the prepaid card does not access an overdraft feature) and an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor.
In addition, the proposal would also make two technical revisions
to comment 12(a)(2)-6. First, the example in comment 12(a)(2)-6.i
related to debit cards would be revised for clarity; no substantive
changes are intended. In addition, the example in existing comment
12(a)(2)-6.ii would be moved to proposed comment 12(a)(2)-6.iii.
[[Page 77238]]
12(c) Right of Cardholder to Assert Claims or Defenses Against Card
Issuer
Under TILA section 170, as implemented in Sec. 1026.12(c) of
Regulation Z, a cardholder may assert against the card issuer a claim
or defense for disputes as to goods or services purchased in a consumer
credit transaction with a credit card. The claim or defense applies
only as to unpaid balances for the goods or services and any finance or
other charges imposed on that amount, if the merchant honoring the card
fails to resolve the dispute. The right is further limited generally to
disputes exceeding $50 for purchases made in the consumer's home state
or within 100 miles of the cardholder's address. See 15 U.S.C. 1666i.
The proposal would revise commentary to Sec. 1026.12(c) to provide
guidance on how this provisions applies to prepaid cards that are
credit cards, or account numbers that are credit cards where the
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor.
Comment 12(c)(1)-1 and comment 12(c)-3 provides guidance on the
types of transactions that are covered by Sec. 1026.12(c) and the
types of transactions that are not covered. Comment 12(c)(1)-1 provides
that the consumer may assert claims or defenses only when the goods or
services are ``purchased with the credit card.'' This could include
mail, Internet or telephone orders, if the purchase is charged to the
credit card account. The proposal would amend this comment and add
proposed comment 12(c)-5 to explain that Sec. 1026.12(c) would apply
when goods or services are purchased by a consumer using credit
accessed by a credit card that also is a prepaid card.
The Bureau notes that the provisions in 1026.12(c) generally do not
apply to purchases effected by use of either a check guarantee card or
a debit card when used to draw on overdraft credit plans. See comments
12(c)-3 and 12(c)(1)-1.iv. In addition, comment 12(c)(1)-1.ii also
provides that the provisions in Sec. 1026.12(c) do not apply to the
purchase of goods or services by use of a check accessing an overdraft
account and a credit card used solely for identification of the
consumer. On the other hand, if the credit card is used to make partial
payment for the purchase and not merely for identification, the right
to assert claims or defenses would apply to credit extended via the
credit card, although not to the credit extended on the overdraft line.
The Board adopted these exceptions in 1981 as part of implementing the
Truth in Lending Simplification and Reform Act.\372\ In the
supplemental information provided with that rulemaking, the Board
indicated that it had decided to exempt check guarantee cards and debit
cards when used to draw on an overdraft line because of serious
operational problems cited by commenters as arising from applying the
claims and defenses provisions to check guarantee and debit card
transactions.
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\372\ 46 FR 20848, 20865 (Apr. 7, 1981); see also 46 FR 50288,
50313 (Oct. 9, 1981).
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The Bureau proposes not to exempt from the provisions of Sec.
1026.12(c) purchases made with prepaid cards that are credit cards,
including when the prepaid cards are used to draw on overdraft credit
plans. For the reasons set forth in the Overview of Regulation Z
Proposal section, the Bureau believes that prepaid cards that are
credit cards generally should be subject to the provisions in
Regulation Z that apply to credit cards. The Bureau solicits comment,
however, on what, if any, operational issues might arise from applying
the protections in Sec. 1026.12(c) to overdraft credit plans that are
accessed by prepaid cards.
Proposed comment 12(c)-5 also would provide guidance on how Sec.
1026.12(c) applies to transactions at point of sale where a prepaid
card that is a credit card is used to obtain goods or services from a
merchant and the transaction is partially funded by the consumer's
prepaid account, and partially funded by credit. Proposed comment
12(c)-5.ii provides that the amount of the purchase transaction that is
funded by credit generally would be subject to the requirements of
Sec. 1026.12(c), and provides that the amount of the transaction
funded from the prepaid account would not be subject to the
requirements of Sec. 1026.12(c). The Bureau notes that Sec.
1026.12(c) applies only to disputes as to property or services
purchased with a credit card in a consumer credit transaction. The
portion of the transaction that is funded from the prepaid account
would not be credit and thus, under the proposal, this amount of the
transaction would not be subject to Sec. 1026.12(c). The Bureau
solicits comment on what operational issues, if any, might arise as a
result of applying Sec. 1026.12(c) to transactions that are partially
funded from the prepaid account and partially funded with credit.
Comment 12(c)(1)-1.i through .iv provides examples of transactions
that are not covered by the provisions in Sec. 1026.12(c). Comment
12(c)(1)-1.i provides that Sec. 1026.12(c) does not apply to the use
of a credit card to obtain a cash advance, even if the consumer then
uses the money to purchase goods or services. The comment explains that
such a transaction would not involve ``property or services purchased
with the credit card.''
The proposal would revise comment 12(c)(1)-1.i to clarify that
Sec. 1026.12(c) does not apply to an advance on a credit plan accessed
by an account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. This example is designed to address situations where (1)
a separate line of credit is linked to a prepaid account where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, (2) the consumer
requests an advance on the account using an account number other than a
prepaid card, and (3) the advance is deposited into the prepaid
account. In this situation, the advance taken on the line of credit
would not be a transaction covered by Sec. 1026.12(c) even if the
consumer subsequently uses the deposited funds to purchase goods or
services at a merchant. This proposed provision would not apply to
open-end credit or a credit card account that is directly accessed by a
prepaid card. As discussed above, the provisions in Sec. 1026.12(c)
would apply where a prepaid card that is a credit card accesses credit
to obtain goods or services from a merchant.
For the reasons discussed in the Overview of Regulation Z Proposal
section, the proposal would retain the exemptions from the provisions
from Sec. 1026.12(c) for purchases effected by use of either a check
guarantee card or a debit card when used to draw on overdraft credit
plans that are currently contained in comments 12(c)-3 and 12(c)(1)-
1.ii and iv. The proposal, however, would revise the example in comment
12(c)(1)-1.ii to specify that the comment does not apply to overdraft
plans that are accessed by a prepaid card.
12(d) Offsets by Card Issuer Prohibited
TILA section 169 generally prohibits card issuers from taking any
action to offset a cardholder's credit card indebtedness against funds
of the cardholder held on deposit with the card issuer. Nonetheless, a
card issuer would not violate this provision if the card issuer
periodically deducts all or a portion of a consumer's credit card debt
from the consumer's deposit account, if the periodic deductions are in
[[Page 77239]]
accordance with a preauthorized written authorization by the consumer
and the card issuer does not deduct payment for any portion of the
outstanding balance that is in dispute. 15 U.S.C. 1666h(a). This TILA
section also provides that the prohibition described above does not
alter or affect the right under State law of a card issuer to attach or
otherwise levy upon funds of a cardholder held on deposit with the card
issuer if that remedy is constitutionally available to creditors
generally. 15 U.S.C. 1666h(b). TILA section 169 is implemented by Sec.
1026.12(d).
Section 1026.12(d)(1) provides that a card issuer may not take any
action, either before or after termination of credit card privileges,
to offset a cardholder's indebtedness arising from a consumer credit
transaction under the relevant credit card plan against funds of the
cardholder held on deposit with the card issuer. Section 1026.12(d)(2)
provides that the prohibition on offsets in Sec. 1026.12(d)(1) does
not alter or affect the right of a card issuer acting under state or
Federal law to do any of the following with regard to funds of a
cardholder held on deposit with the card issuer if the same procedure
is constitutionally available to creditors generally: Obtain or enforce
a consensual security interest in the funds; attach or otherwise levy
upon the funds; or obtain or enforce a court order relating to the
funds. Section 1026.12(d)(3) provides that the prohibition on offsets
set forth in Sec. 1026.12(d)(1) does not prohibit a plan, if
authorized in writing by the cardholder, under which the card issuer
may periodically deduct all or part of the cardholder's credit card
debt from a deposit account held with the card issuer (subject to the
limitations in Sec. 1026.13(d)(1)).
The offset provision in TILA section 169 was added to TILA as part
of the Fair Credit Billing Act.\373\ In adding this offset provision,
Congress was concerned that
\373\ Public Law 93-495, 88 Stat. 1500.
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Funds in these accounts can be attached without any recourse to
the courts and in spite of any valid legal defense the cardholder
may have against the bank. Banks which issue cards and also have the
cardholder's funds on deposit may thus obtain a unique leverage over
the consumer. Other creditors would have to apply to a court before
being permitted to attach funds in a borrowers' deposit
account.\374\
\374\ S. Rep. No. 93-278, at 9 (June 28, 1973).
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As discussed in more detail below, the proposal would enhance the
offset protections in Sec. 1026.12(d) for credit card accounts linked
to prepaid accounts to ensure that card issuers are not able to obtain
unfair leverage over the consumer or over other creditors with respect
to these accounts. First, the proposal would provide that with respect
to credit card accounts linked to prepaid accounts, a card issuer would
be permitted to deduct all or a part of the cardholder's credit card
debt automatically from the prepaid account or other deposit account
held by the card issuer no more frequently than once per month,
pursuant to a signed, written authorization by the cardholder to do so.
Second, the proposal would enhance the requirements that card issuers
of credit card accounts linked to prepaid accounts must follow in order
to obtain a security interest in a prepaid account.
Without these additional protections, the Bureau is concerned that
given the overall creditworthiness of prepaid accountholders, some card
issuers may attempt to circumvent the prohibition on offsets by
obtaining a consumer's written authorization to deduct all or part of
the cardholder's credit card debt on a daily or weekly basis from the
prepaid account to help ensure that the debt is repaid. Because the
card issuer holds the prepaid account, the card issuer may know the
patterns of when consumers are likely to be depositing funds into the
prepaid accounts. These prepaid card issuers could take advantage of
this knowledge to set up preauthorized withdrawals to correspond to
when the consumer is likely to be depositing funds. In addition, the
Bureau believes prepaid consumers may grant the authorization, or a
security interest, more readily than other credit card holders because
consumers may believe that they must provide written authorization, or
a security interest, to allow a card issuer to deduct all or part of
the cardholder's credit card debt from the linked prepaid account.
The Bureau believes that these proposed requirements, along with
proposed changes to the timing requirement for a periodic statement in
Sec. 1026.5(b)(2)(ii), and the compulsory-use provisions in Regulation
E (proposed Sec. 1005.10(e)(1)), are reasonable interpretations that
are necessary to fully effectuate the intent of these provisions and
would allow consumers to retain control over the funds in their prepaid
accounts even when a credit card feature becomes associated with that
account, which is consistent with the prohibition on offsets.
In particular, with these proposed changes, such card issuers (1)
would be required to adopt reasonable procedures designed to ensure
that periodic statements are mailed or delivered at least 21 days prior
to the payment due date disclosed on the periodic statement and to
ensure that the due date that is disclosed on the periodic statement
must be the same day of the month for each billing cycle; (2) could
move funds automatically from the asset account held by the card issuer
to the credit card account held by the card issuer to pay some or all
of the credit card debt no more frequently than once per month, such as
on the payment due date (pursuant to the consumer's signed, written
agreement that the issuer may do so); and (3) would be required to
offer consumers a means to repay their outstanding credit balances
other than automatic repayment (such as by means of a transfer of funds
from the asset account to the credit account that the consumer
initiates on the prepaid account's online banking Web site).
12(d)(1) General Rule
Section 1026.12(d)(1) provides that a card issuer may not take any
action, either before or after termination of credit card privileges,
to offset a cardholder's indebtedness arising from a consumer credit
transaction under the relevant credit card plan against funds of the
cardholder held on deposit with the card issuer. The proposal would add
comment 12(d)-1 to make clear that for purposes of the prohibition on
offsets in Sec. 1026.12(d), funds of the cardholder held on deposit
include funds in a consumer's prepaid account and the term deposit
account includes a prepaid account.
Comment 12(d)(1)-2 provides that if the consumer tenders funds as a
deposit (to a checking account, for example) held by the card issuer,
the card issuer may not apply the funds to repay indebtedness on the
consumer's credit card account. The proposal would amend this comment
to provide guidance on the tender of funds as a deposit to a prepaid
account. Specifically, this comment would be revised to specify that if
the card issuer receives funds designated for the consumer's prepaid
account with the issuer, such as by means of an ACH deposit or cash
reload, the card issuer may not automatically apply the funds to repay
indebtedness on the consumer's credit card account.
12(d)(2) Rights of the Card Issuer Under Other Law
TILA section 169(a) generally prohibits card issuers from taking
any action to offset a cardholder's credit card indebtedness against
funds of the cardholder held on deposit with the
[[Page 77240]]
card issuer. 15 U.S.C. 1666h(a). TILA section 169(b) provides, however,
that the prohibition on offset does not alter or affect the right under
State law of a card issuer to attach or otherwise levy upon funds of a
cardholder held on deposit with the card issuer if that remedy is
constitutionally available to creditors generally. 15 U.S.C. 1666h(b).
Implementing TILA section 169, Sec. 1026.12(d)(2) provides that
the prohibition on offsets in Sec. 1026.12(d)(1) does not alter or
affect the right of a card issuer acting under state or Federal law to
attach or otherwise levy upon the funds of a cardholder held on deposit
with the card issuer if the same procedure is constitutionally
available to creditors generally. Section 1026.12(d)(2) also provides
two additional methods for obtaining funds that the Board found were
not prohibited by the prohibition on offsets in TILA section 169.
Specifically, Sec. 1026.12(d)(2) provides that the prohibition on
offsets in Sec. 1026.12(d)(1) does not alter or affect the right of a
card issuer acting under state or Federal law to obtain or enforce a
consensual security interest in the funds or obtain or enforce a court
order relating to the funds.
The Board adopted these additional two methods in 1981 as part of
its rulemaking to implement the Truth in Lending Simplification and
Reform Act.\375\ In the supplemental information to that rulemaking,
with respect to the method related to security interests, the Board
stated its belief that TILA section 169 was not intended to apply to
the granting of security interests in cardholders' deposit accounts. In
addition, the Board imposed certain limitations on the use of security
interests that it believed would prevent circumvention of the offset
prohibition because (1) only consensual security interests are
permitted, and thus the cardholder must affirmatively agree to grant
the security interest; (2) the security interest can be enforced only
through procedures by which other creditors could enforce their
security interests in the same funds; and (3) any security interest
granted to secure credit card indebtedness will be disclosed in the
card issuer's initial disclosures to the cardholder. The Board
considered but rejected limiting the amount of the security interest to
a specified amount, reasoning that other third-party creditors are not
required to do so. The Board believed that these requirements should
eliminate the possibility of unfair surprise to consumers, and of
unfair advantage for depository institutions over other creditors that
Congress sought to avoid in enacting TILA section 169.\376\
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\375\ 46 FR 20848 (Apr. 7, 1981).
\376\ 46 FR 20848, 20866 (Apr. 7, 1981).
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Current comment 12(d)(2)-1 is intended to ensure that the security
interest is consensual. Specifically, comment 12(d)(2)-1 provides that
the security interest must not be the functional equivalent of a right
of offset; as a result, routinely including in agreements contract
language indicating that consumers are giving a security interest in
any deposit accounts maintained with the issuer does not result in a
security interest that falls within the exception in Sec.
1026.12(d)(2). In addition, for a security interest to qualify for the
exception under Sec. 1026.12(d)(2) the following conditions must be
met: (1) The consumer must be aware that granting a security interest
is a condition for the credit card account (or for more favorable
account terms) and must specifically intend to grant a security
interest in a deposit account; and (2) The security interest must be
obtainable and enforceable by creditors generally. If other creditors
could not obtain a security interest in the consumer's deposit accounts
to the same extent as the card issuer, the security interest is
prohibited by Sec. 1026.12(d)(2).
Comment 12(d)(2)-1.i provides that indicia of the consumer's
awareness and intent to provide a security interest must include at
least one of the following (or a substantially similar procedure that
evidences the consumer's awareness and intent): (1) Separate signature
or initials on the agreement indicating that a security interest is
being given; (2) Placement of the security agreement on a separate
page, or otherwise separating the security interest provisions from
other contract and disclosure provisions; or (3) Reference to a
specific amount of deposited funds or to a specific deposit account
number.
The Bureau believes, however, that additional protections may be
needed to ensure that consumers understand that they are giving a
security interest when a credit card account is directly linked to a
prepaid account through an overdraft feature or through a separate
account where extensions of credit are permitted to be deposited
directly only in particular prepaid accounts specified by the creditor.
The Bureau believes that prepaid account issuers may have significant
interest in securing credit card debt by means of the prepaid account.
These credit cards will always be associated with this linked asset
account, and prepaid card users who use the cards to obtain consumer
credit are likely to have lower credit ratings than credit card users
overall. Unlike traditional secured credit cards, these prepaid cards
likely would not be marketed as secured credit cards and would not
require consumers to establish a new separate account or to set aside
specific funds. As a result, prepaid consumers are less likely than
secured credit card users to understand that they are required to
provide a security interest in the prepaid account in order to receive
the credit card account, and have a need to be able to manage their
prepaid accounts very carefully to cover both daily expenses and any
overdraft repayments.
Thus, to prevent the security interest from becoming the functional
equivalent to an offset, the proposal would set forth in proposed
comment 12(d)(2)-1.iii the steps that card issuers must take in order
for a consumer to show awareness and intent to grant a security
interest in a prepaid account. Specifically, a card issuer would be
required to meet all the following conditions: (1) In addition to being
disclosed in the issuer's account-opening disclosures under Sec.
1026.6, the security agreement must be provided to the consumer in a
document separate from the prepaid account agreement and the credit
card account agreement; (2) The separate document setting forth the
security agreement must be signed by the consumer; (3) The separate
document setting forth the security agreement must refer to the prepaid
account number and to a specific amount of funds in the prepaid account
in which the card issuer is taking a security interest and these two
elements of the document must be separately signed or initialed by the
consumer; and (4) The separate document setting forth the security
agreement must specifically enumerate the conditions under which the
card issuer will enforce the security interest and each of those
conditions must be separately signed or initialed by the consumer.
The Bureau believes that all of the indicia in proposed comment
12(d)(2)-2.ii, including delineating a specific dollar amount as being
subject to the security interest, will help to ensure that a security
interest arrangement does not circumvent the offset provision in TILA
section 169 by ensuring that consumers focus careful attention on the
consequences of granting the security interest so that consumers are
better prepared to manage their accounts to both cover daily expenses
and repay any credit extensions. The Bureau solicits comment on this
approach. The Bureau also solicits comment on whether the
[[Page 77241]]
Bureau should engage in consumer testing of disclosures that describe
security interests in connection with prepaid accounts to develop model
language or model forms for presenting this information.
The Bureau also solicits comment on whether these additional
protections are sufficient to ensure that security interests do not
become the functional equivalent to an offset when a credit card
account is directly linked to a prepaid account through an overdraft
feature or through a separate account where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. If these additional protections are
not sufficient, the Bureau seeks comment on what additional protections
would be sufficient to ensure that the security interests taken in
prepaid accounts are consensual. Alternatively, the Bureau seeks
comment on whether it should prohibit a card issuer from obtaining or
enforcing any consensual security interest in the funds of a cardholder
held in a prepaid account with the card issuer, to ensure that card
issuers cannot circumvent the prohibition on offsets by taking
routinely a security interest in the prepaid account funds without
consumers being aware that the security interest is being taken.
For security interests related to other types of deposit accounts,
the proposal would retain the current guidance in comment 12(d)(2)-1.i
detailing indicia of the consumer's awareness and intent to provide a
security interest. The proposal would move this guidance to comment
12(d)(2)-1.ii. In addition, under the proposal, the requirement in
current 12(d)(2)-1.ii that the security interest must be one that other
creditors could obtain in the consumer's deposit accounts to the same
extent as the card issuer would be moved to proposed comment 12(d)(2)-
1.iv; no substantive change is proposed.
12(d)(3) Periodic Deductions
Implementing TILA section 169, Sec. 1026.12(d)(3) of Regulation Z
provides that the prohibition on offsets set forth in Sec.
1026.12(d)(1) does not prohibit a plan, if authorized in writing by the
cardholder, under which the card issuer may periodically deduct all or
part of the cardholder's credit card debt from a deposit account held
with the card issuer (subject to the limitations in Sec.
1026.13(d)(1)).
Neither TILA section 169 nor Sec. 1026.12(d)(3) defines
``periodically'' for purposes of Sec. 1026.12(d)(3). The Bureau is
concerned that, with respect to credit card accounts that are accessed
by prepaid cards or by account numbers where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, some card issuers may attempt to
circumvent the prohibition on offsets by obtaining a consumer's written
authorization to deduct all or part of the cardholder's credit card
debt on a daily or weekly basis from the prepaid account to help ensure
that the debt is repaid. If ``periodically'' is not defined for
purposes of Sec. 1026.12(d)(3), the Bureau believes that card issuers
that offer credit card accounts linked to a prepaid account may obtain
a consumer's written authorization to daily or weekly debits to the
prepaid account to repay the credit card debt given the overall
creditworthiness of prepaid accountholders. In addition, the Bureau
believes prepaid consumer may grant the authorization more readily than
other credit card holders because consumers may believe that they must
provide written authorization to allow a card issuer to deduct all or
part of the cardholder's credit card debt from the linked prepaid
account.
An appropriate interval for ``periodic[ ]'' deduction plans may
depend on the facts and circumstances of the particular credit plan,
but because of the above reasons, the Bureau believes that an
appropriate interval for credit cards linked to prepaid cards is no
more frequently than once per calendar month. The proposal would set
forth a new proposed Sec. 1026.12(d)(3)(ii) that provides that, with
respect to credit cards that are also prepaid cards or credit cards
that are also account numbers where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor, for purposes of Sec. 1026.12(d)(3),
``periodically'' means no more frequently than once per calendar month.
For example, a deduction could be scheduled for each monthly due date
disclosed on the applicable periodic statement in accordance with the
requirements of Sec. 1026.7(b)(11)(i) or on an earlier date in each
calendar month in accordance with a written authorization signed by the
consumer. Thus, under proposed Sec. 1026.12(d)(3), with respect to
such credit card accounts linked to a prepaid account, a card issuer
may deduct all or a part of the cardholder's credit card debt
automatically from the prepaid account or other deposit account held by
the card issuer no more frequently than once per month, pursuant to a
signed, written authorization by the cardholder to do so. The Bureau
believes that allowing a card issuer to execute a preauthorized
transfer once per calendar month to repay all or some of a consumer's
credit card balance is appropriate because card issuers of credit cards
linked to prepaid accounts are prohibited from providing periodic
statements more frequently than on a monthly basis and the due date
must be the same day of the month for each billing cycle. As discussed
in the section-by-section analysis of Sec. Sec. 1026.5(b)(2)(ii) and
.7(b)(11), the card issuer must adopt reasonable procedures to ensure
that periodic statements are mailed or delivered at least 21 days prior
to the payment due date disclosed on the periodic statement and the due
date must be the same day of the month for each billing cycle.
Proposed comment 12(d)(3)-3 would provide an example to illustrate
when card issuers could deduct automatically all or part of the
cardholder's credit card debt from a deposit account (such as a prepaid
account) held with the card issuer under Sec. 1026.12(d)(3) with
respect to credit cards that are also prepaid cards or credit cards
that are also account numbers where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor. Proposed comment 12(d)(3)-3 would provide
that with respect to those types of credit cards, a card issuer would
not be prohibited under Sec. 1026.12(d) from periodically deducting
all or part of the cardholder's credit card debt from a deposit account
(such as a prepaid account) held with the card issuer (subject to the
limitations of Sec. 1026.13(d)(1)) under a plan that is authorized in
writing by the cardholder, so long as the creditor does not deduct all
or part of the cardholder's credit card debt from the deposit account
(such as a prepaid account) more frequently than once per calendar
month, pursuant to such a plan. The proposed comment would provide the
following example: With respect to credit cards that are also prepaid
cards or credit cards that are also account numbers where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, assume that a periodic
statement is sent out each month to a cardholder on the first day of
the month and the payment due date for the amount due on that statement
is the 25th day of each month. In this case, the card issuer would not
be prohibited under Sec. 1026.12(d) from automatically deducting the
amount due on the periodic statement on the 25th of each month, or on
an earlier date in each calendar month, from a deposit account held by
the card issuer, if the
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deductions are pursuant to a plan that is authorized in writing by the
cardholder (as discussed in comment 12(d)(3)-1) and comply with the
limitations in Sec. 1026.13(d)(1). Proposed comment 12(d)(3)-3 also
would explain that the card issuer would be prohibited under Sec.
1026.12(d) from automatically deducting all or part of the cardholder's
credit card debt from a deposit account (such as a prepaid account)
held with the card issuer more frequently than once per calendar month,
such as on a daily or weekly basis, or whenever deposits are made to
the deposit account.
The Bureau solicits comment on situations where at the time a
preauthorized payment is set to occur, the prepaid account does not
have sufficient funds to cover the amount of the credit card payment.
How do issuers anticipate handling this situation, including cases
where the prepaid account contains funds sufficient to pay some but not
all of the credit card payment due? Do issuers anticipate charging a
specific fee because the preauthorized payment could not be completed,
in addition to any late fee that might be charged if the credit card
balance was not paid by the due date? Should the Bureau adopt any
specific rules to address these issues? If so, what rules should the
Bureau adopt?
The Bureau believes that the proposed requirement in Sec.
1026.12(d)(3), along with proposed changes to the timing requirement
for a periodic statement in Sec. 1026.5(b)(2)(ii), and the compulsory-
use provision in Regulation E (proposed Sec. 1005.10(e)(1)), are
necessary to fully effectuate the intent of the provisions and would
allow consumers to retain control over the funds in their prepaid
accounts even when a credit card feature becomes associated with that
account, which is consistent with the prohibition on offsets. In
particular, with these proposed changes, such card issuers (1) would be
required to adopt reasonable procedures designed to ensure that
periodic statements are mailed or delivered at least 21 days prior to
the payment due date disclosed on the periodic statement and the due
date disclosed must be the same day of the month for each billing
cycle; (2) could move funds automatically from the asset account held
by the card issuer to the credit card account held by the card issuer
to pay some or all of the credit card debt no more frequently than once
per month, such as on the payment due date (pursuant to the consumer's
signed, written agreement that the issuer may do so); and (3) would be
required to offer consumers a means to repay their outstanding credit
balances other than automatic repayment (such as by means of a transfer
of funds from the asset account to the credit account that the consumer
initiates on the prepaid account's online banking Web site).
The proposal would also make two technical revisions to Sec.
1026.12(d)(3) and related commentary. First, Sec. 1026.12(d)(3) would
be moved to proposed Sec. 1026.12(d)(3)(i). Second, the proposal would
revise comment 12(d)(3)-1.iii, which references EFTA section 913 to
also reference Regulation E Sec. 1005.10(e), which implements that
section of EFTA.
12(h) Timing Requirement for Solicitation or Application With Respect
to a Prepaid Cardholder
As discussed in more detail in the section-by-section analysis of
Sec. 1026.12(a), credit cards generally may not be issued on an
unsolicited basis. Thus, TILA section 132 and Sec. 1026.12(a) prevent
a card issuer from issuing on an unsolicited basis a prepaid card that
also is a credit card at the time of issuance. For example, prepaid
cards that are sold in retail locations could not access automatically
an overdraft credit feature that would make the prepaid card into a
credit card at the time the prepaid card is sold. Under TILA section
132 and Sec. 1026.12(a), a card issuer could add a credit card feature
to a prepaid card only in response to a consumer's explicit request or
application.
The Bureau proposes to use its authority in TILA section 105(a) and
Dodd-Frank Act section 1032(a) to add new proposed Sec. 1026.12(h)(1)
that would require card issuers to wait at least 30 calendar days after
a prepaid card is registered before the card issuer may make a
solicitation or provide an application to the holder of the prepaid
account to open a credit or charge card account. In addition, card
issuers would be required to wait until at least 30 calendar days after
registration to open a credit card account for the holder the prepaid
account that would be accessed by the prepaid card or by an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor. Moreover, if a card issuer has established
an existing credit or charge card account with a holder of a prepaid
card that is accessed by a prepaid card or an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, the card issuer
would be prevented from allowing an additional prepaid card obtained by
the consumer from the card issuer to access the credit or charge card
account, or permitting credit from the credit or charge card account to
be deposited into an additional prepaid account, until at least 30
calendar days after the consumer has registered the additional prepaid
account.
Proposed Sec. 1026.12(h)(2) would define ``solicitation'' for
purposes of Sec. 1026.12(h)(1) to mean an offer by the card issuer to
open a credit or charge card account that does not require the consumer
to complete an application. This proposed definition of
``solicitation'' is the same as one used with respect to credit card
disclosures set forth in Sec. 1026.60 that must be provided on or with
credit card applications and solicitations. See the section-by-section
analysis of Sec. 1026.60. Consistent with Sec. 1026.60, proposed
Sec. 1026.12(h)(2) also would specify that a ``firm offer of credit''
as defined in section 603(l) of the Fair Credit Reporting Act (15 U.S.
C. 1681a(l)) for a credit or charge card would be a solicitation for
purposes of proposed Sec. 1026.12(h). Comment 12(h)-1 would explain
that a prepaid card or prepaid account is registered, such that the 30-
day interval required by Sec. 1026.12(h) begins, when the issuer of
the prepaid card or prepaid account successfully completes its
collection of consumer identifying information and identity
verification in accordance with the requirements of applicable Federal
and state law. The beginning of the required 30-day interval would be
triggered by successful completion of collection of consumer
identifying information and identity verification, not by the
consumer's mere purchase or obtaining of the card. Comment 12(h)-2
would provide a cross-reference to Sec. 1026.12(a)(1) and comment
12(a)(1)-7 for additional rules that would apply to the addition of a
credit or charge card account to a previously-issued prepaid account.
As discussed in the section-by-section of Sec. 1026.12(a)(1), comment
12(a)(1)-7 would provide that a credit card feature may be added to a
previously issued prepaid card only upon the consumer's specific
request and only in compliance with Sec. 1026.12(h). Proposed comment
12(h)-2 also would cross-reference Sec. 1026.60 and related commentary
for disclosures that generally must be provided on or with applications
or solicitations to open a credit or charge card account.
The Bureau notes that if the prepaid card issuer offers the credit
plan accessed by the prepaid card, the prepaid card issuer is the
``card issuer'' for purposes of Regulation Z, including Sec.
1026.12(h). This is because the prepaid card accessing the credit plan
is
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a credit card and Sec. 1026.2(a)(7) defines ``card issuer'' as a
person that issues a credit card or that person's agent with respect to
the card. See Sec. 1026.2(a)(7). If a third party offers the credit
plan that is accessed by a prepaid card, both the person offering the
credit plan and the prepaid card issuer are card issuers for purposes
of Sec. 1026.12(h). In this case, the person offering the credit plan
would be an agent of the prepaid card issuer. See proposed comment
2(a)(7)-1.ii. For credit plans accessed by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, the person
extending the credit and issuing the account number would be a card
issuer for purposes of Sec. 1026.12(h). For those types of credit
plans, the prepaid card issuer would not be a card issuer for purposes
of Sec. 1026.12(h). Nonetheless, the prepaid card issuer would be
covered under Regulation E proposed Sec. 1005.18(g)(1), which would
prevent the financial institution from allowing credit extensions from
a credit plan subject to Regulation Z to be deposited in the prepaid
account, where the credit plan is accessed by an account number that is
a credit card under Regulation Z where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. See the section-by-section analysis
of Regulation E proposed Sec. 1005.18(g)(1). The Bureau believes that
covering both the prepaid card issuer and the person extending credit
under the credit card account (if different from the prepaid card
issuer) would help avoid circumvention of the provisions in Sec.
1026.12(h). The Board solicits comment on whether additional provisions
are needed to avoid circumvention, such as requiring card issuers to
adopt policies and procedures reasonably designed to ensure that its
affiliates, service providers, or commercial entities with whom the
card issuer has a contractual relationship do not make a solicitation
or provide an application as described in Sec. 1026.12(h)(1) to the
consumer during the 30-day interval.
The Bureau believes that use of its authority under TILA section
105(a) to add the proposed provisions in Sec. 1026.12(h) is necessary
and proper to effectuate the purposes of TILA to help ensure the
informed use of the credit or charge card account when it is opened.
Specifically, TILA section 102 provides that one of the main purposes
of TILA is to promote the informed use of credit by ensuring meaningful
disclosure of credit terms so that consumer will be able to compare
more readily the various credit terms available to him or her and avoid
the uninformed use of credit. 15 U.S.C. 1601. Furthermore, TILA section
132 requires that ``[n]o credit card shall be issued except in response
to a request or application therefor.'' 15 U.S.C. 1642. In addition,
the Bureau believes that the proposed waiting period will, consistent
with Dodd-Frank section 1032(a), ensure that the features of the credit
card connected to the prepaid account are fully, accurately, and
effectively disclosed to consumers in a manner that permits the
consumers to understand the costs, benefits, and risks associated with
the account.
The Bureau believes that the requirement in proposed Sec.
1026.12(h) of a 30-day waiting period for prepaid-linked credit cards
would promote the informed and voluntary use of credit. Under Sec.
1026.12(h)(1), a card issuer would be required to wait 30 calendar days
after a prepaid account has been registered by the consumer holding the
prepaid account before the card issuer may open a credit or charge card
account, or may provide a solicitation or application to open a credit
or charge card account, that will be accessed by the prepaid card, or
by an account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the card issuer. The Bureau believes that it would promote the informed
use of the credit to separate the decision to purchase and register a
prepaid account from the decision to accept an offer to add a credit
card account to that prepaid account. The Bureau believes that without
this proposed provision, prepaid card issuers would be likely to
provide solicitations or applications to open credit card accounts
linked to prepaid accounts to prepaid cardholders at the time the
prepaid accounts are registered because prepaid card issuers will
already be collecting information from the cardholders in order to
register the prepaid accounts.
As discussed in the section-by-section analysis of Sec.
1005.18(g)(1), the Bureau believes that separating these decisions
would better allow consumers to focus on the terms and conditions that
apply to the prepaid account at the time of purchase and registration
which may enable the consumer to better understand those terms and
conditions, consistent with EFTA section 905(a) which requires
financial institutions to disclose the terms and conditions of
electronic fund transfers involving a consumer's account. The Bureau
also believes that requiring at least 30 calendar days to elapse
between the registration of a prepaid account and any offer of a linked
credit or charge card account would enhance consumer understanding of
the terms of the prepaid account and would help consumers to make more
informed decisions regarding linking a credit or charge card account to
the prepaid account.
In addition, as discussed in the section-by-section analysis of
Regulation E proposed Sec. 1005.18(e)(3), the registration process is
critical to application of full Regulation E protections. Specifically,
Regulation E proposed Sec. 1005.18(e)(3) provides that for all prepaid
accounts other than payroll card accounts and government benefit
accounts, a financial institution is not required to provide error
resolution and limited liability protections for unverified prepaid
accounts, so long as the financial institution discloses to consumers
in advance the risks of not registering a prepaid account. If a
consumer asserts an error on an unregistered account, the financial
institution must collect identifying information and verify the
consumer's identity, and then investigate the error. If a card issuer
were allowed to market credit card accounts to consumers at the time of
prepaid account registration, the Bureau fears that that consumers
could believe that they are required to request that the credit or
charge card account be linked to the prepaid account in order to
register or access the prepaid account. This could cause some consumers
to not register their prepaid accounts and lose important protections
under Regulation E.
Moreover, the Bureau believes that the 30-day time period between
the registration of a prepaid account, and when a linked credit or
charge card account can be offered to the holder of the prepaid
account, would help consumers to make more informed decisions about
whether to request that the credit or charge card account be linked to
the prepaid account. The Bureau believes that consumers may be able to
focus more effectively on the credit terms of the linked credit
feature, and make a more informed decision whether to request such a
credit card account, if the decision to accept the linked credit card
account occurs apart from the process to register the card. Without
these protections, card issuers may attempt to market the credit card
account to prepaid cardholders at the time they purchase the prepaid
card or at registration. Consumers may feel pressured to make decisions
on whether
[[Page 77244]]
to add the credit card accounts without the time to fully consider the
terms of the credit card accounts and the consequences of obtaining the
accounts. The Bureau believes that a consumer's decision to add a
credit card account to the prepaid account should be a distinct phase
from the decision to obtain or register the prepaid card so that
consumers have the time to consider fully the terms of the credit card
account and consider the consequences of obtaining the credit card
account.
Section 1026.13 Billing Error Resolution
TILA section 161, as implemented in Sec. 1026.13 of Regulation Z,
sets forth error resolution procedures for billing errors that relate
to any extension of credit that is made in connection with an open-end
account or credit card account. Specifically, it requires a consumer to
provide written notice of an error within 60 days after the first
periodic statement reflecting the alleged error is sent. 15 U.S.C.
1666. The written notice triggers a creditor's duty to investigate the
claim within prescribed time limits. The proposal would revise certain
provisions that apply to the resolution procedures for billing errors
set forth in Sec. 1026.13 to provide guidance on how those provisions
apply to open-end plans or credit card account accessed by a prepaid
card or an account number where extensions of credit are permitted to
be deposited directly only into particular prepaid accounts specified
by the creditor.
Specifically, as discussed in more detail below, the proposal would
address issues related to the definition of ``billing error'' in Sec.
1026.13(a)(3) related to disputes about property or services that are
not delivered to the consumer as agreed. The proposal would amend
commentary to Sec. 1026.13(a)(3) to address the circumstances in which
a consumer may assert a billing error under Sec. 1026.13(a)(3) with
respect to purchases that are made with funds that have been deposited
into a prepaid account and those funds were credit from a credit plan
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor. In
addition, the proposal would revise Sec. 1026.13(i), which sets forth
rules on whether billing error procedures set forth in Regulation E or
Regulation Z apply if an extension of credit is incident to an
electronic fund transfer.
13(a) Definition of Billing Error
13(a)(3)
Section 1026.13(a) defines a ``billing error'' for purposes of the
error resolution procedures. Under Sec. 1026.13(a)(3), the term
``billing error'' includes disputes about an extension of credit for
property or services not accepted by the consumer or not delivered to
the consumer as agreed. Comment 13(a)(3)-2 explains that, in certain
circumstances, a consumer may assert a billing error under Sec.
1026.13(a)(3) with respect to property or services obtained through any
extension of credit made in connection with a consumer's use of a
third-party payment service.
Specifically, comment 13(a)(3)-2 provides that Sec. 1026.13(a)(3)
generally applies to disputes about goods and services that are
purchased using a third-party payment intermediary, such as a person-
to-person Internet payment service, funded through use of a consumer's
credit plan when the goods or services are not accepted by the consumer
or not delivered to the consumer as agreed. However, the extension of
credit must be made at the time the consumer purchases the good or
service and match the amount of the transaction to purchase the good or
service (including ancillary taxes and fees). Under these
circumstances, the property or service for which the extension of
credit is made is not the payment service, but rather the good or
service that the consumer has purchased using the payment service.
Thus, for example, Sec. 1026.13(a)(3) does not apply to purchases
using a third party payment intermediary that is funded through use of
a credit plan if: (1) The extension of credit is made to fund the
third-party payment intermediary ``account,'' but the consumer does not
contemporaneously use those funds to purchase a good or service at that
time; or (2) The extension of credit is made to fund only a portion of
the purchase amount, and the consumer uses other sources to fund the
remaining amount.
Similar to the provision relating to third-party intermediaries,
the proposal would add proposed comment 13(a)(3)-2.ii to address
situations where goods or services are purchased using funds deposited
into a prepaid account and those funds are credit drawn from a credit
plan that is accessed by an account number where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. Proposed comment 13(a)(3)-2.ii is
designed to address situations where (1) a separate line of credit is
linked to a prepaid account where extensions of credit are permitted to
be deposited directly only into particular prepaid accounts specified
by the creditor, (2) the consumer requests an advance on the credit
plan using an account number other than a prepaid card, and (3) the
advance is deposited into the prepaid account. This provision is not
intended to apply to credit extensions for property or services that
are accessed by the prepaid card directly. In that situation, there is
no intervening account in which credit is deposited; instead, credit is
directly accessed by the prepaid card to purchase the property or
services. When credit is accessed by a prepaid card and that credit is
used to fund the entire amount of a purchase of property or service,
Sec. 1026.13 applies to these transactions, and a billing error would
occur under Sec. 1026.13(a)(3) when the goods or services are not
accepted by the consumer or not delivered to the consumer as agreed.
See the section-by-section analysis of Sec. 1026.13(i) for a
discussion of transactions made with prepaid cards that are credit
cards where transactions are partially paid with funds from the prepaid
account and partially funded with credit.
Proposed comment 13(a)(3)-2.ii would provide that Sec.
1026.13(a)(3) generally applies to disputes about goods and services
that are purchased using a prepaid card funded through use of a
consumer's credit plan accessed by an account number where extensions
of credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor when the goods or services
are not accepted by the consumer or not delivered to the consumer as
agreed. However, the extension of credit must be made at the time the
consumer purchases the good or service and match the amount of the
transaction to purchase the good or service (including ancillary taxes
and fees). Thus, for example, Sec. 1026.13(a)(3) would not apply to
purchases using a prepaid card that is funded through use of such a
credit plan if: (1) The extension of credit is made to fund the prepaid
account, but the consumer does not contemporaneously use those funds to
purchase a good or service at that time; or (2) The extension of credit
is made to fund only a portion of the purchase amount, and the consumer
uses other sources to fund the remaining amount.
The Bureau believes that for purposes of billing error resolution
procedures, it is appropriate to consider purchases in the situations
described above to be purchases made with the credit plan. In cases
where the extension of credit is
[[Page 77245]]
made at the time the consumer purchases the good or service and matches
the amount of the transaction to purchase the good or service
(including ancillary taxes and fees), from the consumer's perspective,
there is likely to be little difference between this transaction and a
transaction where a consumer would use his or her prepaid card to
access a credit plan to fund the entire amount of the purchase. In the
latter situation, a purchase made with the prepaid card using a credit
plan accessed by the card to fund the entire amount of the purchase
would be a billing error under Sec. 1026.13(a)(3) when the goods or
services are not accepted by the consumer or not delivered to the
consumer as agreed. Due to the similarities, consumers may reasonably
believe that those two types of similar transactions would be afforded
the same billing error protections.
The proposal also would make a technical revision to comment
13(a)(3)-2, by moving the existing language of the comment to proposed
comment 13(a)(3)-2.i.
13(i) Relation to Electronic Fund Transfer Act and Regulation E
Section 1026.13(i) provides guidance on whether billing error
provisions under Regulation E or Regulation Z apply in certain
overdraft related transactions. Specifically, Sec. 1026.13(i) provides
that if an extension of credit is incident to an electronic fund
transfer, under an agreement between a consumer and a financial
institution to extend credit when the consumer's account is overdrawn
or to maintain a specified minimum balance in the consumer's account,
the creditor must comply with the requirements of Regulation E, Sec.
1005.11 governing error resolution rather than those of Sec.
1026.13(a), (b), (c), (e), (f), and (h). The provisions of Regulation Z
Sec. 1026.13 (d) and (g) would still apply to these transactions.
As discussed in the Overview of Regulation Z Proposal section,
currently under Regulation Z, overdraft credit is subject to Regulation
Z only if there is an agreement to extend credit, which is typically
described as an overdraft line of credit. In those cases, Sec.
1026.13(i) applies when a transaction is partially funded through an
electronic fund transfer from an asset account and partially funded
through an overdraft credit line. Such transactions will be subject to
both Regulation Z and E. Under Sec. 1026.13(i), for those
transactions, the creditor must comply with the requirements of
Regulation E Sec. 1005.11 governing error resolution rather than those
of Sec. 1026.13(a), (b), (c), (e), (f), and (h). The provisions of
Regulation Z Sec. 1026.13 (d) and (g) would still apply to these
transactions. See comment 13(i)-2. For overdraft lines of credit, (1)
if a transaction only accesses credit and does not access funds in the
asset account, the error resolution provisions in Regulation Z apply
and the ones in Regulation E do not apply; and (2) if a transaction
only accesses the funds in the asset account and does not access
credit, the error resolution provisions in Regulation E apply and the
ones in Regulation Z do not apply. For overdraft credit where there is
not an agreement to extend credit, Regulation Z does not apply. For
those overdraft credit programs, overdraft transactions are governed
solely by the error resolution provisions in Regulation E. See comment
13(i)-2. Credit extended directly from a non-overdraft credit line is
governed solely by Regulation Z, even though a combined credit card/
access device is used to obtain the extension. See comment 13(i)-1.
As discussed above in the Overview of Regulation Z Proposal
section, both overdraft services and overdraft lines of credit linked
to prepaid accounts would be subject to Regulation Z's open-end rules
set forth in subpart B if they meet the definition of open-end credit
or they are accessed by a credit card. For such overdraft credit plans
accessed by a prepaid card, where a transaction is partially funded
through an electronic fund transfer from an prepaid account and
partially funded from credit, the proposal would provide that a
creditor must comply with the requirements of Regulation E Sec.
1005.11 governing error resolution rather than those of Sec.
1026.13(a), (b), (c), (e), (f), and (h). See proposed Sec.
1026.13(i)(2). The provisions of Regulation Z Sec. 1026.13(d) and (g)
would still apply to these transactions.
For asset accounts other than prepaid accounts, proposed Sec.
1026.13(i)(1) would continue to focus on whether there is an agreement
between a consumer and a financial institution to extend credit when
the consumer's account is overdrawn or to maintain a specified minimum
balance in the consumer's account. On the other hand, for prepaid
accounts, proposed Sec. 1026.13(i)(2) would apply if credit is
extended under a credit plan that is subject to subpart B and the
credit extended is incident to an electronic fund transfer when the
consumer's prepaid account is overdrawn. A credit plan accessed by a
prepaid card that is a credit card would be subject to subpart B, and
thus proposed Sec. 1026.13(i)(2) would apply. Under the proposal, a
prepaid card can be a credit card under Regulation Z even if the
creditor retains discretion to not pay the credit transactions. As
discussed in the section-by-section analysis of Sec. 1026.2(a)(15)(i),
proposed comment 2(a)(15)-2.i.F would provide that the term ``credit
card'' for purposes of Regulation Z includes a prepaid card that is a
single device that may be used from time to time to access a credit
``plan,'' except if the prepaid card only accesses credit that is not
subject to any finance charge described in Sec. 1026.4 or any fee
described in Sec. 1026.4(c), such as an application fee to apply for
credit or a late payment fee, and is not payable by written agreement
in more than four installments. As discussed in the section-by-section
analysis of Sec. 1026.2(a)(20), with respect to credit that is
accessed by a prepaid card, a ``plan'' includes a program where the
consumer is obligated contractually to repay the credit. For example,
such a plan includes a program under which a creditor routinely pays
transactions when a consumer has insufficient or unavailable funds in a
prepaid account and the consumer is obligated contractually to repay
those transactions. Under the proposal, such a program would constitute
a plan notwithstanding that the creditor retains discretion not to pay
such transactions. Thus, with respect to prepaid accounts, proposed
Sec. 1026.13(i)(2) focuses on whether credit is extended under a
credit plan that is subject to subpart B incident to an electronic fund
transfer and extended when the consumer's prepaid account is overdrawn,
rather than whether there is an agreement between a consumer and a
financial institution to extend credit when the consumer's account is
overdrawn or to maintain a specified minimum balance in the consumer's
account.
Comment 13(i)-1 would be revised to explain that with respect to a
credit account accessed by an account number where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, Sec. 1026.13(i) does not apply to
transfers from that plan to a prepaid account. Under the proposal, the
creditor for such transfers must comply with the billing error
provisions in Sec. 1026.13. This guidance is designed to address
situations where (1) a separate line of credit is linked to a prepaid
account where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor, (2) the consumer requests an advance on the account using an
account number other
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than a prepaid card, and (3) the advance is deposited into the prepaid
account. The provisions in Sec. 1026.13(i) would not apply to these
types of credit accounts because these credit plans do not involve
overdraft transactions that are partially funded through electronic
fund transfers from prepaid accounts and partially funded from credit
transactions. For these types of credit accounts, transactions where
credit is deposited into the prepaid account are separate from
transactions that withdraw the funds from the prepaid account. Proposed
comment 13(i)-1 would specify that transfers from such credit plans to
a prepaid account are subject to the error resolution procedures in
Regulation Z Sec. 1026.13 and are not covered by the rules in Sec.
1026.13(i).
The proposal also would add proposed comment 13(i)-4 to provide
guidance on how proposed Sec. 1026.13(i) applies to overdraft credit
plans that are subject to subpart B such as credit plans that are
accessed by prepaid cards that are credit cards. Specifically, proposed
comment 13(i)-4 would provide that for transactions involving a credit
plan that is subject to subpart B when the credit extension is incident
to an electronic fund transfer and the credit is extended where the
prepaid account is overdrawn, whether Regulation E or Regulation Z
applies depends on the nature of the transaction. For example, if the
transaction solely involves an extension of credit under an overdraft
plan, and does not include a debit to the prepaid account, the error
resolution requirements of Regulation Z would apply. If the transaction
debits a prepaid account only (with no credit extended under the
overdraft plan), the provisions of Regulation E would apply.
Nonetheless, under the proposal, if the transaction debits a
prepaid account but also draws on an overdraft plan subject to subpart
B, a creditor would be required to comply with the requirements of
Regulation E, Sec. Sec. 1005.11 and proposed Sec. 1005.18(c),
governing error resolution rather than those of Sec. 1026.13(a), (b),
(c), (e), (f) and (h).
Comment 13(i)-3 provides additional guidance on how the error
resolution provisions of Regulations Z and E interact. Comment 13(i)-3
provides an example of the application of Sec. 1026.13(i) to a
transaction where a consumer withdraws money at an automated teller
machine and activates an overdraft line of credit on the checking
account. In this case, an error asserted with respect to the
transaction would be subject, for error resolution purposes, to the
applicable Regulation E (12 CFR part 1005) provisions (such as timing
and notice) for the entire transaction. In addition, the creditor would
not need to provisionally credit the consumer's account, under
Regulation E Sec. 1005.11(c)(2)(i), for any portion of the unpaid
extension of credit. Also, the creditor would need to credit the
consumer's account under Sec. 1005.11(c) with any finance or other
charges incurred as a result of the alleged error. The provisions of
Sec. Sec. 1026.13(d) and (g) would apply only to the credit portion of
the transaction. Proposed comment 13(i)-4 would provide similar
guidance for how Sec. 1026.13(i)(2) applies to transactions involving
an overdraft credit plan subject to subpart B in connection with a
prepaid account (such as a credit plan accessed by a prepaid card that
is a credit card).
Proposed comment 13(i)-5 would explain that an overdraft credit
plan would not be subject to subpart B if the credit plan is only
accessed by a prepaid card that is not a credit card. A prepaid card
would not be a credit card if the prepaid card only accesses credit
that is not subject to any finance charge as defined in Sec. 1026.4 or
fee described in Sec. 1026.4(c) and is not payable by written
agreement in more than four installments. See proposed comment
2(a)(15)-2.i.F. For these types of credit plans, only the error
resolution provisions in Regulation E would apply.
The Bureau believes that it is appropriate to apply the error
resolution procedures in Regulation E generally to transactions that
debit a prepaid account but also draw on an overdraft plan subject to
subpart B. The Bureau believes that this proposed approach is
consistent with EFTA section 909(c), which applies EFTA's limits on
liability for unauthorized use to transactions which involve both an
unauthorized electronic fund transfer and an extension of credit
pursuant to an agreement between the consumer and the financial
institution to extend such credit to the consumer in the event the
consumer's account is overdrawn. 15 U.S.C. 1693g(c). An unauthorized
electronic fund transfer on a prepaid account generally would be
subject to the limits on liability in Regulation E Sec. 1005.6 and
proposed Sec. 1005.18(e); an unauthorized electronic fund transfer on
a prepaid account also is an error for purposes of the error resolution
procedures set forth in Regulation E Sec. 1005.11 and proposed Sec.
1005.18(e). See Regulation E Sec. 1005.11(a)(1). Although billing
errors under Regulation Z Sec. 1026.13(a) include a broader category
than only unauthorized use, the Bureau believes it is necessary and
proper to exercise its adjustment and exception authority under TILA
section 105(a) to apply Regulation E's error resolution provisions and
limited Regulation Z error resolution provisions to these transactions,
to facilitate compliance with EFTA section 908 and TILA section 161 on
error resolution. The Bureau is concerned that conflicting provisions
could apply to transactions that debit a prepaid account but also draw
on an overdraft plan subject to subpart B if Regulation E's provisions
applied to limits on liability for unauthorized use, and Regulation Z's
provisions generally apply to investigation of billing errors,
including transactions involving unauthorized use. To avoid these
potential conflicts and to facilitate compliance, under Sec.
1026.13(i)(2), if the transaction debits a prepaid account but also
draws on an overdraft plan subject to subpart B, a creditor would be
required to comply with the requirements of Regulation E, Sec. 1005.11
and proposed Sec. 1005.18(e), governing error resolution rather than
those of Sec. 1026.13(a), (b), (c), (e), (f) and (h). This approach is
also consistent with the existing provisions in Regulation E Sec.
1005.12(a)(1)(iv) and Regulation Z Sec. 1026.13(i), which applies
Regulation E's liability limitation and error resolution procedures to
an extension of credit that is incident to an electronic fund transfer
for overdraft lines of credit. The Bureau specifically solicits comment
on this approach and any operational issues that might arise under this
approach.
The proposal also would make technical revisions to Sec. 1026.13
and related commentary. First, the existing language of Sec.
1026.13(i) would be moved to proposed Sec. 1026.13(i)(1) and revised
to specify that this provision would apply to asset accounts that are
not prepaid accounts. Second, comments 13(i)-2 and -3 would be revised
to specify that they only apply to debit cards and not to prepaid
cards.
Subpart G
Except for Sec. 1026.60, which concerns certain credit card
disclosures, all of the provisions in subpart G implement the Credit
CARD Act. The provisions in subpart G that implement the Credit CARD
Act generally apply to a ``card issuer'' as defined in Sec.
1026.2(a)(7) that is extending credit under a ``credit card account
under an open-end (not home-secured) consumer credit plan'' as defined
in Sec. 1026.2(a)(15)(ii).\377\ Among
[[Page 77247]]
other things, subpart G contains provisions to implement the Credit
CARD Act that:
\377\ Section 1026.57(c) applies to all open-end credit. That
section prohibits a card issuer or creditor from offering a tangible
item to a college student on or near a college campus or at an event
sponsored by the college to induce the student to apply for or open
an open-end credit plan.
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Prohibit credit card issuers from extending credit without
assessing the consumer's ability to pay, with special rules regarding
the extension of credit to persons under the age of 21. (Sec. 1026.51)
Restrict the amount of required fees that an issuer can charge
during the first year after an account is opened. (Sec. 1026.52(a)(1))
Limit the amount issuers can charge for ``back-end'' penalty
fees, such as when a consumer makes a late payment or exceeds his or
her credit limit. (Sec. 1026.52(b)(1))
Ban ``declined transaction fees'' and other penalty fees where
there is no cost to the issuer associated with the violation of the
account agreement. (Sec. 1026.52(b)(2))
Restrict the circumstances under which issuers can increase
interest rates on credit card accounts and establish procedures for
doing so. (Sec. 1026.55 and 59)
Restrict fees for over-the-limit transactions to one per
billing cycle and require that the consumer opt-in to payment of such
transactions in order for the fee to be charged. (Sec. 1026.56)
Require institutions of higher education to publicly disclose
agreements with credit card issuers and limit the marketing of credit
cards on or near college campuses. (Sec. 1026.57)
In addition, subpart G also contains Sec. 1026.60, which sets forth
disclosures that card issuers generally must provide on or with a
solicitation or an application to open a credit or charge card account.
As discussed above in the Overview of Regulation Z Proposal
section, the Bureau anticipates that most credit accessed by a prepaid
card, or credit accessed by an account number where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, would meet the definition
of ``open-end credit'' if the creditor imposes a finance charge for the
credit. See section-by-section analysis of the definition of ``credit''
in Sec. 1026.2(a)(14), the definition of ``open-end-credit'' in Sec.
1026.2(a)(20), and the definition of ``finance charge'' in Sec.
1026.4. In addition, as discussed above in the section-by-section
analysis of Sec. Sec. 1026.2(a)(7), (a)(15)(i) and (a)(15)(ii), an
open-end credit plan accessed by a prepaid card that is a credit card,
or by an account number that is a credit card where the extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, would be a ``credit card
account under an open-end (not home-secured) consumer credit plan,''
and the person issuing the prepaid card or account number would be a
``card issuer.''
As a result, pursuant to the Bureau's proposed amendments, certain
provisions in subpart G generally would apply to open-end credit that
is accessed by a prepaid card that is a credit card (such as overdraft
credit) or open-end credit that is accessed by an account number that
is a credit card and deposited into a prepaid account where the
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor.\378\
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\378\ A person would not be extending open-end credit where the
person is not charging a finance charge for the credit that is
accessed by a prepaid card or by an account number where the
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor. See
section-by-section analysis of Sec. 1026.2(a)(17) and (a)(20).
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As discussed in more detail below, the Bureau is proposing to amend
commentary to the following provisions to provide guidance on how
certain provisions in subpart G would apply to open-end credit plans
that are accessed by prepaid cards that are credit cards or account
numbers as described above that are credit cards:
(1) Section 1026.52(a), which restricts required fees charged
during the first year the account is opened;
(2) Section 1026.52(b), which restricts the imposition of penalty
fees, including the ban on declined transaction fees; and
(3) Section 1026.57, which limits the marketing of credit cards to
college students.\379\
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\379\ The Overview of the Regulation Z Proposal describes some
of the benefits from these regulations for prepaid account
consumers.
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The Bureau also is proposing to provide guidance on how Sec.
1026.60, which requires disclosures to be provided on or with a
solicitation or application to open a credit or charge card account,
applies to card issuers that are issuing prepaid cards that are credit
cards or account numbers, as described above, that are credit cards.
Section 1026.52 Limitations on Fees
52(a) Limitations During First Year After Account Opening
TILA section 127(n)(1) restricts the imposition of certain fees
during the first year after opening a credit card account under an
open-end consumer credit plan in order to restrict certain ``fee
harvester'' or subprime credit cards that charged a large amount of
fees early in the account relationship to the credit line, which
significantly reduced the credit available to a consumer during the
first year. Specifically, the statute provides that ``no payment of any
fees (other than any late fee, over-the-limit fee, or fee for a payment
returned for insufficient funds) may be made from the credit made
available under the terms of the account'' where the account terms
would require consumers to pay ``an aggregate amount [of non-exempt
fees] in excess of 25 percent of the total amount of credit authorized
under the account when the account is opened.''
This provision is implemented in Sec. 1026.52(a), which provides
generally that the total amount of fees a consumer is required to pay
with respect to a credit card account under an open-end (not home-
secured) consumer credit plan during the first year after account
opening must not exceed 25 percent of the credit limit in effect when
the account is opened. Fees not subject to the 25 percent restriction
are late payment fees, over-the-limit fees, and returned-payment fees;
or fees that the consumer is not required to pay with respect to the
account. See Sec. 1026.52(a)(2). Existing comment 52(a)(1)-1 provides
that the 25 percent limit in Sec. 1026.52(a)(1) applies to fees that
the card issuer charges to the account as well as to fees that the card
issuer requires the consumer to pay with respect to the account through
other means (such as through a payment from the consumer's asset
account to the card issuer or from another credit account provided by
the card issuer).
Particularly in the context of prepaid cards with linked credit
card accounts that are designed to provide liquidity to the prepaid
account, the Bureau believes that the statute and regulation provide
important protections to consumers. From the consumer's perspective,
there is no practical difference between a fee charged against the
credit card account and a fee charged to the linked prepaid account in
order to access credit because both functionally reduce the total
amount of credit available to the consumer through the prepaid account
until such fees are paid. If the statute were not interpreted to
include fees charged across any linked accounts, the Bureau is
concerned that card issuers could hide non-exempt fees reducing the
credit made available under such accounts by artificially charging such
fees as negative balances on asset accounts or
[[Page 77248]]
by creating separate artificially distinct credit accounts and
attempting to collect the non-exempt fees from those linked credit
accounts. The Bureau believes that such arrangements would subvert the
purpose and meaning of TILA section 127(n)(1).
As described below, the Bureau is proposing to amend several
comments to Sec. 1026.52(a) to provide examples and other guidance on
how this provision would apply to credit card accounts under an open-
end (not home-secured) consumer credit plan that are accessed by
prepaid cards that are credit cards, or accessed by account numbers
that are credit cards where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. The Bureau seeks comment on whether additional amendments
to the regulation or commentary would be helpful to effectuate its
interpretation of the statute or to facilitate compliance. For example,
the Bureau seeks comment on whether it would be helpful to mandate the
disclosure to consumers of the initial credit line that is made
available under the terms of the account, including any linked credit
accounts.
52(a)(1) General Rule
Section 1026.52(a)(1) provides that generally the total amount of
fees a consumer is required to pay with respect to a credit card
account under an open-end (not home-secured) consumer credit plan
during the first year after account opening must not exceed 25 percent
of the credit limit in effect when the account is opened. Fees not
subject to the 25 percent restriction are late payment fees, over-the-
limit fees, and returned-payment fees; or fees that the consumer is not
required to pay with respect to the account. See Sec. 1026.52(a)(2).
The Bureau is proposing to amend existing comment 52(a)(1)-1, which
explains that the 25 percent limit in Sec. 1026.52(a)(1) applies to
fees that the card issuer charges to the account as well as to fees
that the card issuer requires the consumer to pay with respect to the
account through other means (such as through a payment from the
consumer's asset account to the card issuer or from another credit
account provided by the card issuer). This comment also provides two
examples illustrating the limitations on fees set forth in Sec.
1026.52(a).
The proposal would amend comment 52(a)(1)-1 to add a prepaid
account as an example of a consumer's asset account. Thus, for a credit
card account under an open-end (not home-secured) consumer credit plan
that are accessed by a prepaid card that is a credit card, or accessed
by an account number that is a credit card where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, the 25 percent limit in Sec.
1026.52(a)(1) applies to fees that the card issuer charges to the
account as well as to fees that the card issuer requires the consumer
to pay with respect to the account through other means (such as through
a payment to the card issuer from the consumer's prepaid account or
other asset account or from another credit account provided by the card
issuer). The Bureau is also proposing to add two new examples to
existing comment 52(a)(1)-1 to illustrate how the prohibition in Sec.
1026.52(a) applies to credit card accounts under an open-end (not home-
secured) consumer credit plan that are accessed by prepaid cards that
are credit cards. See proposed comment 52(a)(1)-1.iii and .iv. While
the proposed examples that would be added to comment 52(a)(1)-1.iii and
.iv assume that a consumer opens a credit account accessed by the
prepaid card that is a credit card, the same proposed guidance would
apply to credit card accounts that are accessed by account numbers that
are credit cards where extensions of credit are only permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor.
52(a)(2) Fees Not Subject to Limitations
Section 1026.52(a)(2) provides that the 25 percent restriction does
not apply to late payment fees, over-the-limit fees, and returned-
payment fees, or fees that the consumer is not required to pay with
respect to the account. Existing comment 52(a)(2)-1 provides guidance
on the types of fees that are included in the 25 percent threshold.
Specifically, existing comment 52(a)(2)-1 provides that except as
provided in Sec. 1026.52(a)(2), Sec. 1026.52(a) applies to any fees
or other charges that a card issuer will or may require the consumer to
pay with respect to a credit card account during the first year after
account opening, other than charges attributable to periodic interest
rates. The existing comment further clarifies that for example, Sec.
1026.52(a) applies to: (1) Fees that the consumer is required to pay
for the issuance or availability of credit described in Sec.
1026.60(b)(2), including any fee based on account activity or
inactivity and any fee that a consumer is required to pay in order to
receive a particular credit limit; (2) fees for insurance described in
Sec. 1026.4(b)(7) or debt cancellation or debt suspension coverage
described in Sec. 1026.4(b)(10) written in connection with a credit
transaction, if the insurance or debt cancellation or debt suspension
coverage is required by the terms of the account; (3) fees that the
consumer is required to pay in order to engage in transactions using
the account (such as cash advance fees, balance transfer fees, foreign
transaction fees, and fees for using the account for purchases); (4)
fees that the consumer is required to pay for violating the terms of
the account (except to the extent specifically excluded by Sec.
1026.52(a)(2)(i)); (5) fixed finance charges; and (6) minimum charges
imposed if a charge would otherwise have been determined by applying a
periodic interest rate to a balance except for the fact that such
charge is smaller than the minimum.
The Bureau also is proposing to add two additional comments to
Sec. 1026.52(a)(2) to provide specific guidance on the types of fees
that would be covered by the 25 percent limitation for credit card
accounts under an open-end (not home-secured) consumer credit plan that
are accessed by prepaid cards that are credit cards, or accessed by
account numbers that are credit cards where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.
First, proposed comment 52(a)(2)-2 would provide additional
examples of the types of fees that would be covered by the 25 percent
limitation for credit card accounts under an open-end (not home-
secured) consumer credit plan that are accessed by prepaid cards that
are credit cards. Specifically, proposed comment 52(a)(2)-2 provides
that except as provided in Sec. 1026.52(a)(2), Sec. 1026.52(a)
applies to any charge or fee, other than a charge attributable to a
periodic interest rate, that the card issuer will or may require the
consumer to pay in connection with a credit account accessed by a
prepaid card that is a credit card, including fees that are assessed on
the prepaid account in connection with credit accessed by the prepaid
card. Under proposed comment 52(a)(2)-2, this would include, but is not
limited to: (1) Per-transaction fees for ``shortages'' or
``overdrafts;'' (2) fees for transferring funds from a credit account
to a prepaid account that are both accessed by the prepaid card; (3) a
daily, weekly, or monthly (or other periodic) fee (other than a
periodic interest rate) assessed each period a prepaid account is in
``overdraft'' status, or would be in overdraft status but for funds
supplied by a linked line of credit accessed by the prepaid card; or
(4) a daily, weekly, or monthly (or other periodic) fee (other than a
periodic
[[Page 77249]]
interest rate) assessed each period a line of credit accessed by the
prepaid card has an outstanding balance.
Second, proposed comment 52(a)(2)-3 would provide additional
examples of the types of fees that that would be covered by the 25
percent limitation for credit card accounts under an open-end (not
home-secured) consumer credit plan that are accessed by account numbers
that are credit cards where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. Specifically, proposed comment 52(a)(2)-3 would provide
that except as provided in Sec. 1026.52(a)(2), Sec. 1026.52(a)
applies to any charge or fee, other than a charge attributable to a
periodic interest rate, that the card issuer will or may require the
consumer to pay in connection with a credit account accessed by an
account number that is a credit card where extensions of credit are
only permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, including fees that are assessed on
the prepaid account in connection with the credit assessed by the
account number. Proposed comment 52(a)(2)-3 would further clarify that,
this would include, but is not limited to: (1) Per-transaction fees for
``shortages'' or ``overdrafts;'' (2) fees for transferring funds from
the credit account to a prepaid account; and (3) a daily, weekly, or
monthly (or other periodic) fee (other than a periodic interest rate)
assessed each period the line of credit accessed by the account number
has an outstanding balance.
Proposed comment 52(a)(2)-3 is designed to address situations where
(1) a separate line of credit is linked to a prepaid account where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, (2) the consumer
requests an advance on the open-end account using an account number,
and (3) the advance is deposited directly into the prepaid account.
Proposed comment 52(a)(2)-3 would not apply to a credit card account
that is accessed by an account number that is a prepaid card; proposed
comment 52(a)(2)-2 would provide guidance on that type of credit card
account.
Finally, the Bureau proposes several technical revisions. Current
comments 52(a)(2)-2 and -3 would be moved to comments 52(a)(2)-4 and -5
respectively; no substantive change is intended. In addition, the
section heading to Sec. 1026.52(a) would be revised to delete the
reference to limitations prior to account opening to be consistent with
the scope of the limitations set forth in Sec. 1026.52(a); no
substantive change is intended.
52(b) Limitations on Penalty Fees
TILA section 149(a) provides that ``[t]he amount of any penalty fee
or charge that a card issuer may impose with respect to a credit card
account under an open end consumer credit plan in connection with any
omission with respect to, or violation of, the cardholder agreement,
including any late payment fee, over-the-limit fee, or any other
penalty fee or charge, shall be reasonable and proportional to such
omission or violation.'' 15 U.S.C. 1665d(a). TILA section 149(e)
provides that the Bureau, in consultation with the Comptroller of the
Currency, the Board of Directors of the Federal Deposit Insurance
Corporation, the Director of the Office of Thrift Supervision, and the
National Credit Union Administration Board, may issue rules to provide
an amount for any penalty fee or charge described in TILA section
149(a) that is presumed to be reasonable and proportional to the
omission or violation to which the fee or charge relates. 15 U.S.C.
1665d(e).
Implementing TILA section 149, Sec. 1026.52(b) provides that a
card issuer must not impose a fee for violating the terms or other
requirements of a credit card account under an open-end (not home-
secured) consumer credit plan unless the dollar amount of the fee: (1)
Is consistent with either the cost analysis in Sec. 1026.52(b)(1)(i)
or the safe harbors in Sec. 1026.52(b)(1)(ii); and (2) Does not exceed
the dollar amount associated with the violation.\380\
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\380\ A card issuer also must not impose more than one fee for
violating the terms or other requirements of a credit card account
under an open-end (not home-secured) consumer credit plan based on a
single event or transaction. See Sec. 1026.52(b)(2)(ii).
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Section 1026.52(b)(2)(i)(B) provides a card issuer must not impose
a fee for violating the terms or other requirements of a credit card
account under an open-end (not home-secured) consumer credit plan when
there is no dollar amount associated with the violation. Section
1026.52(b)(2)(i)(B)(1) through (3), respectively, would prohibit the
following fees because there is no dollar amount associated with the
following violations: (1) Transactions that the card issuer declines to
authorize; (2) Account inactivity; and (3) The closure or termination
of an account.
The Bureau is proposing to add comment 52(b)(2)(i)-7 to provide
guidance on when the ban on declined transaction fees in Sec.
1026.52(b)(2)(i)(B)(1) would apply in the context of prepaid accounts.
Specifically, this proposed comment would provide that Sec.
1026.51(b)(2)(i)(B)(1) applies to declined transaction fees where an
account number is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. In addition, the proposed comment
would clarify that with respect to a credit card that is a prepaid
card, the prohibition in Sec. 1026.52(b)(2)(i)(B)(1) applies to the
consumer's transactions using the prepaid card where a declined
transaction would have accessed the consumer's credit account with the
card issuer had it been authorized. A fee for declining such a
transaction is no different than a fee for declining a credit card
transaction, which is prohibited by current Sec. 1026.52(b)(2). Thus,
if a transaction using a prepaid card that is a credit card would have
accessed the credit card account had it been authorized, the card
issuer may not impose a declined transaction fee for declining that
transaction. Finally, the proposed comment would provide that fees
imposed for declining a transaction that would have only accessed the
prepaid account and would not have accessed the consumer's credit card
account would not be covered by Sec. 1026.52(b)(2)(B)(i)(1). Such
transactions do not directly involve a credit card account, although
they do involve a prepaid card that is a credit card. The Bureau
requests comment on whether, once a credit card account has been added
to a prepaid card, it should prohibit a card issuer from thereafter
assessing a fee for declining to authorize a prepaid card transaction,
notwithstanding that a given transaction would not have accessed the
credit card account even had it been authorized.
Section 1026.57 Reporting and Marketing Rules for College Student Open-
End Credit
Overview of Proposed Changes
TILA section 140(f) requires the public disclosure of contracts or
other agreements between card issuers and institutions of higher
education for the purpose of marketing a credit card and imposes
restrictions related to marketing open-end credit to college students.
15 U.S.C. 1650(f). TILA section 140(f)(1) provides that an institution
of higher education must publicly disclose any contract or other
agreement made with a card issuer or creditor for the purpose of
marketing a credit card. 15 U.S.C. 1650(f)(1). TILA section 140(f)(2)
provides that no card
[[Page 77250]]
issuer or creditor may offer to a student at an institution of higher
education any tangible item to induce such student to apply for or
participate in an open-end consumer credit plan offered by such card
issuer or creditor, if such offer is made (1) on the campus of an
institution of higher education; (2) near the campus of an institution
of higher education, as determined by rule of the Bureau; or (3) at an
event sponsored by or related to an institution of higher education. 15
U.S.C. 1650(f)(2).
In addition, TILA section 127(r) requires card issuers to submit an
annual report to the Bureau containing the terms and conditions of all
business, marketing, promotional agreements, and college affinity card
agreements with an institution of higher education, or other related
entities, with respect to any college student credit card issued to a
college student at such institution. 15 U.S.C. 1637(r). TILA section
140(f) and 127(r) are implemented in Sec. 1206.57.
Section 1026.57(b) provides that an institution of higher education
must publicly disclose any contract or other agreement made with a card
issuer or creditor for the purpose of marketing a credit card. The
Bureau is proposing to add comment 57(b)-3 to Sec. 1026.57(b) to
explain that this provision of Regulation Z would apply to any contract
or other agreement that an institution of higher education makes with a
card issuer or creditor for the purpose of marketing either (1) the
addition of an open-end (not home-secured) consumer credit account to
previously issued prepaid accounts that were issued to full-time or
part-time students or (2) new prepaid accounts where a credit account
may be added in connection with the prepaid account, where, in either
case, the credit account would be accessed by a prepaid card that is a
credit card, or would be accessed by an account number that is a credit
card where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor. Thus,
under the proposal, Sec. 1026.57(b) would require an institution of
higher education to publicly disclose such agreements.
Section 1026.57(c) provides that no card issuer or creditor may
offer a college student any tangible item to induce such student to
apply for or open an open-end consumer credit plan offered by such card
issuer or creditor, if such offer is made: (1) On the campus of an
institution of higher education; (2) Near the campus of an institution
of higher education; or (3) At an event sponsored by or related to an
institution of higher education. The proposal would add comment 57(c)-7
to Sec. 1026.57(c) to explain that Sec. 1026.57(c) applies to either
(1) the application for or opening of a credit card account that is
being added to previously issued prepaid accounts that were issued to
full-time or part-time students or (2) the application for or opening
of a prepaid account where a credit account may be added in connection
with the prepaid account, where, in either case, the credit account
would be accessed by a prepaid card that is a credit card, or would be
accessed by an account number that is a credit card where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor. Thus, under the proposal,
Sec. 1026.57(c) would prevent a card issuer or creditor from offering
a college student any tangible item to induce such student to apply for
or open a prepaid account with a linked credit card account (as
discussed above) or a credit card account linked to the previously-
issued prepaid account (as discussed above), offered by such card
issuer or creditor, if such offer is made: (1) On the campus of an
institution of higher education; (2) Near the campus of an institution
of higher education; or (3) At an event sponsored by or related to an
institution of higher education.
Section 1026.57(d) requires card issuers that are a party to one or
more ``college credit card agreements'' to submit annual reports to the
Bureau regarding those agreements. The proposal would amend existing
comments 57(a)(1)-1 and 57(a)(5)-1 relating to the definitions of
``college student credit card'' and ``college credit card agreement''
respectively to provide that Sec. 1026.57(d) applies to a business,
marketing or promotional agreement between a card issuer and a college
or university (or an affiliated organization, such as an alumni club or
a foundation) if the agreement provides for the addition of open-end
(not home-secured) consumer credit plans to previously-issued prepaid
accounts that were issued to full-time or part-time students, where
that credit account would be accessed by a prepaid card that is a
credit card, or would be accessed by an account number that is a credit
card where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor.
Proposed comment 57(a)(1)-1 and 57(a)(5)-1 also would provide that
Sec. 1026.57(d) applies to a business, marketing or promotional
agreement between a card issuer and a college or university (or an
affiliated organization, such as an alumni club or a foundation) if (1)
the agreement provides for the issuance of prepaid accounts to full-
time or part-time students; and (2) an open-end (not home-secured)
consumer credit plan may be added in connection with the prepaid
accounts where that credit account would be accessed by a prepaid card
that is a credit card, or would be accessed by an account number that
is a credit card where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor. Thus, under the proposal, a card issuer that is a party
to one or more such agreements would be required to submit annual
reports to the Bureau regarding those agreements.
The proposal would add or amend the comments discussed above to
provide that the provisions of Sec. 1026.57 apply to prepaid accounts
that do not contain a credit card feature at the time the prepaid
account is issued, so long as a credit card feature may be added to the
previously issued prepaid account issued to a college student where
that credit account would be accessed by a prepaid card that is a
credit card, or may be accessed by an account number that is a credit
card where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor. The
Bureau notes that under proposed Sec. 1026.12(h), a prepaid account at
the time it is opened or issued cannot include a credit card feature.
As discussed in more detail in the section-by-section analysis of
proposed Sec. 1026.12(h), under the proposal, card issuers would be
required to wait at least 30 days after a prepaid account is registered
before the card issuer may open a credit card account for the holder of
the prepaid account, or make a solicitation or provide an application
to the holder of the prepaid account to open a credit or charge card
account, accessed by the prepaid card or by an account number that is a
credit card where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor. Nonetheless, the Bureau believes that the marketing efforts
related to a prepaid account, and the inducements given by a card
issuer to open a prepaid account, also may have an impact on whether
consumers may request that a credit card account be linked to the
prepaid account, as discussed above, when such credit card accounts are
offered to them. Thus, the proposal would add or amend the comments
discussed above to provide that the provisions in that section apply to
the issuance of prepaid accounts that do not have credit card accounts
linked to them at the time the prepaid accounts are opened, if credit
card accounts may
[[Page 77251]]
be linked to the prepaid accounts in the future as described above.
The Bureau requests comment on this approach. The Bureau believes
it is reasonable to interpret credit cards in this section to include
prepaid cards where credit features may subsequently be added, and that
it is consistent with congressional concerns that college students
could become trapped in a cycle of credit card debt.\381\ Further,
these concerns might be heightened with respect to prepaid cards to
which credit card accounts may be linked, because students might be
more prone to use such cards as their primary transaction account. The
Bureau notes that, in light of these types of concerns, the Department
of Education is undertaking a negotiated rulemaking considering, among
other things, overdraft fees on prepaid cards marketed to college
students.\382\
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\381\ See, for example, an August 11 letter from Senator
Menendez to CFPB Director Richard Cordray and Department of
Education Secretary Arne Duncan urging the agencies to prohibit
overdraft fees on student prepaid accounts established in connection
with the financial aid process or students' relationships with
colleges. The letter is available at www.menendez.senate.gov/newsroom/press/menendez-calls-for-protections-from-campus-card-trap.
\382\ See www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html for further information about the department's
negotiated rulemaking.
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57(a) Definitions
Section 1026.57(d) requires card issuers that are a party to one or
more college credit card agreements to submit annual reports to the
Bureau regarding those agreements. Section 1026.57(a)(5) defines
``college credit card agreement'' to mean any business, marketing or
promotional agreement between a card issuer and an institution of
higher education or an affiliated organization in connection with which
college student credit cards are issued to college students currently
enrolled at that institution. Section 1026.57(a)(1) defines ``college
student credit card'' as used in the term ``college credit card
agreements'' to mean a credit card issued under a credit card account
under an open-end (not home-secured) consumer credit plan to any
college student.
Existing comment 57(a)(1)-1 provides guidance on the definition of
``college student credit card'' which is used in the definition of
``college credit card agreements.'' The proposal would amend this
comment to include a prepaid card that is a credit card, or an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor, that is issued to any college student under
a credit card account under an open-end (not home-secured) consumer
credit plan. Proposed comment 57(a)(1)-1 also would provide that the
definition of college student credit card includes a prepaid account
that is issued to any college student where an open-end (not home-
secured) consumer credit plan may be added in connection with the
prepaid account and the credit account may be accessed by a prepaid
card that is a credit card, or may be accessed by an account number
that is a credit card where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor.
Existing comment 57(a)(5)-1 provides guidance on the definition of
``college credit card agreements.'' The proposal would amend this
comment to include guidance on when agreements related to prepaid
accounts would be considered ``college credit card agreements.''
Proposed comment 57(a)(5)-1 would provide that the definition of
``college credit card agreements'' includes a business, marketing or
promotional agreement between a card issuer and a college or university
(or an affiliated organization, such as an alumni club or a foundation)
if the agreement either provides for the addition of open-end (not
home-secured) consumer credit plans to previously-issued prepaid
accounts that were issued to full-time or part-time students, where
that credit account would be accessed by a prepaid card that is a
credit card, or may be accessed by an account number that is a credit
card where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor.
Proposed comment 57(a)(5)-1 also would provide that the definition of
``college credit card agreements'' includes a business, marketing or
promotional agreement between a card issuer and a college or university
(or an affiliated organization, such as an alumni club or a foundation)
if (1) an agreement provides for the issuance of prepaid accounts to
full-time or part-time students; and (2) an open-end (not home-secured)
consumer credit plan may be added in connection with the prepaid
account where that credit account may be accessed by a prepaid card
that is a credit card, or may be accessed by an account number that is
a credit card where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor.
Thus, pursuant to the Bureau's proposed amendments to commentary,
Sec. 1026.57(d) would require a card issuer that is a party to one or
more agreements in connection with prepaid accounts with linked credit
cards, as described above, to submit annual reports to the Bureau
regarding those agreements. Under the proposal, a card issuer would be
required to submit agreements that provide for the issuance of prepaid
accounts to full-time or part-time students even if credit accounts are
not linked to the prepaid account when they are issued, so long as
credit accounts may be added in connection with the prepaid accounts
where the credit accounts may be accessed by a prepaid card that is a
credit card, or may be accessed by an account number that is a credit
card where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor.
As discussed above, the Bureau believes that the marketing efforts
related to a prepaid account, and the inducements given by a card
issuer to open a prepaid account, also have an impact on whether
consumers may request that a credit card account be linked to the
prepaid account when such credit card accounts are offered to them.
Thus, even though a prepaid account will not have a credit card account
linked to it at the time the prepaid account is opened, if a credit
card account may be linked to a prepaid account as described above in
the future, the prepaid account at the time of issuance would be a
``college student credit card'' for purposes of Sec. 1026.57(a)(1) if
the prepaid account is issued to a college student. As a result, under
the proposal, a card issuer that is a party to one or more agreements
between the card issuer and a college or university (or an affiliated
organization, such as an alumni club or a foundation) must submit
annual reports to the Bureau regarding those agreements if (1) an
agreement provides for the issuance of prepaid accounts to full-time or
part-time students; and (2) a credit account may be added in connection
with the prepaid account where that credit account may be accessed by a
prepaid card that is a credit card, or may be accessed by an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor.
57(b) Public Disclosure of Agreements
Section 1026.57(b) provides that an institution of higher education
must publicly disclose any contract or other agreement made with a card
issuer or creditor for the purpose of marketing a credit card. The
Bureau is proposing
[[Page 77252]]
comment 57(b)-3 to explain that Sec. 1026.57(b) applies to any
contract or other agreement that an institution of higher education
makes with a card issuer or creditor for the purpose of marketing
either (1) the addition of open-end (not home-secured) consumer credit
accounts to previously issued prepaid accounts that were issued to
full-time or part-time students, where that credit account would be
accessed by a prepaid card that is a credit card, or may be accessed by
an account number that is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor; or (2) prepaid accounts where a
credit account may be added in connection with the prepaid account and
that credit account may be accessed by a prepaid card that is a credit
card or may be accessed by an account number that is a credit card
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor. Thus, under
Sec. 1026.57(b), an institution of higher education must publicly
disclose such agreements.
As discussed above, the Bureau believes that the marketing efforts
related to a prepaid account, and the inducements given by a card
issuer to open a prepaid account, also may have an impact on whether
consumers may request that a credit card account be linked to the
prepaid account, as discussed above, when such credit card accounts are
offered to them. Thus, the Bureau believes that the marketing related
to a prepaid account where a credit card feature may be added in
connection with the prepaid account as discussed above would constitute
marketing of a credit card. Thus, under the proposal, an institution of
higher education must publicly disclose agreements for the marketing of
prepaid accounts where a credit account may be added in connection with
the prepaid account and that credit account may be accessed by a
prepaid card that is a credit card or may be accessed by an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor.
57(c) Prohibited Inducements
Section 1026.57(c) provides that no card issuer or creditor may
offer a college student any tangible item to induce such student to
apply for or open an open-end consumer credit plan offered by such card
issuer or creditor, if such offer is made: (1) On the campus of an
institution of higher education; (2) Near the campus of an institution
of higher education; or (3) At an event sponsored by or related to an
institution of higher education. The Bureau is proposing to add comment
57(c)-7 to explain that Sec. 1026.57(c) applies to (1) the application
for or opening of a credit card account that is being added to
previously-issued prepaid accounts that were issued to full-time or
part-time students, where that credit account would be accessed by a
prepaid card that is a credit card, or may be accessed by an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor; or (2) the application for or opening of a
prepaid account where a credit account may be added in connection with
the prepaid account where that credit account may be accessed by a
prepaid card that is a credit card or may be accessed by an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor.
As discussed above, the Bureau believes that the marketing efforts
related to a prepaid account, and the inducements given by a card
issuer to open a prepaid account, also may have an impact on whether
consumers may request that a credit card account be linked to the
prepaid account, as discussed above, when such credit card accounts are
offered to them. Thus, any tangible item given to induce college
students to apply or open a prepaid account where a credit card feature
may be added in connection with the prepaid account as discussed above
would also be seen as inducing a college student to apply for or open a
credit card account in connection with the prepaid account when it is
offered to the consumer. As a result, under the proposal, under Sec.
1026.57(c), a card issuer or creditor would be prohibited from offering
a college student any tangible item to induce such student to apply for
or open a prepaid account offered by such card issuer or creditor where
a credit account may be added in connection with the prepaid account
where that credit account may be accessed by a prepaid card or may be
accessed by an account number where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor, if such offer is made: (1) On the campus of
an institution of higher education; (2) Near the campus of an
institution of higher education; or (3) At an event sponsored by or
related to an institution of higher education.
Section 1026.58 Internet Posting of Credit Card Agreements
TILA section 122(d), implemented by Sec. 1026.58, generally
requires card issuers to post their card agreements on the internet and
to provide those agreements to the Bureau. Separately, as part of this
proposal, the Bureau is proposing to adopt similar provisions for
prepaid card accounts in Regulation E in proposed Sec. 1005.19.
Although the Bureau is not proposing to revise Sec. 1026.58, it does
note that the requirements of Sec. 1026.58 and those of Regulation E
in proposed Sec. 1005.19 are distinct and independent of one another.
In other words, card issuers would have to comply with both as
appropriate.
Section 1026.60 Credit and Charge Card Applications and Solicitations
TILA section 127(c), implemented by Sec. 1026.60, generally
requires card issuers to provide certain cost disclosures on or with an
application or solicitation to open a credit or charge card account. 15
U.S.C. 1637(c). Under Sec. 1026.60, card issuers generally are
required to provide the following disclosures, among other cost
disclosures, on or with the credit or charge card applications or
solicitations: (1) The annual percentage rates applicable to the
account, for purchases, cash advances, and balance transfers; (2) any
annual or other periodic fee, expressed as an annualized amount, that
is imposed for the issuance or availability of a credit card, including
any fee based on account activity or inactivity; (3) any non-periodic
fees related to opening the account, such as one-time membership or
participation fees; (4) any minimum or fixed finance charge that could
be imposed during a billing cycle; (5) any transaction charge imposed
on purchases, cash advances or balance transfers; and (6) any late
payment fees, over the limit fees or returned payment fees.
Section 1026.60(a)(5) provides several exceptions to the
requirements in Sec. 1026.60 to provide cost disclosures on or with
credit or charge card applications or solicitations. Specifically,
Sec. 1026.60(a)(5) provides that Sec. 1026.60 does not apply to: (1)
Home-equity plans accessible by a credit or charge card that are
subject to the requirements of Sec. 1026.40; (2) Overdraft lines of
credit tied to asset accounts accessed by check-guarantee cards or by
debit cards; (3) Lines of credit accessed by check-guarantee cards or
by debit cards that can be used
[[Page 77253]]
only at automated teller machines; (4) Lines of credit accessed solely
by account numbers; (5) Additions of a credit or charge card to an
existing open-end plan; (6) General purpose applications unless the
application, or material accompanying it, indicates that it can be used
to open a credit or charge card account; or (7) Consumer-initiated
requests for applications.
As discussed above in the Overview of Regulation Z Proposal
section, under the proposal, a person would be a card issuer if the
person issues a prepaid card that is a credit card, or issues an
account number that is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. Thus, such a card issuer generally
would be required to provide the disclosures required by Sec. 1026.60
on or with a solicitation or application to open a credit plan that is
accessed by a prepaid card that is a credit card, or by an account
number that is a credit card where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor.
As discussed above, Sec. 1026.60(a)(5)(iv) currently provides that
the disclosure requirements in Sec. 1026.60 do not apply to lines of
credit accessed solely by account numbers. As discussed further below,
the proposal would amend Sec. 1026.60(a)(5)(iv) to provide that this
exception does not apply where the account number is a credit card
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor. Thus, under
the proposal, a card issuer would have to provide the disclosures
required by Sec. 1026.60 on or with a solicitation or application to
open a credit or charge card account that will be accessed by an
account number that is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.\383\
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\383\ The Bureau notes that, pursuant to Regulation E proposed
Sec. 1005.18(b)(2)(ii)(B), a financial institution also would have
to include these disclosures as part of the long form provided
before a consumer acquires a prepaid account.
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The proposal also would amend the commentary to Sec. 1026.60(b)(4)
and (b)(8) to provide additional guidance on how disclosures related to
transaction fees for purchases and for cash advances would have to be
provided for credit card accounts that will be accessed by a prepaid
card that is a credit card, or by an account number that is a credit
card where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor.
60(a) General Rules
Comment 60(a)-1 explains that Sec. 1026.60 generally requires that
credit disclosures be contained in application forms and solicitations
initiated by a card issuer to open a credit or charge card account.
This comment provides a cross reference to several relevant provisions
of Regulation Z related to credit cards, such as a cross reference to
Sec. 1026.60(a)(5) and (e)(2) for exemptions to the disclosure
requirements in Sec. 1026.60, to Sec. 1026.60(a)(1) and accompanying
commentary for the definition of solicitation, and to Sec.
1026.2(a)(15) and accompanying commentary for the definition of charge
card. The proposal would amend this comment to provide a cross
reference to proposed Sec. 1026.12(h) that sets forth restrictions on
when credit or charge card accounts can be added to previously-issued
prepaid accounts. As discussed in more detail in the section-by-section
analysis of proposed Sec. 1026.12(h), new proposed Sec. 1026.12(h)(1)
would require card issuers to wait at least 30 calendar days after a
prepaid card is registered before the card issuer may make a
solicitation or provide an application to the holder of the prepaid
account to open a credit or charge card account, or open a credit card
account for the holder the prepaid account, accessed by a prepaid card
that is a credit card or by an account number that is a credit card
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor.
60(a)(5) Exceptions
As discussed above, Sec. 1026.60(a)(5) provides several exceptions
to the requirements in Sec. 1026.60 to provide cost disclosures on or
with credit or charge card applications or solicitations. Specifically,
Sec. 1026.60(a)(5) provides that Sec. 1026.60 does not apply to: (1)
Home-equity plans accessible by a credit or charge card that are
subject to the requirements of Sec. 1026.40; (2) Overdraft lines of
credit tied to asset accounts accessed by check-guarantee cards or by
debit cards; (3) Lines of credit accessed by check-guarantee cards or
by debit cards that can be used only at automated teller machines; (4)
Lines of credit accessed solely by account numbers; (5) Additions of a
credit or charge card to an existing open-end plan; (6) General purpose
applications unless the application, or material accompanying it,
indicates that it can be used to open a credit or charge card account;
or (7) Consumer-initiated requests for applications. These exemptions
are not specifically listed in TILA section 127(c).
In 1989, to implement the disclosure provisions in TILA section
127(c) as amended by the Fair Credit and Charge Card Disclosure Act of
1988,\384\ the Board exempted the following credit card accounts from
the disclosure requirements set forth in its Sec. 226.5a (which are
contained in the Bureau's Regulation Z Sec. 1026.60): (1) Home equity
plans accessible by a credit or charge card that are subject to the
Home Equity Loan Consumer Protection Act of 1988, Public Law 100-709;
(2) overdraft lines of credit tied to asset accounts accessed by check
guarantee cards or by debit cards; or (3) lines of credit accessed by
check guarantee cards or by debit cards that can be used only at
automated teller machines.\385\ In the supplemental information to that
rulemaking, the Board indicated that a number of commenters raised
issues concerning coverage of the proposed rule given the broad
definition of the term ``credit card'' in the regulation.\386\ Among
other things, the Board reported that commenters argued that
congressional intent was to require disclosures only for
``traditional'' credit card accounts used primarily to purchase goods
and services, and not for other types of accounts that do not fall
within such a category or for which the use of a credit or charge card
as an access device is merely incidental to the product being
offered.\387\
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\384\ Public Law 100-583, 102 Stat. 2960.
\385\ 54 FR 13855, 13857 (Apr. 6, 1989).
\386\ Id.
\387\ Id.
---------------------------------------------------------------------------
In 1990, the Board added commentary to its Regulation Z Sec.
226.5a (now Sec. 1026.60) to provide that the disclosures set forth in
its Regulation Z Sec. 226.5a also did not apply to (1) lines of credit
accessed solely by account numbers; (2) the addition of a credit or
charge card to an existing open-end plan; or (3) general purpose
applications unless the application, or material accompanying it,
indicates that it can be used to open a credit or charge card account;
or (4) consumer-initiated requests for applications.\388\ In the
supplemental information to the 1990 rulemaking, the Board did not
explain why it was including these exemptions.
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\388\ See 55 FR 13103, 13103 (Apr. 9, 1990).
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For the reasons discussed below, the proposal would revise the
exemption in Sec. 1026.60(a)(5)(iv) that relates to lines of credit
accessed solely by account numbers so that this exception would not
apply to lines of credit that are accessed only by account numbers that
[[Page 77254]]
are credit cards where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor.
This proposed revision is intended to address situations where (1)
a separate line of credit is linked to a prepaid account where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, (2) the consumer
requests an advance on the account using an account number only, and
(3) the advance is deposited into the prepaid account. Thus, under the
proposal, a card issuer would be required to provide the disclosures
set forth in Sec. 1026.60 on or with solicitations or applications to
open a credit or charge card account that would be accessed only by an
account number that is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.
The Bureau does not believe that TILA section 127(c) dictates that
the above credit card accounts be exempted from the disclosures
requirements set forth in TILA section 127(c). The Bureau also believes
that the cost disclosures in Sec. 1026.60 would be helpful to
consumers in deciding whether to open such a credit or charge card
account. The Bureau notes that under the current regulation, a card
issuer generally would be required to provide the cost disclosures in
Sec. 1026.60 on or with solicitations or applications to open a credit
or charge card account that is accessed by a prepaid card that is a
credit card. The Bureau believes that consumers would benefit from
receiving the cost disclosures set forth in Sec. 1026.60 when a credit
or charge card is linked to a prepaid account as discussed above,
regardless of whether the credit account is accessed by a prepaid card
or whether the credit account is assessed by only an account number
that is a credit card where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor.\389\
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\389\ The Bureau also believes consumers would benefit from
receiving these disclosures before they acquire a prepaid account.
See section-by-section analysis of Regulation E proposed Sec.
1005.18(b)(2)(ii)(B).
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60(b)
60(b)(4) Transaction Charges
Section 1026.60(b)(4), which implements TILA section
127(c)(1)(A)(ii)(III), generally requires that card issuers disclose on
or with solicitations or applications to open credit or charge card
accounts any transaction charge imposed on purchases. 15 U.S.C.
1637(c)(1)(A)(ii)(III). The proposal would add proposed comment
60(b)(4)-3 to provide guidance on when fees would be considered
transaction fees for purchases under Sec. 1026.60(b)(4) for prepaid
cards that are credit cards. Specifically, proposed comment 60(b)(4)-3
would provide that if a card issuer assesses a fee (other than a
periodic rate that may be used to compute the finance charge on an
outstanding balance) for credit accessed by a credit card that is a
prepaid card to make a purchase, that fee is a transaction charge as
described in Sec. 1026.60(b)(4). Proposed comment 60(b)(4)-3 would
provide that such fees must be disclosed as transaction charges under
Sec. 1026.6(b)(4) whether the fee is a flat per-transaction fee to
make a purchase, a flat fee for each day (or other period) the consumer
has an outstanding balance of purchase transactions, or a one-time fee
for transferring funds from the consumer's credit account to the
consumer's prepaid account to cover the shortfall in the prepaid
account as a result of a purchase with the prepaid card.
60(b)(8) Cash-Advance Fee
Section 1026.60(b)(8), which implements TILA section
127(c)(1)(B)(i), generally requires that card issuers disclose on or
with solicitations or applications to open credit or charge card
accounts any fee imposed for an extension of credit in the form of cash
or its equivalent. 15 U.S.C. 1637(c)(1)(B)(i). The proposal would add
proposed comment 60(b)(8)-4 to provide guidance on when fees would be
considered cash advance fees that must be disclosed under Sec.
1026.60(b)(8) for credit card accounts that are accessed by prepaid
cards. In addition, proposed comment 60(b)(8)-4 would provide guidance
on how cash advance fees must be disclosed. Specifically, proposed
comment 60(b)(8)-4 would provide that if a card issuer assesses a fee
(other than a periodic rate that may be used to compute the finance
charge on an outstanding balance) for a cash advance accessed by a
credit card that is a prepaid card, such as a cash withdrawal at an
ATM, that fee is a cash advance fee. Under proposed comment 60(b)(8)-4,
if the cash advance fee is the same dollar amount as the transaction
charge for purchases described in Sec. 1026.60(b)(4), the card issuer
may disclose the fee amount under a heading that indicates the fee
applies to both purchase transactions and cash advances. Proposed
comment 60(b)(8)-4 would provide the following three examples of how
cash advance fees must be disclosed.
Under proposed comment 60(b)(8)-4.i, the first example would
provide that a card issuer assesses a $15 fee for credit accessed by a
credit card that is a prepaid card to purchase goods or services at the
point of sale when the consumer has insufficient or unavailable funds
in the prepaid account. Under this proposed example, the card issuer
assesses a $25 fee for credit accessed by a prepaid card for a cash
advance at an ATM when the consumer has insufficient or unavailable
funds in the prepaid account. In this instance, under the proposal, the
card issuer must disclose separately a purchase transaction charge of
$15 and a cash advance fee of $25.
Under proposed comment 60(b)(8)-4.ii, the second example would
provide that a card issuer assesses a $15 fee for credit accessed by a
credit card that is a prepaid card to purchase goods or services at the
point of sale when the consumer has insufficient or unavailable funds
in the prepaid account. Under this proposed example, the card issuer
also assesses a $15 fee for credit accessed by a credit card that is a
prepaid card for providing cash at an ATM when the consumer has
insufficient or unavailable funds in the prepaid account. In this
instance, under the proposal, the card issuer may disclose the $15 fee
under a heading that indicates the fee applies to both purchase
transactions and ATM cash advances. Alternatively, under the proposal,
the card issuer may disclose the $15 fee on two separate rows, one row
indicating that a $15 fee applies to purchase transactions, and a
second row indicating that a $15 fee applies to ATM cash advances. The
Bureau believes that either alternative would provide effective
disclosure of the transaction fee for purchases and the cash advance
fee.
Under proposed comment 60(b)(8)-4.iii, the third example would
provide that a card issuer assesses a $15 fee for credit accessed by a
credit card that is a prepaid card for providing cash at an ATM when
the consumer has insufficient or unavailable funds in the prepaid
account. The card issuer also assesses a fee of $1.50 for out-of-
network ATM cash withdrawals and $1.00 for in-network ATM cash
withdrawals. The card issuer must disclose the cash advance fee as
$16.50 for out-of-network ATM cash withdrawals, indicating that $1.50
is for the out-of-network ATM withdrawal fee, such as ``$16.50
(including a $1.50 out-of-network ATM withdrawal fee). The
[[Page 77255]]
card issuer also must disclose the cash advance fee as $16.00 for in-
network ATM cash withdrawals, indicating that $1.00 is for the in-
network ATM withdrawal fee, such as ``$16 (including a $1.00 in-network
ATM cash withdrawal fee).'' The Bureau believes that the proposed
disclosure of the total amount of cash advance fees that the consumer
will pay for each transaction along with an indication of the separate
ATM withdrawal fee that the consumer will pay for each transaction,
will allow consumers to more easily understand the cost of each cash
advance transaction.
The proposal also would add proposed comment 60(b)(8)-5 to provide
guidance on when fees will be considered cash advance fees under Sec.
1026.60(b)(8) with respect to a credit card account accessed by an
account number where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor. Specifically, proposed comment 60(b)(8)-5 would provide that
if a card issuer assesses a fee (other than a periodic rate that may be
used to compute the finance charge on an outstanding balance) for an
extension of credit that will be deposited into a prepaid account that
fee is a cash advance fee. This proposed revision is intended to
address situations where (1) a separate line of credit is linked to a
prepaid account where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor, (2) the consumer requests an advance on the account using
an account number only, and (3) the advance is deposited into the
prepaid account. In this situation, any fee for an advance taken on the
line of credit would be disclosed as a cash advance fee under Sec.
1026.60(b)(8) even if the consumer subsequently uses the deposited
funds to purchase goods or services at a merchant. This provision would
not apply to credit that is accessed by a prepaid card. As discussed
above, proposed comments 60(a)(4)-3 and 60(b)(8)-4 would provide
guidance on how transaction fees for purchases and for cash advances
would be disclosed when charged on credit card accounts accessed by
prepaid cards.
Other Topics in the Bureau's Prepaid ANPR
In its Prepaid ANPR, the Bureau sought comment on several topics
that it is not proposing to address in this rulemaking, including how
credit reporting and savings accounts relate to prepaid accounts.
Credit Reporting
In the Prepaid ANPR, the Bureau sought input and data on the
efficacy of credit reporting features that some GPR cards claim to
offer to enable consumers to improve or build credit and on whether
regulatory provisions should address how such services are marketed to
consumers. Numerous comments from industry, trade associations, and
consumer groups pointed out that, because GPR cards typically do not
involve the extension of credit, none of the three primary credit
reporting agencies factor prepaid card-related payment histories into
their credit scoring models. Several commenters suggested that the
Bureau consider issuing rules to prevent deceptive credit building
claims or to establish reasonable guidelines on accurate disclosures.
Others suggested it was premature to issue regulations until there is a
well-established basis for using such information to determine
creditworthiness and noted that, in the interim, the Bureau has
authority to police misleading or deceptive claims via its UDAAP
authority.
Based on its understanding of the current state of the market, the
Bureau does not believe it is appropriate to take further action on
credit reporting in the context of this proposal although the Bureau
does note that it has concerns about deceptive marketing regarding
claims of a credit building aspect to certain prepaid accounts. The
Bureau does, however, continue to seek comment on recent developments
in this area and whether future action might be warranted.
Savings Features
In the Prepaid ANPR, the Bureau noted that, at the time, most GPR
cards did not offer a savings account associated with the card and
sought input on the costs, benefits, and consumer protection issues
related to savings features offered with GPR cards. A savings account
feature could allow a consumer to save or separate funds, such as for
budgeting purposes, and potentially earn interest on such funds. Many
industry, trade association, and consumer group commenters remarked
that savings accounts are or can be beneficial to consumers and should
be encouraged by the Bureau but not be made mandatory. Several
commenters noted that such accounts, depending on how they are
structured, are generally already subject to Regulation E as well as
Regulation DD. A few consumer group commenters suggested that fees
should be prohibited on such linked savings accounts, while several
industry commenters noted that implementing a savings feature or linked
savings account can be very expensive and is difficult for financial
institutions to do.
The Bureau agrees with the majority of commenters that both linked
savings accounts and savings features associated with prepaid accounts
can be beneficial to consumers. Such savings programs may allow
participating consumers to better manage their current spending and set
aside funds for planned or unexpected expenses. Further, research
suggests that having savings and engaging in regular saving activity
each can contribute to both short-term financial stability and medium-
to long-term economic mobility, even when the amounts are small.\390\
Adding savings features may help consumers establish long-term
relationships with financial services providers that facilitate
effective money management. Finally, one non-profit commenter to the
Bureau's ANPR noted that results from its qualitative research using
focus groups with consumers who purchase and use prepaid debit cards
found that an overwhelming majority of focus group participants want a
savings feature on their GPR prepaid cards.
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\390\ Signe-Mary McKernan, Caroline Ratcliffe & Katie Vinopal,
Urban Institute, Do Assets Help Families Cope with Adverse Events?
(Nov. 2009), available at http://www.urban.org/uploadedpdf/411994_help_family_cope.pdf; Diane R. Calmus, The Heritage
Foundation, Improving Economic Mobility Through Increased Savings,
(Dec. 21, 2012) available at http://www.heritage.org/research/reports/2012/12/improving-economic-mobility-through-increased-savings.
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Nevertheless, the Bureau is not taking regulatory action at this
time on this issue and hopes that financial institutions will continue
to expand their offerings in this area, in such a way as to provide
protections and opportunities for consumers. The Bureau remains
interested in learning more about these products and therefore requests
comment on recent developments regarding such features and whether
future regulation might be warranted.
Proposed Effective Date
Except as modified by proposed Sec. 1005.18(h), discussed above,
the Bureau is proposing that this rule take effect nine months after
publication of a final rule in the Federal Register. As is explained in
proposed Sec. 1005.18(h)(2), the Bureau proposes an exception to this
nine month implementation period; specifically that after12 months, all
prepaid accounts and related packaging, access devices, and other
physical materials that are offered, sold, or otherwise made available
to consumers in connection
[[Page 77256]]
with a prepaid account must comply with the requirements of this
section. As discussed in the Section-by-Section Analysis of proposed
Sec. 1005.18(h)(1), the Bureau believes that nine months strikes the
appropriate balance between providing consumers with necessary
protections while giving financial institutions adequate time to comply
with all aspects of this proposal. The Bureau notes that many providers
already comply with many of the new requirements proposed herein.\391\
The Bureau seeks comment on its approach to the effective date of this
proposal, whether it should be simplified and whether the proposed time
periods are appropriate, should be lengthened, or should be shortened.
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\391\ See, e.g., Study of Prepaid Account Agreements.
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Section 1022(b)(2) of the Dodd-Frank Act
A. Overview
In developing the proposed rule, the Bureau has considered the
potential benefits, costs and impacts.\392\ The Bureau requests comment
on the preliminary discussion presented below as well as submissions of
additional data that could inform the Bureau's consideration of the
potential benefits, costs, and impacts of the proposed rule. The Bureau
has consulted, or offered to consult, with the prudential regulators,
the Department of the Treasury, the Securities and Exchange Commission,
and the Federal Trade Commission, regarding consistency with any
prudential, market, or systemic objectives administered by such
agencies.
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\392\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act
calls for the Bureau to consider the potential benefits and costs of
a regulation to consumers and covered persons, including the
potential reduction of access by consumers to consumer financial
products or services; the impact on depository institutions and
credit unions with $10 billion or less in total assets as described
in section 1026; and the impact on consumers in rural areas.
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As discussed above, the Bureau is proposing to amend Regulation E
and Regulation Z, as well as the official commentary to those
regulations. Regulation E implements the Electronic Fund Transfer Act
(EFTA), and Regulation Z implements the Truth in Lending Act (TILA).
The proposal would bring a wide range of general use prepaid products
within a unified regulatory regime for ``prepaid accounts'' by
expressly defining them as accounts subject to Regulation E.
Additionally, the proposal would subject credit features linked to
prepaid accounts to Regulation Z. Further, the Bureau also proposes to
modify certain Regulation E provisions as they would apply to prepaid
accounts and certain existing Regulation E provisions that currently
apply to payroll card accounts and government benefit accounts.\393\
For those prepaid accounts that offer overdraft services or other
credit features in connection with the account, the Bureau is proposing
that such accounts are additionally subject to relevant provisions in
Regulation Z and is proposing to modify certain provisions of
Regulations E and Z accordingly. In proposing to apply the consumer
protections in Regulation E to a broader set of prepaid accounts, the
Bureau is furthering the statutory purposes of EFTA, which include
providing a basic framework establishing the rights, liabilities, and
responsibilities of participants in electronic fund transfer systems
and providing individual consumer rights. In addition, the Bureau
believes that applying the consumer protections articulated in
Regulation Z to overdraft services offered in connection with prepaid
accounts conforms to TILA's statutory purposes, which include assuring
a meaningful disclosure of credit terms, avoiding the uninformed use of
credit, and protecting consumers against inaccurate and unfair billing
and credit card practices.
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\393\ The requirements for government benefit accounts are
described in Sec. 1005.15. Proposed Sec. 1005.2(b)(3)(iii) would
state that a government benefit account is a prepaid account.
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B. Provisions To Be Discussed
With respect to each major provision of the proposed rule, the
discussion considers the benefits and costs to consumers and covered
persons and, in certain instances, considers other impacts.
Specifically, the discussion below considers the following major
proposed provisions:
1. The establishment of certain disclosures that financial
institutions would be required to provide to consumers (or, in certain
circumstances, provide consumers access to) prior to the consumer's
acquisition of a prepaid account;
2. The application of Regulation E's periodic statement requirement
to prepaid accounts and the establishment of an alternative to this
requirement that would require financial institutions to give consumers
access to certain types of account information at no cost to the
consumer;
3. The extension of Regulation E's limited liability and error
resolution regime, including provisional credit requirements, to all
prepaid accounts that have been through a customer identification and
verification process;
4. The requirement that all issuers of prepaid accounts post their
prepaid account agreements on their Web sites or, in limited
circumstances, respond to consumers' requests for written copies of
their agreements and, with some exceptions, submit copies of their
agreements to the Bureau on a quarterly basis; and
5. The modification and application of particular provisions in
Regulation E and open-end credit provisions in Regulation Z to prepaid
accounts that offer overdraft services or other credit features in
connection with the account.
This discussion also addresses certain alternative provisions that
were considered by the Bureau in the development of the proposed rule.
In considering the relevant potential benefits, costs, and impacts,
the Bureau has utilized the available data discussed in this preamble
and has applied its knowledge and expertise concerning consumer
financial markets. When available, the Bureau has used the economic
analyses that it regards as most reliable and helpful to consider the
relevant potential benefits, costs, and impacts of the proposal.
However, the Bureau notes that, in some instances, there are limited
data available with which to quantify the potential benefits, costs,
and impacts. For instance, prepaid account providers that are presently
applying Regulation E's limited liability or error resolution
provisions, including provisional credit, do not generally publicize
information regarding the incremental costs associated with these
activities. Moreover, some potential benefits are difficult to
quantify.
General economic principles, considered in combination with
available quantitative information, provide insight into the potential
benefits, costs, and impacts arising from the proposed rule. Where
possible, the Bureau has made quantitative estimates based on these
principles as well as available data. However, in light of data
limitations, the Bureau generally provides a qualitative discussion of
the benefits, costs, and impacts of the proposed rule.
C. Baseline for Consideration of Benefits and Costs
The baseline for this discussion is the current market for prepaid
accounts.\394\ However, in order to more fully inform
[[Page 77257]]
the proposed rulemaking, the Bureau also discusses potential future
impacts relative to how the market might evolve absent the proposed
rule. This baseline considers both the existing regulatory structure as
well as the economic attributes of the relevant market.\395\
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\394\ The Bureau has discretion in future rulemakings to choose
the relevant provisions to discuss and the most appropriate baseline
for that particular rulemaking.
\395\ As discussed above, several Federal regulatory regimes,
including those regarding consumer protection; receipt of Federal
payments onto prepaid cards; interchange fees; and prevention of
money laundering, terrorist financing, and other financial crimes,
apply to some or all types of prepaid accounts or to transactions
involving these accounts. Prudential regulators have also issued
guidance pertaining to the application of their rules to prepaid
cards, program managers, and issuing financial institutions. In
addition, the benefits, costs, and impacts that would arise as a
consequence of the proposed rule are attenuated to the extent that
certain provisions are already required under State law.
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With respect to proposed provisions regarding access to account
information, limited liability, and error resolution protections, the
Bureau is generally proposing to extend existing provisions of
Regulation E, as they apply to payroll card accounts, to prepaid
accounts. Since payroll card accounts and prepaid accounts that receive
Federal payments (and thus are subject to the FMS Rule) are presently
subject to provisions of Regulation E (as they apply to payroll card
accounts) that address consumer access to account information, limited
liability, and error resolution protections, financial institutions
currently are required to offer these protections to some consumer
accounts that would be covered by the proposed rule. In addition, the
proposed rule would amend similar provisions of Regulation E applicable
to government benefit accounts to make these provisions generally
conform to proposed requirements for other types of prepaid accounts.
The existing provisions governing access to account information for
government benefit accounts differ somewhat from those applicable to
payroll card accounts.\396\ See existing Sec. 1005.15(c) and (d).
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\396\ Specifically, the alternative to the periodic statement
described in existing Sec. 1005.15(c) does not require that an
electronic history of the consumer's account transactions be made
available to the consumer.
---------------------------------------------------------------------------
Given that many of the proposed requirements are consistent with
current industry practice, the benefits, costs, and impacts arising
from the proposal are moderated relative to those that would be
experienced if current industry practice were significantly different
from the proposal's requirements. As discussed above, the Bureau's
Study of Prepaid Account Agreements suggested that many covered
providers are already fully or partially implementing the proposed
requirements pertaining to access to account information, limited
liability, and error resolution regardless of whether they are
currently required to do so. Providers may already be fully or
partially implementing the proposed requirements with respect to
limited liability and error resolution due, in part, to the need for
issuers to comply with payment card association network rules in
addition to the existing Federal regulatory requirements described
above.\397\
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\397\ As discussed above, payment card association network rules
impose some form of zero liability protections for prepaid
cardholders in certain circumstances. See, e.g., Visa Inc., Zero
Liability, http://usa.visa.com/personal/security/zero-liability.jsp#anchor_2 (last visited Nov. 3, 2014). See, e.g.,
MasterCard Inc., Zero Liability Protection, http://www.mastercard.us/zero-liability.html (last visited Nov. 3, 2014).
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In addition to these requirements, the proposal includes
requirements for financial institutions and creditors that offer
overdraft services or other credit features in connection with prepaid
accounts. The Bureau's understanding is that, at present, overdraft
services are offered in connection with a small number of products that
would be considered to satisfy the proposed definition of prepaid
account.\398\ However, one of the largest providers of prepaid accounts
offers an overdraft service in connection with its prepaid accounts
(which include GPR cards and payroll card accounts), so the number of
prepaid accounts currently eligible for overdraft is not
negligible.\399\ The credit limits extended to consumers for these
overdraft services are generally of modest size (e.g., $100).\400\
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\398\ The Study of Prepaid Account Agreements suggested that
some prepaid programs, according to their terms and conditions,
reserve the right to impose a fee for a negative balance on a
prepaid account. (These programs' agreements typically state that
the cardholder is not permitted to spend beyond the balance in the
prepaid account, but if circumstances were to occur that cause the
balance to go negative, a fee will or may be imposed. Some
agreements state that repeated attempts to spend beyond the card
balance will or may result in the prepaid account being closed).
Roughly 10 percent of reviewed agreements noted such a charge. Based
on its outreach, the Bureau has doubts as to whether, in practice,
these charges are assessed and requests comment regarding current
industry practice.
In addition, one source suggests that overdraft fees may be
collected by a handful of government benefit card programs, but the
Bureau is not certain whether such fees are currently being assessed
as it understands several such programs have ceased charging
overdraft fees, and the aggregate value of these fees is relatively
modest. See Bd. of Governors of the Fed. Reserve Sys., Report to
Congress on Government-Administered, General Use Prepaid Cards, at
9, (July 2014), available at http://www.federalreserve.gov/publications/files/2014_Prepaid_Cards_Final.pdf (showing $2 million
in overdraft fees in 2013).
\399\ NetSpend is a significant provider of prepaid accounts.
See Aite Grp. LLC, The Contenders: Prepaid Debit and Payroll Cards
Reach Ubiquity, at 23-24 (Nov. 2012). A recent news article reported
that six percent of NetSpend's customers regularly use overdraft.
See Suzanne Kapner, Prepaid Plastic is Creeping into Credit, Wall
Street J. (Sept. 5, 2012), http://online.wsj.com/news/articles/SB10000872396390443686004577633472358255602. In addition, a larger
percentage of accounts would potentially be eligible for their
overdraft program. A recent financial filing suggested that NetSpend
had 3.4 million active cards as of June 30, 2014 and 47 percent of
those active cards had direct deposit. See Total Sys. Serv. Inc.,
Form 10-Q, at 28, available at http://www.sec.gov/Archives/edgar/data/721683/000119312514300851/d737574d10q.htm (for the quarterly
period ended June 30, 2014)
\400\ See Suzanne Kapner, Prepaid Plastic is Creeping Into
Credit, Wall Street J. (Sept. 5, 2012), http://online.wsj.com/news/articles/SB10000872396390443686004577633472358255602.
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The Bureau believes that providers of overdraft services offered in
connection with these prepaid accounts do not presently comply with all
of the practices that would be required by the proposal. For those
prepaid accounts that offer overdraft services, the Bureau understands
that providers currently require consumers to opt-in to the service and
that they condition eligibility on receipt of a regularly-occurring
direct deposit.\401\ When funds are added to a prepaid account that has
an associated overdraft service, the Bureau understands that these
funds are generally applied automatically to any negative balance
(including to repay fees) before the consumer may access the remaining
funds.\402\ The Bureau understands that providers that presently offer
these overdraft services in connection with prepaid accounts have
adopted program rules designed to discourage persistent use of the
overdraft feature, such as capping the number of fees that may be
incurred in a month.\403\ However, there is presently no Federal
regulatory requirement that providers limit the frequency with which
overdraft services are used or the
[[Page 77258]]
frequency with which a consumer may incur overdraft-related fees.
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\401\ See Kansas City Fed Study, at 9.
\402\ The Treasury FMS rule, described above, prohibits prepaid
cards from having an attached line of credit if the credit agreement
allows for the automatic repayment of the loan from a card account
triggered by the delivery of the Federal payment into the account
(31 CFR 210(b)(5)(i)(C)). Certain State laws subject some government
benefit accounts to similar provisions (see CA AB 1280 and CA AB
2252). In addition, payroll card accounts are currently subject to
Regulation E's compulsory use provision.
\403\ See Suzanne Kapner, Prepaid Plastic is Creeping Into
Credit, Wall Street J. (Sept. 5, 2012), http://online.wsj.com/news/articles/SB10000872396390443686004577633472358255602; see also
NetSpend Corp., Amended Terms for Your Cardholder Agreement, https://www.netspend.com/account/overdraftTerms.m (last visited Nov. 11,
2014) (overdraft terms and conditions).
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The Bureau believes that additional providers may be considering
offering credit features, such as an overdraft service, in connection
with prepaid accounts. This suggests that there could be increased
consumer access to these products in the future. The proposed rule
would provide clarity regarding the terms on which overdraft services
and other credit features may be offered in connection with prepaid
accounts. The proposed provisions would help to ensure that such credit
would be offered to consumers in a transparent manner and that
consumers would obtain certain important protections.
D. Coverage of the Proposal
The provisions of the proposed rule would apply to any account that
meets the definitional criteria described in proposed Sec.
1005.2(b)(3). Covered persons would include prepaid account issuers who
may work with program managers or other industry participants in
marketing, establishing, and maintaining these accounts. As discussed
above, prepaid account issuers may choose to perform all of the
functions required to manage a prepaid program, including marketing
prepaid accounts directly to consumers. More commonly, however, prepaid
account issuers elect to take a more limited role, leaving program
management to others although the scope of such roles may vary.\404\ In
addition to the requirements specified in Regulation E, persons
offering overdraft or other credit features in connection with prepaid
accounts would also be subject to the provisions of Regulation Z
governing extensions of credit. These persons may or may not be
distinct from the prepaid account issuer or the prepaid account program
manager. For the purpose of discussing the benefits and costs of the
proposed rule, the Bureau considers potential impacts on both prepaid
account issuers and program managers (who would both be directly
affected by the proposed provisions) and discusses burdens without
allocating them among market participants.\405\
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\404\ The issuer typically enters into a contract with the
program manager to provide the association bank identification
number for the program and to monitor regulatory compliance in
exchange for fee income and indemnification from risk. See 2012 FRB
Philadelphia Study, at 10.
\405\ With respect to overdraft services or credit features
offered in connection with prepaid accounts, the impacts on
creditors are also considered. The creditor may be the prepaid
account issuer, program manager, or another person.,
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E. Potential Benefits and Costs to Consumers and Covered Persons
In proposing to apply the consumer protections in Regulations E and
Z to a wider group of accounts, the Bureau intends to reduce consumer
uncertainty regarding responsibilities and liabilities among market
participants. The Bureau also aims to lessen consumer risk associated
with the use of prepaid accounts that do not currently comply with the
proposed protections or that would not comply in the future, absent the
adoption of the proposed rule. In particular, the Bureau is concerned
that certain consumers with prepaid accounts that do not currently
offer the protections provided by Regulation E may incorrectly believe
that these accounts have such protections. The Bureau believes that it
is likely that some consumers do not realize that, under current
Federal law, their prepaid accounts may offer fewer protections than
substitute products. Both prepaid cards and debit cards provide
consumers with access to their own funds and have similar
functionalities and appearances, which may encourage the perception
that the accounts associated with such cards have similar protections.
With the possible exception of certain provisions applicable to
overdraft services and other credit features offered in connection with
prepaid accounts, the proposed rule is not anticipated to meaningfully
reduce consumer access to consumer financial products and services.
The proposed requirements would address the potential under-
provision of information about prepaid accounts to consumer holders of
these accounts by the private sector and the possible exercise of
market power by prepaid account providers.\406\ The socially optimal
amount of information about a prepaid account depends on the cost to
prepaid providers (or third party information providers) of acquiring
and providing product information and the benefit to consumers from
improved understanding and choice.\407\ Prepaid account providers have
strong incentives to make consumers aware of generally attractive
product features, such as functionality that may be used by consumers
without a fee. They have less incentive to identify and highlight
unattractive product features, such as high fees that may be associated
with certain types of activities, even if those features are utilized
frequently by prepaid account holders.\408\ In principle, third parties
could try to generate (or approximate) this information independently.
However, simply collecting, synthesizing, and providing product
information for a fee likely would not be profitable since the
information generally would be non-excludable; that is, it could not be
withheld from consumers who did not pay for it.\409\ Information is
generally a public good in that it is both non-rival, meaning that it
may be used without reducing the amount available for others, and non-
excludable. As with any other public good, standard microeconomic
analysis establishes that this information would be under-produced by
the private sector.\410\
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\406\ Classically, the issues discussed here would be considered
to be market failures.
\407\ In general, at the social optimum, the benefit to
consumers from additional information would exactly equal the
additional cost to providers of providing that information.
\408\ Recent research covering prepaid programs that represent
approximately 90 percent of the GPR card market (in terms of number
of cards) shows that the majority of the market sampled (70 percent)
provides explicit tips regarding how to avoid fees and minimize the
costs associated with using the card. However, marketing and
communication to promote positive consumer use is identified as an
area for improvement. See Ctr. for Fin. Serv. Innovation, Prepaid
Industry Scorecard, Assessing Quality in the Prepaid Industry with
CFSI's Compass Principles, at 11 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf.
\409\ In contrast, personalized estimates of the cost of using a
product or product recommendations based on private information
would not be a public good. However, charging customers a fee for
this information might not be possible if other providers receive
revenue from industry or other sources and do not charge for
information that appears to be comparable.
\410\ See, e.g., Joseph E. Stiglitz, Market Failure, in
Economics of the Public Sector, (W.W. Norton & Co., Inc., 3d ed.
2000).
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In addition, consumers rely on providers of prepaid accounts to
offer services on an ongoing basis, including access to account
information and error resolution. Although the account terms and
conditions may articulate the provider's commitments with respect to
these features, many consumers may not review these documents in
advance and may not be able to anticipate their needs accurately even
if they did. In addition, the quality with which these functions are
performed is difficult or impossible to observe in advance. While a
provider would lose customers and the reputation of its products would
suffer if it consistently provided poor service, these long-term
consequences may not protect consumers sufficiently against incentives
for short-term gain.\411\ Having opened an account, the costs incurred
[[Page 77259]]
by a consumer to change prepaid account providers may serve as an
additional friction that decreases a provider's incentive to provide
high quality ongoing services.
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\411\ The relationship between reputation and quality is highly
complex, even under competition; see Rachel Kranton, Competition and
the Incentive to Produce High Quality, 70 Economica 385 (2003). For
a general survey of reputation and quality, see Heski Bar-Isaac
&Steve Tadelis, Seller Reputation, 4 Foundations and Trends in
Microeconomics 273 (2008).
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The proposed disclosure formatting requirements and the provisions
requiring the posting of prepaid account agreements are designed to
decrease consumer search costs, which can be a source of market power
for providers. Consumers generally incur costs, in terms of time or
money, in order to find and understand the price and quality of a
particular product before purchasing it. Consumers have less of an
incentive to shop around and to compare various products when the costs
associated with performing these comparisons are high. Prepaid account
providers can obtain market power when consumers are unwilling to incur
these search costs to learn about available options. A sufficiently
inexpensive reduction in these costs can benefit consumers and enhance
efficiency.\412\ In the context of the proposed rule, disclosure
formatting requirements that are relatively inexpensive and, through
standardization, reduce the cost of finding and understanding critical
information about prepaid accounts address this market failure. It is
worth noting that the benefits of lower search costs extend beyond
those consumers who actually search since all consumers of the product
potentially benefit from any resulting reduction in prices.
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\412\ See Dale O. Stahl II, Oligopolistic Pricing with
Sequential Consumer Search, 79 Am. Econ. Rev. 700 (1989).
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Although the Bureau's Study of Prepaid Account Agreements suggested
that most prepaid account programs reviewed already generally offer the
proposed limited liability and error resolution protections, the Bureau
is concerned that as more consumers adopt and use prepaid accounts, the
number of consumers at risk of an unexpected loss could increase. Most
prepaid accounts generally leverage large payment network rails and, as
such, are widely accepted by a broad range of merchants. A survey
conducted by the Board in 2013 found that 15 percent of respondents
reported using a general purpose prepaid card in the past 12
months.\413\ Among those who reported having a general purpose prepaid
card or a payroll card, 38 percent reported that it was reloadable, and
about half of those respondents who reported that they had a reloadable
general purpose or payroll card reported that they or someone else
added money to their card in the past month.\414\ In the prior wave of
the survey, 10.8 percent of respondents had used a ``general purpose
prepaid card that you can add funds to'' in the past 12 months.\415\
Another survey conducted in May 2014 found that 16 percent of
respondents had used a ``prepaid card'' that was not a gift card in the
last 12 months.\416\ A survey performed by the FDIC in 2013 found that
12 percent of households had ever used prepaid cards, 7.9 percent had
used prepaid cards in the last 12 months, and 3.9 percent had used
prepaid cards in the last 30 days; further, use was more common among
households that were unbanked or underbanked.\417\ Another study found
that five percent of adults use prepaid cards at least once a
month.\418\
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\413\ See Bd. of Governors of the Fed. Reserve Sys., Consumers
and Mobile Financial Services 2014, at 8 (Mar. 2014), available at
http://www.federalreserve.gov/econresdata/mobile-devices/files/consumers-and-mobile-financial-services-report-201403.pdf. (2014
Mobile Report). General purpose prepaid cards are one type of
product that would be subsumed within the proposed rule's definition
of prepaid account. As described above, payroll card accounts are
already required to comply with Regulation E's limited liability and
error resolution regime.
\414\ See 2014 Mobile Report at 48 tbl.C.9 & C.10. Note that
this implies that roughly three percent of respondents had a general
purpose prepaid card or payroll card which they or someone else had
(re)loaded in the past month.
\415\ See Bd. of Governors of the Fed. Reserve Sys., Consumers
and Mobile Financial Services 2013, at 53 tbl C.12 (Mar. 2013),
available at http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201303.pdf.
\416\ See GFK, GfK Prepaid Omnibus Research Findings, at 6
(2014), available at http://www.nbpca.org/~/media/
2519B8BADB1B4388BA5F11C511B3ACAE.ashx. The definition of prepaid
card in this survey appears to have included products that would not
be covered by the proposed definition of prepaid account. Id. at 7.
\417\ See Fed. Deposit Ins. Corp., 2013 FDIC National Survey of
Unbanked and Underbanked Households, at 29-30 (Oct. 2014), available
at https://fdic.gov/householdsurvey/2013report.pdf.
\418\ See The Pew Charitable Trusts, Why Americans Use Prepaid
Cards: A Survey of Cardholders' Motivations and Views, at 1 (Feb.
2014) (2014 Pew Survey), available at http://www.pewtrusts.org/~/
media/legacy/uploadedfiles/pcs_assets/2014/
PrepaidCardsSurveyReportpdf.pdf. For the purpose of this survey,
respondents were explicitly told not to include gift cards, rebate
cards, credit cards, or phone cards.
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Although there are many uses for prepaid accounts, covered accounts
may be designed, implemented, and marketed as substitutes for
traditional checking accounts. According to one study, of the five
percent of adults surveyed that reported using a prepaid card at least
once a month, 41 percent did not currently have a checking account,
implying that roughly two percent of the adult population uses a
prepaid card monthly and does not have a checking account.\419\
According to a survey conducted by the Board, 1.6 percent of
respondents reported that either they or their partner had a reloadable
prepaid card and did not have a checking, savings, or money market
account in 2012.\420\ Prepaid accounts offer individuals who do not
have access to traditional debit accounts or credit accounts a means to
perform electronic fund transfers. These accounts enable consumers who
may not otherwise have access to an electronic payment mechanism to
make purchases from online merchants and others who do not accept cash.
Additionally, prepaid accounts provide individuals who do not have
access to traditional checking accounts a means of storing funds that
can be more secure than holding cash. Prepaid accounts also offer
consumers the ability to accept payments of wages and/or benefits via
direct deposit; for the unbanked, this can serve as an alternative to
relying on a check cashing provider.
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\419\ See 2014 Pew Survey, at 1, 7.
\420\ See Bd. of Governors of the Fed. Reserve Sys., Consumers
and Mobile Financial Services 2013, at 5 (Mar. 2013), available at
http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201303.pdf. This statistic is derived from
the following: ``In 2012, the share of unbanked consumers [meaning
those who reported that neither they nor their spouse or partner had
a checking, savings, or money market account] declined to 9.5
percent of the population. Adopting a more expansive definition of
being banked that includes use of a reloadable prepaid card, the
share of consumers who are unbanked declined . . . to 7.9 percent in
2012.'' The 2014 Mobile Report, which summarizes a survey conducted
in 2013, did not permit the Bureau to calculate this statistic using
information from the later survey.
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Although consumers may access funds through certain types of
prepaid accounts that are currently subject to Regulation E, some
consumers regularly deposit funds into prepaid accounts that are not
currently subject to Regulation E.\421\ Consumers may use these prepaid
accounts instead of traditional checking accounts, holding these
prepaid accounts for extended periods and loading significant portions
of their available funds into such accounts. If their prepaid account
provider does not offer limited liability and error resolution
protections (including provisional credit), these consumers may be at
risk of an unexpected loss or a delay in access to funds in the event
of an error or unauthorized transfer. The proposed rule would reduce
the risk associated with prepaid accounts for these consumers by
requiring that providers offer a limited liability and error resolution
regime that includes
[[Page 77260]]
provisional credit once cards are registered.
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\421\ As discussed above, payroll card accounts and government
benefit accounts are currently subject to Regulation E. The FMS Rule
ensures that the protections that apply to payroll card accounts
under Regulation E also apply to any prepaid cards that receive
Federal payments.
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In addition, the proposed rule would aid consumers in properly
assessing the risks and costs associated with using these products by
requiring more comprehensive and standardized information disclosures.
Standardization of information disclosures may permit consumers to make
better informed comparisons among products when they are choosing a
prepaid account. To the extent that this information is not already
provided, more comprehensive disclosure of account information may help
consumers to understand the financial costs associated with using these
products and may aid in the recognition of errors and the exercise of
error resolution rights. As discussed below, with some exceptions, the
costs incurred by covered financial institutions arising from the
standardization of information disclosure are one-time implementation
costs, and many providers of covered accounts presently implement
several of the provisions relating to communication of account
information, including providing access to account history information.
The proposed rule would generally also require issuers to treat an
overdraft service or other credit feature offered in connection with a
prepaid account as a credit card account subject to the provisions of
Regulation Z that apply to such accounts.\422\ As a result, consumers
using prepaid accounts with associated credit card plans would be
guaranteed certain important consumer protections. Specifically,
persons offering overdraft services or other credit features in
connection with prepaid accounts would be required to comply with the
provisions governing application and disclosure that apply to credit
cards and would be subject to certain fee and payment restrictions,
among other requirements.
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\422\ A credit plan that is accessed by a prepaid card would not
be a credit card account where the credit is not subject to any
finance charge as defined in Sec. 1026.4 or fee described in Sec.
1026.4(c) and is not payable by written agreement in more than four
installments. Such credit plans would not be subject to Regulation
Z, but would be subject to Regulation E. See section-by-section
analysis of Sec. 1026.2(a)(15) and (17).
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Further, the proposed rule would modify Regulation E to require
that financial institutions offering prepaid accounts that could be
associated with a credit card feature disclose the fees associated with
the credit card plan to consumers in the prepaid account's pre-
acquisition disclosures and in the prepaid account agreement. In
addition, financial institutions would be prohibited from providing a
solicitation or an application to a consumer to open an associated
credit card account prior to 30 calendar days after the prepaid account
has been registered, and they would be prohibited from offering terms
and conditions, applicable to transactions solely accessing the prepaid
account, that differ depending on whether the consumer elects to link a
credit feature to a prepaid account.
Although few providers of prepaid accounts currently offer
overdraft services or other credit features in connection with prepaid
accounts, the Bureau believes that such product offerings could become
more widespread in the future. Therefore, the Bureau believes that it
is important to ensure that these products are structured so that
consumers receive appropriate protections when offered prepaid accounts
that include credit features. By proposing to put requirements in place
now, the Bureau hopes to mitigate costs to consumers and providers that
may occur if these products become more prevalent and the proposed
protections are not in place.
To assess the potential impacts of the proposed rule on consumers
and covered persons, the Bureau separately discusses the benefits and
costs associated with each major proposed provision. For clarity of
discussion, costs arising from compliance burdens that would be imposed
on providers by the proposed rule will be discussed under the
subheading ``Benefits and Costs to Covered Persons'' for each major
proposed provision. The proposed provisions may impose one-time
implementation costs and may affect ongoing operational costs. Both of
these types of costs may be fixed or variable.\423\ Economic theory
predicts that fixed cost increases will be absorbed by providers.
However, consumers may be adversely affected by increases in these
costs to the extent these cost increases prompt current providers of
prepaid accounts to exit the market or deter entry by new providers in
the future. This could result in consumers having more restricted
choices than they would otherwise have. In certain situations, a
decrease in the number of market participants could better enable those
remaining providers to exercise market power, resulting in higher
prices for consumers, decreased product quality, or both.
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\423\ Fixed costs are those costs that do not depend on the
number of prepaid accounts offered by the provider.
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With respect to variable costs, the ability of providers to recoup
cost increases by charging consumers higher prices for covered products
depends on the relative elasticities of supply and demand for the
product (e.g., how responsive the quantity supplied by providers is to
a price change relative to how responsive the quantity demanded by
consumers is to a price change) and the extent of competition in the
market. The burdens will ultimately be shared by both providers and
consumers, with the larger share of the burden falling on the party
that is less responsive to a price change.
It is worth noting that the relative elasticities of supply and
demand can vary across products that would be covered by the proposed
rule and may be influenced by the presence of substitute products as
well as the availability of information (which would influence the
perceived availability of substitute products).
1. Establishing Certain Disclosures That Providers Must Give to
Consumers
The proposed rule would require two new, pre-acquisition
disclosures; extend existing Regulation E disclosure requirements to
prepaid accounts; and require new disclosures to be made on prepaid
account access devices. Under the proposal, newly-printed disclosures
would need to be compliant after nine months, and, financial
institutions would be required to be in full compliance with the rule's
disclosure requirements after twelve months. See proposed Sec.
1005.18(h).
Proposed Sec. 1005.18(b)(1) would require that a financial
institution must provide a ``short form'' disclosure and a ``long
form'' disclosure before a consumer acquires a prepaid account.
Proposed Sec. 1005.18(b)(2) through(6) would establish the content,
form, and timing of these two disclosures. Proposed Sec.
1005.18(b)(2)(i) would set forth the information a financial
institution would be required to provide on the short form disclosure.
The short form disclosure would include a ``static'' portion that would
be disclosed for all prepaid account products. In addition to certain
other fees, this static portion would have a ``top-line'' component
that highlights at the top of the form, in a large font-size, four
types of fees (a periodic fee, per purchase fees, ATM withdrawal fees,
and a cash reload fee) that the Bureau believes to be the most
important to consumers when shopping for a prepaid account. The short
form disclosure would also include an ``incidence-based'' portion that
would require inclusion of up to three additional fees. These would be
[[Page 77261]]
the fees that consumers incurred most frequently during the prior 12-
month period when using a given prepaid account product. The fees
disclosed could therefore vary across products. If the amount of a fee
listed in the short form disclosure could vary, a financial institution
would have to disclose the highest fee it could impose for utilizing
the service associated with the fee, along with a symbol, such as an
asterisk, and explanatory text indicating that the fee could be lower.
A financial institution would be required to use the same symbol and
explanatory text for all fees that could be lower.
The short form disclosure would also state the number of other fees
that apply to the product that are not disclosed on the short form
disclosure; an instruction for the prepaid account holder to register
his or her prepaid account in order to protect his or her funds; the
URL for the Web site of the Consumer Financial Protection Bureau; and a
statement regarding whether the product offers overdraft services or
other credit features. In most cases, the short form would also
disclose if a prepaid account is not eligible for FDIC (or NCUSIF)
pass-through deposit (or share) insurance. A short form disclosure for
a payroll card account or government benefit account would also include
a notice at the top of the form, when applicable, that consumers are
not required to accept such an account.
Proposed Sec. 1005.18(b)(2)(ii) would set forth the information a
financial institution would be required to provide on the long form
disclosure. The long form disclosure would set forth all fees imposed
in connection with a prepaid account and their qualifying conditions.
Financial institutions would be required to provide consumers with the
long form disclosure prior to acquisition of a prepaid account, unless
that account is acquired orally by telephone or in a retail store, as
discussed below. The long form disclosure would also include the
telephone number, Web site, and address of the person or office that
the consumer may contact to learn about the terms and conditions of the
prepaid account, to call for a balance inquiry, to request or to notify
the person or office when a consumer believes that unauthorized
electronic fund transfer has occurred; the disclosure described above
regarding FDIC pass-through or NCUSIF share insurance, when
appropriate; and the URL of the Web site and the telephone number of
the Consumer Financial Protection Bureau that consumers could use to
report a complaint in connection with a prepaid account. Finally, if at
any point a credit plan may be offered to any holder of a given prepaid
account, then the financial institution would be required to include in
that prepaid account's long form disclosures the disclosures described
in Regulation Z 12 CFR 1026.60(a), (b) and (c).
The proposed rule would also set forth requirements for how the
short form and long form disclosures must be presented. Specifically,
proposed Sec. 1005.18(b)(3) would set forth general form requirements
for written, electronic, and oral disclosures; provide requirements
regarding whether these disclosures should be in a retainable form; and
set forth parameters for the tabular form in which the disclosures must
be presented, including specific requirements for short form
disclosures presenting multiple service plans. Proposed Sec.
1005.18(b)(4) would provide specific formatting requirements on
grouping, prominence, and size.
If a financial institution principally uses a foreign language on a
package, when speaking to a consumer by telephone, in person, or on a
Web site consumers utilize to acquire a prepaid account, proposed Sec.
1005.18(b)(6) would require financial institutions to provide the short
and long form disclosures in that same foreign language. The financial
institution would also be required to provide the long form disclosure
in English upon the consumer's request or on its Web site where it
provides the long form disclosure in a foreign language.
The proposed rule would create exceptions to the proposed pre-
acquisition disclosure regime if the prepaid account is acquired in a
retail store or orally by telephone. In a retail store, financial
institutions would be required to provide the short form disclosure
before the consumer acquires a prepaid account, but they could provide
the long form disclosure after the consumer acquires a prepaid account
as long as certain conditions are met. See proposed Sec.
1005.18(b)(1)(ii).
Before a consumer acquires a prepaid account orally by telephone, a
financial institution must disclose the short form information that
would be required by proposed Sec. 1005.18(b)(2)(i). However, a
financial institution could disclose the long form content required by
Sec. 1005.18(b)(2)(ii) after the consumer acquires a prepaid account
provided that the financial institution communicates to the consumer,
before the consumer acquires the prepaid account, that the information
required to be disclosed by Sec. 1005.18(b)(2)(ii) is available by
telephone or via a Web site.
The proposed rule would require modifications to the initial
disclosures required by Regulation E. Regulation E Sec. 1005.7(b)
currently requires financial institutions to provide certain initial
disclosures when a consumer contracts for an electronic fund transfer
service or before the first electronic fund transfer is made involving
the consumer's account. The Bureau is proposing that these existing
disclosure requirements be extended to prepaid accounts; \424\ however,
the Bureau is further proposing (see proposed Sec. 1005.18(f)) to
modify the initial disclosure of fees requirement in Sec. 1005.7(b)(5)
for prepaid accounts to require that in addition to disclosing any fees
imposed by a financial institution for electronic fund transfers or the
right to make such transfers, the financial institution must also
provide all other fees imposed by the financial institution in
connection with a prepaid account, in the form of a table substantially
similar to proposed sample form A-10(e) in appendix A.
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\424\ See Section ``Disclosure Requirements Generally'' for a
summary of disclosures Sec. 1005.7(b) currently requires.
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Finally, the proposed rule would require that financial
institutions include on a prepaid account access device the financial
institution's name, the URL of a Web site, and a telephone number. See
Sec. 1005.18(b)(7).
a. Benefits and Costs to Consumers
The benefits and costs to consumers arising from the proposed
disclosure requirements for prepaid accounts are addressed in four
parts: (i) A general discussion of the benefits to consumers of
information; (ii) a discussion of the anticipated benefits of the
proposed disclosure requirements; (iii) a discussion of consumer
engagement with disclosure; and (iv) a discussion of potential costs of
the proposed disclosure requirements. Finally, this analysis discusses
alternatives to the Bureau's proposed disclosure requirements.
i. Information
According to standard social science models, when consumers are
faced with a choice among products in a given market, they consider
which choices are available to them as well as the information they
have about each of those choices. Further, in order for consumers to
make the best choices for their situations, their information must be
accurate and descriptive of all of their available options.\425\ In
reality,
[[Page 77262]]
however, consumers may not be fully informed. As discussed above, among
other reasons, this could transpire because firms perceive an advantage
to withholding information, or because consumers perceive gathering
information as overly burdensome.
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\425\ Here, ``make the best choice'' is intended to be
descriptive of the consumer's process of choice; to consciously
optimize over her choice set and through that process, select the
best option. This is distinct from the possible interpretation of
obtaining the best outcome, which could be achieved without
optimizing; through random selection among known options, for
example.
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Information provision (e.g., mandated disclosure) can therefore
facilitate consumer decision-making in at least three ways. First,
information provision can inform consumers about the choices that are
available to them. This provides a direct benefit of improving the
likelihood that consumers find products that fit their needs.\426\ In
addition, as discussed above, informing consumers about their choices
(or facilitating information gathering by consumers) may increase
competition in the product market, which in turn could cause firms to
offer consumers better terms. Second, information provision can inform
consumers about the attributes of the products that are available to
them. This provides the direct benefit of enabling consumers to
consider the relative merits of each product and to select the best
products from among their choices. In addition, revealing or
highlighting certain attributes of a product-type could induce firms to
compete on those attributes, raising benefits to consumers or lowering
costs. Third, information provision can inform consumers about the
attributes of the products they have already chosen. This can both
increase the benefits a consumer receives from a chosen product and
reduce the costs associated with its use.
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\426\ Increasing knowledge of the consumer's choice set may be
particularly beneficial when products within a market are highly
differentiated or in which consumers within a market have diverse
tastes.
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ii. Benefits
Together, the Bureau believes that the short and long form
disclosures provide consumers with the information necessary to make
fully informed choices regarding the prepaid account products available
to them. The short form disclosure would disclose key fees, conditions,
and notices. So that they may be quickly located and compared, the fees
that participants in the Bureau's testing identified as being most
important to them would be listed at the top of the short form
disclosure.\427\ Consumers seeking information not found on the short
form disclosure could utilize the long form disclosure. The long form
disclosure would list all fees for a particular prepaid account product
and their qualifying conditions, if any. Accompanying fees with their
qualifying conditions would help consumers to become fully informed
about the details of each prepaid account product and therefore improve
consumer choice among available products. As noted, the long form would
be required to be made available to consumers pre-acquisition in all
acquisition channels. As a result, interested consumers would always be
enabled to make fully-informed acquisition decisions. In addition,
proposed Sec. 1005.18(f) would effectively require the long form
disclosure to be disclosed whenever a product's terms and conditions
are disclosed. The Bureau believes that because these disclosures are
what consumers will likely reference throughout their ongoing use of
their prepaid accounts, this provision could potentially help inform
consumers' use of their prepaid account products after acquisition.
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\427\ Examining payroll account usage data, Wilshusen el al.
find that these fees also constitute a large majority of the fees
charged to consumers, both by incidence and total value. See 2012
FRB Philadelphia Study, at 10.
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In part, the Bureau designed the short form disclosure to guide
consumers to what it believes are important features of most prepaid
account products. By limiting displayed information, the disclosure
would make the information that is disclosed more salient and easier to
locate.\428\ As noted above, the fees that participants in the Bureau's
testing identified as being most important to them would be listed at
the top of the short form disclosure, which the Bureau believes is a
likely point for consumers' first engagement.\429\ This effect would be
reinforced by the display of top-line information, which would be
presented in a relatively large, bold font offset by whitespace. Other
disclosed fees would be presented in clear, concise language and listed
in a table with horizontal lines to direct the eye and padded by
whitespace for ease of reading.
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\428\ Reducing the size of the choice set for choices made under
time pressure has been shown to increase both the percentage of the
remaining items seen as well as the time of fixation on those items.
See Elena Reutskaja et al., Search Dynamics in Consumer Choice under
Time Pressure: An Eye-Tracking Study, 101 Am. Econ. Rev. 900 (2011).
\429\ Andrew Caplin et al., Search and Satisficing, 101 Am.
Econ. Rev. 2899 (2011).
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One potential outcome of the Bureau's emphasis of a limited number
of fees in the short form is that consumers could begin to rely on this
information to guide their purchase decisions more heavily than they do
currently. If so, then financial institutions may in turn increase
their competitive efforts on these dimensions, which could result in a
benefit for consumers in the form of a reduction in these particular
fees.
Another benefit of the proposed rule would be to standardize
prepaid account product disclosures. Currently, there is significant
variation in the content and formatting of the disclosures offered in
connection with prepaid accounts that are available to consumers prior
to acquisition.\430\ These disclosures generally convey only certain
fees, terms, and conditions, and the items disclosed vary across
prepaid account products. In addition, the form of these disclosures
varies significantly across products, variously utilizing bulleted
lists, tables, plain text, and combinations of these methods. In some
cases, fee inclusion, fee descriptions, and fee prominence are
seemingly selected to highlight the relative strengths or to diminish
the relative weaknesses of the particular product. As described above,
the Bureau believes that standardization would reduce the cost to
consumers associated with finding and understanding critical
information about prepaid accounts and therefore increase consumers'
knowledge of their available choices and facilitate comparison shopping
among prepaid account products. The short form disclosure would
standardize the summary disclosure of key fees, conditions, and
notices. Similarly, the long form disclosure would standardize the
display of fees and the details of their qualifying conditions. The
proposed long form disclosure's categories and its tabular display
would organize the complete list of a prepaid account product's fees,
making them easier for consumers to locate and compare across products.
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\430\ This variation is pronounced in both retail stores and
non-retail channels. For example, The Pew Charitable Trusts
documented wide disparity in disclosures available on prepaid card
Web sites. See The Pew Charitable Trusts, Loaded with Uncertainty:
Are Prepaid Cards a Smart Alternative to Checking Accounts? (Sept.
2012), available at http://www.pewtrusts.org/en/research-and-analysis/reports/2012/09/06/loaded-with-uncertainty; see also The
Pew Charitable Trusts, Consumers Continue to Load Up on Prepaid
Cards (Feb. 2014), available at http://.pewtrusts.org/en/research-
and-analysis/reports/2014/02/06/consumers-continue-to-load-up-on-
prepaid-cards. Relatedly, CFSI and Pew cited the lack of current
standards, among other things, as motivation for developing their
own model forms. See CFSI, Thinking Inside the Box: Improving
Consumer Outcomes Through Better Fee Disclosure for Prepaid Cards
(Mar. 2012), available at http://www.cfsinnovation.com/content/improving-consumer-outcomes-through-prepaid-cards; see also The Need
for Improved Disclosures for General Purpose Reloadable Prepaid
Cards (Feb. 2014), available at http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2014/02/26/the-need-for-improved-disclosures-for-general-purpose-reloadable-prepaid-cards.
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If a financial institution principally uses a foreign language on
packaging material, by telephone, in person, or on
[[Page 77263]]
the Web site consumers utilize to acquire a prepaid account, the short
form and long form must be provided in that same foreign language. A
financial institution must also provide the long form disclosure in
English upon a consumer's request and on any part of the Web site where
it provides the long form disclosure in a foreign language. The Bureau
believes that utilizing a foreign language to acquire a prepaid account
could imply that that foreign language is the consumer's language of
greatest proficiency, and this proposed requirement therefore ensures
that such consumers receive the information they need to make an
informed choice. Since this implication does not necessarily follow,
the English version of the long form disclosure would also be available
to consumers who are more proficient in English or who may seek
informed help and advice from family or friends with English
proficiency.
The proposal would also require disclosure of the availability of
an overdraft service or other credit feature or the lack thereof on the
short form disclosure. Because both the existence of, and the absence
of, possible credit plans are required to be similarly disclosed,
consumers would be able to easily compare prepaid account products
along this dimension. The Bureau's consumer testing, in addition to
external studies,\431\ suggests that many consumers choose prepaid
products specifically to avoid overdraft services. Requiring the
existence of credit features to be disclosed on the short form
disclosure would help those consumers make informed acquisition
decisions. Conversely, those consumers who are seeking a prepaid
account with the possibility of accessing credit would be able to more
easily identify products that offer such a feature.
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\431\ See 2014 Pew Study.
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In addition, if at any point a credit feature may be offered to any
holder of a given prepaid account, then the financial institution would
be required to include in that prepaid product's long form the
disclosures described in Regulation Z, 12 CFR 1026.60(a), (b) and (c).
These are the same disclosures that Regulation Z requires financial
institutions to provide along with mail or electronic applications for,
or solicitations to open, credit card accounts. Because this
information would be included in prepaid accounts' long form
disclosures, consumers would be made aware of the fees associated with
such a plan, were it to be offered. Those consumers who are able to
accurately predict their future use of such services could compare the
prices of various prepaid account products, taking into account the
price of an associated credit feature, in making their initial
acquisition decision. The Bureau requests comment and the submission of
data that could inform the Bureau's consideration of the effectiveness
of the proposed credit-related disclosures on both the short form and
long form disclosures, including information about the use of the terms
``credit-related,'' ``credit,'' and ``overdraft.''
Before acquiring a payroll card account or government benefit
account, the proposed rule would require financial institutions to
include above the top-line on their short form disclosure a statement
that the consumer does not have to accept the payroll card account and
that other methods are available from which the consumer may choose to
receive his wages or salary from the employer instead of receiving them
on the payroll card account. This provision would ensure that employees
are informed that receiving their wages on a payroll card account is
neither a condition of their employment nor their only option.
Moreover, it would ensure that recipients of government benefits are
informed that they do not have to accept payments in the government
benefit account and that they can ask about other ways to get their
benefit payments.
Finally, proposed Sec. 1005.18(b)(2)(i)(B)(10) would require
disclosure of the total number of fees charged by the financial
institution other than those disclosed on the short form disclosure. In
the Bureau's testing, this number became a focal point for
participants. If this number becomes a focal point for consumers
generally, then financial institutions may choose to compete on this
metric, which could potentially reduce the number of fees imposed in
connection with prepaid accounts. As a result, consumers may benefit
from fewer hidden fees and simpler products, generally.
iii. Engagement
According to the standard social science models of consumer
decision-making presented above, consumers must have relevant and
accurate information in order to make good choices. However, recent
research in social science, law, and design suggests that even if
consumers were provided an unlimited amount of information, many
consumers would not comprehend or utilize all that information.\432\
This research highlights the importance of an initial step,
``engagement,''\433\ and posits that when a consumer encounters any new
informational provision, she conducts a split-second analysis,
assessing the costs and benefits of continued consumption of that
information.\434\ This calculation incorporates the consumer's
automatic emotional response to the design as well as the consumer's
expected reward from engagement. Without an affirmative decision at
this first step, neither utilization nor comprehension can occur.\435\
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\432\ James Lacko & Janis Pappalardo, The Failure and Promise of
Mandated Consumer Mortgage Disclosures: Evidence from Qualitative
Interviews and a Controlled Experiment with Mortgage Borrowers, 100
Am. Econ. Rev. 516 (2010); see also Kleimann Commc'n Group, Know
Before You Owe: Evolution of the Integrated TILA RESPA Disclosures
(July 2012); For example, Eric Johnson, et. al. Can Consumers Make
Affordable Care Affordable? The Value of Choice Architecture, PLOS
One, Dec. 2013, at 1, 2.
\433\ Throughout, this treatment describes the first moment of
information consumption as ``engaging'' with the information
provision. ``Engaging,'' as it is used here, is therefore distinct
from ``reading'' or ``comprehending,'' both of which could imply
sustained consumption.
\434\ A related decision-making framework is developed with
accompanying case studies by Stephen Wendel. See, Stephen Wendel,
Designing for Behavior Change: Applying Psychology and Behavioral
Economics (Mary Treseler ed., 2013).
\435\ See, e.g., Ian Ayres & Alan Schwartz, The No-Reading
Problem in Consumer Contract Law, 66 Stan. L. Rev. 545 (2014).
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The Bureau designed the model short form disclosure not only to
provide relevant information to consumers, but also to increase
consumer engagement. To appeal to consumers' automatic emotional
response, the Bureau designed the short form disclosure to be visually
appealing as well. In addition, to reduce the perceived difficulty of
learning about a prepaid product, the short form disclosure assigns
terms a clear hierarchy through positioning, font-size, accompanying
whitespace, and font-weight; includes concise descriptions of fees and
conditions; and uses asterisks and fine-print sparingly. Finally, as
the perceived cost of using a disclosure increases with the amount of
information provided, the proposed short form disclosure presents
consumers with a reduced, manageable set of information about the
product.\436\
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\436\ The idea that consumers may decrease their engagement with
information when more information is provided is somewhat supported
by research on ``choice overload.'' This work demonstrates that when
choice sets are large, some people opt to make no choice at all.
See, e.g., Sheena Iyengar et al., How Much Choice Is Too Much?
Contributions to 401(k) Retirement Plans, in Pension Design and
Structure: New Lessons from Behavioral Finance 83 (Oxford: Oxford
University Press 2004).
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iv. Costs
The Bureau's effort to simplify pre-acquisition disclosures may
also
[[Page 77264]]
generate costs for consumers. As discussed above, the Bureau's emphasis
of a limited number of fees in the short form could result in a
reduction of those particular fees through competitive pressure.
However, to the extent they exist, fees that would be relatively de-
emphasized by the proposed disclosure regime could, as a result,
experience an easing of competitive pressure and thereby increases in
the amounts charged.
Proposed Sec. 1005.18(b)(2)(i)(C) may also generate costs for
consumers. If the amount of the fee that a financial institution
imposes for a given fee type can vary, then proposed Sec.
1005.18(b)(2)(i)(C) would require the financial institution to disclose
the highest fee associated with that fee type. As discussed above, the
Bureau believes that there is a clear benefit to consumers of providing
a simple and concise short form disclosure, and the Bureau believes
that this is achieved, in part, by limiting footnotes and fine print.
However, in acquisition channels in which the short form disclosure is
not necessarily accompanied by the long form disclosure, this provision
could result in a consumer having less information about a prepaid
product than they would have had in the current marketplace. The
provision would therefore create a distinct new cost to consumers if it
results in them not having all the information they want or need to
make their acquisition choice.
Furthermore, proposed Sec. 1005.18(b)(2)(i)(C) may make some fees
associated with a fee type less salient to consumers than they are
currently. As a result, these fees could increase either because
consumers find those fees difficult to monitor or because of a
reduction in competitive pressure on those fees.
v. Alternatives
An alternative to the proposed disclosure regime that some
nonprofit groups have suggested is full disclosure of all fees
regardless of the acquisition channel. These groups argue that, among
other things, any disclosure other than a full disclosure of all fees
enables financial institutions to hide fees that could be important to
consumers. The Bureau believes the potential harm of such actions to be
largely mitigated by the existence of the long form disclosure, which
discloses all fees, and which consumers would have to receive or have
access to prior to account acquisition. The short form disclosure also
would contain two additional elements that could mitigate the risk of
hidden fees. First, the proposed incidence-based portion of the short
form disclosure ensures that consumers are informed of the fees that
consumers incur most frequently for a particular product and that are
not part of the static portion of the short form disclosure. Second, as
noted above, the proposal would require disclosure of the total number
of fees charged by the financial institution other than those disclosed
on the short form disclosure. The Bureau believes that disclosure of
this number, coupled with the incidence-based disclosures, should make
conspicuous any attempt to hide charges.
Another alternative suggested by some consumer advocacy groups was
to disclose a single number for each product that would indicate the
relative costliness of that product. Commenters suggested that this
number could be an estimate of monthly costs to consumers for using a
prepaid account, the average amount paid by users of a prepaid account
program, or the output of an algorithm intended to replicate specific
consumers' use-cases of prepaid accounts. The Bureau believes that
while such an approach holds promise, it is not well-suited to prepaid
products at this time. The Bureau's testing, along with other studies,
revealed many typical use cases for prepaid accounts.\437\ The
diversity of use cases makes it difficult to design disclosures that
provide relevant information for consumers with respect to their all-in
cost to use a particular product since such costs could vary
significantly. For example, the monthly cost for someone who uses a
prepaid product primarily for occasional online purchases could be
significantly different from the monthly cost for someone who uses a
prepaid product as a checking account replacement. Indeed, because of
the variety of use-patterns, such overly-simplistic disclosures may be
more misleading than helpful.
---------------------------------------------------------------------------
\437\ See ICF Report at 5; see also 2014 Pew Study.
---------------------------------------------------------------------------
b. Benefits and Costs to Covered Persons
The benefits and costs to a covered person arising from the
proposed disclosure requirements depend on the covered person's current
business practices. This treatment therefore considers benefits and
costs relative to those borne by financial institutions in the current
marketplace. They are addressed in five parts: (i) A discussion of
common sources of cost; (ii) a discussion of the costs associated with
proposed provisions, including acquisition-channel-specific costs for
channels other than the retail channel; \438\ (iii) a discussion of the
costs specific to the retail acquisition channel; (iv) a discussion of
benefits; and (v) a discussion of the costs and benefits to new
entrants.
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\438\ This treatment considers five significant acquisition
channels for prepaid accounts: In-person, in a retail store; in-
person, in a non-retail environment, such as a bank or place of
employment; orally, over the telephone; electronically, via a Web
site; and via direct mail.
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i. Common Sources of Cost
The Bureau recognizes that certain financial benefits to consumers
that stem from the proposed disclosures may have an associated
financial impact on covered persons. Covered persons generate revenue
through consumers' use of their products. Therefore, when a consumer
experiences a financial benefit, a financial institution may experience
a financial cost of the same magnitude. Such costs could stem from each
of the primary consumer benefit channels identified above: Bolstered
consumer knowledge of alternative products; improved acquisition-
choices from among available products; lower-cost, higher-benefit usage
of acquired products; and increased competitive pressures.
A number of the provisions detailed above require financial
institutions to provide or make available disclosures orally via a
telephone. The Bureau expects that compliance with these proposals may
require implementation costs of updating an interactive voice response
(IVR) system and/or training live customer service agents. The Bureau
believes that both of these costs will be relatively small. To the
extent that the proposed provisions increase usage of financial
institutions' telephone systems, financial institutions may incur
additional ongoing costs of utilizing or operating these systems.
According to industry sources, utilizing an IVR system costs up to
$0.12 per minute, while live agent customer service costs up to $0.90
per minute. The total burden of these costs for any single financial
institution would depend on the financial institution's potential
customers' demand for obtaining disclosures orally over the telephone,
and may depend on the financial institution's negotiated rates for IVR
and/or live agent customer service. Finally, financial institutions
would bear small ongoing costs of monitoring and updating to ensure
that their telephone systems provide accurate information.
Similarly, a number of the provisions detailed above require
financial institutions to provide or make available disclosures
electronically, via a Web
[[Page 77265]]
site. The Bureau believes that all prepaid account providers already
offer at least one service electronically, via a Web site, and
therefore that implementation costs of complying with these provisions
would not include the costs of obtaining and initializing a Web site.
To the extent that the proposed provisions increase usage of financial
institutions' Web site(s), financial institutions may bear additional
ongoing costs of bandwidth usage. In addition, financial institutions
would be required to design an electronic version of the relevant
disclosure(s), and therefore would bear a one-time web-design cost. The
Bureau believes this cost would be relatively small and also mitigated
by the Bureau's provision of model forms and sample forms. The total
burden of these costs for any single financial institution would depend
on the financial institution's customers' demand for obtaining
disclosures electronically, via a Web site, and may depend on the
financial institution's negotiated web-hosting rates. Finally,
financial institutions would bear small ongoing costs of monitoring and
updating to ensure that their Web site(s) provides accurate
information.
ii. Costs
As noted, Regulation E Sec. 1005.7(b) currently requires financial
institutions to provide certain initial disclosures, and this proposal
would extend this provision to prepaid accounts. Generally, the Bureau
believes that financial institutions already disclose full terms and
conditions, which include much of what would be required by Sec.
1005.7(b), before the first electronic fund transfer is made. The
disclosure requirements of Regulation E section Sec. 1005.7(b) as they
are currently defined (not considering the modifications in proposed
Sec. 1005.18(f)) would therefore entail very small cost to covered
persons.
Proposed Sec. 1005.18(b)(2) through (4) would set forth the
content and form requirements for the short form and long form
disclosures. To satisfy these requirements, financial institutions
would incur one-time costs of designing compliant disclosures. Based on
industry outreach, the Bureau understands that the design process will
require as many as 100 labor hours per prepaid product, including time
for design work and legal and financial institution review. However,
the design costs should be offset somewhat by the Bureau's provision of
model forms and sample forms for the required disclosures.
In-person transactions and direct mail transactions would require
the short form and long form disclosures to be disclosed on paper. The
long form disclosure would be disclosed both pre-acquisition and as
part of the terms and conditions document. For each prepaid account
sold, this would entail additional costs of materials (e.g., printing,
paper), logistics (e.g., shipping costs), and personnel training (e.g.,
how to disclose the forms in retail settings).
Prepaid account transactions conducted orally over the telephone
would necessitate an oral disclosure of the short form disclosure prior
to acquisition. Financial institutions would be able to choose between
disclosing the long form orally prior to acquisition and communicating
prior to acquisition that the long form is available orally over the
telephone or electronically, via a Web site. Both the costs of
providing disclosures orally over the telephone and the costs of
providing disclosures electronically, via a Web site, were considered
above. Because the labor and capital necessary to conduct business over
the telephone may also be used to disclose fees, the Bureau estimates
that the costs of providing disclosures orally over the telephone would
be substantially mitigated for financial institutions that already
transact over the telephone.
Prepaid account transactions conducted electronically, via a Web
site would necessitate electronic disclosure of both the short and long
form disclosures prior to account acquisition. The costs of providing
disclosures electronically, via a Web site were considered above. The
Bureau believes that these costs would be minimal for financial
institutions that transact online since they generally already disclose
fees and terms and conditions online.
Transactions that do not occur in person, such as those that occur
over the telephone, via direct mail, or via a Web site, may necessitate
financial institutions to send consumers an account access device via
the mail. The Bureau understands that these deliveries typically
include the prepaid products' full terms and conditions. Therefore,
proposed Sec. 1005.18(f) would require that these deliveries include a
long form disclosure. As a result, financial institutions that do not
transact with consumers in person may incur small new ongoing costs in
the form of increased shipping costs and increased materials costs.
Financial institutions that distribute payroll card accounts or
government benefit accounts may incur additional costs in order to
provide on the short form the notice described in proposed Sec.
1005.18(b)(2)(i)(A) that consumers are not required to accept a payroll
card account, and a similar requirement for government benefit accounts
in proposed Sec. 1005.15(c)(2). Additional costs could accrue, for
example, if the additional disclosure caused the short form disclosure
to exceed the space constraints of payroll card packaging materials.
However, the Bureau believes that in the payroll card account context,
prepaid accounts are not usually distributed within space-constrained
packaging, and that the short form disclosure requirements could be
easily met if provided, for example, on an 8\1/2\ inch by 11 inch sheet
of paper.\439\ If it is the case that this disclosure both informs
consumers and motivates them to consider other payment options, then
the costs to some financial institutions could increase. In particular,
a financial institution could experience a cost if consumers decline to
acquire its prepaid account product as a result of this notice. Both of
these types of costs could be small, depending on current industry
practice. In particular, existing regulation already prohibits
employers and financial institutions from requiring a consumer to use a
payroll card account to receive wages or a government benefit account
to receive benefit payments. If covered persons comply with this
existing regulation in a manner similar to the proposed requirement,
then the additional cost of this proposal would be very small.
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\439\ The Bureau's industry outreach revealed that in some cases
payroll card accounts and similar products are distributed in
unsealed envelopes that also contain fee disclosures, the terms and
conditions documents, and marketing materials. The model short form
that includes this payroll card account notice easily fits within
these constraints. See proposed Model Form A-10(a) in Appendix A.
---------------------------------------------------------------------------
If a financial institution principally uses a foreign language on
packaging material, by telephone, in person, or on the Web site
consumers utilize to acquire a prepaid account, then it would be
required to provide the short form and long form disclosures in that
same foreign language. In addition, the financial institution would be
required to make an English version of the long form disclosure
available upon request. If a financial institution does not already
maintain the practice of disclosing its fee schedules in both
languages, then this requirement may entail a small fixed cost to have
its disclosures translated, as well as additional ongoing translation
costs whenever the financial institution introduces a new fee or
changes the wording of any part of its terms and conditions. Because,
in such cases, the long form disclosure would be required
[[Page 77266]]
to be provided in two languages, this requirement could also result in
additional ongoing material costs and increased shipping costs. The
total burden of costs related to this requirement would depend on the
amount that these requirements diverge from current practices. Based on
industry outreach, the Bureau believes that most financial institutions
that transact in foreign languages also provide fee disclosures in
those foreign languages, and therefore that this requirement is
unlikely to generate significant additional costs.
A financial institution would need to design its short form
disclosure to indicate whether it may offer an overdraft service or
other credit feature to its prepaid account holders, and its long form
disclosure to disclose the fees and costs associated with such a credit
feature, when offered. This requirement would generate direct costs for
financial institutions that offer such credit features. However, based
on its Study of Prepaid Account Agreements of existing prepaid account
products, the Bureau believes that very few financial institutions
offer such features. Financial institutions that do offer credit
features would face ongoing costs of insuring that the disclosed costs
of credit in the long form disclosure are accurate.
The ongoing costs of maintaining the short form and long form
disclosures would depend on current practices and the acquisition
channel. The long form and the non-incidence-based portions of the
short form disclosure (the incidence-based portion is discussed below)
would require updating at most as often as a prepaid product's terms
and conditions are updated. Based on industry outreach, the Bureau
believes that financial institutions rarely change the terms and
conditions of their prepaid products in a way that would require
changes to the disclosures they provide. Moreover, the Bureau believes
that pursuant to State law and regardless of this proposal, provided
marketing materials, fee disclosures, and terms and conditions
documents must always be accurate when provided to consumers.
Therefore, the Bureau does not believe that maintaining the accuracy of
the long form disclosure and the non-incidence-based portions of the
short form disclosure would represent a substantial new ongoing cost to
financial institutions.
Financial institutions may incur a number of ongoing costs to
comply with the short form disclosure's proposed incidence-based
disclosure requirements. The incidence-based portion of the short form
disclosure would require disclosure of the three fees incurred most
frequently in the prior 12-month period for that particular prepaid
product that are also not already disclosed in the static portion of
the short form disclosure. These fees could vary over time for a given
product due to changes in how consumers use the card or due to changes
in the product itself. In either case, financial institutions would be
responsible for updating the incidence-based portion of their short
form disclosures. If a financial institution changed its product, then
it would be required to populate the incidence-based portion with a
reasonable estimate of the fees that would match the incidence-based
portion's criteria. For each prepaid product, the financial institution
would be required to reassess fee incidence ranking used to determine
the incidence-based portion of the product's short form disclosure once
per year. Financial institutions would be permitted to choose the date
of reassessment for each individual product, but for a given product,
reassessment would be required to occur at the same time each year. Fee
incidence rankings would be required to be assessed using data from the
twelve months prior to the reassessment date each year. Financial
institutions may incur some fixed costs of implementation if they must
update their accounting systems or practices to evaluate fee incidence
from all sources on a twelve-month basis. However, the Bureau believes
that most financial institutions are already capable of tabulating fees
in this manner, and thus it expects this cost to be small. Moreover,
since financial institutions would be free to choose reassessment
dates, the Bureau believes that ongoing costs associated with this
reassessment should be small as well. For example, financial
institutions could choose their reassessment date to coincide with its
established calendar for evaluating its prior year performance for tax,
or other reporting, purposes.
After reassessment, financial institutions would have up to 90 days
to update the incidence-based portion on their short form disclosures.
In addition, after reassessment, financial institutions would be
prohibited from printing new retail stock that includes out-of-date
incidence-based fee information. However, financial institutions would
be allowed to continue to sell stock printed prior to the reassessment
date indefinitely. For a given prepaid product, the full burden of the
costs of updating short form disclosures due to changes in the
incidence-based portion would depend on the frequency with which the
top three fees change for that product and the channel through which
that product is distributed. The Bureau believes the costs of updating
the incidence-based portion are very small for acquisition channels
where disclosures are not printed on packaging material.
iii. Retail Costs
Through industry outreach and analysis, the Bureau understands that
the proposed rule could generate many costs unique to the retail
acquisition channel. For this reason, the retail acquisition channel is
considered separately here. Nonetheless, costs borne by financial
institutions transacting in the retail acquisition channel are largely
the same as those borne by the financial institutions described above.
This treatment therefore takes the above treatment as a starting point
and describes costs to covered persons only as they deviate from that
treatment.
In a retail store, financial institutions would be required to
provide their prepaid account product's short form disclosure before
the consumer acquires the prepaid account. Through discussions with
industry participants, the Bureau has learned that some financial
institutions will not be able to accommodate the short form disclosure
on the exterior of their current packaging materials without
significant changes, such as redesigning of packages.\440\ The one-time
costs associated with a package redesign are discussed above and are
relatively small. However, some financial institutions currently
utilize the exterior of their packaging materials to facilitate retail
transactions or to incorporate fraud prevention mechanisms (i.e., by
providing bar codes or other information). In these cases, the Bureau
has heard from industry participants that complying with the short form
disclosure requirement of proposed Sec. 1005.18(b)(1), while
maintaining their products' previous levels of functionality and fraud
prevention, could as much as double the per unit cost of printing
packaging materials.\441\
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\440\ The Bureau made early versions of its model forms
available to the public for comment. See Eric Goldberg, Prepaid
cards: Help design a new disclosure, CFPB Blog Post (Mar. 18, 2014),
http://www.consumerfinance.gov/blog/prepaid-cards-help-design-a-new-disclosure/.
\441\ The Bureau heard from industry participants that the per-
package printing cost, including the card access device and the
packaging materials, ranges from $0.75 to $2.00.
---------------------------------------------------------------------------
In a retail store that is not operated by the financial institution
or agent of the financial institution, the financial
[[Page 77267]]
institution would be able to choose between two methods of providing
the long form disclosure. As it would be required to do in other
acquisition channels, the financial institution could provide the long
form disclosure before a consumer acquires a prepaid account.
Alternatively, in a retail store, a financial institution could provide
the long form disclosure after the consumer acquires a prepaid account,
provided that, among other things, the short form disclosure includes
both a telephone number and a URL of a Web site that the consumer could
use to access the long form disclosure. The cost of this requirement
will therefore vary for financial institutions based on the option they
select. Financial institutions that provide the long form disclosure
pre-acquisition would bear additional costs of shipping and materials
and potentially personnel training in retail settings. Financial
institutions that do not provide the long form disclosure pre-
acquisition would bear the costs of making the long form available
electronically, via a Web site and orally over the telephone. These
costs were considered in generality above.\442\
---------------------------------------------------------------------------
\442\ These costs would also apply to provision of the English
version of the long form as would be required upon a consumer's
request by proposed Sec. 1005.18(b)(6).
---------------------------------------------------------------------------
Based on industry outreach and analysis, the Bureau believes that
in the retail channel a prepaid product's terms and conditions document
is included in its packaging materials. In this case, proposed Sec.
1005.18(f) would require that financial institutions also include the
long form disclosure inside their retail packaging materials. This
requirement could create new ongoing costs for financial institutions
through increased material and shipping costs.
Moreover, currently, if a prepaid product's terms and conditions
document is included in its packaging materials, then any change in a
prepaid account product that would trigger a need to update the prepaid
account product's disclosures would also trigger a need to update the
prepaid account product's terms and conditions document. Therefore, the
Bureau believes that in the retail acquisition channel, monitoring the
long form and the non-incidence-based portions of short form disclosure
for accuracy, and updating these disclosures to reflect changes in the
prepaid product, would not represent significant new costs relative to
the costs currently borne by financial institutions.
In addition, the Bureau believes that in the retail channel the
cost of monitoring and updating the incidence-based portion of the
short form would be almost fully mitigated by two factors: first,
because financial institutions would be able to sell their out-of-date
retail packaging indefinitely there would be no costs of product
destruction or resetting; second, because financial institutions could
choose their reassessment dates to coincide with their natural product
refresh cycle, there would be few additional costs to printing or
shipping new prepaid cards.
The proposed two-tiered effective date of this proposed rule would
require that newly printed retail materials are accurate within nine
months of the date of publication of a final rule in the Federal
Register, but would allow out-of-date stock to be sold for up to twelve
months thereafter. Because this extended implementation period would
allow financial institutions time to sell their old stock, it would
also reduce, relative to a shorter period, financial institutions'
total costs of shipping and destroying old stock. Moreover, the
extended implementation period would allow financial institutions'
printing and shipping of updated stock to coincide with financial
institutions' natural yearly product refresh cycle. Nonetheless,
through discussion with industry participants, the Bureau understands
that even after an extended implementation period, out-of-date stock
may remain in retail locations, financial institutions may be uncertain
as to whether or not out-of-date stock remains at a given retail
location, and as a result, certain costs, such as the labor cost for
merchandisers, may not be greatly reduced by the extended
implementation period.
If a financial institution has not sold all of its out of date
stock by the second effective date, then the proposed rule may result
in financial institutions destroying and replacing out-of-date
stock.\443\ The Bureau estimates the one-time cost of destruction and
replacement of retail stock due to implementation of the proposed rule
to be $0.68 per prepaid card in distribution.\444\ This cost is
comprised of the costs of creating new stock; removing and destroying
old stock; confirming that no old stock remains in retailers'
possession and/or is offered for sale; and replenishing retail
inventory. Based on industry outreach, the Bureau estimates that after
twelve months 40 percent of total prepaid account stock will remain in
distribution. It estimates that destroying remaining stock would cost
approximately $0.05 per card for the destruction service itself,
approximately $20 per retail location in resetting costs,\445\ and $28
per retail location for secure shipping to a destruction facility.
Further, it estimates that the cost of printing new cards and packaging
materials would be between $0.75 and $2.00 per newly printed card,
depending on the volume of the order and the type of packaging
materials.\446\
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\443\ The figures presented in this treatment are estimates
derived from discussions with a limited number of industry
participants. In some cases, the Bureau arrived at its estimates by
combining estimates from various sources or by interpolating from
industry estimates to estimate costs over new timeframes. Moreover,
the Bureau recognizes that these figures vary as a function of
myriad factors, including the size of the financial institution's
business, its business practices, and its relationships with other
participants in the value chain. The Bureau requests comment on
these preliminary figures as well as the submission of data that
could inform the Bureau's consideration of the costs of pre-
acquisition disclosures to providers of retail prepaid accounts.
\444\ ``Card'' is used here to refer to the access device for a
single physical prepaid account sold in a retail store. ``Cards in
distribution'' is defined to be the number of cards in retail
distribution channels on the date of publication of the Bureau's
final rule in the Federal Register.
\445\ This estimate is based on discussions with industry
participants, and is comprised of an estimate of $20 per hour to pay
a professional stocker, or ``merchandiser,'' and an estimate that
the resetting process takes approximately one hour complete.
\446\ The cost of printing a single new card could be more than
the per-card cost of implementation because not every card in
distribution would need to be reprinted as a result of this proposed
rule. As stated, the Bureau believes that approximately 40 percent
of cards will remain after the second effective date and this is
therefore also the Bureau's estimate of the percentage of cards that
would need to be re-printed as a result of this proposed rule.
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iv. Benefits
Finally, the Bureau recognizes that when a consumer chooses one
prepaid product over another, one covered person incurs a cost but
another receives a benefit. Because consumers use prepaid products in a
variety of ways, it is currently unclear if the proposed rule would
yield more such benefits for some financial institutions than for
others. However, in line with the discussion of benefit to consumers,
the Bureau believes that the proposed rule may most benefit financial
institutions that offer products with low fees, generally; low top-line
fees (and other fees in the static portion of the short form),
specifically; and fewer fees, overall.
v. New Entrants
The Bureau expects that costs and benefits to new entrants would be
similar as those experienced by financial institutions that currently
provide prepaid account products. Therefore, except where noted in this
[[Page 77268]]
part, the above discussions apply to new entrants as well.
The proposed rule would imply fewer fixed costs of implementation
for new entrants. Because producing disclosures, marketing materials,
and packaging materials is a natural part of the process of creating a
new prepaid account product, the proposed rule would not impose new
costs of changing these things for new entrants. Moreover, because new
entrants do not currently have stock in retail channels, the proposed
rule would not generate the implementation costs of destroying and
replacing out-of-date stock in the retail channel for new entrants.
The Bureau believes that new entrants' costs, as they relate to the
incidence-based portion, would be similar to other covered persons'.
Although financial institutions do not have actual fee data for new
prepaid account products, the Bureau believes that they nonetheless
should have a reasonable expectation as to which fees would be incurred
most frequently. Thus, proposed Sec. 1005.18(b)(2)(i)(B)(8)(II) would
require institutions, for those prepaid account products without prior
fee data, to estimate in advance the fees that should be disclosed in
the incidence-based portion of the short form disclosure. The Bureau
expects that this effort would be no more costly than the effort of
producing an incidence-based portion based on actual fee data (as would
be required of financial institutions that possess such data). Like
other covered persons, new entrants would be required to update the
incidence-based portions of their disclosures to reflect the previous
year's data every twelve months.
2. Applying Regulation E's Periodic Statement Requirement With Slight
Modification and Providing an Alternative Means of Compliance With the
Requirement
While expressly defining prepaid accounts as accounts subject to
Regulation E, the Bureau's proposal also would extend the alternative
means of compliance with Regulation E's periodic statement requirement,
currently offered to payroll card account providers, to prepaid
accounts with certain modifications. See proposed Sec. 1005.18(c)(1).
In addition, the proposed rule would modify the alternative means of
compliance with Regulation E's periodic statement requirement for
government benefit accounts so that it is consistent with the
alternative means of compliance for prepaid accounts. See proposed
Sec. 1005.15(d).
Regulation E currently states in Sec. 1005.18(b) that financial
institutions offering payroll card accounts need not furnish periodic
statements if the financial institution makes available to the consumer
his or her account balance through a readily available telephone line,
an electronic history of the consumer's account transactions that
covers at least 60 days preceding the date that the consumer
electronically accesses the account, and, upon oral or written request,
a written transaction history that covers at least 60 days. Similarly,
government agencies offering government benefit accounts need not
comply with the periodic statement requirement if they make available
to the consumer the account balance, through a readily available
telephone line and at a terminal, and promptly provide at least 60 days
of written history of the consumer's account transactions in response
to an oral or written request. See existing Sec. 1005.15(c).
The proposed rule would require that covered financial institutions
wishing to avail themselves of this alternative means of complying with
the Regulation E periodic statement requirement make available to the
consumer at no charge his or her account balance through a readily
available telephone line, provide the consumer with access to at least
18 months of transaction history online and, if requested by the
consumer, provide at least 18 months of transaction history in writing.
See proposed Sec. 1005.18(c)(1). For those payroll card account
providers and providers of prepaid accounts that receive Federal
payments that are presently required to comply with the Regulation E
periodic statement requirement and are meeting their compliance
obligations by relying on the alternative means of compliance, this
proposed provision would extend the present requirement that 60 days of
transaction history be provided to 18 months. For government agencies
that are currently required to comply with the Regulation E periodic
statement requirement, this proposed provision would additionally
require electronic access to government benefit account history
information under the alternative means of compliance, which Regulation
E does not presently require.
Regardless of how a financial institution chooses to comply with
the proposal, the proposed rule also would require that the financial
institution disclose to the consumer a summary total of the amount of
all fees assessed against the consumer's prepaid account, the total
amount of deposits to the prepaid account, and the total amount of all
debits from the prepaid account for both the prior calendar month as
well as the calendar year to date. This information would be required
to be disclosed on any periodic statement and any electronic or written
history of account transactions provided. Finally, for financial
institutions following the alternative means of complying with the
periodic statement requirement, the proposed rule would extend to
prepaid accounts modified requirements for initial disclosures
regarding access to account information and error resolution, as well
as annual error resolution notices.\447\
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\447\ See existing Sec. 1005.18(c)(1) and (2) for payroll card
accounts, revised as proposed Sec. 1005.18(d) for prepaid accounts,
and existing Sec. 1005.15(d)(1) and (2) for government benefit
accounts, revised as proposed Sec. 1005.15(d)(1) and (2).
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a. Benefits and Costs to Consumers
Extending Regulation E's periodic statement requirement to all
prepaid accounts would help to ensure that consumers receive the
benefits associated with increased information regarding their prepaid
accounts. These benefits include having the ability to monitor account
balances for both budgeting and the identification of errors.
The Bureau's proposal would require that financial institutions
disclose to the consumer a summary total of the amount of all fees
assessed against the consumer's prepaid account, along with the total
amount of deposits to and the total amount of debits from the prepaid
account for the prior calendar month and the calendar year to date, on
any periodic statement, any written history of account transactions,
and any electronic history of account transactions (see proposed Sec.
1005.18(c)(4) \448\). This disclosure would make the cumulative costs
associated with the use of the prepaid account accessible and
transparent to consumers and, given that some consumers use their
prepaid account as their primary transaction account or as a budgeting
mechanism for a particular category of expenditures, would also provide
these consumers with a means of tracking budgeting goals. The inclusion
of these summary measures may also make tracking spending and load
patterns less burdensome for consumers and may aid consumers in
identifying atypical account activity or spending trends. For those
consumers who use their prepaid accounts infrequently and may not track
balance information on a regular basis, this
[[Page 77269]]
disclosure would provide another means to become familiar with the
costs associated with using the prepaid account, including any
inactivity fees that may be incurred.
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\448\ With respect to government benefit accounts, proposed
Sec. 1005.15(d)(2) would refer to Sec. 1005.18(c)(2), (3), and
(4).
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In extending the Regulation E periodic statement requirement to all
prepaid accounts, the Bureau would also require that those financial
institutions relying on the alternative means of complying with the
periodic statement requirement make accessible 18 months of transaction
history electronically and, if requested, in writing. Consumers,
especially those who rely on a prepaid account as their primary
transaction account, may need to consult more extensive account history
in connection with, for example, rental and employment applications or
tax filings; in these situations, they would benefit from having 18
months of account history available. Additionally, transaction
histories may help consumers to discover unauthorized transfers or
other errors. For instance, in certain circumstances, consumers have up
to 120 days from the date of the unauthorized transfer to assert an
error and thus in order to fully exercise these protections, consumers
must be able to access at least 120 days of transaction history. The
proposed rule additionally requires that account histories provided as
part of the alternative means of compliance with the periodic statement
requirement be provided electronically. Though government benefit
accounts are not presently required by Regulation E to provide such
access, and prepaid accounts generally are not subject to this
requirement at present, the Bureau's understanding is that most
financial institutions offer electronic access.
The Bureau considered alternatives, such as expanding the
Regulation E periodic statement requirement without an alternative for
prepaid accounts, requiring electronic periodic statements (as opposed
to transaction histories), requiring that account histories be made
available for various lengths of time, and not expanding the periodic
statement requirement to prepaid accounts in any form. In focus group
research, the Bureau generally found that consumers were satisfied with
the amount of information they receive regarding their transaction
history presently (either online, through text message, or over the
telephone), and they generally did not express a desire to receive a
paper statement.\449\ Several industry participants the Bureau spoke
with during its outreach, as well as several participants in the
Bureau's consumer testing, noted that the time lag between receipt of a
paper statement and the transactions covered by the statement decreased
its utility for tracking account balance information relative to other
means, such as real-time text message alerts, which provide consumers
with more timely access. According to one program manager, when it
provided electronic periodic statements to all of its customers, its
customers only infrequently accessed those statements.\450\
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\449\ See ICF Report, at 10.
\450\ The program manager reported that consumers viewed the
statements for just over one percent of active accounts, and
consumers downloaded the statements for slightly less than one
percent of active accounts.
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Many consumers participating in the Bureau's focus groups also
stated that they monitor their account balance using the internet and
mobile devices.\451\ This is consistent with the findings of various
industry surveys, which suggest that many consumers currently have
multiple methods through which they can access information regarding
their prepaid account. According to one survey of 66 GPR card programs,
almost three-quarters offer text alerts, and more than half offer email
alerts regarding account balances and transactions.\452\ Another
organization reviewed the terms and conditions associated with 18 GPR
card programs that they estimated collectively represented 90 percent
of the total GPR card marketplace (based on number of active cards in
circulation). It found that all of the reviewed cards allowed
cardholders to check balances online, via text message, by calling
customer service, or on a mobile app or a mobile-enabled Web site.\453\
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\451\ According to a survey conducted by the Board, roughly 87
percent of respondents owned or had regular access to a mobile
phone, and roughly 61 percent of those with a mobile phone had a
smartphone as of December 2013. Additionally, over 89 percent had
regular access to the internet, either at home or outside of the
home (but excluding internet access through a cellular phone). See
Bd. of Governors of the Fed. Reserve Sys., Consumers and Mobile
Financial Services 2014, at 49 tbl.C16, C.18 & C.19 (Mar. 2014),
available at http://www.federalreserve.gov/econresdata/mobile-devices/files/consumers-and-mobile-financial-services-report-201403.pdf. A survey of prepaid card users found that 88 percent use
the internet. See 2014 Pew Survey, at 5 ex.2.
\452\ See The Pew Charitable Trusts, Consumers Continue to Load
Up on Prepaid Cards: Changes in General Purpose Reloadable Prepaid
Cards Make Them More Like Checking Accounts but Without Important
Protections, at 17 (Feb. 2014), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2014/
PrepaidCardsStillLoadedReportpdf.pdf.
\453\ Additionally, they found that all of the cards reviewed
provided consumers with accessible customer service assistance and
IVR systems. See Ctr. for Fin. Serv. Innovation, Prepaid Industry
Scorecard, Assessing Quality in the Prepaid Industry with CFSI's
Compass Principles, at 12 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf.
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Although consumers generally have access to transaction history
information in some form at present, the proposed rule's requirement
that 18 months of written transaction history, 18 months of electronic
transaction history, and telephone access to balance information must
generally be provided for free would lower the cost of accessing this
information for some consumers. Of the 66 GPR card programs reviewed by
one organization, 68 percent disclosed a paper statement fee ranging
from 99 cents to $10 (median $2.95).\454\ As discussed below, the
Bureau's discussions with industry participants suggest that few
consumers presently request paper statements. It is worth noting,
however, that if financial institutions were unwilling to provide such
statements to consumers for free, they may decide to require all
consumers to provide E-Sign consent in order to have access to the
product so that they could provide statements electronically. This
could result in decreased access to account information for those
consumers who cannot or choose not to provide E-Sign consent.
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\454\ Of the GPR card programs reviewed by that organization, 21
percent of programs did not disclose a paper statement fee, and 11
percent disclosed that paper statements are free. See The Pew
Charitable Trusts, Consumers Continue to Load Up on Prepaid Cards:
Changes in General Purpose Reloadable Prepaid Cards Make Them More
Like Checking Accounts but Without Important Protections, at 19
(Feb. 2014), available at http://www.pewtrusts.org/~/media/legacy/
uploadedfiles/pcs_assets/2014/PrepaidCardsStillLoadedReportpdf.pdf.
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b. Benefits and Costs to Covered Persons
The benefits and costs to covered persons arising from the
application of Regulation E's periodic statement requirement to all
prepaid accounts would depend on the financial institution's current
business practices and whether the financial institution would choose
to avail itself of the alternative means of complying with the periodic
statement requirement. Specifically, financial institutions may comply
with the proposed requirement by providing periodic statements, either
in paper form or in electronic form having obtained E-Sign consent from
the consumer, or they may choose to implement the alternative means of
complying with the periodic statement requirement.
As discussed above, financial institutions are already required to
comply with the Regulation E periodic statement requirement, or the
specified alternative, for payroll card accounts and for accounts that
receive Federal
[[Page 77270]]
payments (pursuant to the FMS Rule). Government agencies that offer
government benefit accounts are similarly required to comply with this
requirement (without the requirement to provide electronic access to
account history under the periodic statement alternative). Based on
outreach to industry participants, the Study of Prepaid Account
Agreements, and review of various industry studies, the Bureau
understands that financial institutions generally provide consumers
with electronic access to transaction histories or electronic periodic
statements and generally provide telephone access to account
information similar to what the Bureau is proposing to require.\455\ In
many instances, electronic transaction histories currently provided
extend well beyond the 60 days currently required for certain prepaid
accounts.\456\ The Bureau's understanding based on outreach to industry
is that few, if any, financial institutions provide paper periodic
statements or paper transaction histories to consumers with prepaid
accounts on a non-ad hoc basis.
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\455\ One review of 66 GPR card programs found that almost every
card provided free online access to account information. It also
found that most card programs offered email and text alerts free of
charge and that most programs provided the customer with at least a
limited number of free interactive voice-recognition customer
service calls through which consumers could access account
information. See The Pew Charitable Trusts, Consumers Continue to
Load Up on Prepaid Cards: Changes in General Purpose Reloadable
Prepaid Cards Make Them More Like Checking Accounts but Without
Important Protections, at 36 (Feb. 2014), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2014/
PrepaidCardsStillLoadedReportpdf.pdf. Another review of 18 GPR card
programs, comprising an estimated 90 percent of active GPR cards in
circulation, found that all of the cards reviewed allowed
cardholders ``to check their balance online, via text message, by
calling customer service, or on a mobile app or a mobile-enabled Web
site.'' See Ctr. for Fin. Serv. Innovation, Prepaid Industry
Scorecard, Assessing Quality in the Prepaid Industry with CFSI's
Compass Principles, at 12 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf.
\456\ See Ctr. for Fin. Serv. Innovation, Prepaid Industry
Scorecard, Assessing Quality in the Prepaid Industry with CFSI's
Compass Principles, at 12 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf. ``Eleven of the fifteen
cards for which information is available . . . allow cardholders to
access at least two years of transactional data online, which can be
important for tax-filing and budgeting purposes. Three of the four
cards that offer less than two years of transactional data provide
one year of data, while one card offers six months of data.''
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If the proposed rule were adopted, the Bureau predicts that most
financial institutions would continue to offer account history
information to consumers electronically (except for those cases where a
written transaction history is required in response to an ad hoc
consumer request) and would continue to use an automated telephone line
to provide 24 hour access to account balance information. Therefore,
the Bureau believes that the majority of costs to covered persons would
arise from two sources.
First, periodic statements or transaction histories would be
required to display a summary total of the amount of all fees assessed
against the consumer's prepaid account, along with the total amount of
deposits and the total amount of all debits made to the prepaid account
for the prior calendar month and for the calendar year to date. Covered
financial institutions would need to modify existing statements or
electronic transaction histories to include these totals if such totals
are not already included. Second, those covered financial institutions
that do not presently make 18 months of transaction history available
to consumers would potentially incur additional data storage costs and
may need to implement system changes if they choose to avail themselves
of the proposed alternative means of complying with Regulation E's
periodic statement requirement.\457\
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\457\ As a result of the proposed rule, financial institutions
that do not provide consumers with 18 months of transaction history
may incur additional costs in the future when migrating information
across information technology platforms since additional data must
be retained.
---------------------------------------------------------------------------
The structure of the costs associated with these changes would
depend on whether the financial institution relies on vendors to format
or host online periodic statements or transaction histories or whether
it performs these functions in-house. In either case, the Bureau
anticipates the cost associated with these changes to be minimal. Those
financial institutions that format their own periodic statements or
transaction histories and do not currently display the required totals
on their periodic statements or transaction histories would incur a
one-time implementation cost to modify these disclosures.\458\ Those
providers that currently do not make available 18 months of account
history would incur costs associated with obtaining additional
electronic storage media to expand existing capacity. According to
discussions with industry participants, the costs associated with such
an expansion should be minimal.
---------------------------------------------------------------------------
\458\ One program manager estimated that modifying its Web site
to provide such functionality would cost approximately $15,000.
---------------------------------------------------------------------------
Many providers of prepaid accounts rely on processors to provide
online portals that give consumers access to account history
information. Based on discussions with industry participants, the
Bureau understands that program managers typically pay processors a
flat fee per account that may be a function of both the extent of the
account history provided and the number of accounts that are being
serviced.\459\ These entities would generally rely on their processor
to modify periodic statements or electronic transaction histories to
display the required summary totals. However, one program manager
predicted that if such a fee disclosure were a regulatory requirement,
the processor would offer it as part of a standard package of services
at no additional cost.\460\ However, the Bureau requests additional
comment regarding the costs associated with the impact of these
proposed provisions.
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\459\ One program manager that relies on a processor for this
function told the Bureau that fees for data storage are charged on a
per account basis one time at activation. The program manager did
not have an estimate of the cost associated with 18 months of
history, but costs were generally increasing from $0.08 per account
for three months of transaction history to $0.19 per account for one
year of transaction history. This program manager also suggested
that processor prices decrease with scale and that they were
operating at low scale and were consequently paying among the
highest prices.
\460\ One program manager stated that its processor quoted a
one-time cost of $65,000 for providing this functionality on its
processor-hosted Web site (in response to an ad-hoc request). This
potentially represents an upper bound for the true development cost
since this number likely includes a mark-up over the true cost of
providing the service. Actual development costs would be borne
jointly by the processor and the prepaid account providers relying
on the processor for hosting services.
---------------------------------------------------------------------------
In formulating its proposal, the Bureau conducted outreach to
prepaid card issuers and program managers regarding the utilization of
paper account statements by consumers and the cost to financial
institutions of providing such statements. Based on these discussions,
the Bureau's understanding is that consumer requests for written
account histories for GPR cards are infrequent, generally well under
one percent of active cardholder-months, regardless of whether the
consumer is charged a fee for the statement.\461\ The Bureau notes that
some providers currently charge consumers fees if they wish to receive
paper statements or transaction histories, and in some cases, providers
may charge consumers fees that exceed the cost to provide these
statements.\462\
[[Page 77271]]
However, given the infrequent nature of such requests (regardless of
whether a fee is charged for the statement), the Bureau believes that
the revenue impact is likely de minimis. Since a covered financial
institution may require that consumers provide E-Sign consent in order
to receive a prepaid account, and thus would provide traditional
periodic statements electronically instead of following the proposed
periodic statement alternative, any revenue impact could be further
mitigated.
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\461\ One program manager reported that when it eliminated a
$2.50 fee for receiving a paper statement, there was no change in
the frequency with which statements were requested.
\462\ Estimates quoted to the Bureau by providers varied
somewhat but generally were approximately $1 per statement to
respond to ad hoc requests once the costs associated with fielding
the incoming call, postage, and producing the statement were
considered. Providers generally noted that postage is a large driver
of this cost. One provider noted that, given the sensitivity
associated with the information, such statements need to be sent via
first class mail. Another provider that relied on its processor to
provide ad hoc paper statements to consumers pays its processor $2
for each paper statement delivered.
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If the proposed provisions expanded consumer access to account
information, financial institutions could benefit from receiving more
timely notice of unauthorized transfers by consumers and potentially
fewer inquiries by telephone or email. For example, in the event that a
consumer identifies an unauthorized transfer, the financial institution
may be able to place the appropriate holds on the account to prevent
further unauthorized use. Timely notification could also decrease the
costs associated with investigations of alleged errors. In addition, if
timely notification by some consumers were to provide an early warning
of a widespread or systemic set of unauthorized transfer attempts, the
financial institution could benefit from cutting off the avenue for the
unauthorized transfers before the issue becomes more widespread.
However, to the extent that consumers are able to identify unauthorized
transfers and other errors that they would not have identified in the
absence of these disclosures, financial institutions may incur
additional costs.
3. Applying Regulation E's Limited Liability and Error Resolution
Regime
The Bureau is also proposing to extend Regulation E's limited
liability and error resolution regime, including provisional credit
requirements, to all prepaid accounts that have been through the
customer identification and verification processes.\463\ Regulation E
provides that a consumer may be held liable for an unauthorized
electronic fund transfer resulting from the loss or theft of an access
device only if the financial institution has provided certain required
disclosures and other conditions are met. See Sec. 1005.6(a). In
addition to describing conditions under which a consumer may be held
liable for an unauthorized electronic fund transfer, Regulation E
provides limitations on the amount of liability a consumer may assume.
See Sec. 1005.6(b).
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\463\ Payroll card accounts and government benefit accounts are
required to follow Regulation E's limited liability and error
resolution regime regardless of whether the account had been through
the customer identification and verification processes. As described
above, the FMS Rule requires that a prepaid card that receives a
Federal payment comply with these provisions.
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For accounts subject to the Regulation E error resolution
provisions, EFTA places the burden of proof on the financial
institution to show that an alleged unauthorized transfer was, in fact,
authorized. See EFTA section 909(b). More specifically, after receiving
notice that a consumer believes that an electronic fund transfer was
unauthorized, the financial institution must promptly perform an
investigation to determine whether an error occurred. Although the
investigation must generally be completed within 10 business days (20
business days if the EFT occurred within 30 days of the first deposit
to the account), the financial institution may take up to 45 days to
complete the investigation if it provisionally credits the consumer's
account for the amount of the alleged error within 10 business days of
receiving the error notice.\464\ See Sec. 1005.11(c)(2). Upon
completion of the investigation, the financial institution must report
the investigation's results to the consumer within three business days
and correct an error within one business day after determining that an
error occurred. See Sec. 1005.11(c)(1). In cases where the financial
institution ultimately can establish that no error (or a different
error) occurred, the financial institution may reverse the provisional
credit. See Sec. 1005.11(d)(2). If the financial institution cannot
establish that the transfer in question was authorized, the financial
institution must credit the consumer's account (or not reverse the
provisional credit).
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\464\ The financial institution has 90 days (instead of 45) if
the claimed unauthorized EFT was not initiated in a state, resulted
from a point-of-sale debit card transaction, or occurred within 30
days after the first deposit to the account was made. See Sec.
1005.11(c)(3). Provisional credit is not required if the financial
institution requires, but does not receive, written confirmation
within 10 business days of an oral notice by the consumer. See Sec.
1005.11(c)(2)(i)(A).
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Prepaid accounts that are payroll card accounts, government benefit
accounts, and those that receive Federal payments are presently
required to provide Regulation E's limited liability and error
resolution protections. Other types of prepaid accounts, such as GPR
cards that do not receive Federal payments, currently are not required
to provide these protections. One study reviewed 18 GPR card programs,
estimated to represent 90 percent of the number of active GPR cards in
circulation, and found that all of the programs reviewed had adopted
the consumer liability protections outlined by Regulation E as it
applies to payroll cards.\465\ The Bureau's Study of Prepaid Account
Agreements found that roughly 89 percent of all programs, and all of
the largest GPR card programs, offer liability protections to
consumers. The Bureau's Study of Prepaid Account Agreements also found
that over two-thirds of prepaid programs (excluding government benefit
accounts and payroll card accounts) appear to follow Regulation E's
error resolution regime, including provisional credit requirements,
with roughly 80 percent of the largest GPR card programs offering such
protections.
---------------------------------------------------------------------------
\465\ See Ctr. for Fin. Serv. Innovation, Prepaid Industry
Scorecard, Assessing Quality in the Prepaid Industry with CFSI's
Compass Principles, at 12 (Mar. 2014), available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf. Another study asserts that
only two-fifths of 66 GPR card programs reviewed included all of the
protections, but most of this appears to be the lack of disclosure
of mandatory extensions of time frames to submit claims for good
cause. Regulation E, as applied to payroll card programs, does not
require the disclosure of this information, so it is unclear whether
it can be inferred that lack of disclosure of this information in
the terms and conditions implies lack of protection for consumers
See The Pew Charitable Trusts, Consumers Continue to Load Up on
Prepaid Cards: Changes in General Purpose Reloadable Prepaid Cards
Make Them More Like Checking Accounts but Without Important
Protections, at 20 (Feb. 2014), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2014/
PrepaidCardsStillLoadedReportpdf.pdf.
---------------------------------------------------------------------------
To the extent that providers already follow policies consistent
with Regulation E's limited liability and error resolution regime, the
potential impacts on most consumers and covered persons arising from
these proposed provisions are limited. Additionally, prepaid accounts
are typically subject to payment card association network rules that
provide zero-liability protection and chargeback rights in some
circumstances that, unless changed by the networks, would apply
regardless of what Regulation E requires.\466\ In certain cases,
business practices may differ from those guaranteed by the terms and
conditions associated with the prepaid account, and consumers may, in
practice, have additional protections beyond those articulated in the
account agreement.
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\466\ See, e.g., Network Branded Prepaid Card Association,
Cardholder Protections--NBPCA Position, available at http://www.nbpca.org/en/Government-Affairs/Policy-Positions/Cardholder-Protections.aspx (last accessed Nov. 4, 2014).
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[[Page 77272]]
a. Benefits and Costs to Consumers
In general, the potential benefits to consumers arising from the
proposed requirements include reduced risk (relative to a baseline
where some programs do not offer the proposed protections) and reduced
uncertainty regarding responsibilities and liabilities among market
participants. With respect to consumer uncertainty, the Bureau does not
have information that would permit it to quantify the extent to which
some consumers may overestimate the risks associated with using prepaid
accounts (and so may underutilize them) or the extent to which other
consumers may underestimate the risks (and therefore may fail to take
certain precautions if they utilize them). Both groups would benefit
from the reduced uncertainty regarding limited liability and error
resolution protections that would result from the proposed rule.
Consumers using prepaid accounts would further benefit from any
reduction in expected financial losses incurred due to unauthorized
electronic fund transfers or other errors that would result from the
adoption of the proposed rule. Although providers typically offer
limited liability and error resolution protections in connection with
prepaid accounts, the proposed rule would largely eliminate any
remaining losses as well as ensure that errors are investigated
expeditiously and that consumers regain access to funds more quickly.
Thus, this potential benefit to consumers would depend on the
following: (a) The number of consumers with prepaid accounts that do
not follow the limited liability and error resolution regime, including
access to provisional credit, that is described in the proposed rule;
(b) the average magnitude of the financial losses consumers would
experience from unauthorized transfers or other errors absent the
proposed rule; and (c) the probability that these unauthorized
transfers or other errors would occur absent the proposed rule. The
Bureau notes that these benefits could be concentrated among certain
segments of the population were the proposed rule adopted.\467\
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\467\ The proposed rule may also provide additional benefits to
consumers. First, the proposed requirements may reduce the frequency
with which unauthorized transfers or other errors occur by creating
an additional incentive for financial institutions to prevent these
adverse events in the first place. This change could benefit
consumers in non-monetary ways if adverse events nevertheless impose
meaningful costs (including inconvenience). Second, even if no
unauthorized transfer or other error has occurred, the requirement
to offer provisional credit provides consumers with a zero-interest
loan and a timely investigation. Third, as discussed further below,
consumers with prepaid accounts from providers that currently
voluntarily offer the proposed protections receive some benefit from
the proposed requirements since providers currently offering these
protections could change their terms and conditions and stop
providing these protections in the future, absent the proposed rule.
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In order to quantify the potential benefits to consumers from the
proposed requirements, the Bureau would need the quantities in (a),
(b), and (c) or a database of representative market information from
which to construct these quantities. To the Bureau's knowledge, neither
these quantities nor the required database currently exists. However,
industry studies provide some insight into the magnitude and
distribution of these determinants of the potential benefits from these
provisions.
The Bureau first considers the number of consumers with prepaid
accounts that currently do not offer the limited liability and error
resolution protections, including access to provisional credit, which
the proposed rule would require for registered prepaid accounts (and
would continue to require for all payroll card accounts and government
benefit accounts). As described above, surveys suggest that between
eight and 16 percent of consumers have used a general purpose prepaid
card in the past 12 months.\468\ Providers of these products are
probably not required, at present, to offer any of the limited
liability and error resolution protections required by the proposed
rule to consumers, except for those consumers with prepaid accounts
that receive Federal payments (and therefore are covered by the FMS
Rule).
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\468\ See Bd. of Governors of the Fed. Reserve Sys., Consumers
and Mobile Financial Services 2014, at 48 Tbl.C.8a (Mar. 2014),
available at http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201403.pdf. See also 2014 Pew
Survey, at 1. For the purpose of this survey, respondents were
explicitly told not to include gift cards, rebate cards, credit
cards, or phone cards. Five percent of adults reported using a
prepaid card at least once a month. See also Fed. Deposit Ins.
Corp., 2013 FDIC National Survey of Unbanked and Underbanked
Households, at 29-30 (Oct. 2014), available at https://fdic.gov/householdsurvey/2013report.pdf (which reports that 12 percent of
households surveyed had ever used prepaid cards, 7.9 percent have
used a prepaid card in the last 12 months, and 3.9 percent have used
a prepaid card in the last 30 days). See also Mercator Advisory
Grp., Prepaid 2013: U.S. Consumers Buying More Cards For Own Use, at
9 (Oct. 2013) (which reports that seven percent of households
surveyed in 2013 currently use a GPR card). See also id. at 11
(which reports that 14 percent of households surveyed in 2013
purchased a GPR card in the last year). See also GFK, GfK Prepaid
Omnibus Research Findings, at 6 (2014), available at http://
www.nbpca.org/~/media/2519B8BADB1B4388BA5F11C511B3ACAE.ashx. The
definition of prepaid card in this survey appears to have included
some products that would not be covered by the proposed definition
of prepaid account. This survey found that 16 percent of respondents
had used a ``prepaid card'' that was not a gift card in the last 12
months.
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However, financial institutions offering prepaid accounts may (and
often do) voluntarily offer these protections. As discussed above, the
Bureau's Study of Prepaid Account Agreements found that the vast
majority of programs reviewed follow Regulation E's limited liability
protections. In addition, most prepaid programs appear to follow
Regulation E's error resolution regime, including provisional credit
requirements. Excluding payroll card account programs and government
benefit account programs (which are currently required to comply), over
two-thirds of included programs provide error resolution protections,
with provisional credit, consistently with Regulation E. The majority
of the remainder offered some form of error resolution, albeit with
limitations on the conditions under which provisional credit is
offered. Among the programs reviewed that were offered by the largest
GPR providers, the Study of Prepaid Account Agreements found that
roughly 80 percent currently offer error resolution with provisional
credit and all offer limited liability protections. Most remaining
programs offer full error resolution with provisional credit in limited
circumstances.
For the foregoing reasons, the Bureau believes that the number of
consumers with prepaid accounts that do not currently offer the limited
liability and error resolution (including provisional credit)
protections that would be required by the proposed rule is small.\469\
However, the proposed rule would provide consumers who lack these
protections with important benefits. Further, since financial
institutions that voluntarily offer these protections could change
their terms and conditions at any time, the proposed rule would remove
the risk to consumers that these protections would be discontinued.
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\469\ One study which asserts that it covers programs accounting
for 90 percent of active GPR cards in circulation found that all
providers offered liability and error resolution provisions
consistent with those in Regulation E. See Ctr. for Fin. Serv.
Innovation, Prepaid Industry Scorecard, Assessing Quality in the
Prepaid Industry with CFSI's Compass Principles, at 12 (Mar. 2014),
available at http://cfsinnovation.s3.amazonaws.com/CFSI_Prepaid_Industry_Scorecard_2014.pdf.
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The Bureau believes that data describing the average size of the
financial losses consumers currently experience from unauthorized
transfers or other errors that would be covered by the proposed rule or
the frequency with which these events occur are not available. However,
these quantities may be associated with certain
[[Page 77273]]
observable factors. The average size of a transaction is likely
correlated with the loss to the consumer if the consumer is fully
liable for the loss. For example, if a consumer were charged for a
given purchase twice instead of once or were charged for a transaction
that should have been cancelled, the loss would be correlated with the
typical size of those transactions.\470\ Similarly, the balance
typically held in a prepaid account should be correlated with the loss
to the consumer if account access is compromised and the consumer is
fully liable. Finally, the frequency of transactions is likely
correlated with the probability of a loss since transacting with a
prepaid account creates exposure to transaction-related errors.
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\470\ The Bureau recognizes that the risk of loss is likely
different for different types of transactions. For example, one
study using data from a large program manager's GPR card portfolio
shows that fraud rates differ by transaction type. See Kansas City
Fed Study, at 72 tbl.6.1. Thus, the size of a typical transaction
need not be similar to the size of a typical loss on a transaction
(conditional on a loss occurring) since the types of transactions
most susceptible to fraud may be relatively high-value or low-value.
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Although data that would permit the Bureau to quantify the
potential benefits to consumers from the proposed requirements is
limited, recent research can provide some information. One study
analyzed prepaid accounts from one large program manager's GPR card
program and reports whether the prepaid accounts receive periodic
government direct deposits (and therefore are subject to the FMS Rule
if it is a Federal payment), periodic non-government direct deposits,
periodic self-funded loads, occasional reloads, or are never
reloaded.\471\ It found that 46 percent of GPR cards analyzed have
periodic self-funded reloads and cumulative monthly purchases of
$266.\472\ The average lifespan of the cards that have periodic self-
funded reloads was 256 days; the median, however, was only 60
days.\473\ An additional 13 percent of GPR cards analyzed had
occasional reloads, cumulative monthly purchases of $94, an average
life of 489 days, and a median life of 330 days; and 18 percent of GPR
cards analyzed have periodic non-government direct deposit, cumulative
monthly purchases of $660, an average life of 925 days, and a median
life of 570 days. To the extent that these figures are representative
of other prepaid programs, they suggest that approximately three-
quarters of GPR cards may be used for significant purchases and are
likely not within the current scope of Regulation E (or the FMS Rule).
Other researchers have also identified programs that offer prepaid
cards that consumers regularly load with funds, but are not payroll
cards, are active for at least a year and are used for many thousands
of dollars in purchases, loads, and cash withdrawals.\474\
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\471\ See id. at 43 tbl.2.1. It is worth noting that the shares
of load types reported in Table 2.1 of this study add up to 102
percent.
\472\ See id. at 43 tbl.2.1, 59 tbl.4.9.
\473\ See Kansas City Fed Study, at 47 tbl.4.1.
\474\ See 2012 FRB Philadelphia Study, at 67.
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Only limited data describing the frequency of transactions is
available, and while these frequencies should correlate with the
probability of a loss, the Bureau would require additional information
to convert these frequencies into probabilities.\475\ There is,
however, some suggestive information about the risk of loss in data
describing the incidence of fraud with GPR cards offered by one large
program manager. According to one study using this data, approximately
six out of every 10,000 transactions with GPR cards involve fraud, with
a loss of $9.60 for every $10,000 transacted.\476\ To the extent
consumers are the victims of these frauds, and to the extent these
average figures are similar for all types of prepaid accounts, these
numbers provide some information about one particular risk that
consumers encounter in using prepaid cards and one benefit of the
proposed rule.
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\475\ Prepaid cards with periodic self-funded reloads average
5.7 purchases and 6.5 debits per month. Prepaid cards with
occasional reloads average 2.0 purchases and 2.3 debits per month,
and prepaid cards with periodic non-government direct deposits have
18.1 purchases and 21 debits per month, on average. Kansas City Fed
Study, at 50 tbl.4.3, 59 tbl.4.9.
\476\ Kansas City Fed Study, at 72 tbl.4.9.
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The Bureau believes that some consumers with prepaid accounts could
receive important benefits in certain circumstances from the additional
protections that would be required by the proposed rule. Further, the
share of consumers with prepaid accounts who could potentially receive
these benefits may grow over time. One group of industry analysts
predicts that the GPR segment of prepaid accounts will grow on average
11 percent each year from 2012 to 2016, and there appears to be
sustained interest among consumers in using GPR cards as transaction
accounts.\477\ While the voluntary provision of limited liability and
error resolution (including provisional credit) protections might keep
pace with this expansion, it is also possible that growth could lead to
new forms of product differentiation, including variation in consumer
protections.
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\477\ Mercator Advisory Grp., Tenth Annual U.S. Prepaid Cards
Market Forecasts, 2013-2016, at 16 (Oct. 2013). The graph reports
the growth rate in the aggregate amount loaded onto cards. This
growth rate approximates the growth rate in the number of accounts
as long as the amount loaded per account remains fairly stable, but
it would overstate the growth rate in the number of accounts if the
amount loaded per account is increasing.
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To the extent that providers sustain increased losses from the
requirement to extend Regulation E's limited liability and error
resolution regime, including provisional credit requirements, to all
prepaid accounts, the proposed provisions may result in decreased
access to these products if financial institutions are more apt to
close accounts that have repeated or unusual error claims or to limit
who can open accounts in the first place. Additionally, the proposed
requirements may result in decreased access to these accounts for some
consumers if financial institutions implement more rigorous screening
requirements. That is to say, financial institutions would have an
increased incentive to identify customers who would be likely to make
fraudulent error claims and deny them access to these accounts. This
screening may, however, also cause some consumers who would not make
such claims to be denied access to these accounts. Further, to the
extent that the screening technology correctly identifies those
individuals who are likely to make fraudulent error claims, negative
externalities arising from these individuals' fraudulent claims
activities (which benefit these consumers while imposing costs on other
consumers and market participants) are reduced.
b. Benefits and Costs to Covered Persons
In general, the potential costs to covered financial institutions
arising from the proposed requirements would depend on their current
business practices, the number and types of errors that their consumers
claim, and any potential future changes that would affect the number
and types of errors claimed, separate and apart from the proposed rule.
Implementation of the proposed requirements would be simplified by the
fact that financial institutions offering prepaid accounts generally
keep a central record of transactions and track authorized users.
If adopted, the proposed rule would require that those covered
financial institutions that do not currently offer their consumers
limited liability and error resolution protections in accordance with
Regulation E establish procedures for complying with the proposed
requirements or modify existing procedures (depending on their current
practices). Specifically, covered financial institutions that do not
currently offer these protections would
[[Page 77274]]
need to develop the capacity to give the required disclosures to
consumers, receive oral or written error claims, investigate error
claims, provide consumers with investigation results in writing,
respond to any consumer request for copies of the documents that the
institution relied on in making its determination, and correct any
errors discovered under the required timeframes.\478\ If unable to
complete their investigation within the required timeframe (generally
10 business days), covered financial institutions would be compelled to
extend provisional credit and, in the case that a provisionally
credited amount is subsequently reversed, notify the consumer.
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\478\ Covered financial institutions often rely on industry
partners to perform some or all of these functions.
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For those covered financial institutions that do not currently
offer limited liability and error resolution protections in the manner
required by the proposed rule, the extension of these protections would
require the establishment or modification of practices and procedures,
as well as employee training. The establishment or modification of
these practices and procedures would constitute a one-time
implementation cost for those financial institutions that do not
currently offer limited liability and error resolution in the manner
required by Regulation E, and implementing these procedures would
constitute an ongoing cost for covered financial institutions.\479\ The
costs associated with implementing these procedures would be a function
of the number and types of errors that consumers claim which, in turn,
may be affected by the composition of the customer base and how those
customers use their prepaid accounts.
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\479\ It is possible that those institutions that currently
offer Regulation E compliant error resolution on a voluntary basis
would choose to rely on higher-skilled staff or perform additional
reviews to assess compliance if the proposed rule were adopted.
CFPB, Understanding the Effects of Certain Deposit Regulations on
Financial Institutions' Operations, Findings on Relative Costs for
Systems, Personnel, and Processes at Seven Institutions, at 96 (Nov.
2013), available at http://files.consumerfinance.gov/f/201311_cfpb_report_findings-relative-costs.pdf .
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Errors may vary on many dimensions that affect the cost associated
with their investigation.\480\ The Bureau spoke with several program
managers who immediately resolve disputes involving amounts below a
certain de minimis threshold since the amount of funds at issue does
not justify the likely cost associated with conducting the
investigation. Separately, when an investigation is conducted,
resolution times may be affected by the responsiveness of third
parties, including merchants and ATM owners, and may be subject to
timeframes established by networks or other standard setting
bodies.\481\ Additionally, the amount of information provided by the
consumer and the timeliness of the report can affect the duration of
the investigation.\482\ For instance, ATM error claims may result from
an ATM malfunction that causes the consumer to receive the wrong amount
of funds or from unauthorized use. Error claims that occur when an ATM
dispenses the incorrect amount of funds are generally resolved when the
ATM is balanced; however, in cases involving unauthorized ATM use, it
is possible that the investigation may include obtaining and consulting
video evidence.
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\480\ In addition, with the proposed requirement to extend
provisional credit, there could be additional monetary costs
associated with errors that require an extended timeline for
investigation aside from the cost associated with the investigation
itself.
\481\ Payment card network rules may require the merchant
acquirer to reply within a specified timeline in certain instances
and may, in turn, require merchants to follow the acquirer's time
frame for responding to such requests. See Visa Inc., Chargeback
Management Guidelines for Visa Merchants at 24 (2014), available at
http://usa.visa.com/download/merchants/chargeback-management-guidelines-for-visa-merchants.pdf.
\482\ One program manager reported to the Bureau that, in 85
percent of cases, there were 15 or fewer days between the
transaction date and the initial notification date. Another program
manager reported that in 76 percent of cases, there were 10 or fewer
days between the transaction date and the dispute notification date.
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Errors may also vary in terms of their legitimacy. Consumers may
assert that an error occurred when one did not occur either to attempt
to defraud the financial institution or due to a misunderstanding.
Since, under EFTA, the burden is on the financial institution to
establish that the transaction in question was not an error, it is
possible that the financial institution would be liable for errors that
may not be legitimate. Because the financial institution may be held
liable for the error unless it can determine the error is not
legitimate, it is helpful to classify alleged errors based on whether
the financial institution would be ultimately liable for the error as
opposed to whether the error actually occurred. Therefore, for the sake
of discussion, the Bureau classifies disputes as either substantiated
or unsubstantiated.
Substantiated disputes include situations in which the financial
institution credits the consumer's account, either because an error
legitimately occurred or because an error was illegitimately asserted
and the financial institution could not establish that the transaction
was authorized.\483\ In the case of substantiated disputes, covered
financial institutions that do not currently offer limited liability
and error resolution rights consistent with Regulation E would incur
one-time and ongoing costs associated with training personnel, as well
as one-time and ongoing costs associated with information technology
support to track reported disputes, investigations, resolutions, and to
produce reports for internal audit and potential supervisory review.
Ongoing costs associated with conducting investigations would include
compensating personnel tasked with dispute intake, obtaining receipts
and other documentation from merchants or ATM owners, and communicating
investigation findings to the consumer. When the financial institution
can neither establish that the electronic fund transfer was authorized
nor receive a credit from the merchant or ATM owner, covered financial
institutions also would incur costs associated with paying funds to
consumers.\484\
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\483\ Note that in some limited situations, payment card network
rules permit the issuer to perform a merchant chargeback and be
reimbursed. See Visa Inc., Chargeback Management Guidelines for Visa
Merchants, at 43-88 (2014), available at http://usa.visa.com/download/merchants/chargeback-management-guidelines-for-visa-merchants.pdf.
\484\ The Bureau spoke with several program managers regarding
error resolution, and the rate at which error claims were paid out
varied greatly. One program manager paid out roughly half of the
claims made (including those credited by the merchant), with under
30 percent paid by the program manager.
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Additionally, the proposed rule would require covered financial
institutions to extend provisional credit to consumers asserting an
error claim when the length of the investigation exceeds 10 business
days. In cases where the claim is ultimately substantiated, offering
provisional credit represents little additional cost to the financial
institution over and above any costs associated with error resolution
because the amount credited is ultimately due to the consumer following
the investigation. Since the financial institution would be required to
pay the claim under the error resolution provision, the only cost to
the financial institution associated with expediting the availability
of funds is the opportunity cost of those funds as applied to another
investment for the applicable period. The Bureau expects that this cost
is generally negligible.
In contrast, unsubstantiated disputes occur when the financial
institution is able to establish that a transfer was authorized and,
therefore, that institution is not ultimately required to
[[Page 77275]]
return funds to the consumer. In the case of unsubstantiated disputes,
covered financial institutions that do not currently offer error
resolution rights would incur costs associated with conducting
investigations, and covered financial institutions that do not
currently offer provisional credit would incur costs associated with
crediting accounts when the length of the investigation exceeds 10
business days. Although the financial institution extending provisional
credit could subsequently reverse the credit were it able to establish
that the transfer was authorized, the consumer may draw down the funds
in the interim or intentionally close the account and abscond with the
funds.\485\ This could result in the financial institution losing all
or some of the provisional credit formerly extended. For provisional
credit that could be reclaimed, the financial institution would incur a
small opportunity cost of those funds as applied to another investment
for the period spanning when the funds were granted and when they could
be reclaimed. The Bureau expects that this cost generally would be
negligible.
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\485\ One program manager told the Bureau that it was unable to
reclaim provisional credit extended in roughly 65 percent of the
cases in which a merchant could provide proof that the electronic
fund transfer was authorized.
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To a certain extent, financial institutions would be able to limit
losses associated with error claims. In discussions with prepaid
account providers, the Bureau learned that financial institutions often
close (or could close) accounts that have repeated error claims,
thereby limiting their exposure to potential losses, and may add
individuals to a watch list. Additionally, industry partners sometimes
share information regarding individuals who appear to be instigating
fraudulent activity, and one payment card network has plans to create a
centralized database to better detect fraud on prepaid cards.\486\ The
presence or absence of direct deposit, customer tenure, and card use
patterns--including the type of merchant and the existence of prior
activity at the merchant or ATM--can all be used to predict the
likelihood that fraud occurs. If adopted, the imposition of the
proposed liability provisions may encourage covered financial
institutions to invest in more robust systems to prevent errors to the
extent that they do not currently abide by such provisions.
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\486\ All U.S. Visa prepaid issuing financial institutions and
their program managers will be required to report into Visa's
Prepaid Clearinghouse Service by June 2015. See Press Release, Visa
Inc., Visa Prepaid Clearinghouse Service Creates Centralized
Database to Better Detect and Prevent Fraud Schemes on Prepaid Cards
(Feb. 27, 2014), available at http://investor.visa.com/news/news-details/2014/Visa-Enhances-Industry-Fraud-Detection-on-Prepaid-Cards/default.aspx. While the Bureau supports industry efforts to
reduce fraud, the Bureau cautions that any entities that maintain or
furnish watch lists, screening programs, or other similar services
should consider whether and how the Fair Credit Reporting Act or
other statutes may apply to its activities.
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Although most programs reviewed as part of the Bureau's Study of
Prepaid Account Agreements provided error resolution with provisional
credit, there was some heterogeneity across programs with respect to
the error resolution and provisional credit policies. To the extent
that concern regarding the absence of a comprehensive Federal
regulatory regime governing error resolution is currently limiting
consumer adoption of prepaid accounts, providing for Regulation E
limited liability and error resolution coverage, with provisional
credit, for prepaid accounts--which include person-to-person transfer
products--would help to facilitate wider adoption of these accounts and
could benefit providers. Additionally, since the costs associated with
complying with the proposed rule would vary across covered financial
institutions, providers that are already offering these protections may
benefit if competitors need to raise prices or degrade quality to cover
the costs associated with extending these protections to consumers.
However, those providers that are presently offering these protections
on a voluntary basis would lose the option of ceasing to offer such
protections to consumers in the future were the proposed rule adopted.
4. Requiring the Posting and Provision of Prepaid Account Agreements
The proposed rule would require issuers to submit agreements
governing prepaid accounts that they offer to the Bureau on a quarterly
basis for posting on a publicly-available Web site established and
maintained by the Bureau. See generally proposed Sec. 1005.19.\487\
Issuers would not be required to submit agreements to the Bureau if
they qualify for one of two exceptions; these include (1) a de minimis
exception for those issuers that had fewer than 3,000 open prepaid
accounts as of the last day of the calendar quarter \488\ and (2) a
product testing exception for those prepaid products offered to a
limited group of consumers and otherwise meeting the requirements
specified in proposed Sec. 1005.19(b)(5). Issuers would also be
required to post and maintain on their publicly available Web site any
prepaid account agreements that the issuer must submit to the Bureau.
See proposed Sec. 1005.19(c).
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\487\ Only those agreements offered to the public as of the last
business day of the preceding calendar quarter that have not been
previously submitted as well as those agreements that have been
amended would be required to be submitted. See proposed Sec.
1005.19 (b)(1)(ii) and (iii). In addition, the issuer must notify
the Bureau of any prepaid account agreement previously submitted
that the issuer is withdrawing. See proposed Sec. 1005.19
(b)(1)(iv).
\488\ See proposed Sec. 1005.19(b)(4).
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In addition to these requirements, proposed Sec. 1009.19(d) would
require that issuers provide access to individual account agreements to
any consumer holding an open prepaid account, unless such agreements
would be required to be submitted to the Bureau pursuant to proposed
Sec. 1005.19(b) or posted on the issuer's Web site pursuant to
proposed Sec. 1005.19(c). An issuer could fulfill this requirement by
posting and maintaining the consumer's agreement on its Web site or by
promptly providing a copy of the agreement in response to a consumer's
request.\489\
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\489\ If the issuer chooses to comply with this requirement by
providing a copy of the agreement in response to a consumer request,
the issuer would be required to provide the consumer with the
ability to request a copy of the agreement by calling a readily
available telephone line. The issuer would be required to send to
the consumer or otherwise make the copy of the consumer's agreement
available no later than five business days after the issuer receives
the consumer's request.
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a. Benefits and Costs to Consumers
The proposed provisions would generally increase the amount of
information available to consumers regarding prepaid accounts both when
shopping for a prepaid account and after acquisition of the prepaid
account. Having internet access to account agreements (both on the
Bureau's Web site and on the issuer's Web site) would enable suitably
motivated consumers to more easily compare the fees, as well as other
terms and conditions, of various prepaid account products. By placing
this information on the Bureau's Web site, side-by-side comparisons may
be facilitated, and third parties would have more readily available
access to this information should they want to develop shopping tools
for consumer use. By decreasing consumer search costs and generally
making available products and their terms more transparent, consumers
seeking a prepaid account should benefit from additional competition in
the market for such accounts. Increased competition could result in
lower prices, higher quality products, or both.
For those consumers who have already acquired their prepaid
account, access to the account's terms and conditions, regardless of
whether the
[[Page 77276]]
account is currently offered to the public, could be helpful should a
question arise regarding the terms of the account. Given that some
accounts are held for a period of years, it is possible that consumers
might misplace the initial disclosures provided with their prepaid
accounts. Having the terms and conditions available post-acquisition
could be helpful if a consumer wishes to assert an error or if other
questions arise regarding the account.
Actual and potential consumer holders of prepaid accounts could
also benefit from the requirement that issuers provide prepaid account
agreements to the Bureau on a quarterly basis. In addition, knowing
that agreements must be provided to the Bureau and posted on a Web site
could serve as an impetus for prepaid account issuers to ensure that
they are complying with all applicable regulatory requirements.
b. Benefits and Costs to Covered Persons
As a result of the proposed provisions, issuers of prepaid accounts
that do not qualify for the de minimis exception would be required to
review information for all products, except those qualifying for the
product testing exception, on a quarterly basis to determine whether
they need to provide any agreements to the Bureau or to notify the
Bureau that they are withdrawing an agreement. In addition, issuers
would need to ensure that any submission includes the elements
described in proposed Sec. 1005.19(b)(1). The Bureau expects that the
burden imposed by this reporting requirement would be minimal, as
issuers are required to maintain current account agreements for other
purposes.
In addition, those issuers of prepaid accounts that are required to
submit prepaid account agreements to the Bureau would be required to
post prepaid account agreements on their publicly available Web site.
Many issuers of prepaid accounts currently make account agreements
available on their Web sites, but the proposed rule would require that
issuers that do not qualify for the de minimis exception post and
maintain any agreements currently offered to the public that do not
qualify for the product testing exception. Therefore, issuers would
need to ensure that their Web sites include current agreements. The
Bureau anticipates that some issuers would need to restructure their
Web sites so that required agreements are publicly available. In
addition, issuers of payroll card accounts, the terms of which are
often individually negotiated with employers, would need to post the
agreements for each account that does not qualify for the product
testing exception, if the issuer does not qualify for the de minimis
exception.
The proposed rule would also require that all issuers provide
consumers with access to the agreement for their prepaid account,
unless such agreements would be required to be submitted to the Bureau
pursuant to proposed Sec. 1005.19(b) or posted on the issuer's Web
site pursuant to proposed Sec. 1005.19(c). For those issuers choosing
to comply with this requirement by posting the relevant agreements
online, the issuer would need to ensure that its Web site includes all
agreements for open accounts and to ensure that the online agreements
posted online were complete and up-to-date should product offerings
evolve. For those issuers choosing to comply with the requirement by
mailing a paper copy of the agreement or otherwise making a copy of the
agreement available in response to a consumer request, the cost
associated with this provision would depend on the frequency with which
consumers make requests for such information. Costs associated with
fulfilling such requests could consist of customer service agent time
spent receiving and responding to a request made via telephone, as well
as postage or other materials should the issuer respond to the inquiry
with a paper copy of the agreement. Those issuers choosing to comply in
this manner would also potentially incur implementation costs
associated with training customer service agents to handle such
requests and/or changing existing IVR menu options.
5. Requirements Relating to Overdraft Services and Other Credit
Features Offered in Connection With Prepaid Accounts
The proposed rule would address overdraft services and other credit
features offered in connection with prepaid accounts. Under the
proposed revisions to Regulation Z, the Bureau anticipates that, to the
extent overdraft services or other credit features are offered in
connection with prepaid accounts, those features would meet the
definition of ``open-end credit.'' \490\ In addition, under the
proposal, a prepaid card or account number that accesses such an
overdraft service or other credit feature generally would be a ``credit
card'' under Regulation Z, and the overdraft services and other credit
features (``credit card plans'') described above would therefore be
governed by subparts A, B, D, and G of the regulation.\491\ In
addition, the proposal includes modifications to Regulation E that
would be applicable to prepaid accounts that may offer such credit
features in connection with the account. As a result of these changes,
financial institutions and card issuers would be newly subject to a
number of requirements, as summarized below.
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\490\ This would generally apply if the creditor establishes a
program where the creditor reasonably contemplates repeated
extensions of credit for which the creditor assesses fees. See
section-by-section analysis of Sec. 1026.2(a)(20) (the Regulation Z
definition of open-end credit) above for more detail.
\491\ Transactions that are authorized on a prepaid account when
the consumer has insufficient or unavailable funds at the time of
authorization as well as transactions that are paid from a prepaid
account when the consumer has insufficient or unavailable funds at
the time of payment would generally be considered to be credit under
Regulation Z. However, under the proposal, Regulation Z would not
apply to overdraft services or other credit features accessed by a
prepaid card that are not subject to any finance charge or fee and
not payable by written agreement in more than four installments.
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Of particular importance to assessing potential impacts, the
proposed rule includes provisions that would restrict the type and
structure of fees that may be imposed by issuers in connection with
credit card plans or by financial institutions in connection with
prepaid accounts which are associated with such plans.\492\ For
example, Regulation Z generally requires card issuers to limit fees (as
opposed to periodic interest rates) to 25 percent of the credit limit
during the first year after the consumer opens the credit card account.
See Sec. 1026.52(a). This limit would apply to any per-transaction
fees. In addition, the proposed rule would modify Regulation E to
specify that on a prepaid account product where a credit card plan may
be offered at any point to the consumer in connection with the prepaid
account, a financial institution that establishes or holds such a
prepaid account may not apply terms and conditions (to transactions
solely accessing the prepaid account)--including fee schedules--that
differ depending on whether the consumer elects to link such a credit
card plan to the prepaid account. See proposed Sec. 1005.18(g)(2).
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\492\ Section 1026.52(a) specifies that, other than periodic
interest rates, most fees that are charged during the first year
after the credit account is opened would be subject to a cap of 25
percent of the initial credit line; Sec. 1026.52(b) would place
limits on penalty fees, including a prohibition on fees for
transactions that the card issuer declines to authorize; and Sec.
1026.56 would prohibit over-the-limit fees unless the consumer opts-
in (and the consumer cannot be charged more than one fee per month
if opted-in).
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In addition to these restrictions on fee structure, certain
provisions of Regulation E and Regulation Z, which would be newly
applicable to such accounts and plans, would restrict how
[[Page 77277]]
a balance incurred on a credit card plan linked to a prepaid account
may be repaid. In Regulation E, the proposal would apply the EFTA
compulsory use provision to prepaid accounts with credit features.
Accordingly, creditors would not be able to require the repayment of
credit extended under a credit feature by electronic means on a
preauthorized, recurring basis.\493\ In particular, creditors would be
required to offer prepaid account consumers a means to repay their
outstanding credit balances other than by automatic repayment from the
prepaid account (such as by means of a transfer of funds from the asset
account to the credit account that the consumer initiates on the
prepaid account's online banking Web site). See proposed Sec.
1005.10(e)(1). Further, within Regulation Z, the proposal would require
that under an authorized repayment plan where issuers may periodically
deduct payments from the consumer's deposit account, issuers may not
deduct a payment more frequently than once per calendar month and must
obtain the consumer's written, signed agreement to automatic repayment.
See proposed Sec. 1026.12(d). In addition, the proposal would require
that periodic statements for the credit card account be mailed or
delivered 21 days prior to the payment due date.\494\ This ensures a
time gap between when a debt is incurred and when it is due to be
repaid for all credit card accounts, including those not subject to an
authorized repayment plan.
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\493\ However, a creditor may offer an incentive to consumers to
agree to repayment by recurring, preauthorized EFTs.
\494\ See section-by-section analysis of Sec. Sec.
1026.5(b)(2)(ii) and 1026.7(b)(11) above.
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Pursuant to Regulation Z, persons offering such credit card plans
would additionally be required to comply with a number of requirements
governing solicitation, disclosure, liability, and error resolution.
Further, in providing a credit card plan, a card issuer would be
required by Sec. 1026.51(a) to establish and maintain reasonable
written policies and procedures to consider the consumer's ability to
make the required minimum periodic payments under the terms of the
plan, based on the consumer's income or assets and the consumer's
current obligations. In addition, proposed Sec. 1005.18(g) and
proposed Sec. 1026.12(h) would prohibit an issuer from opening a
credit card account in connection with a prepaid account, or providing
a solicitation or an application for a credit card plan in connection
with a prepaid account, any time prior to 30 days after the consumer
has registered the prepaid account. Consumers with prepaid accounts who
wish to add a credit card plan would be required to make an explicit
request or application for the credit line. See Sec. 1026.12(a)(1).
Were an issuer or other person to offer an overdraft service or other
credit feature in connection with a prepaid account, credit card
applications and solicitations would need to comply with the
requirements specified in Sec. 1026.60. Credit card issuers would also
be required to provide the account-opening disclosures required by
Sec. 1026.6(b) before the first transaction is made under the credit
plan.
Regulation Z also includes a number of disclosure requirements that
would apply to credit card plans offered in connection with prepaid
accounts in addition to the solicitation or application disclosures and
the account-opening disclosures discussed above. Persons offering a
credit card plan in connection with a prepaid account would be required
by Sec. 1026.7 to provide a periodic statement for each billing cycle
in which the account has a debit or credit balance of more than $1 or a
finance charge has been imposed. The Regulation Z periodic statement
requirements would be in addition to those of Regulation E for the
prepaid account.\495\ Issuers generally would also be obligated to
provide the disclosures described in Sec. 1026.9 when changing terms
on the credit card account.
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\495\ In addition, as mentioned above, Sec. 1026.5(b)(2)
specifies that periodic statements would need to be mailed or
delivered at least 21 days prior to the payment due date on the
statement.
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Transactions performed using a credit line established in
connection with an overdraft service or other credit feature may be
subject to additional liability and error resolution protections that
extend beyond those protections afforded to transactions involving
funds drawn from a prepaid account. For those transactions subject to
Regulation Z's liability limitations, existing Sec. 1026.12(b)
restricts consumer liability to $50. By contrast, Regulation E's
liability limitations permit a financial institution to hold a consumer
liable for up to $500 if the consumer does not report the loss in a
timely manner.\496\ See existing Sec. 1005.6(b). Regulation Z's
definition of error is more expansive than Regulation E's definition of
error and includes an extension of credit for property or services not
accepted by the consumer or the consumer's designee or not delivered as
agreed. See existing Sec. 1026.13(a). Since Regulation Z and
Regulation E specify different liability limitations and error
resolution procedures, the proposed rule specifies which limitations
and procedures would apply to transactions involving a prepaid account
that has a credit feature. For those transactions that exclusively draw
on a credit feature, the proposed rule specifies that Regulation Z's
liability limitations and error resolution procedures would apply.\497\
For those transactions that both debit a prepaid account and draw on a
credit feature, Regulation E's liability limitations and error
resolution rules, as well as part of Regulation Z's error resolution
rules, described in existing Sec. 1026.13(d) and (g), would apply to
the transaction. For those transactions that solely debit a prepaid
account, the Regulation E liability limits and error resolution rules
apply.
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\496\ Irrespective of whether a transaction is subject to the
liability limitations of Regulation Z or those of Regulation E,
payment card networks' ``zero liability'' programs may further limit
consumers' liability for unauthorized transactions.
\497\ For those transactions that occur using a prepaid account
that does not draw at all on the line of credit, Regulation E's
liability limitations and error resolution procedures would apply.
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In the Bureau's consideration of benefits, costs, and impacts
arising from these proposed provisions, the baseline for discussion of
these provisions is the current market for prepaid accounts.\498\ In
addition, in order to more fully inform the proposed rulemaking, the
Bureau also discusses, further below, the potential future impacts
relative to how the market might evolve absent the proposed rule.
Consistent with the discussion of other provisions in this proposal,
this baseline incorporates both the existing regulatory structure as
well as other economic attributes of the relevant market, most notably
the current set of incumbent firms and potential entrants and the
underlying preferences of consumers.
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\498\ The Bureau has discretion in future rulemakings to choose
the relevant provisions to discuss and the most appropriate baseline
for that particular rulemaking.
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The Bureau's understanding is that, at present, a number of
providers offer prepaid accounts to consumers. The vast majority of
these providers do not offer any credit features in connection with
prepaid accounts, and thus would be largely unaffected by the various
credit provisions described above.\499\ However, one of the largest
providers of prepaid accounts offers an overdraft service in connection
with its prepaid
[[Page 77278]]
accounts (which include GPR cards and payroll card accounts). Although
the number of consumers who are eligible for overdraft services in
connection with such accounts is not negligible, those regularly using
overdraft services represent only a small minority of consumers with
prepaid accounts, even for that one provider. A reasonable estimate of
the current market indicates that less than one percent of prepaid
account holders regularly use overdraft or other credit features.\500\
For that reason, the benefits, costs, and impacts arising from these
prepaid credit provisions would have only a limited effect on prepaid
account consumers generally, as described more fully below.
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\499\ As noted above, some account agreements reserve the right
to impose negative balance fees, which may fall under the proposed
credit provisions. However, the Bureau believes that most providers
would withdraw such requirements, which would have minimal impact
since these charges do not appear to be imposed frequently at any
rate.
\500\ Although NetSpend is a significant provider of prepaid
accounts, a recent news article reported that only six percent of
NetSpend's customers regularly use overdraft. See Suzanne Kapner,
Prepaid Plastic is Creeping Into Credit, Wall Street J. (Sept. 5,
2012), http://online.wsj.com/news/articles/SB10000872396390443686004577633472358255602. In addition, a larger
percentage of accounts would potentially be eligible for their
overdraft program. A recent financial filing suggested that NetSpend
had 3.4 million active cards as of June 30, 2014 and 47 percent of
those active cards had direct deposit. See Total Sys. Serv. Inc.,
Form 10-Q, at 28, available at http://www.sec.gov/Archives/edgar/data/721683/000119312514300851/d737574d10q.htm (for the quarterly
period ended June 30, 2014). One projection estimates that there are
22.4 million active prepaid debit and payroll cards in the United
States as of 2014. See Aite Grp. LLC, The Contenders: Prepaid Debit
and Payroll Cards Reach Ubiquity, at 13 (Nov. 2012).
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For the small number of prepaid providers that currently offer
overdraft services, the Bureau understands that providers of these
accounts condition eligibility on receipt of a regularly-occurring
direct deposit over a predetermined amount. Additionally, consumers
must affirmatively choose (opt-in to) the service. Therefore, given the
current market baseline, consumers may find themselves in one of four
categories depending on whether they access (or desire to access) the
overdraft service or not and whether they meet the eligibility
requirements or not.\501\
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\501\ That is, consumers may either (1) meet the eligibility
requirements and use the service; (2) not meet the eligibility
requirements and desire to use the service; (3) meet the eligibility
requirements and not desire to use the service; or (4) not meet the
eligibility requirements and not desire to use the service.
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In order to more fully inform the proposed rulemaking, the Bureau
also discusses potential future impacts relative to how the market
might evolve absent the proposed rule. As discussed above, the Bureau's
understanding is that few providers currently offer overdraft services
in connection with prepaid accounts. The Bureau understands that other
firms might be considering doing so in the future, and the proposed
provisions could affect the projected future profitability of business
plans.
a. Benefits and Costs to Consumers
As detailed further below, the Bureau believes that the proposed
requirements concerning disclosures, account opening, liability
limitations, and error resolution procedures would provide a number of
consumer benefits, mirroring the same benefits that Congress conferred
on credit card account holders under Federal law. In some cases the
proposals would heighten consumer protections relative to current
industry practices, and in other cases the proposal would codify
requirements that are largely consistent with current practices but not
required as a matter of Federal law. In light of the modest credit
limits currently offered in the market, the Bureau believes that these
provisions would have minimal impacts on which consumers have access to
the credit features, the amount of credit offered, or the payment
terms.
The proposed rule includes certain other provisions that, in
contrast, would likely incentivize those providers offering a credit
feature to change how their prepaid accounts are priced and the terms
on which these credit features are offered. These changes could
potentially affect which consumers have access to these credit features
or which consumers desire these features. In addition, the proposed
rule would provide consumers who use such credit features with the
recognized benefits associated with the disclosure provisions,
liability limitations, billing error rights, and other protections that
are provided to consumer holders of credit card accounts.
The benefits, costs, and impacts arising from the proposed
provisions would likely vary with the intensity of the consumer's use
of overdraft services. Consumers who use prepaid accounts may do so to
fulfill different needs. Some consumers who rely on prepaid accounts
choose such products to help them control spending or as a budgeting
aid.\502\ Given this use, some of these consumers likely would not
choose to use overdraft or other credit features in connection with
their prepaid accounts. Other consumers may desire access to overdraft
or other credit features but do not meet current eligibility
requirements for such services.
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\502\ Several studies as well as the Bureau's focus group
research indicate that some consumers view spending control or
budgeting as a benefit offered by prepaid accounts. See, e.g., 2014
Pew Survey; The Pew Charitable Trusts, Key Focus Group Findings on
Prepaid Debit Cards (Apr. 2012), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
FSP1201420Pew20DebitCardsR10A4512pdf.pdf; see also ICF Report, at 5.
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As discussed below, the impacts would be most directly felt by
those consumers who presently use prepaid accounts offered by the
limited number of providers that offer overdraft services. Among those
consumers who use the overdraft services from these providers, some may
knowingly rely on overdraft services only occasionally. Other consumers
may knowingly overdraft frequently, choosing to rely on these services
as a source of credit with regularity. Once an overdraft service is
activated, consumers may also unintentionally overdraw their prepaid
accounts if they are not closely monitoring their account
balances.\503\ Some providers currently mitigate this possibility by
requiring users to sign up for text or email alerts or by other
mechanisms, although they are not required to do so by Federal law.
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\503\ Prepaid accounts generally do not require a minimum
balance, so balances held in these accounts can be quite low.
According to one large program manager, the average account balance
is less than $100 for prepaid accounts they offer. See Examining
Issues in the Prepaid Card Market: Hearing before the Subcomm. On
Fin. Inst. And Consumer Prot., S. Comm. On Banking, Housing and
Urban Affairs, 112th Cong. 2 (2012) (Remarks of Daniel R. Henry,
Chief Executive Officer, NetSpend Holdings, Inc.), available at
http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=2bf6b634-fbf6-40d8-a859-3af59300f9d0&Witness_ID=b5fbcae3-a234-4d44-b13a-4f990befafe7 (stating that ``They typically put a few hundred
dollars into their card accounts every couple of weeks, and maintain
an average balance of less the $100 [SIC].''). As a result,
consumers may have insufficient funds for even relatively modest
purchases.
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The Bureau expects that the proposed restrictions on certain fees
that may be charged to credit card accounts offered in connection with
prepaid accounts would incentivize those providers offering credit
features to change their pricing structures. Most notably, other than
periodic interest rates, most fees charged during the first year after
the credit card account is opened would be subject to the cap of 25
percent of the initial credit line, which already applies to credit
cards pursuant to the CARD Act. Similar to the fee structure typically
used for checking account overdraft products, those consumers currently
utilizing an overdraft service in connection with a prepaid account are
generally charged a per transaction fee that does not vary with the
size of the overdraft.\504\ These fees can be high relative to the
amount of credit
[[Page 77279]]
extended. As a consequence, for all but infrequent users of the credit
card account, the proposed restriction on fees charged in the first
year would be a binding constraint that would translate directly into
lower transaction fees to consumers during the first year of their
credit card account (conditional on consumers continuing to be eligible
for and using a credit feature).\505\
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\504\ Although providers may limit the number of fees incurred
within a specified time period or opt not to charge for overdrafts
that cause an account to go negative by a de minimis amount, this
choice is voluntary.
\505\ For instance, consumers may pay $15 per overdrawn
transaction to access a credit line of $100. See, Comment Letter,
Nat'l Consumer Law Ctr. et al., NCLC Prepaid Card Comments Final,
Consumer Financial Protection Bureau docket CFPB-2012-009, at 8
(resubmitted July 23, 2012), available at http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0019-0218.
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Since this constraint would restrict the level of certain fees, it
is possible that providers that offer credit features would respond by
raising fees that are not subject to this constraint.\506\ These
providers could either charge an application fee for access to a credit
card account (that would be assessed to the prepaid account prior to
the opening of the credit card account), or they could raise other fees
charged in connection with the prepaid account that do not relate to
the credit feature. Since, under the proposal, a provider offering
credit features would be required to offer the same terms and
conditions for transactions accessing the prepaid account to all
consumers regardless of whether they accept a credit feature, raising
fees charged in connection with the prepaid account could result in a
decrease in the quantity of prepaid accounts demanded from these
providers, while raising an application fee could lead to a decrease in
the number of consumers demanding credit.\507\ Therefore, fewer
consumers may choose to access prepaid accounts from these providers or
credit features offered in connection with these providers' accounts if
the proposal is finalized and affected providers impose or increase
fees not subject to the restriction, as discussed above. It is also
possible that providers may choose not to offer credit features in
connection with prepaid accounts, or to offer them on different terms
or to a more select set of consumers, relative to the present.
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\506\ Under the assumption that prepaid account providers are
profit-maximizing firms, the fact that providers that offer credit
features in connection with their prepaid accounts are not offering
such a fee structure at present suggests that these providers'
profits would decrease with this alternative fee structure.
\507\ This could result from moving from an add-on pricing model
to a model where the cost for access to the credit feature is borne
upfront (and is therefore more salient for consumers). At present,
the Bureau does not believe that consumers are presently charged a
fee for opting in to overdraft services or other credit features
offered in connection with prepaid accounts.
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Those consumers who use overdraft services infrequently may pay
higher prices or use less credit as a consequence of these provisions.
For instance, if providers respond to the pricing restrictions by
adopting a high application fee for the credit feature, those consumers
who anticipate occasional use may not be willing to pay a salient and
transparent up-front fee (unless they highly value the possibility of
having this credit readily available), and therefore would cease to
access the credit feature. This would be a benefit to some consumers,
as it may prevent these consumers from inadvertently accessing a credit
feature (after having opted-in) and incurring the attendant fees or may
cause consumers to avoid accessing this particular form of credit. If
an unanticipated need for funds were to arise, however, some of these
consumers may need to rely on other potentially higher cost or less
convenient credit sources since they would be unlikely to have the
funds to pay an application fee at that point.\508\ A consumer's need
to manage a relationship with an additional financial services provider
could also result in some efficiency losses and could render
understanding the provider's terms and conditions more taxing and
tracking account balances and due dates more costly.
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\508\ The extent to which this is true would depend on the size
of the fee charged to establish access to the credit feature and the
size of the credit line available.
The fees charged presently for overdraft services in connection
with prepaid accounts, which generally range from $15 to $25 per
transaction, are generally lower than chose charged for overdrafts
from a checking account. According to data obtained from one
research firm, the Bureau found that the median overdraft fee among
the 33 institutions that the source monitors was $34 in 2012 and the
median overdraft fee across nearly 800 smaller banks and credit
unions was $30 in 2012. See CFPB Overdraft White Paper, at 52.
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As noted, some consumers who utilize overdraft services with great
frequency may do so due to poor account management skills.\509\ Other
consumers who frequently utilize these services may accurately
anticipate their use of these services but still prefer to use an
overdraft service or other credit feature associated with a prepaid
account because they perceive it to be their best available option for
receiving short-term credit. Regardless of the consumer's motivation
for frequent use of the credit line, both types of consumers would
likely pay lower fees in connection with these services (to the extent
that they are able to access such services). As described above, the
current fee structure offered by providers would not be permitted for
all but occasional users of credit features in their first year of
their account (assuming that the size of the credit lines offered
remain unchanged).\510\ Although providers may impose an application
fee or raise other fees associated with the account, such upfront fees
are salient to consumers, and a one-time fee of the magnitude of the
total fees incurred by a consumer who overdrafts his account frequently
is unlikely to be paid by many consumers. For current frequent users
adopting credit card plans under the revised pricing structure, the
marginal cost associated with accessing the credit card account would
likely be lower, and these consumers would have increased incentive to
utilize the credit card account once obtained relative to the present.
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\509\ According to one study, 41 percent of prepaid users who
have ever had a checking account have either closed a checking
account themselves or have had an account closed by an institution
because of overdraft or bounced check fees. See 2014 Pew Survey, at
8.
\510\ As discussed above, once a consumer has opted-in to a
credit feature offered in association with a prepaid account, these
consumers generally pay a per-transaction fee per overdraft that
does not vary with the size of the overdraft. At present, there is
generally no fee associated with opting-in to a credit feature
offered in association with a prepaid account.
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These changes to the pricing structure could also affect consumers
not currently using overdraft. Along with changes in pricing structure,
it is likely that the firms offering overdraft services or considering
doing so would also alter their own eligibility criteria and that some
consumers who are currently eligible or would otherwise become eligible
may lose or not obtain eligibility. The change in pricing structure
could also change the opt-in trade-offs among consumers who currently
have not opted-in.
Restricting how a balance incurred on a credit feature offered in
connection with a prepaid account may be repaid would provide potential
benefits to consumers. Specifically, the prohibition on offsets that
would apply to the credit card account would permit consumers
additional discretion over how funds deposited into prepaid accounts
are used to pay off debts incurred on an associated credit card
account. Consumers would have access to the funds in their prepaid
account before a creditor, and they could decide whether those funds
should be used to pay off any outstanding debts or for another use.
Card issuers only would be permitted to sweep funds periodically from
the prepaid asset account with the consumer's written authorization
(and
[[Page 77280]]
no more often than once per calendar month), meaning that consumers
could benefit from additional control of their funds during the
intervening period. In addition, the proposal would require that
periodic statements for the credit card account be mailed or delivered
21 days prior to the payment due date. Practically speaking, this
requirement would ensure a gap between when debts are incurred and when
they are due to be repaid and would enable consumers to have access to
funds that may ultimately be used to pay off a balance in the credit
card account during the intervening period.
Decreasing the likelihood that debt payments are automatic would
increase the onus on the consumer to remember to pay a debt and to
budget for the debt's payment. This could result in some consumers
unintentionally not paying the credit card debt and incurring more or
higher fees (if, for example, providers offering credit features were
to begin to assess late fees), or experiencing other adverse effects
such as an inability to access additional credit, although consumers
could conversely choose to spend the funds in their prepaid account on
something they deem to be a higher priority than the credit card debt.
At the same time, the proposed rule's restrictions on the ability
of a card issuer to apply the funds in the prepaid asset account to
debts outstanding in the credit card account would increase the risk
borne by providers and (at least in the absence of countervailing
measures) would generally make offering credit features in connection
with prepaid accounts less profitable for providers. Consumers could
incur some of these costs since, in order to compensate for that risk,
those card issuers offering a credit feature could offer less credit to
consumers, charge higher fees for credit extended, or both relative to
the present.\511\
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\511\ The proposed rule would introduce restrictions on the
magnitude of certain fees charged in connection with these credit
card accounts.
---------------------------------------------------------------------------
The proposed rule would require that persons offering credit card
plans in connection with prepaid accounts adhere to certain timing
restrictions governing when a credit feature may be opened or offered
to a consumer which provides some transparency to the consumer and
assurance that the consumer has the opportunity to become informed and
consider options when applying for credit.\512\ Additionally, credit
card issuers would be required to establish and maintain reasonable
written policies and procedures to consider the consumer's ability to
make required minimum payments when deciding to offer a credit card
account to a consumer. These requirements are not expected to impact
consumer access to credit generally beyond the impacts of other
provisions already mentioned. Creditors can assess consumers' ability
to pay at low cost, and as long as credit limits remain low it would be
relatively easy for consumers who have or are eligible to have prepaid
overdraft to be deemed able to make the minimum periodic payment on the
small amount of credit currently extended in connection with these
services.
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\512\ A consumer would be prevented from completing the
application process for a credit card account offered in connection
with a prepaid account until after 30 days had elapsed following the
completion of the customer verification processes for the associated
prepaid account.
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The impact of the requirement to consider the consumer's ability to
make required minimum payments when deciding to offer a credit card
account to a consumer would also be attenuated should the proposed
rule's restrictions on the ability of a card issuer to apply the funds
in the prepaid asset account to debts outstanding in the credit card
account be adopted. As noted, these latter provisions would increase
the risk borne by providers and, as a result, they should have an
increased incentive to verify the consumer's ability to pay, even
absent this new provision.
Under the proposed rule, overdraft services and other credit
features offered in connection with prepaid accounts would be
characterized as credit, and fees assessed for accessing that credit
would be characterized as finance charges. The proposed rule would
impose distinct requirements for disclosure, liability limitations, and
error resolution procedures for the prepaid account and the credit
feature. These protections would directly benefit consumer holders of
prepaid accounts that have a credit feature.
Periodic statements and other disclosures required by the proposed
rule would enable consumers to monitor their credit card accounts.
Consumers would potentially receive separate periodic statements for
their credit card account and their prepaid account (or for the prepaid
account, an electronic history of transactions), though providers are
permitted to combine the two periodic statements if the requirements of
Regulation E and Regulation Z are met in the combined statement. The
periodic statement requirement would ensure that consumers receive
important information regarding transactions performed and fees
incurred using their credit card account. Providers may not disclose
all information that would be required regarding the credit card
account absent this requirement. As noted above, transactions solely
accessing the credit card account would be subject to different,
stronger limited liability and error resolution protections than those
transactions that do not access the credit card account.\513\
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\513\ Those transactions that access both the prepaid asset
account and the credit card account generally would be subject to
Regulation E's liability limitations and error resolution
procedures, as well as part of Regulation Z's error resolution
rules, described in existing Sec. 1026.13(d) and (g).
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As an alternative, the Bureau also considered, among other options,
extending the Regulation E overdraft opt-in regime (Sec. 1005.17) to
prepaid accounts. To the extent that current providers of overdraft
services offered in connection with prepaid accounts appear to be
providing overdraft services consistently with these requirements, any
impacts on consumers would be limited using the current market as the
baseline for analysis, though this approach would forgo all of the
benefits to consumers of applying the requirements of Regulation Z to
prepaid accounts, as discussed above.
b. Benefits and Costs to Covered Persons
This discussion covers many of the same issues already addressed in
the preceding section. As noted above, the proposed rule would
introduce additional requirements for the relatively few providers that
currently offer overdraft services or other credit features to
consumers in connection with prepaid accounts. By restricting the terms
on which credit features offered in connection with prepaid accounts
may be offered to consumers, this may threaten the economic viability
of certain business practices or business plans among the small number
of providers currently offering credit features in connection with a
prepaid account. In addition, the proposed rule would require that
covered persons provide certain disclosures and adhere to certain
processes in connection with the solicitation of consumers and the
subsequent extension of credit, which would likely require
restructuring existing programs to meet the requirements of the
proposed rule. In addition, these provisions would affect any plans by
other providers to offer credit card accounts in connection with
prepaid accounts in the future, by precluding such providers from
offering credit features in a manner that is inconsistent with the
proposal's
[[Page 77281]]
requirements but potentially more profitable for the providers. For
example, the proposed rule's provision preventing providers from
offering terms and conditions that vary according to whether the
consumer accepts a credit card account would preclude providers from
offering certain pricing structures. These additional restraints are
neutral at best and would most likely reduce potential profits relative
to options that providers could choose to implement in the absence of
such a requirement.
The proposed rule would limit the types of fees that may be charged
during the first year after the credit card account is opened. Among
other things, most fees (other than periodic interest rates) charged
during the first year after the credit card account is opened would be
subject to a cap of 25 percent of the initial credit line. As discussed
above, this could result in some consumers paying less in fees covered
by the cap, but any resulting reduction in revenue could be offset to
some extent if providers of overdraft services and other credit
features offered in connection with prepaid accounts were to decide to
restructure their fee schedules away from the current pricing structure
that relies on transaction-based fees. Providers may adopt a pricing
structure in which a fee is collected during the application process
and prior to the establishment of the credit card account (and thus is
not subject to the cap) or one which raises other fees that are
unrelated to the credit feature, though the latter approach would
potentially put these providers at a competitive disadvantage with
respect to those consumers who do not desire overdraft services or
other credit features in connection with their prepaid accounts.
With the restructured fee schedules, the small group of providers
that currently offer overdraft would likely earn less revenue from
offering overdraft services or other credit features in connection with
prepaid accounts than they do at present.\514\ For current product
offerings, a fee cap at 25 percent of credit line would be binding for
any consumer who incurs more than one overdraft fee per year.\515\ When
faced with the option of paying for overdraft services prior to an
overdraft being incurred, consumers may be less willing to incur
upfront charges for the service. Since these providers would be
required to offer the same terms and conditions to all consumers
regardless of whether they accept a credit feature in connection with
their account, raising fees aside from an application fee could
decrease the overall quantity of prepaid accounts demanded by consumers
from these providers.
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\514\ At present, providers have the option of offering
consumers a fee schedule that would be compliant with the proposed
rule's provisions. These additional restrictions could only
constrain providers relative to the present.
\515\ As described above, current transaction-based charges for
overdrafts (in excess of those for de minimis amounts) range from
$15 to $25. Assuming a credit line of $100, this means that at most
one overdraft fee (or $25) could be collected in the first year with
the new restriction. It is possible that providers would be willing
to extend larger credit lines, but they would incur more risk in
doing so and would likely need to develop more robust underwriting
procedures to ensure a sufficient return and compliance with
Regulation Z's ability to pay requirement.
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In addition to these costs, the proposed rule would restrict a
creditor's ability to access a consumer's prepaid account to pay debts
incurred on the associated credit card as well as the requirement that
funds may be swept from the prepaid account only periodically to repay
a debt, which would increase the risk of default.\516\ In addition, the
proposed rule's requirement that periodic statements for the credit
card account be mailed 21 days before the due date for any payment
ensures a delay between when a debt is incurred and when it must be
repaid. To manage this additional risk, those card issuers with a
credit offering, or those considering doing so, may choose to offer
less credit to consumers, to charge higher fees for credit extended, or
both.
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\516\ Sweeps additionally require the consumer's consent. Firms
would lose access to funds for a longer period of time due to delays
in repayment time and would incur a small opportunity cost
associated with losing access to these funds. Some of these costs
may be passed on to consumers in the form of higher prices.
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To comply with the proposed rule, the relatively few providers that
currently offer overdraft services and other credit features in
connection with prepaid accounts would incur implementation costs in
transitioning and educating consumers about any product changes, in
developing new disclosures, and in designing and implementing new
procedures. Card issuers wishing to offer credit card accounts in
connection with prepaid accounts would need to ensure that
solicitations and application materials conform to the requirements
specified in Regulation Z. This may require the production of a new
disclosure or the modification of an existing disclosure. Card issuers
additionally would be required to ensure that any opening of a credit
card account in connection with a prepaid account, or any solicitation
or application to open such a credit card account provided to a
consumer holder of a prepaid account, does not violate the timing
requirements specified in the proposed rule.
Card issuers would be required to establish and maintain reasonable
written policies and procedures to consider the consumer's ability to
make required minimum payments when deciding to offer a credit card
account to a consumer in connection with a prepaid account. As noted
above, these provisions should involve minimal additional burden beyond
the impacts of other provisions already mentioned as creditors can
assess consumers' ability to pay at low cost and virtually all
consumers who have or are eligible to have prepaid overdraft today
likely could be deemed to have the ability to make the minimum periodic
payment on the small amount of credit currently extended on prepaid
overdraft.
Once a credit card account is established in connection with a
prepaid account, card issuers would incur some ongoing costs as a
result of the proposed provisions. These include costs associated with
the proposed rule's periodic statement requirement as well as the
requirement that additional disclosures be provided in certain
circumstances, such as when certain account terms are changed.
Specifically, card issuers would incur costs associated with designing
these disclosures and ensuring that such disclosures comply with
Regulation Z. In certain instances, card issuers would incur costs
associated with printing and distributing these disclosures, though
they could mitigate some of these costs by obtaining E-Sign consent
from the consumer. Finally, to the extent that Regulation Z's liability
limitations and error resolution provisions apply, card issuers may
incur additional costs due to more restrictive limitations on consumer
liability and an expanded definition of error as compared to Regulation
E.
The new requirements, described above, could impact consumer
choice. As a consequence, the small number of providers that currently
offer credit in connection with prepaid accounts may experience changes
in the size or composition of the customer base seeking to associate a
credit feature with a prepaid account and could experience revenue
impacts arising from these changes. An individual provider may
experience such revenue impacts due to adjustments in aggregate market
demand or due to substitution by consumers to or from other providers
within the market. For instance, if the proposed provisions result in
providers that offer overdraft charging higher fees for their prepaid
accounts more generally or ceasing to offer overdraft
[[Page 77282]]
services (and therefore offering a product that may be regarded as less
desirable by consumers who value the overdraft feature), prepaid
account providers that do not offer overdraft services presently could
benefit as consumers substitute away from those providers that offer
overdraft services.
In terms of alternatives, the Bureau also considered extending the
Regulation E opt-in regime to prepaid accounts. To the extent that
current providers of overdraft services offered in connection with
prepaid accounts appear to be providing overdraft services consistently
with these requirements, the benefits, costs, and impacts arising from
such an approach would be limited, though again it would not bring
these products into compliance with the requirements of Regulation Z,
as discussed above.
F. Potential Specific Impacts of the Proposed Rule
1. Depository Institutions and Credit Unions With $10 Billion or Less
in Total Assets, as Described in Section 1026
With respect to most provisions, the Bureau does not expect that
the proposed rule would have a unique impact on depository institutions
and credit unions with $10 billion or less in total assets as described
in Section 1026. One exception pertains to the provisions addressing
overdraft services or other credit features offered in connection with
prepaid accounts. Issuers with consolidated assets of less than $10
billion are exempt from Regulation II's restrictions on debit
interchange fees. See Sec. 235.5(a). Additionally, interchange
restrictions do not apply to electronic debit transactions made using
debit cards provided pursuant to certain government-administered
payment programs and certain reloadable, general-use prepaid cards not
marketed or labeled as a gift card or gift certificate. See Sec.
235.5(b) and Sec. 235.5(c). However, these exemptions do not apply if
a fee or charge for an overdraft, including a shortage of funds or a
transaction processed for an amount exceeding the account balance, may
be charged to a cardholder (unless the fee or charge is imposed for
transferring funds from another asset account to cover a shortfall in
the account accessed by the card). See Sec. 235.5(d)(1).\517\ Since
institutions with greater than $10 billion in assets that offer
overdraft services in connection with a prepaid account would be
subject to Regulation II's restrictions on debit interchange fees, they
presently have less incentive to offer such credit features than
similarly-situated depository institutions with less than $10 billion
in assets. Therefore, the new consumer protections applicable to credit
card accounts articulated in this proposal are more likely to impact
those institutions with less than $10 billion in assets.
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\517\ See 76 FR 43394 (July 20, 2011).
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The proposed requirements would be applied uniformly across covered
financial institutions without regard for their asset size.\518\ Among
those depository institutions and credit unions that the Bureau
believes would be potentially affected by the proposed rule, roughly 72
percent have $10 billion or less in total assets.\519\ The impact of
the proposed rule on depository institutions and credit unions would
depend on a number of factors, including whether the institution offers
prepaid accounts, the relative contribution of prepaid accounts to firm
revenues, and the cost of complying with the rule--which would depend
on the present prepaid account offerings as well as regulations to
which those accounts are currently subject.
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\518\ The de minimis exception for providing prepaid account
agreements to the Bureau and posting them to a Web site is a
function of the number of open accounts, not the asset size of the
issuer.
\519\ Figures were obtained using asset sizes reported as of
December 2013. Depository institutions and credit unions offering
white label programs and programs through certain agent
relationships were not included in arriving at this statistic.
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The Bureau solicits comment regarding the proposed rule's impact on
those depository institutions and credit unions with $10 billion or
less in total assets and how those impacts may be distinct from those
experienced by institutions of larger size.
2. Impact of the Proposed Provisions on Consumers in Rural Areas
Consumers in rural areas may experience benefits from the proposed
rule that are different in certain respects from the benefits
experienced by consumers in general. Consumers in rural areas may
differ from other consumers in terms of their reliance on prepaid
accounts as well as their ability to use online disclosures for
shopping by accessing the internet.\520\ The Bureau is not aware of
evidence which states whether consumers in rural areas are more likely
to acquire prepaid accounts, to use prepaid accounts that do not
presently follow Regulation E's limited liability and error resolution
regime, or to use prepaid accounts that offer overdraft services or
other credit features.\521\ The Bureau requests comment regarding these
issues.
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\520\ Broadband availability may be more limited in rural areas.
See Nat'l Telecomm. and Info. Admin., U.S. Broadband Availability:
June 2010--June 2012 at 10, (May 2013), available at http://www.ntia.doc.gov/files/ntia/publications/usbb_avail_report_05102013.pdf.
\521\ One study finds that consumers living in rural areas were
more likely to deposit tax refunds onto a prepaid card than
consumers in urban areas. See Caroline Ratcliff, et al., Urban
Inst., Prepaid Cards at Tax Time and Beyond, at 26, (Mar. 2014),
available at http://www.urban.org/UploadedPDF/413082-prepaid-cards-at-tax-time-report.pdf. Another study reports prepaid debit card use
by metropolitan status. There was not a robust relationship between
whether a household was in a metropolitan area and prepaid debit
card use. See Fed. Deposit Ins. Corp., 2013 FDIC National Survey of
Unbanked and Underbanked Households: Appendices, at 41 (Oct. 2014)
available at https://fdic.gov/householdsurvey/2013appendix.pdf.
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G. Request for Information
The Bureau will further consider the benefits, costs, and impacts
of the proposed provisions before finalizing the proposal. As noted
above, there are a number of areas where additional information would
allow the Bureau to better estimate the benefits, costs, and impacts of
this proposal and more fully inform the rulemaking. The Bureau asks
interested parties to provide comment on various aspects of the
proposed rule, as detailed in the section-by-section analysis
discussion above. The Bureau specifically requests precise cost or
operational data that would permit it to better evaluate the potential
implementation costs and ongoing operational costs imposed by the
proposed provisions as well as any alternatives under consideration.
The most significant of these include information or data addressing:
The benefits and costs associated with the proposed
provisions addressing overdraft services and other credit features
offered in connection with prepaid accounts;
The impact of the proposed provisions addressing overdraft
services and other credit features on consumer access to credit;
The benefits and costs associated with extending
provisional credit to all covered accounts;
The impact of extending provisional credit to all covered
accounts on consumer access to prepaid accounts generally;
The benefits and costs associated with implementing the
disclosure requirements articulated in the proposal;
The Study of Prepaid Account Agreements and the extent to
which its findings are or are not representative of the market for
prepaid accounts as a whole; and
The impact of the proposed rule on consumers in rural
areas and
[[Page 77283]]
specifically how these impacts may differ from those experienced by
other consumers.
Regulatory Flexibility Analysis
The Regulatory Flexibility Act (RFA) generally requires an agency
to conduct an initial regulatory flexibility analysis (IRFA) and a
final regulatory flexibility analysis (FRFA) of any rule subject to
notice-and-comment rulemaking requirements, unless the agency certifies
that the rule would not have a significant economic impact on a
substantial number of small entities.\522\ The Bureau also is subject
to certain additional procedures under the RFA involving the convening
of a panel to consult with small business representatives prior to
proposing a rule for which an IRFA is required.\523\
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\522\ 5 U.S.C. 601 et seq.
\523\ 5 U.S.C. 609.
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An IRFA is not required for this proposed rule because the
proposal, if adopted, would not have a significant economic impact on a
substantial number of small entities.\524\
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\524\ 5 U.S.C. 605(b).
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A. Overview of Analysis
The analysis below evaluates the potential economic impact of the
proposed rule on small entities as defined by the RFA.\525\ It
establishes that the only small entities that are likely to potentially
experience a significant economic impact from the proposed rule are
those that currently (1) do not provide limited liability protections
to consumers, (2) do not provide error resolution protections to
consumers, or (3) offer overdraft services or other credit features in
connection with prepaid accounts.
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\525\ For purposes of assessing the impacts of the proposed rule
on small entities, ``small entities'' is defined in the RFA to
include small businesses, small not-for-profit organizations, and
small government jurisdictions. 5 U.S.C. 601(6). A ``small
business'' is determined by application of the Small Business
Administration regulations and reference to the North American
Industry Classification System (``NAICS'') classifications and size
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small
governmental jurisdiction'' is the government of a city, county,
town, township, village, school district, or special district with a
population of less than 50,000. 5 U.S.C. 601(5). Aside from credit
unions, the Bureau does not believe that any small not-for-profit
organizations would be regulated by the proposed rule for RFA
purposes. In its Study of Prepaid Account Agreements, the Bureau did
not locate any small governmental jurisdictions that would be
regulated by the proposed rule for RFA purposes.
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Based on the Bureau's understanding of the market, which was
arrived at through the Study of Prepaid Account Agreements, outreach to
interested stakeholders and other regulatory agencies, and review of
existing industry studies, the Bureau has determined that very few
small banks or credit unions are likely to be directly affected by the
proposed rule.\526\ As discussed in detail below, these small banks and
credit unions each represent a fraction of one percent of all small
banks and credit unions. In addition, the Bureau identified 96 small or
potentially small non-bank entities that would be likely to be directly
affected by the proposed rule. The Bureau has also determined that
almost all such entities presently provide limited liability and error
resolution protections to consumers, and very few presently offer
overdraft services or other credit features in connection with prepaid
accounts.\527\ As discussed in detail below, the number of small or
potentially small non-bank entities that would experience a significant
economic impact is a very small percentage of all relevant small non-
bank entities. Therefore, the Bureau concludes that the proposed rule,
if adopted, would not have a significant economic impact on a
substantial number of small entities.
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\526\ Excluding those banks and credit unions relying on white-
label solutions and agent-based relationships, the Bureau identified
19 directly affected small (or potentially small) banks and six
directly affected small credit unions. For the purpose of this
discussion, the Bureau considers an entity to be directly affected
if it presently offers prepaid accounts to consumers.
\527\ As discussed below, some of these non-bank entities
provide limited liability protections that are less comprehensive
than those required by Regulation E. In addition, some of these non-
bank entities that otherwise provide error resolution protections
consistently with Regulation E offer provisional credit with
limitations or do not mention provisional credit in their account
terms and conditions.
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B. Number and Classes of Directly Affected Entities
The provisions of the proposed rule would apply to any account that
meets the criteria described in proposed Sec. 1005.2(b)(3). Providers
of these products include issuers and program managers. Prepaid account
issuers are typically banks and credit unions, and program managers are
typically non-banks. Some issuers act as program manager for some or
all of their programs as well. While the proposed rule does not
directly regulate prepaid program managers for RFA purposes, the Bureau
exercises its discretion to take a comprehensive approach and to
consider both prepaid account issuers and program managers in
determining whether the proposed rule would have a significant economic
impact on a substantial number of small entities.\528\
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\528\ As discussed below, in determining whether the economic
impact is significant, the Bureau compares the total revenues earned
by both the program manager and the issuer to the total costs
incurred by these entities. In some cases, the same entity performs
both the issuing and program management functions, and in other
cases, different entities perform these functions.
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Since the Bureau is not aware of a comprehensive list of entities
that actively issue or manage prepaid accounts or a comprehensive list
of prepaid account programs, the Bureau compiled its own list of known
prepaid account issuers and program managers based on its review of
publicly available information and outreach to industry.\529\ The
number of banks, credit unions, and non-bank entities identified by the
Bureau as likely to be directly affected by the proposed rule are
reflected in Table 1. Table 1 also gives context to those counts by
also reporting the total number of entities, as well as the total
number of small entities, within each relevant NAICS code.\530\ For the
purpose of this analysis, the Bureau considers directly affected non-
bank entities to fall within NAICS code 522320 (Financial transactions
processing, reserve, and clearinghouse activities).\531\ The Small
Business Administration (SBA) considers those banks and credit unions
with less than $550 million in assets and those non-bank entities
within NAICS code 522320 with average annual receipts less than $38.5
million to be small.\532\
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\529\ This compilation includes all issuers and program managers
whose prepaid account agreements were included in the Study of
Prepaid Account Agreements. The Bureau also included other issuers
and program managers identified even though account agreements for
their prepaid programs were not located by the Bureau in its review
of publicly available information and outreach to industry.
\530\ The North American Industry Classification System
(``NAICS'') is the standard used by the SBA to match small business
size standards to industries.
\531\ According to the Census Bureau, NAICS code 522320
corresponds to ``establishments primarily engaged in providing one
or more of the following: (1) Financial transaction processing
(except central bank); (2) reserve and liquidity services (except
central bank); and/or (3) check or other financial instrument
clearinghouse services (except central bank).'' One illustrative
example given by the Census Bureau is ``electronic funds [sic]
transfer services.'' See U.S. Census Bureau, 2007 NAICS Definition,
available at http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=522320&search=2007.
NAICS code 522320 was relied upon in FinCEN's Prepaid Access
Rule. See 76 FR 45403, 45414 (July 29, 2011).
\532\ See U.S. Small Bus. Admin., Table of Small Business Size
Standards Matched to North American Industry Classification System
Codes (July 2014), available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
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Table 1 also reports the number of directly affected entities the
Bureau
[[Page 77284]]
believes to be small or ``potentially small.'' \533\ In order to
determine which directly affected entities are small or potentially
small, the Bureau compiled asset size information for directly affected
banks and credit unions and receipt estimates for directly affected
non-bank entities.\534\ For banks and credit unions, assets were
determined by averaging the assets reported in the institution's four
quarterly Call Report entries for 2012, and institutions reporting an
average of under $550 million in assets across the four quarters were
considered to be small. Receipt estimates for non-bank entities were
obtained by reviewing publicly available information regarding firm
revenues, and those entities estimated to have under $38.5 million in
average annual receipts were considered to be small.\535\
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\533\ Since many of the directly affected non-bank entities are
privately-held firms, information regarding their size was difficult
to obtain, so a reliable size classification could not be made in
many instances. In addition, there were multiple banks with the same
name in one instance, and a size classification could not be
obtained. Therefore, out of an abundance of caution, the Bureau's
analysis considers any entity for which a size classification could
not be made to be ``potentially small.''
\534\ The Bureau uses revenue estimates to proxy for receipts.
\535\ When available, the Bureau used publicly available revenue
estimates for 2012. If revenue estimates from 2012 were not
available, available information from recent years was used.
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As shown in Table 1, the Bureau identified 19 directly affected
small or potentially small banks and six directly affected small credit
unions. These entities constitute less than one percent of small banks
and credit unions.\536\ This fraction does not comprise a substantial
number of small entities under the RFA.
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\536\ Although the Bureau includes the common issuer of record
and program manager for prepaid accounts offered through white-label
programs, agent-mediated relationships, or other similar
arrangements in the entity counts reported in Table 1, the Bureau
does not include individual agent or member banks and credit unions
in these counts (to the extent that they could be identified as such
by the Bureau). In the traditional white label model, banks and
credit unions rely upon another institution to issue prepaid
accounts, which may be branded with the bank or credit union's name.
There are a handful of such programs through which banks and credit
unions, including some that are small, offer prepaid accounts
(typically as a convenience to their customers or members). In
addition, the Bureau is aware of a program in which the participant
bank is the prepaid account issuer, but the bank relies on an
external party for BIN sponsorship. While inclusion of these
entities would result in a larger number of directly affected small
banks and credit unions than is reported in Table 1, the Bureau
believes that few of these entities, if any, would experience a
significant economic impact from the proposed rule, as the Bureau's
understanding is that prepaid accounts offered through these
arrangements generally provide limited liability and error
resolution protections, and overdraft services or other credit
features are not offered in connection with these prepaid accounts.
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Directly affected non-bank entities are primarily prepaid program
managers, although there are issuers of P2P payment products and other
non-Visa or MasterCard branded prepaid products as well. The Bureau has
identified a total of 127 non-bank entities likely to be directly
affected by the proposed rule. Among those, a size classification could
be made for 44 entities, with approximately 30 percent of those
entities for which a classification could be made (13 entities)
classified as small. It is likely, however, that many of the 83 non-
bank entities for which a classification could not be made are small as
well and are thus referred to herein as ``potentially small.'' Applying
the conservative assumption that all of the non-bank entities that
could not be classified are small, the number of directly affected
small or potentially small non-bank entities is a modest percentage of
all small entities within the relevant NAICS code (four percent).\537\
This does not comprise a substantial number of small entities under the
Regulatory Flexibility Act.
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\537\ In its Regulatory Flexibility Act analysis, FinCEN
narrowed its count to those entities that are within NAICS code
522320 and perform either electronic fund transfers or electronic
financial payment services, relying on commercial database
information (Dun and Bradstreet, D&B Duns Market Identifiers Plus
(US)). FinCEN estimated that there were 700 entities that shared
this classification. Using the SBA threshold of $7 million in
average annual receipts that was in effect at the time, FinCEN
estimated that 93 percent, or 651, of these entities were small.
Using the denominator relied upon by FinCEN in its rulemaking,
referenced above, directly affected small or potentially small non-
bank entities comprise, at most, 15 percent of all small entities
within that narrower set of entities. At present, the SBA considers
entities within NAICS code 522320 with under $38.5 million in
average annual receipts to be small. Therefore, assuming the total
number of entities meeting the criterion for this narrower
classification is unchanged, at least 651 entities would be
considered to be small since the threshold has increased.
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[[Page 77285]]
[GRAPHIC] [TIFF OMITTED] TP23DE14.000
C. Impacts of Proposed Provisions on Directly Affected Entities
To determine whether the economic impact of the proposed rule is
likely to be significant for directly affected small entities, the
Bureau compares the costs potentially incurred by these entities as a
result of the proposed provisions to an estimate of revenues
earned.\538\ Less than one percent of small banks and credit unions and
roughly four percent of small or potentially small non-bank entities--a
non-substantial number under the RFA--could be directly affected by the
proposed rule. Nonetheless, to better inform the proposed rulemaking,
the Bureau analyzes the impact of the proposed rule on directly
affected small or potentially small non-bank entities. The Bureau uses
the current market as the baseline.
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\538\ When the functions required to offer prepaid accounts are
not performed by one, vertically-integrated firm, the exact division
of revenue streams between the issuer and the program manager for a
given prepaid program varies. In this analysis, the Bureau does not
take a position as to whether the prepaid account issuer or the
program manager assumes the burdens imposed by the proposed
provisions. However, it is worth noting that a program manager that
assumes fraud risk likely has the ability to control fees charged to
consumers, to control screening procedures, or to take other actions
to mitigate fraud losses.
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The major provisions of the proposed rule are summarized below.
Although several proposed provisions potentially impose burden, the
Bureau believes that most burdens imposed by the proposed rule are
minimal given current business practices. One relevant exception
pertains to potential burdens related to the proposed extension of
Regulation E's limited liability and error resolution regime, including
provisional credit requirements, to all prepaid accounts (except those
that have not completed the customer identification and verification
process).\539\ A second exception is the potential burdens associated
with the proposed provisions relating to overdraft services and other
credit features offered in connection with prepaid accounts.
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\539\ These protections are currently required for payroll card
accounts and government benefit accounts. The proposed exception for
unverified accounts would not extend to any payroll card accounts or
government benefit accounts.
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The proposed rule includes additional provisions that are not
discussed further since their impact on small entities is expected to
be limited. Although the provisions related to overdraft services and
other credit features potentially impose a significant economic impact
on those entities offer such services in connection with prepaid
accounts, the Bureau's understanding is that, at most, one small or
potentially small non-bank entity would be directly affected.\540\ In
[[Page 77286]]
addition, as described below, the proposed rule includes several pre-
acquisition disclosure requirements. Industry participants have told
the Bureau that the costs associated with the implementation of these
requirements for accounts distributed via the retail channel are
meaningful. However, the Bureau's outreach to industry has indicated
that small non-bank entities are not likely to distribute prepaid
accounts via retail channels (or would distribute a limited part of
their portfolios via this channel). Therefore, the Bureau does not
further discuss such costs.
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\540\ As discussed above, the Study of Prepaid Account
Agreements suggested that some prepaid programs, according to their
terms and conditions, reserve the right to impose a fee for a
negative balance on a prepaid account. (These programs' agreements
typically state that the cardholder is not permitted to spend beyond
the balance in the prepaid account, but if circumstances were to
occur that cause the balance to go negative, a fee will or may be
imposed. Some agreements state that repeated attempts to spend
beyond the card balance will or may result in the prepaid account
being closed). Roughly 10 percent of reviewed agreements noted such
a charge. Based on its outreach, the Bureau has doubts as to
whether, in practice, these charges are assessed and requests
comment regarding current industry practice.
In addition, one source suggests that overdraft fees may be
collected by a handful of government benefit card programs, but the
Bureau is not certain whether such fees are currently being assessed
as it understands several such programs have ceased charging
overdraft fees, and the aggregate value of these fees is relatively
modest. See Bd. of Governors of the Fed. Reserve Sys., Report to
Congress on Government-Administered, General Use Prepaid Cards, at
9, (July 2014), available at http://www.federalreserve.gov/publications/files/2014_Prepaid_Cards_Final.pdf (showing $2 million
in overdraft fees in 2013).
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1. Limited Liability and Error Resolution Requirements
The proposed rule would require financial institutions offering
prepaid accounts to comply with Regulation E's limited liability and
error resolution regime, including the requirement that provisional
credit be extended to consumers in certain circumstances. For accounts
subject to Regulation E's limited liability and error resolution
provisions, EFTA places the burden of proof on the financial
institution to show that an alleged unauthorized transfer was, in fact,
authorized.\541\ Specifically, after receiving notice that a consumer
believes that an electronic fund transfer was unauthorized, the
financial institution must promptly perform an investigation to
determine whether an error occurred. Regulation E further states that,
if the financial institution is unable to complete the investigation
within 10 business days, the institution may take up to 45 days to
complete the investigation if it provisionally re-credits the
consumer's account for the amount of the alleged error.\542\ When the
financial institution ultimately can establish that the transfer in
question was not an error, it can reverse the provisional credit.
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\541\ EFTA section 909(b).
\542\ The timeline is somewhat different for certain types of
transactions and for new accounts.
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Under Regulation E, a consumer may be held liable for an
unauthorized electronic fund transfer resulting from the loss or theft
of an access device only if the financial institution has provided
certain required disclosures and other conditions are met. If the
consumer provides timely notice to the financial institution within two
business days of learning of the loss or theft of the access device,
the consumer's liability is the lesser of $50 or the amount of any
unauthorized transfers made before giving notice. If timely notice is
not given, the consumer's liability is the lesser of $500 or the sum of
(1) the lesser of $50 or the amount of unauthorized transfers occurring
within two business days of learning of the loss or theft and (2) the
amount of unauthorized transfers that occur after two business days but
before notice is given to the financial institution.\543\
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\543\ Section 1005.6(b)(3) provides, in part, that a consumer
must report an unauthorized transfer that appears on a periodic
statement within 60 days of the financial institution's transmittal
of the statement in order to avoid liability for subsequent
transfers.
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Regulation E currently applies to certain types of prepaid
accounts--namely payroll card accounts and certain accounts used for
distribution of government benefits.\544\ Further, some prepaid
accounts currently provide limited liability and error resolution
protections even if not directly required to do so by Regulation E.
First, the FMS Rule extends Regulation E's payroll card account
protections to prepaid accounts that receive Federal payments. Second,
many providers choose to provide these protections to consumers by
contract as part of their customer service offerings. Finally, payment
card network association rules require that issuers limit consumers'
liability and remedy certain errors related to transactions that occur
over their networks and may require that provisional credit be extended
within a shorter timeframe for losses from unauthorized card use.\545\
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\544\ Covered government benefit programs currently do not need
to provide periodic statements or online access to account
information as long as balance information is made available to
benefits recipients via telephone and electronic terminals and a
written account history of at least 60 days is given upon request
(the proposed rule would change this). Needs-tested EBT programs
established or administered under State or local law are exempt from
Regulation E via Sec. 1005.15(a). The proposed rule would not
impact such programs.
\545\ See, e.g., Visa Inc., Zero Liability, http://usa.visa.com/personal/security/zero-liability.jsp#anchor_2 (last visited Nov. 3,
2014). See, e.g., MasterCard Inc., Zero Liability Protection http://www.mastercard.us/zero-liability.html (last visited Nov. 3, 2014).
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Limited Liability Protections. The Bureau's market research,
including the Study of Prepaid Account Agreements, strongly suggested
that the vast majority of directly affected small or potentially small
non-bank entities presently extend some form of limited liability
protections to consumers. Table 2 summarizes the Bureau's findings from
the Study of Prepaid Account Agreements regarding current industry
practice with respect to limited liability for the 96 directly affected
small or potentially small non-bank entities identified by the Bureau.
Of these 96 entities, the Bureau believes that 15 entities only offer
payroll card accounts and therefore are required to provide Regulation
E's limited liability protections to consumers at present. Of the
remaining 81 entities, the Bureau was able to locate an agreement for
at least one prepaid account program for all but 14 entities.
In the Study of Prepaid Account Agreements, the Bureau examined
prepaid account agreements' language addressing limitations on
consumers' liability for unauthorized transfers to assess whether each
program provides by contract the limited liability protections that
Regulation E provides with respect to the accounts to which it applies.
For each entity for which at least one prepaid account agreement was
available and that offers at least one program that is not a payroll
card account program,\546\ the Bureau classified the entity's limited
liability protections as belonging to one of three categories: (1)
Liability limitations consistent with Regulation E or better for all
reviewed agreements; (2) some liability limitations but less than what
is provided for under Regulation E; and (3) no limited liability
protections.\547\
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\546\ The Bureau did not identify any directly affected small or
potentially small non-bank entities that exclusively offer
government benefit programs.
\547\ The Bureau reviewed available prepaid account agreements,
as described in the Study of Prepaid Account Agreements. In some
instances, a small or potentially small non-bank entity is involved
with multiple programs that appear to provide different levels of
limited liability protection. When a non-bank entity offered
multiple programs which fall into different categories of coverage,
the entity was classified according to the program providing the
lowest level of protection for consumers. This approach was also
taken with respect to the error resolution policy classifications
discussed below.
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The Bureau determined that approximately 75 percent (16 percent +
59 percent) of all small or potentially small non-bank entities likely
to be directly affected by the proposed rule currently provide
protections consistent with Regulation E or better, as reflected in
Table 2. The Bureau found that four percent of small or potentially
small non-bank entities provide some liability limitations but less
than what is required for accounts under Regulation E for at least one
of their programs, and six percent of small or potentially small
entities had at least one agreement that does not appear to provide any
limited liability protections.\548\ The Bureau was unable to locate any
account agreements for the remaining 15 percent of small or potentially
small non-bank entities.
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\548\ One of these six entities also does not provide error
resolution protections (see below).
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The final column of Table 2 reports the relative frequency of
limited liability protections for the set of directly affected small or
potentially small non-
[[Page 77287]]
bank entities for which the Bureau was able to locate an agreement for
at least one program (or which only offer payroll card accounts).
Within this narrower group of entities, 88 percent (18 percent + 70
percent) presently provide liability limitations consistent with
Regulation E or better for all reviewed programs, and thus, would not
need to change their practices if the proposed rule were adopted. An
additional five percent provide some liability limitations for at least
one of their programs and thus would incur only a portion of the total
burden arising from the extension of limited liability
protections.\549\
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\549\ The Bureau repeated this analysis restricting attention to
just those 13 non-bank entities that could be classified as small.
Of these entities, 12 provide liability limitations consistent with
Regulation E (or only offer payroll card accounts). The one
remaining entity did not have an available account agreement.
[GRAPHIC] [TIFF OMITTED] TP23DE14.001
Error Resolution Protections. The Bureau's market research,
including the Study of Prepaid Account Agreements, strongly suggested
that the majority of directly affected small or potentially small non-
bank entities presently extend some form of error resolution
protections to consumers. Table 3 summarizes the Study's findings
regarding current industry practice with respect to error resolution
and provisional credit for the 96 directly affected small or
potentially small non-bank entities identified by the Bureau.
In the Study of Prepaid Account Agreements, the Bureau examined
relevant language in prepaid account agreements addressing error
resolution in order to assess whether each program provides by contract
the same error resolution protections that Regulation E provides with
respect to accounts to which it applies. For each entity for which at
least one prepaid account agreement was available and that offers at
least one prepaid account program that was not a payroll card account
program, the Bureau classified the entity's error resolution
protections as belonging to one of four categories: (1) Full error
resolution with provisional credit for all consumers when the error is
not resolved within a defined period of time, for all reviewed
agreements; (2) error resolution with limitations on provisional
credit; (3) error resolution with no mention of provisional credit; and
(4) no error resolution.
[[Page 77288]]
The Bureau determined that approximately 58 percent (16 percent +
42 percent) of all small or potentially small non-bank entities likely
to be directly affected by the proposed rule currently provide full
error resolution with provisional credit for all of their reviewed
programs, as reflected in Table 3.\550\ Therefore, over half of non-
bank entities that are small or potentially small would not need to
change their error resolution or provisional credit practices if the
proposed rule were adopted. Further, an additional 18 percent of
entities provide error resolution protections but with provisional
credit available only in limited circumstances. These non-bank entities
would experience only a portion of the total increase in burden
associated with the requirement that they extend provisional credit to
all consumers in instances when an error is not resolved within a
defined period of time. An additional eight percent of entities offer
error resolution but would potentially incur the entire portion of the
burden associated with extending provisional credit. Only two percent
of small or potentially small non-bank entities (two entities)
currently provide no error resolution protections for at least one of
their prepaid programs, and thus would incur the entire burden
associated with providing error resolution and provisional credit.
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\550\ Note that the percentages cited in this paragraph may not
add up to 100 percent due to rounding.
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The final column of Table 3 reports the relative frequency of the
error resolution policies for the set of directly affected small or
potentially small non-bank entities for which the Bureau could locate
an agreement for at least one program (or which only offer payroll card
accounts). Within this group of directly affected entities, 67 percent
(18 percent + 49 percent) presently provide full error resolution with
provisional credit for all reviewed programs, and thus, would not need
to change their policies if the proposed rule were adopted. An
additional 21 percent would incur only a portion of the total burden
arising from the extension of provisional credit requirements.\551\
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\551\ The Bureau repeated this analysis restricting attention to
just those 13 non-bank entities that could be classified as small.
The distribution of policies was as follows: 31 percent of entities
presently comply with Regulation E because they only offer payroll
card accounts, 46 percent provide full error resolution with
provisional credit for all reviewed agreements (excluding payroll
only providers), eight percent provide error resolution with
limitations on provisional credit for at least some reviewed
agreements, eight percent provide error resolution with no mention
of provisional credit for at least some reviewed agreements, zero
percent do not provide error resolution protections, and prepaid
account agreements could not be located for eight percent of the
small non-bank entities.
[GRAPHIC] [TIFF OMITTED] TP23DE14.002
[[Page 77289]]
Costs Associated with Limited Liability and Error Resolution
Protections. As a result of the proposed rule, those few directly
affected small or potentially small non-bank entities that do not
currently provide limited liability or error resolution protections to
consumers would incur costs associated with offering these protections.
As described in the Section 1022(b)(2) discussion above, these entities
would need to establish procedures for complying with the proposed
requirements, including developing the capacity to give the required
disclosures to consumers, receive oral or written error claims,
investigate error claims, provide consumers with investigation results
in writing, respond to any consumer request for copies of the documents
that the institution relied upon in making its determination, and
correct any errors discovered within the required timeframes. The
establishment of these policies and procedures would constitute a one-
time cost for those few small or potentially small non-bank entities
that do not currently offer limited liability or error resolution, and
implementing these procedures and paying out claims, as well as
provisional credit, would constitute an ongoing cost.\552\
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\552\ It is worth noting that program managers may rely on
industry partners, including processors or issuing banks, to perform
some or all of the functions associated with performing error
resolution. The Bureau's understanding from discussion with industry
participants is that processor fees can include a fixed fee per
dispute as well as a variable component.
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Those directly affected small or potentially small non-bank
entities that offer limited liability and error resolution protections
to consumers but do not currently provide provisional credit, as well
as those entities that provide liability protections or provisional
credit in a more limited form than what would be required by the
proposed rule, would also incur additional costs. Directly affected
entities offering liability protections of a more limited form than is
required by Regulation E would incur additional costs associated with
paying out claims. In addition, directly affected entities that do not
offer provisional credit (or offer it in a more limited form) would
incur a small opportunity cost associated with the funds being extended
as provisional credit. Additionally, in instances where the entity has
extended provisional credit and subsequently determines that an alleged
error was, in fact, an authorized transfer, the entity may be unable to
reclaim all or part of the provisional credit previously extended, thus
incurring additional costs.
The costs associated with providing these protections may vary
across entities for several reasons. For instance, an entity's customer
base may influence the type of errors that are likely to be reported
(and therefore the costs associated with investigations) as well as the
ease with which the entity is able to reclaim provisional credit that
has been previously extended. The initial screening procedures employed
by a prepaid account provider to determine eligibility for an account,
as well as ongoing monitoring of accounts, likely affect realized loss
levels. Although small entities may be at a disadvantage with respect
to fraud screening relative to larger entities that may have access to
more extensive information or more sophisticated screening technology,
small entities are sometimes able to rely on industry partners to
screen for and to investigate potential fraud.\553\ Financial
institutions may choose to limit fraud liability by closing accounts
that have repeated error claims or by not offering accounts to
individuals previously found to engage in potentially fraudulent
activity.
---------------------------------------------------------------------------
\553\ One potentially small program manager told the Bureau that
it receives information from its processor regarding whether a
consumer had filed unsubstantiated disputes with other prepaid
programs serviced by the processor.
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The Bureau conducted industry outreach to attempt to determine the
costs to prepaid account providers associated with implementing
Regulation E compliant error resolution, including provisional credit.
Estimates of the ongoing costs associated with providing error
resolution with provisional credit varied. One program manager that
provides limited liability and error resolution protections with
provisional credit to all consumers suggested that it reserved $0.35
per active cardholder per month in fraud losses (including both losses
related to Regulation E error claims as well as other types of fraud).
Another program manager that also provides limited liability and error
resolution with provisional credit suggested total fraud losses related
to Regulation E that translate to roughly $0.22 per cardholder per
month. As described in the Section 1022(b)(2) discussion, those few
entities that do not presently provide limited liability or error
resolution protections to consumers would additionally incur one-time
implementation costs associated with the establishment or modification
of practices and procedures extending these protections (in addition to
increased ongoing operational costs).
Those small or potentially small non-bank entities that provide
limited liability and error resolution protections to consumers but
give provisional credit only in limited circumstances, or not at all,
would sustain increased ongoing operational costs. The Bureau does not
have information that explicitly captures the incremental cost
associated with extending provisional credit for those entities that
otherwise provide error resolution protections. However, estimates
derived using available information suggest that the magnitude of the
ongoing cost of providing these protections is roughly one-third of the
total ongoing cost associated with fraud losses (including those
specifically related to provisional credit).\554\ To the extent that
many financial institutions currently provide provisional credit
(albeit in limited circumstances), the cost impact arising from this
provision would be further mitigated.
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\554\ One program manager told the Bureau that when they
extended provisional credit to all accounts, having previously only
provided provisional credit to those accounts receiving Federal
payments, their losses arising from providing provisional credit
increased four to six times the previous level, and overall fraud
losses increased 40 percent (including the increased losses arising
from extending provisional credit). Assuming that there was no
change in fraud losses not relating to provisional credit, this
implies that provisional credit accounted for between seven and ten
percent of the initial level of fraud losses and just over a third
of the final fraud losses. This can be shown as follows. Let E=fraud
losses not relating to provisional credit, P=fraud losses relating
to provisional credit, and L=total fraud losses prior to the
expansion of provisional credit coverage to all consumers.
Therefore, it follows that L=P+E prior to the expansion of
provisional credit coverage to all consumers. After the expansion of
provisional credit to all consumers (and assuming no change in E),
it follows that (i.) 1.4L = 5P+ E or (ii.) 1.4L = 7P+E. The
percentage of initial fraud losses accounted for by provisional
credit is represented by P/L. Rearranging (i.) gives P/L = 0.4/4 =
10 percent, and rearranging (ii.) gives P/L = 0.4/6 = 6.7 percent.
In scenario described by (i.), a four time increase, fraud losses
not relating to provisional credit (E) account for 90 percent of the
total fraud losses before the increase; in the scenario described by
(ii.), a six time increase, (E) accounts for 93.3 percent of the
total fraud losses before the increase. Assuming that E does not
change, the percentage of final fraud losses accounted for by
provisional credit once extended to all accounts in scenario (i.) is
5(.10)/[5(.10)+.90] = 36 percent and 7(.067)/[7(.067)+.933] = 34
percent in scenario (ii.). If overall fraud losses, including losses
associated with providing provisional credit, are assumed to be
$0.35 per active cardholder per month, it follows that the cost to
extend provisional credit to all consumers is roughly $0.12 per
cardholder per month.
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2. Other Major Provisions Potentially Affecting Small Entities
The proposed rule includes new pre-acquisition disclosure
requirements for prepaid accounts which are fully applicable to small
entities. As described more extensively in the
[[Page 77290]]
Section 1022(b)(2) discussion above, the proposed rule would require
that financial institutions include a specified subset of fees as well
as a product-specific set of other commonly incurred fees in a
specifically described disclosure box (the ``short form'').\555\ In
addition to the short form disclosure, financial institutions would be
required to provide a disclosure that includes a full listing of fees
as well as any conditions under which the fees may change (the ``long
form''). Finally, the fee disclosure provided as part of the prepaid
account agreement would be required to follow most of the content and
format requirements of the long form disclosure.
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\555\ Additionally, providers of payroll card accounts and
government benefit accounts would be required to include a notice at
the top of the short form disclosure stating that consumers are not
required to accept such a card and that alternative methods are
available by which they may receive their wages or benefits.
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All financial institutions would incur one-time implementation
costs associated with reviewing and revising existing disclosures to
ensure that they conform to the new requirements. Certain requirements
regarding how the disclosures would be made available to consumers
depend on the distribution channel. For those prepaid accounts
distributed in a retail environment, the short form disclosure would be
required to be included on the product's packaging material, and the
long form disclosure would be required to be made available both by
telephone and online. Financial institutions distributing prepaid
accounts online would be required to provide online access to both the
long form and short form disclosures to consumers, and those
institutions distributing prepaid accounts in person would be required
to provide both forms in print. For transactions conducted by
telephone, financial institutions would be required to provide the
short form disclosure information orally, to inform consumers of the
existence of the long form disclosure and its availability by telephone
and on a Web site, and to provide the information in the long form
disclosure to the consumer upon request.
Accordingly, the implementation costs to entities arising from the
proposed disclosure requirements would vary based on which distribution
channels are used by an entity and the relative intensity of the
entity's reliance on each distribution channel. These channels include
retail distribution, online distribution, and in-person distribution,
among others. The impacts on financial institutions distributing via
each of these channels are described in the Section 1022(b)(2)
discussion above.
Based on industry outreach, the Bureau believes that small entities
typically do not rely on the retail channel to distribute prepaid
accounts or, to the extent that they do, rely on this channel in a
limited way.\556\ For products that are not distributed via the retail
channel, providers would incur a one-time cost, believed to be minimal,
to review and edit existing disclosures to ensure that they include all
applicable fees and follow the specified formatting requirements and,
in some cases, to print revised disclosures. Those entities
distributing prepaid accounts online would incur costs, believed to be
minimal, to update Web sites to include the revised disclosures.
---------------------------------------------------------------------------
\556\ This is, in part, due to the potentially high fixed costs
associated with distributing prepaid accounts through this channel.
---------------------------------------------------------------------------
As described in the Section 1022(b)(2) discussion, the pre-
acquisition disclosure requirements also impose ongoing operational
costs on covered entities separate and apart from the aforementioned
implementation costs. In order to determine the composition of the
short form disclosure, covered entities would need to review data on an
annual basis to ascertain which fees should be included in the
incidence-based part of the short form disclosure. Absent a need to
revise the short form disclosure, review of the information necessary
to make these determinations, which is likely maintained in the
ordinary course of business, should comprise minimal ongoing cost. If
disclosures need to be revised due to a change in the required
elements, covered entities would incur costs associated with these
revisions. For those entities distributing prepaid accounts online,
this would require a Web site update, or updated link, to a revised
form. Updates to written and electronic disclosures would need to occur
within 90 days. The Bureau believes that the costs associated with
updates to written and electronic disclosures are minimal.
Other key provisions of the proposed rule potentially triggering
burden include expansions to access to account information requirements
(largely extending the current periodic statement alternative for
payroll card accounts to all prepaid accounts with certain
modifications) and the establishment of certain additional disclosures
related to access to account information. Financial institutions
offering prepaid accounts would be required to comply with Regulation
E's periodic statement requirement; the proposed rule also includes an
alternative means of compliance with this requirement. Specifically,
the proposed rule states that financial institutions are not required
to furnish periodic statements to consumers if they make available to
the consumer his or her account balance through a readily available
telephone line, provide the consumer with access to at least 18 months
of transaction history online, and if requested by the consumer,
provide 18 months of written account history at no charge. Regardless
of whether the financial institution chooses to provide periodic
statements or implement the alternative, the proposed rule would impose
the additional requirement that the financial institution disclose to
the consumer a summary total of the amount of all fees assessed against
the consumer's prepaid account, the total amount of deposits to the
account, and the total amount of all debits made to the prepaid account
for both the prior calendar month as well as the calendar year to date.
Although not all covered financial institutions are currently
required to make transaction history available to consumers, current
industry practice is to provide consumers with electronic access to at
least 60 days of transaction history information.\557\ The Bureau
understands from outreach to industry that some providers currently
make available more than 60 days of transaction history online, ranging
from six months or one year to the entire life of the prepaid account.
The proposed rule would extend this requirement to 18 months of
electronic history for those financial institutions relying on the
alternative means of complying with Regulation E's periodic statement
requirement. Additionally, financial institutions may have to modify
existing transaction history reporting or periodic statements if they
do not presently include the proposed summary totals.
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\557\ Providers of payroll card accounts complying with
Regulation E by using the alternative to providing periodic
statements are currently required to provide consumers with
electronic access to at least 60 days of account history, and the
FMS Rule requires such access to be provided for accounts that
receive Federal payments.
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The nature of the costs associated with these proposed provisions
would depend on the extent to which the entity relies on outside
vendors to perform information technology functions. For those covered
entities maintaining in-house information technology platforms, the
cost associated with updating systems to maintain this information and
providing additional electronic storage should be
[[Page 77291]]
negligible and would consist primarily of an expansion of existing
electronic storage media. Those financial institutions that format
their own periodic statements or transaction histories and do not
currently display the required totals on their periodic statements or
transaction histories would incur a one-time implementation cost to
modify these disclosures.\558\
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\558\ One program manager estimated that modifying its Web site
to provide such functionality would cost approximately $15,000.
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Many small entities rely on a processor to provide online hosting
of consumer account history information, among other functions. The
Bureau's understanding is that providers outsourcing this function pay
processors a fee per prepaid account that may be a function of both the
extent of the account history provided and the number of accounts that
are being serviced by the processor.\559\ These entities would
generally rely on their processor to modify periodic statements or
electronic transaction histories to display the required summary
totals.\560\ However, one program manager indicated to the Bureau that
if such summary totals were a regulatory requirement, it predicted that
the processor would offer it as part of its standard package of
services at no additional cost.
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\559\ One program manager that relies on a processor for this
function told the Bureau that fees for data storage are charged on a
per account basis one time at activation. The program manager did
not have an estimate of the cost associated with providing 18 months
of history, but costs were generally increasing from $0.08 per
account for three months of transaction history to $0.19 per account
for one year of transaction history. This program manager also
suggested that processor prices decrease with scale and that it was
operating at low scale and was consequently paying among the highest
prices charged by the processor.
\560\ One program manager stated that its processor quoted a
one-time cost of $65,000 associated with providing this
functionality on its processor-hosted Web site (in response to an
ad-hoc request). This likely represents an upper bound for the true
development cost since this number likely includes a mark-up over
the true cost of providing the service. Actual costs would be borne
jointly by the processor and the prepaid providers relying on the
processor for hosting services.
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As discussed in the Section 1022(b)(2) consideration of benefits
and costs, the Bureau's understanding from industry outreach is that
most covered financial institutions provide telephone access to balance
information to consumers presently. Therefore, the Bureau regards the
potential burdens associated with these provisions to be de minimis and
not likely, considered separately or cumulatively, to constitute a
significant economic impact.
The proposed rule also includes the requirement that prepaid
account issuers submit copies of their agreements to the Bureau on a
quarterly basis and post such agreements online. In addition, the
proposed rule would require all prepaid account issuers to respond to
consumer requests for written agreements or to post such agreements
online. The Bureau believes that the costs associated with such
activities should be minimal.
D. Conclusion
To determine whether the economic impact of the proposed rule could
be significant, the Bureau compared estimates of the cumulative costs
imposed by the proposed provisions on directly affected small or
potentially small non-bank entities to an estimate of revenues earned
by these entities.\561\
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\561\ The Bureau did not separately consider the costs borne by
small banks and credit unions since a substantial number of such
entities are not directly affected by the proposed rule, as shown
above. With respect to the determination of whether the economic
impact experienced by non-bank entities is significant, the current
policies of such entities are considered. Revenues would be earned
and costs would be borne jointly by both issuers (typically banks
and credit unions) and program managers (often non-banks). In order
to determine whether the economic impact is significant, revenues
and costs are considered cumulatively.
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As discussed above, roughly two percent of the directly affected
small or potentially small non-bank entities identified by the Bureau,
which do not offer any form of limited liability or error resolution
protections to consumers, would sustain an increase in ongoing costs,
which the Bureau estimates to be $0.22 to $0.35 per active cardholder
per month, as well as fixed costs associated with implementing
Regulation E compliant limited liability or error resolution procedures
were the proposed rule adopted. For those entities that provide limited
liability and error resolution protections without provisional credit,
the Bureau estimates that they would experience ongoing costs of up to
one-third of the ongoing costs incurred by those entities that do not
presently provide any form of limited liability or error resolution
protections (or roughly $0.12 per active cardholder per month). The
Bureau does not have information that would enable it to separately
determine the cost associated with extending Regulation E's limited
liability protections and the cost associated with providing error
resolution in general.\562\
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\562\ To the extent that the ongoing fraud loss estimates
include the costs associated with providing liability limitations,
the ongoing costs associated with these protections may be bounded.
For instance, if the ongoing cost of providing limited liability,
error resolution, and provisional credit protections is $0.35 per
active cardholder per month, and provisional credit represents $0.12
of that total, then the ongoing cost associated with providing
limited liability protections could be, at most, $0.23 per active
cardholder per month. The Bureau conservatively assumes that absence
of either limited liability protections or error resolution
protections could imply a significant economic impact.
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Excluding those entities without at least one prepaid account
agreement, two percent of small or potentially small non-bank entities
did not appear to provide any error resolution protections, and seven
percent of small or potentially small non-bank entities did not appear
to provide any limited liability protections in at least one reviewed
prepaid account agreement.\563\ The Bureau uses the observed
distribution of error resolution and limited liability protections to
impute likely levels of protection for those entities for which no
account agreement is available.\564\
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\563\ One entity that does not provide limited liability
protections also does not provide error resolution protections.
\564\ Payroll only providers are excluded from the observed
distribution when imputing the likely protections for those entities
missing account agreements.
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The Bureau assumes that the one directly affected small or
potentially small non-bank entity offers overdraft services or other
credit features in connection with prepaid accounts would experience a
significant economic impact from the proposed provisions.
Since small non-bank entities typically do not distribute prepaid
accounts via the retail channel (or tend to rely on that channel for a
modest portion of their portfolio), the costs associated with the other
provisions of the proposed rule are minimal. Further, the Bureau
believes that non-compliance related economic costs, such as potential
future changes in market share arising from the new disclosure
requirements, are minimal for all proposed provisions aside from those
concerning overdraft or other credit features offered in connection
with prepaid accounts.\565\
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\565\ In addition, such non-compliance related economic costs,
including potential costs relating to disclosure, would be difficult
to predict, and the Bureau does not have reason to believe that they
would cause small entities to experience a significant economic
impact.
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Since both revenue information and metrics describing the number of
active prepaid accounts were not generally available (at the entity
level) for directly affected small or potentially small non-bank
entities, the Bureau relied on findings from industry studies (which
may cover programs offered by entities that are not small or
potentially small) to derive an estimate of the likely fee and
interchange revenue earned per cardholder per month for certain types
[[Page 77292]]
of prepaid accounts.\566\ Although entities offering prepaid accounts
may derive revenue from many sources, including other lines of
business, the Bureau conservatively assumed that small entities only
derive revenues from fees paid by cardholders and interchange fees. The
Bureau obtained revenue estimates $9.98 per active cardholder per month
for GPR cards distributed online and $6.77 per active cardholder per
month for payroll cards.\567\
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\566\ See 2012 FRB Philadelphia Study; see also Kansas City Fed
Study.
\567\ Using this approach, the Bureau obtained a revenue
estimate of $9.14 per active cardholder per month for GPR cards
distributed in a retail setting, but the Bureau notes that its
understanding based on industry outreach is that small non-bank
entities typically do not distribute prepaid accounts via this
distribution channel. Estimates are obtained by combining
information from Tables 5.7 and 5.8 from the 2012 FRB Philadelphia
Study. For example, the revenue estimate is calculated in the
following manner for those general purpose reloadable cards
distributed in an online setting. First, using information in Table
5.7, the net interchange is determined by taking the difference
between the interchange received and the interchange paid ($23.35-
$6.41 = $16.94). Next, the ratio of total revenues (assuming that
these are composed of only cardholder fees and net interchange
earned) to cardholder fees is obtained (($76.00+$16.94)/$76.00 =
1.223). This inflator is then applied to cardholder fees line in
Table 5.8 (1.223*$8.16 = $9.98).
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Comparing these revenue estimates to the range of estimates
available to the Bureau of the ongoing costs of providing limited
liability and error resolution protections with provisional credit and
considering additional implementation costs, the Bureau concludes that
those few small or potentially small non-bank entities that provide
prepaid accounts that do not provide limited liability protections or
do not provide error resolution protections may likely experience a
significant economic impact from the proposed rule.\568\ In addition,
the one small or potentially small entity that offers overdraft
services in connection with its prepaid accounts may experience a
significant economic impact as a result of the proposed rule. Combined,
the Bureau believes that there are approximately nine directly affected
small or potentially small non-bank entities likely to experience a
significant economic impact as a result of the proposed rule. Thus, the
Bureau believes that less than one percent of all small non-bank
entities in the relevant NAICS code would experience a significant
economic impact as a result of the proposed rule.\569\ The Bureau also
believes that less than two percent of all small non-bank entities in
the relevant NAICS code that perform either electronic fund transfers
or electronic payment services would experience a significant economic
impact from the proposed rule.\570\
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\568\ It is worth noting that this approach does not take into
account the likely cost and revenue structure of person-to-person
payment programs that may offer prepaid accounts to consumers.
However, only four non-bank entities offering person-to-person
payment programs were identified by the Bureau as small or
potentially small. One of these entities is being considered by the
Bureau's analysis to sustain a significant economic impact because
it does not provide error resolution protections for consumers.
Therefore, this information omission, at most, could result in
failing to attribute a significant economic impact to three small or
potentially small non-bank entities.
\569\ The numerator in this calculation assumes that one small
non-bank entity experiences a significant economic impact from the
requirements relating to overdraft services and eight small non-bank
entities experience a significant economic impact from the
requirements relating to the imposition of Regulation E's limited
liability and error resolution requirements, including provisional
credit. These eight entities include one entity that does not
provide error resolution protections, one entity that does not
provide error resolution or limited liability protections, five
entities that do not provide limited liability protections, and one
additional entity that does not provide limited liability (imputed
among those entities that are missing account agreements based on
the distribution of protections among those entities with observed
agreements).
\570\ To derive this estimate, the Bureau assumes that 700
entities are within the NAICS code 522320 and perform either
electronic fund transfers or electronic payment services. This is
consistent with the number relied upon in FinCEN's Prepaid Access
Rule. See 76 FR 45403 (July 29, 2011). Using a threshold of $7
million in annual receipts (the SBA threshold at the time), FinCEN
estimated that 93 percent, or 651, of these entities were small. At
present, the SBA considers entities within NAICS code 522320 with
under $38.5 million in annual receipts to be small. Therefore, the
Bureau further assumes that at least 651 of these entities are
small. The Bureau conservatively uses a denominator of 651 to obtain
this estimate.
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The Bureau seeks comment on the methodology for estimating burden
described in this analysis and requests any relevant data, including
information regarding the implementation costs and ongoing costs
associated with the proposed rule, especially as they pertain to small
entities. Additionally, the Bureau seeks comment regarding the revenue
and cost estimates used in this analysis.
Certification
Accordingly, the undersigned certifies that the proposed rule, if
adopted, would not have a significant economic impact on a substantial
number of small entities.
Paperwork Reduction Act
The Bureau's collection of information requirements contained in
this proposal, and identified as such, will be submitted to the Office
of Management and Budget (OMB) for review under section 3507(d) of the
Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et seq.) (Paperwork
Reduction Act or PRA) on or before publication of this proposal in the
Federal Register. Notwithstanding any other provision of law, under the
Paperwork Reduction Act, the Bureau may not conduct or sponsor, and a
person is not required to respond to, an information collection unless
the information collection displays a valid OMB control number.
The proposed rule would amend 12 CFR part 1005, Electronic Fund
Transfers (Regulation E) and 12 CFR part 1026, Truth in Lending
(Regulation Z). Regulation E and Regulation Z currently contain
collections of information approved by OMB. The Bureau's OMB control
number for Regulation E is 3170-0014 (Electronic Fund Transfer Act
(Regulation E) 12 CFR 1005). The Bureau's OMB control number for
Regulation Z is 3170-0015 (Truth in Lending Act (Regulation Z) 12 CFR
1026). As described below, the proposed rule would amend the
collections of information currently in Regulation E and Regulation Z
subparts B and G. The frequency of response is on occasion, except for
periodic statements and quarterly submissions of prepaid account
agreements. These information collections are required to provide
benefits for consumers and are mandatory. The only information the
Bureau would collect under the proposal are the account agreements for
prepaid programs, so no issue of confidentiality arises. The affected
public of the proposed rule includes businesses, government agencies
and other for-profit and not-for-profit organizations. The Bureau is
not aware of any small not-for-profit organizations, aside from credit
unions, that would be directly affected by the proposed rule.
Under the proposed rule, the Bureau generally would account for the
paperwork burden associated with Regulation E and Regulation Z for the
following respondents pursuant to its administrative enforcement
authority: insured depository financial institutions with more than $10
billion in total assets, their depository institution affiliates
(together, the Bureau depository respondents), and certain non-
depository financial institutions (the Bureau non-depository
respondents), such as prepaid account program managers. The Bureau and
the FTC generally both have enforcement authority over non-depository
financial institutions under Regulation E and Regulation Z.
Accordingly, the Bureau has allocated to itself half of the estimated
burden on Bureau non-depository respondents. Other Federal agencies,
including the FTC, are
[[Page 77293]]
responsible for estimating and reporting to OMB the total paperwork
burden for the financial institutions for which they have
administrative enforcement authority. They may, but are not required
to, use the Bureau's burden estimation methodology.
For Regulation E, using the Bureau's burden estimation methodology
discussed below, the estimated burden for the approximately 181 prepaid
providers likely subject to the proposal, including Bureau respondents,
would be one-time burden of 35,398 hours and ongoing burden of 10,376
hours. The Bureau allocates to itself 16,538 hours of one-time burden:
Bureau depository respondents account for 4,450 hours while Bureau non-
depository respondents account for 24,177 hours, half of which the
Bureau allocates to itself and half to the FTC. The remaining one-time
burden (35,398 - 4,450 - 24,177 = 6,771 hours) is allocated to the
other federal agencies that have administrative enforcement authority
over banks and credit unions not subject to the Bureau's administrative
enforcement authority. Similarly, the Bureau allocates to itself 4,494
hours of ongoing burden: Bureau depository respondents account for
1,761 hours while Bureau non-depository respondents account for 5,466
hours, half of which the Bureau allocates to itself and half to the
FTC. The remaining ongoing burden (10,376 - 1,761 - 5,466 = 3,149
hours) is allocated to the other federal agencies that have
administrative enforcement authority over banks and credit unions not
subject to the Bureau's administrative enforcement authority.
For Regulation Z, using the Bureau's burden estimation methodology
discussed below, the estimated burden for two non-depository
institutions subject to the proposal would be one-time burden of 384
hours and ongoing burden of 5,641 hours. The Bureau allocates to itself
half of both these burden estimates (192 hours and 2,821 hours,
respectively) and half to the FTC.
The aggregate estimates of total burdens presented in this part are
based on estimated burden hours that are averages across respondents.
The Bureau expects that the amount of time required to implement each
of the proposed changes for a given institution may vary based on the
size, complexity, and practices of the respondent. The Bureau used
existing burden estimates as well as information obtained through
industry research and outreach to develop the figures presented below.
The Bureau's PRA estimation methodology assumes that one-time
burden increases with the number of programs operated by a program
manager.\571\ Ongoing burden may increase with the number of programs,
the number of customers, or both. However, both one-time and ongoing
PRA burden from the proposed rule is minimal. Most prepaid account
programs already comply with the current requirements of Regulation E,
as they apply to payroll card accounts. The additional proposed
requirements would generally require small extensions or revisions to
existing practices. Finally, there may be several participants in the
prepaid account supply chain and the activities of the participants may
vary across prepaid programs. The Bureau understands that, in general,
the respondents for purposes of PRA are program managers, except for
the collection required by Sec. 1005.19 (internet posting of prepaid
account agreements and submission to the Bureau), where the respondents
will likely be prepaid account issuers.
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\571\ The Bureau recognizes some uncertainty regarding the rate
at which the one-time burden on a program manager increases with the
number of programs as well as uncertainty regarding the average
number of programs per program manager. The Bureau welcomes comments
on its PRA burden methodology as well as data and other factual
information that could improve the Bureau's estimates of PRA burden.
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Regulation E
As discussed further below, the Bureau proposes to require
providers to make available to consumers disclosures before a consumer
agrees to acquire a prepaid account. These disclosures would take two
forms: a short form highlighting key fees that the Bureau believes are
most important for consumers to know about prior to acquisition and a
long form that would set forth all of the prepaid account's fees and
the conditions under which those fees could be imposed. Second, the
Bureau is proposing to extend, with certain modifications, existing
error resolution and limited liability provisions for payroll card
accounts and certain government benefit accounts to all prepaid
accounts.\572\ Third, the proposed rule would adopt provisions
requiring prepaid account issuers to post agreements for prepaid
accounts on the issuers' Web sites and to submit those agreements to
the Bureau for posting on a publicly-available Web site established and
maintained by the Bureau. Finally, the Bureau is proposing to revise
Regulation E (both subparts A and B) in various places to reflect the
new provisions adopted for prepaid accounts including proposed
revisions to provisions currently applicable to payroll card accounts
and certain government benefit accounts.
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\572\ All prepaid cards used to distribute Federally
administered benefits (such as Social Security and SSI) and State
and local non-needs tested benefits (such as unemployment, child
support, and pension payments) are currently covered by Regulation
E. However, government agencies are currently not required to
provide periodic statements or online access to account information
for cards distributing State and local non-needs tested benefits, as
long as balance information is made available to benefits recipients
via telephone and electronic terminals and a written account history
of at least 60 days is given upon request. Needs-tested EBT programs
established or administered under State or local law are not
currently subject to Regulation E pursuant to existing Sec.
1005.15(a). The Bureau's proposed rule would not change this.
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The Bureau is proposing to extend, with certain modifications,
existing provisions for payroll card accounts and certain government
benefit accounts to all prepaid accounts. The Bureau's Study of Prepaid
Account Agreements and review of industry research found that most
programs of GPR prepaid accounts currently comply with the major
provisions of the payroll card requirements of Regulation E. These
accounts would be affected mostly by proposed modifications to the
current provisions for payroll card accounts.
The Bureau believes that providers of prepaid accounts generally
provide account opening disclosures, change in terms notices, and
annual error resolution notices that meet the current requirements of
Regulation E. However, the Bureau is proposing to expand the account
opening requirements of Sec. 1005.7(b)(5) as applied to prepaid
accounts to require the disclosure of all fees, not just fees for
electronic fund transfers. The one-time and ongoing burden from this
requirement should be minimal. Regulation DD already requires banks to
disclose all fees for accounts covered by that regulation (Credit
Unions are subject to a similar requirement). Program managers for
prepaid accounts that may not constitute accounts under Regulation DD
may need to adjust their account opening disclosures. The Bureau
believes the one-time and ongoing cost of implementing this change
would be minimal.\573\
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\573\ The Bureau notes that Regulation DD requires that a
periodic statement disclose all fees debited to accounts covered by
that regulation. Sec. 1030.6(a)(3). Regulation DD defines
``account'' to mean ``a deposit account at a depository institution
that is held by or offered to a consumer. It includes time, demand,
savings, and negotiable order of withdrawal accounts.'' Sec.
1030.2(a). Because some prepaid accounts, as proposed herein to be
defined under Regulation E, may not also constitute accounts as
defined under Regulation DD, the Bureau is proposing new Sec.
1005.18(c)(3) to ensure that periodic statements and histories of
account transactions for prepaid accounts include all fees, not just
those related to electronic fund transfers and account maintenance.
As noted above, this proposed revision is authorized under EFTA
section 904(c) and section 1032(a) of the Dodd-Frank Act. The Bureau
solicits comment on this portion of the proposal.
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[[Page 77294]]
Providers offering certain electronic fund transfer services for
prepaid accounts would also need to provide transaction disclosures.
For example, a disclosure would be required for transactions conducted
at an automated teller machine. These disclosures impose minimal burden
as they are machine-generated and do not involve an employee of the
institution. For preauthorized transfers to the consumer's account
occurring at least once every 60 days, such as direct deposit, the
institution would be required to provide notice as to whether the
transfer occurred unless positive notice was provided by the payor. In
lieu of sending a notice of deposit, the institution may provide a
readily available telephone number that the consumer can call to verify
receipt of the deposit. Thus, the burden of this requirement is also
minimal. For preauthorized transfers from the account, either the
institution or the payee would need to notify the consumer of payment
variations. Because in the vast majority of instances the payee, rather
than the account provider, would satisfy this obligation, the burden on
providers is minimal.
The Bureau is proposing that, subject to certain exceptions
provided in proposed Sec. 1005.18(b)(1)(ii), a provider would be
required to make available a short form and a long form disclosure
required by Sec. 1005.18(b)(2)(i) and (ii) before the consumer
acquires the prepaid account. The Bureau estimates that providers,
including Bureau respondents, would take 40 hours per prepaid account
program, on average, to develop the short form disclosure and to update
systems. The Bureau also recognizes a one-time cost of replacing and
disposing of cards in stores of approximately $17 million.\574\
Providers would take 8 hours annually per prepaid account program to
evaluate and if necessary update incidence-based fees on the short form
disclosure. Providers would incur no other ongoing costs for the short
form disclosure since they already offer consumers a pre-acquisition
disclosure. The Bureau estimates that providers, including Bureau
respondents, would take on average 8 hours per prepaid account program
to develop the long form disclosure and update systems. The long form
disclosure is substantially the same as disclosures already provided in
prepaid account agreements.\575\
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\574\ For a period of 12 months after the final rule is
published in the Federal Register, financial institutions would be
permitted to continue selling prepaid accounts that do not comply
with the final rule's pre-acquisition disclosure requirements, if
the account and its packaging material were printed prior to the
proposed effective date. Based on discussions with industry, the
Bureau understands that after 12 months approximately 40 percent of
stock would remain in stores and would have to be located, shipped,
and destroyed.
\575\ Proposed Sec. 1005.18(b)(2)(ii)(B) would require that the
long form disclosure include the disclosures described in Sec.
1026.60, regarding credit card applications and solicitations, if at
any point a credit plan may be offered in connection with the
prepaid account. This burden would be minimal give the Bureau's
burden estimation methodology for Regulation Z, as explained below.
Under proposed Sec. 1005.18(b)(6), if a person principally uses a
foreign language on a package in a retail store, on the telephone or
on the Web site the consumer utilizes to acquire a prepaid account,
then both the short form and long form disclosures would need to be
provided in that foreign language. Discussions with industry
indicate that providers generally adopt this practice. The long form
disclosure would also need to be provided in English, but this would
be a minimal one-time and ongoing expense.
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Proposed Sec. 1005.18(b)(7) would require that certain disclosures
be made on the actual prepaid account access device. These include the
name of the financial institution and the URL of a Web site and a
telephone number that the consumer can use to contact the financial
institution about the prepaid account. The Bureau believes that
currently all prepaid account access devices provide these disclosures.
The Bureau's proposal would require providers offering prepaid
accounts to provide periodic statements unless they use the alternative
method of compliance in proposed Sec. 1005.18(c)(1). The Bureau
expects that most providers would use the alternative method of
compliance. The Bureau's Study of Prepaid Account Agreements and its
industry research found that most programs provide electronic access to
account information. However, few provide at least 18 months of prepaid
account transaction history. Further, the Bureau currently understands
that prepaid programs generally do not provide a summary total of all
fees posted to the consumer's prepaid account, the total amount of all
deposits to the account, and the total amount of all debits to the
account for the prior calendar month and for the calendar year to date.
The Bureau estimates that providers would take on average 24 hours per
prepaid account program to implement these changes.
The Bureau is proposing to extend to all prepaid accounts the
limited liability and error resolution provisions of Regulation E, as
they apply to payroll card accounts.\576\ As discussed above, the
Bureau's Study of Prepaid Account Agreements and its industry research
found that most providers of prepaid accounts provide limited liability
and error resolution protections (including provisional credit)
generally consistent with the Regulation E requirements for payroll
card accounts. The Bureau estimates that providers (including Bureau
respondents) that do not fully comply with the payroll card rule's
limited liability and error resolution provisions would require 8 hours
per non-compliant program to develop fully compliant limited liability
and error resolution procedures. Regarding ongoing costs, Bureau
outreach indicates that providers receive perhaps one call per month
per customer who actively uses a card and that 95 percent of those
calls are resolved without requiring time from a customer service
agent. Of the remaining five percent, very few calls involve assertions
of error, but escalated calls are time consuming and respondents incur
an ongoing burden.
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\576\ The Bureau is proposing an exception from these
requirements for prepaid accounts (other than payroll card accounts
and government benefit accounts) for which the financial institution
has not completed its collection of consumer identifying information
and identity verification, provided the financial institution has
disclosed to the consumer the risks of not registering the prepaid
account.
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Finally, the Bureau is proposing in Sec. 1005.19(b) to require
certain issuers to send the Bureau copies of the account agreements for
their prepaid account programs. The Bureau estimates each issuer would
take on average 40 hours one-time to upload agreements and then 8 hours
each quarter on an ongoing basis.
The estimated burden on Bureau respondents from the proposed
changes to Regulation E are summarized below.
[[Page 77295]]
[GRAPHIC] [TIFF OMITTED] TP23DE14.003
Regulation Z
For the proposed requirements under Regulation Z, the Bureau
understands that approximately 205,000 consumers currently have a form
of overdraft protection on their GPR and payroll cards.\577\ The
Bureau's PRA estimation methodology assumes that the same number would
use a credit feature if the proposed rule were finalized.\578\ Further,
the methodology generally assumes that the per-respondent and per-
transaction burdens would be consistent with those currently reported
for credit card accounts in Regulation Z.
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\577\ The Bureau is aware of two providers of overdraft services
or credit features on prepaid accounts and believes that NetSpend is
the only significant provider. NetSpend is an operating segment of
TSYS, Inc., for which the 10-Q report for the quarter ending June
20, 2014 states that NetSpend has approximately 3.4 million active
cards; See Total Sys. Serv. Inc., Form 10-Q, available at http://www.sec.gov/Archives/edgar/data/721683/000119312514300851/d737574d10q.htm. In a recent news article, NetSpend reported that
only about six percent of its customers regularly use overdraft. See
Suzanne Kapner, Prepaid Plastic is Creeping Into Credit, Wall Street
J. (Sept. 5, 2012), http://online.wsj.com/news/articles/SB10000872396390443686004577633472358255602. Assuming each NetSpend
customer has overdraft protection on only one account, there are
204,000 prepaid accounts with overdraft protection. No data is
available for the second provider, Insight Card Services. The Bureau
believes, based on industry data, that the median provider of
prepaid accounts likely has about 10,000 customers. Assuming 10%
have an overdraft service or credit feature on one prepaid account
gives an additional 1,000 accounts with overdraft protection.
\578\ Current data on the size of the market for credit features
on prepaid accounts has limited usefulness in predicting the size of
the market if the proposal is finalized, since both eligibility
criteria and credit features may change as a result. See the
previous discussions in this preamble.
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As described in greater detail above, under the proposed rule, if
adopted, the Bureau anticipates that most overdraft services and credit
features offered in connection with a prepaid account, including where
extensions of credit are only permitted to be deposited into particular
prepaid accounts specified by the creditor, would meet the definition
of ``open-end credit.'' \579\ In addition, under the proposal, a
prepaid account that accesses such an overdraft service or credit plan
generally would be a ``credit card'' under Regulation Z. Under the
proposal, the overdraft services or other credit card plans described
above would be governed by subparts A, B, D and G of Regulation Z.\580\
Pursuant to Regulation Z, persons offering such plans would be required
to comply with the requirements governing information collections.
These requirements are as follows.
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\579\ This would apply if the creditor establishes a program
where the creditor routinely extends credit and may impose finance
charges from time to time on an outstanding unpaid balance for
credit.
\580\ Transactions that are authorized on a prepaid account when
the consumer has insufficient or unavailable funds at the time of
authorization as well as transactions that are paid from a prepaid
account when the consumer has insufficient or unavailable funds at
the time of payment would generally be considered to be credit under
Regulation Z. However, under the proposal, Regulation Z would not
apply to overdraft services or other credit plans that are accessed
by a prepaid card if the prepaid card only accesses credit that is
not subject to any fee and is not payable by written agreement in
more than four installments.
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Persons offering an overdraft service or other credit feature in
connection with a prepaid account would be required to inform consumers
of costs and terms before they use the plan and in general to inform
them of certain subsequent changes in the terms of the plan. Initial
information would need to include the finance charge and other charges,
the annual percentage rate (APR), a description of how balances on
which a finance charge is based would be calculated, and any collateral
that would secure repayment. If the card issuer changed any term
initially disclosed, or increased the minimum periodic payment, a
written change-in-term notice generally would need to be provided to
the consumer at least fifteen days prior to the effective date of the
change. Consistent with estimates currently reported for credit card
accounts in Regulation Z, the Bureau estimates 8 hours of one-time
burden per respondent to develop these disclosures and a small ongoing
burden per account. The Bureau also assumes that for these accounts,
the number of account opening disclosures equals the number of accounts
in any year.\581\
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\581\ In one recent analysis, the median life span for GPR cards
with occasional reloads was 330 days and 570 days for GPR cards with
periodic non-government direct deposit. See Fumiko Hayashi and Emily
Cuddy, General Purpose Reloadable Prepaid Cards: Penetration, Use,
Fees, and Fraud Risks, Federal Reserve Bank of Kansas City, February
2014, at 47.
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[[Page 77296]]
Card issuers would be required to provide a written statement of
activity for each billing cycle. The statement would have to be
provided for each account that has a balance of more than $1 or on
which a finance charge is imposed, and it would have to include a
description of activity on the account, opening and closing balances,
finance charges imposed, and payment information. Consistent with
estimates currently reported for credit card accounts in Regulation Z,
the Bureau estimates 80 hours of one-time burden per respondent to
develop these disclosures and a small ongoing burden per account.
Card issuers would be required to notify consumers about their
rights and responsibilities regarding billing problems. Card issuers
would have to provide either a complete statement of billing rights
each year or a summary on each periodic statement. If a consumer
alleged a billing error, the card issuer would need to provide an
acknowledgment, within thirty days of receipt, that the card issuer
received the consumer's error notice and would need to report on the
results of its investigation within ninety days. If a billing error did
not occur, the card issuer would need to provide an explanation as to
why the card issuer believed an error did not occur and provide
documentary evidence to the consumer upon request. The card issuer
would also have to give notice of the portion of the disputed amount
and related finance or other charges that the consumer still owed and
notice of when payment was due. The Bureau estimates 8 hours of one-
time burden per respondent to develop these disclosures and a small
ongoing burden per account. The Bureau further assumes, based on
discussions with industry, that in any year 1.5 percent of customers
will assert errors that require significant time from customer service
representatives.
Persons offering an overdraft service or other credit feature in
connection with a prepaid account would be required, when advertising
their product, to include certain basic credit information if the
advertisement refers to specified credit terms or costs. The Bureau
estimates 8 hours of one-time burden per respondent to develop these
disclosures and small ongoing burden to maintain or revise these
disclosures.
Persons offering an overdraft service or other credit feature in
connection with a prepaid account would be required to send the Bureau
copies of the overdraft service or program agreement. The Bureau
estimates each issuer would take on average 40 hours one-time to upload
agreements and then 8 hours each quarter on an ongoing basis.
Finally, persons offering a credit feature in connection with a
prepaid account would also need to provide additional disclosures with
solicitations and applications. Such persons would need to disclose key
terms of the account, such as the APR, information about variable
rates, and fees such as annual fees, minimum finance charges, and
transaction fees for purchases. The Bureau estimates 8 hours of one-
time burden per respondent to develop these disclosures and small
ongoing burden to maintain or revise these disclosures.\582\
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\582\ The recordkeeping requirement in Sec. 1026.25 does not
specify the kind of records that must be retained, so for purposes
of PRA the paperwork burden is minimal.
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The estimated burden on Bureau respondents from the proposed
changes to Regulation Z are summarized below.
[GRAPHIC] [TIFF OMITTED] TP23DE14.004
[[Page 77297]]
Comments regarding the burden estimate, or any other aspect of
these collections of information, including suggestions for reducing
the burden, should be sent to: The Office of Management and Budget
(OMB), Attention: Desk Officer for the Consumer Financial Protection
Bureau, Office of Information and Regulatory Affairs, Washington, DC
20503, or by the Internet to [email protected]. If you wish to
share your comments with the Bureau, please send a copy of these
comments to the docket for this proposed rule at www.regulations.gov.
The ICR submitted to OMB requesting approval under the PRA for the
information collection requirements contained herein is available both
at www.regulations.gov as well as OMB's public-facing docket at
www.reginfo.gov.
List of Subjects
12 CFR part 1005
Banking, Banks, Consumer protection, Credit unions, Electronic fund
transfers, National banks, Remittance transfers, Reporting and
recordkeeping requirements, Savings associations.
12 CFR part 1026
Advertising, Consumer protection, Credit, Credit unions, Mortgages,
National banks, Reporting and recordkeeping requirements, Savings
associations, Truth in lending.
Authority and Issuance
For the reasons set forth in the preamble, the Bureau proposes to
amend 12 CFR parts 1005 and 1026, as follows:
PART 1005--ELECTRONIC FUND TRANSFERS (REGULATION E)
0
1. The authority citation for part 1005 is amended to read as follows:
Authority: 12 U.S.C. 5512, 5532, 5581; 15 U.S.C. 1693b. Subpart
B is also issued under 12 U.S.C. 5601 and 15 U.S.C. 1693o-1.
Subpart A--General
0
2. Section 1005.2 is amended by revising paragraphs (b)(2) and (b)(3)
to read as follows:
Sec. 1005.2 Definitions.
* * * * *
(b) (1) * * *
(2) The term does not include an account held by a financial
institution under a bona fide trust agreement.
(3) The term includes a ``prepaid account.''
(i) A prepaid account is a card, code, or other device, not
otherwise an account under paragraph (b)(1) of this section, which is
established primarily for personal, family, or household purposes, and
which:
(A) is either issued on a prepaid basis to a consumer in a
specified amount or not issued on a prepaid basis but capable of being
loaded with funds thereafter;
(B) is redeemable upon presentation at multiple, unaffiliated
merchants for goods or services, usable at automated teller machines,
or usable for person-to-person transfers; and
(C) is not: (1) A gift certificate as defined in Sec.
1005.20(a)(1) and (b);
(2) a store gift card as defined in Sec. 1005.20(a)(2) and (b);
(3) a loyalty, award, or promotional gift card as defined in Sec.
1005.20(a)(4) and (b); or
(4) a general-use prepaid card as defined in Sec. 1005.20(a)(3)
and (b) that is both marketed and labeled as a gift card or gift
certificate.
(ii) The term ``prepaid account'' includes a ``payroll card
account,'' which is an account that is directly or indirectly
established through an employer and to which electronic fund transfers
of the consumer's wages, salary, or other employee compensation (such
as commissions) are made on a recurring basis, whether the account is
operated or managed by the employer, a third-party payroll processor, a
depository institution, or any other person.
(iii) The term ``prepaid account'' includes a ``government benefit
account,'' as defined in Sec. 1005.15(a)(2).
(iv) The term ``prepaid account'' does not include a health savings
account, flexible spending account, medical savings account, or a
health reimbursement arrangement.
* * * * *
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3. Section 1005.10 is amended by revising paragraph (e)(1) to read as
follows:
Sec. 1005.10 Preauthorized transfers.
* * * * *
(e) Compulsory use--(1) Credit. No financial institution or other
person may condition an extension of credit to a consumer on the
consumer's repayment by preauthorized electronic fund transfers, except
for credit extended under an overdraft credit plan or extended to
maintain a specified minimum balance in the consumer's account. This
exception does not apply to a credit plan that is a credit card account
accessed by an access device for a prepaid account where the access
device is a credit card under Regulation Z (12 CFR part 1026), or is
accessed by an account number that is a credit card under Regulation Z
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor.
* * * * *
0
4. Section 1005.12 is amended by revising paragraphs (a)(1)(ii),
(a)(1)(iii), (a)(1)(iv), and (a)(2)(i) to read as follows:
Sec. 1005.12 Relation to other laws.
(a) * * *
(1) * * *
(ii) The issuance of an access device (other than an access device
for a prepaid account) that permits credit extensions (under a
preexisting agreement between a consumer and a financial institution)
only when the consumer's account is overdrawn or to maintain a
specified minimum balance in the consumer's account, or under an
overdraft service, as defined in Sec. 1005.17(a) of this part;
(iii) The addition of an overdraft service, as defined in Sec.
1005.17(a), to an accepted access device (other than an access device
for a prepaid account); and
(iv) A consumer's liability for an unauthorized electronic fund
transfer and the investigation of errors involving:
(A) With respect to an account other than a prepaid account, an
extension of credit that is incident to an electronic fund transfer
that occurs under an agreement between the consumer and a financial
institution to extend credit when the consumer's account is overdrawn
or to maintain a specified minimum balance in the consumer's account,
or under an overdraft service, as defined in Sec. 1005.17(a); and
(B) With respect to a prepaid account, an extension of credit under
a credit plan that is subject to Regulation Z subpart B that is
incident to an electronic fund transfer when the consumer's prepaid
account is overdrawn.
(2) * * *
(i) The addition of a credit feature or plan to an accepted access
device, including an access device for a prepaid account, that would
make the access device into a credit card under Regulation Z (12 CFR
part 1026); and
* * * * *
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5. Section 1005.15 is revised to read as follows:
Sec. 1005.15 Electronic fund transfer of government benefits.
(a) Government agency subject to regulation. (1) A government
agency is deemed to be a financial institution for purposes of the Act
and this part if directly or indirectly it issues an access device to a
consumer for use in initiating an electronic fund transfer of
[[Page 77298]]
government benefits from an account, other than needs-tested benefits
in a program established under state or local law or administered by a
state or local agency. The agency shall comply with all applicable
requirements of the Act and this part except as modified by this
section.
(2) For purposes of this section, the term ``account'' or
``government benefit account'' means an account established by a
government agency for distributing government benefits to a consumer
electronically, such as through automated teller machines or point-of-
sale terminals, but does not include an account for distributing needs-
tested benefits in a program established under state or local law or
administered by a state or local agency.
(b) Issuance of access devices. For purposes of this section, a
consumer is deemed to request an access device when the consumer
applies for government benefits that the agency disburses or will
disburse by means of an electronic fund transfer. The agency shall
verify the identity of the consumer receiving the device by reasonable
means before the device is activated.
(c) Pre-acquisition disclosure requirements. (1) Before a consumer
acquires a government benefit account, a government agency shall comply
with the pre-acquisition disclosure requirements applicable to prepaid
accounts as set forth in Sec. 1005.18(b), in accordance with the
timing requirements of Sec. 1005.18(h).
(2) As part of its short form pre-acquisition disclosures, the
agency must provide a statement that the consumer does not have to
accept the government benefit account and that the consumer can ask
about other ways to get their benefit payments from the agency instead
of receiving them through the account, in a form substantially similar
to Model Form A-10(a) in appendix A of this part.
(d) Access to account information--(1) Periodic statement
alternative. A government agency need not furnish periodic statements
required by Sec. 1005.9(b) if the agency makes available to the
consumer:
(i) The consumer's account balance, through a readily available
telephone line and at a terminal (such as by providing balance
information at a balance-inquiry terminal or providing it, routinely or
upon request, on a terminal receipt at the time of an electronic fund
transfer);
(ii) An electronic history of the consumer's account transactions,
such as through a Web site, that covers at least 18 months preceding
the date the consumer electronically accesses the account; and
(iii) A written history of the consumer's account transactions that
is provided promptly in response to an oral or written request and that
covers at least 18 months preceding the date the agency receives the
consumer's request.
(2) Additional access to account information requirements. For
government benefit accounts, a government agency shall comply with the
account information requirements applicable to prepaid accounts as set
forth in Sec. 1005.18(c)(2) through (4).
(e) Modified disclosure requirements. A government agency that
provides information under paragraph (d)(1) of this section shall
comply with the following:
(1) Initial disclosures. The agency shall modify the disclosures
under Sec. 1005.7(b) by disclosing:
(i) Access to account information. A telephone number that the
consumer may call to obtain the account balance, the means by which the
consumer can obtain an electronic account history, such as the address
of a Web site, and a summary of the consumer's right to receive a
written account history upon request (in place of the summary of the
right to receive a periodic statement required by Sec. 1005.7(b)(6)),
including a telephone number to call to request a history. The
disclosure required by this paragraph (e)(1)(i) may be made by
providing a notice substantially similar to the notice contained in
paragraph (a) of appendix A-5 of this part.
(ii) Error resolution. A notice concerning error resolution that is
substantially similar to the notice contained in paragraph (b) of
appendix A-5 of this part, in place of the notice required by Sec.
1005.7(b)(10).
(2) Annual error resolution notice. The agency shall provide an
annual notice concerning error resolution that is substantially similar
to the notice contained in paragraph (b) of appendix A-5 of this part,
in place of the notice required by Sec. 1005.8(b). Alternatively, the
agency may include on or with each electronic or written history
provided in accordance with paragraph (d)(1) of this section, a notice
substantially similar to the abbreviated notice for periodic statements
contained in paragraph (b) in appendix A-3 of this part, modified as
necessary to reflect the error resolution provisions set forth in this
section.
(3) Modified limitations on liability requirements. (i) For
purposes of Sec. 1005.6(b)(3), the 60-day period for reporting any
unauthorized transfer shall begin on the earlier of:
(A) The date the consumer electronically accesses the consumer's
account under paragraph (d)(1)(ii) of this section, provided that the
electronic history made available to the consumer reflects the
unauthorized transfer; or
(B) The date the agency sends a written history of the consumer's
account transactions requested by the consumer under paragraph
(d)(1)(iii) of this section in which the unauthorized transfer is first
reflected.
(ii) An agency may comply with paragraph (e)(3)(i) of this section
by limiting the consumer's liability for an unauthorized transfer as
provided under Sec. 1005.6(b)(3) for any transfer reported by the
consumer within 120 days after the transfer was credited or debited to
the consumer's account.
(4) Modified error resolution requirements. (i) The agency shall
comply with the requirements of Sec. 1005.11 in response to an oral or
written notice of an error from the consumer that is received by the
earlier of:
(A) Sixty days after the date the consumer electronically accesses
the consumer's account under paragraph (d)(1)(ii) of this section,
provided that the electronic history made available to the consumer
reflects the alleged error; or
(B) Sixty days after the date the agency sends a written history of
the consumer's account transactions requested by the consumer under
paragraph (d)(1)(iii) of this section in which the alleged error is
first reflected.
(ii) In lieu of following the procedures in paragraph (e)(4)(i) of
this section, an agency complies with the requirements for resolving
errors in Sec. 1005.11 if it investigates any oral or written notice
of an error from the consumer that is received by the agency within 120
days after the transfer allegedly in error was credited or debited to
the consumer's account.
(f) Initial disclosure of fees and other key information. For
government benefit accounts, a government agency shall comply with the
initial disclosure requirement for fees and other key information
applicable to prepaid accounts as set forth in Sec. 1005.18(f) in
accordance with the timing requirements of Sec. 1005.18(h).
(g) Credit card plans linked to government benefit accounts. For
credit plans linked to government benefit accounts, a government agency
shall comply with prohibitions and requirements applicable to prepaid
accounts as set forth in Sec. 1005.18(g).
0
6. Section 1005.17 is amended by revising paragraph (a)(1) to read as
follows:
[[Page 77299]]
Sec. 1005.17 Requirements for overdraft services.
(a) * * *
(1) A line of credit or credit plan subject to Regulation Z (12 CFR
part 1026), including transfers from a credit card account, home equity
line of credit, overdraft line of credit, or a credit plan that is
accessed by an access device for a prepaid account where the access
device is a credit card under Regulation Z;
* * * * *
0
7. Section 1005.18 is revised to read as follows:
Sec. 1005.18 Requirements for financial institutions offering prepaid
accounts.
(a) Coverage. A financial institution shall comply with all
applicable requirements of the Act and this part with respect to
prepaid accounts except as modified by this section. For rules
governing government benefit accounts, see Sec. 1005.15.
(b) Pre-acquisition disclosure requirements--(1) Timing of
disclosures--(i) General. Except as provided in paragraphs (b)(1)(ii)
or (iii) of this section, a financial institution shall provide the
disclosures required by paragraphs (b)(2)(i) and (ii) of this section
before a consumer acquires a prepaid account.
(ii) Disclosures for prepaid accounts acquired in retail stores. A
financial institution must provide a written form of the disclosures
required by paragraph (b)(2)(i) of this section before a consumer
acquires a prepaid account in person in a retail store. A financial
institution may provide the disclosures required by paragraph
(b)(2)(ii) of this section after a consumer acquires a prepaid account
in person in a retail store if the following conditions are met:
(A) The prepaid account access device is inside of packaging
material.
(B) The disclosures required by paragraph (b)(2)(i) of this section
are provided on or are visible through an outward-facing, external
surface of a prepaid account access device's packaging material in the
tabular format described in paragraph (b)(3)(iii) of this section.
(C) The disclosure required by paragraph (b)(2)(i) of this section
includes the information set forth in paragraph (b)(2)(i)(B)(11) of
this section that allows a consumer to access the information required
to be disclosed by paragraph (b)(2)(ii) of this section by telephone
and via a Web site.
(iii) Disclosures for prepaid accounts acquired orally by
telephone. Before a consumer acquires a prepaid account orally by
telephone, a financial institution must disclose orally the information
required by paragraph (b)(2)(i) of this section. A financial
institution may provide the disclosures required by paragraph
(b)(2)(ii) of this section after a consumer acquires a prepaid account
orally by telephone if the financial institution communicates to a
consumer orally, before a consumer acquires the prepaid account, that
the information required to be disclosed by paragraph (b)(2)(ii) of
this section is available both by telephone and on a Web site.
(2) Content of disclosures--(i) Short form content requirements. In
accordance with paragraph (b)(1) of this section, a financial
institution shall provide a disclosure setting forth only the following
fees, information and notices, as applicable:
(A) Payroll card account notices. When offering a payroll card
account, a statement that a consumer does not have to accept the
payroll card account and that a consumer can ask about other ways to
get wages or salary from the employer instead of receiving them via the
payroll card account, in a form substantially similar to Model Form A-
10(b) in appendix A of this part. For requirements regarding what
notice to give a consumer when offering a government benefit account,
see Sec. 1005.15(c)(2).
(B) Fees and other information--(1) Periodic fee. A periodic fee
charged for holding a prepaid account, assessed on a monthly or other
periodic basis, using the term ``Monthly fee,'' ``Annual fee,'' or a
substantially similar term.
(2) Per purchase fees. Two fees for making a purchase using a
prepaid account, both when a consumer uses a personal identification
number and when a consumer provides a signature, including at point-of-
sale terminals, by telephone, on a Web site, or by any other means,
using the term ``Per purchase'' or a substantially similar term, and
``with PIN'' or ``with sig.,'' or substantially similar terms.
(3) ATM withdrawal fees. Two fees for using an automated teller
machine to initiate a withdrawal of cash in the United States from a
prepaid account, both within and outside of the financial institution's
network or a network affiliated with the financial institution, using
the term ``ATM withdrawal'' or a substantially similar term, and ``in-
network'' or ``out-of-network,'' or substantially similar terms.
(4) Cash reload fee. A fee for loading cash into a prepaid account
using the term ``Cash reload'' or a substantially similar term.
(5) ATM balance inquiry fees. Two fees for using an automated
teller machine to check the balance of a consumer's prepaid account in
the United States, both within and outside of the financial
institution's network or a network affiliated with the financial
institution, using the term ``ATM balance inquiry'' or a substantially
similar term, and ``in-network'' or ``out-of-network,'' or
substantially similar terms.
(6) Customer service fee. A fee for calling the financial
institution or its service provider, including an interactive voice
response system, about a consumer's prepaid account, using the term
``Customer service,'' or a substantially similar term.
(7) Inactivity fee. A fee for non-use, dormancy, or inactivity on a
prepaid account, using the term ``Inactivity'' or a substantially
similar term, as well as the duration of inactivity that triggers a
financial institution to impose such an inactivity fee.
(8) Incidence-based fee disclosures--(I) Generally. Except as
provided in paragraph (b)(2)(i)(B)(8)(II) or (III) of this section, up
to three fees, other than any of those fees disclosed pursuant to
paragraphs (b)(2)(i)(B)(1) through (7) of this section, that were
incurred most frequently in the prior 12-month period by consumers of
that particular prepaid account product. At the same time each year, in
accordance with the timing requirements of paragraph (h) of this
section, a financial institution must assess whether the incidence-
based fees disclosed pursuant to this paragraph were the most
frequently incurred fees in the prior 12-month period and, if
necessary, within 90 days, revise the incidence-based fees on
disclosures provided in written, electronic, or oral form pursuant to
paragraph (b)(1)(i) of this section. Disclosures provided on the
packaging material of prepaid account access devices, for example, in
retail stores pursuant to paragraph (b)(1)(ii) of this section, or in
other locations, must be revised when the financial institution is
printing new packaging material for its prepaid account access devices,
in accordance with the timing requirements of paragraph (h) of this
section. All disclosures provided pursuant to this paragraph and
created after a financial institution makes an incidence-based fee
assessment and determines changes are necessary must include such
changes, in accordance with the timing requirements of paragraph (h) of
this section.
(II) New prepaid account products. If a particular prepaid account
product was not offered by the financial institution during the prior
12-month period, the financial institution must disclose up to three
fees, other than any
[[Page 77300]]
of those fees disclosed pursuant to paragraphs (b)(2)(i)(B)(1) through
(7) of this section, that it reasonably anticipates will be incurred by
consumers most frequently during the next 12-month period. The
incidence-based fee disclosures for newly-created prepaid account
products must be included on all disclosures created for the prepaid
account product, whether the disclosure is written, electronic, or on
the packaging material of a prepaid account product sold in a retail
store, in accordance with the timing requirements of paragraph (h) of
this section.
(III) Revised prepaid account products. If the financial
institution changes an existing prepaid account product's fee schedule
at any point after assessing its incidence-based fee disclosure for the
prior 12-month period pursuant to paragraph (b)(2)(i)(B)(8)(I) of this
section, it must determine whether, after making such changes, it
reasonably anticipates that the existing incidence-based fee disclosure
will represent the most commonly incurred fees for the remainder of the
12-month period. If the financial institution reasonably anticipates
that the current incidence-based fee disclosure will not represent the
most commonly incurred fees for the remainder of the current 12-month
period, it must update the incidence-based fee disclosure within 90
days for disclosures provided in written or electronic form, in
accordance with the timing requirements of paragraph (h) of this
section. Disclosures provided on a prepaid account product's packaging
material, for example, in retail stores pursuant to paragraph
(b)(1)(ii) of this section, or in other locations, must be revised when
the financial institution is printing new packaging material for its
prepaid accounts, in accordance with the timing requirements of
paragraph (h) of this section. All disclosures provided pursuant to
this paragraph and created after a financial institution makes an
incidence-based fee assessment and determines changes are necessary
must include such changes, in accordance with the timing requirements
of paragraph (h) of this section.
(9) Overdraft services and other credit features. A statement that
credit-related fees may apply, in a form substantially similar to the
clause set forth in Model Form A-10(c) in appendix A of this part, if,
at any point, a credit plan that would be a credit card account under
Regulation Z, 12 CFR part 1026 may be offered in connection with the
prepaid account. Such a credit plan could be accessed by a credit card
under Regulation Z, 12 CFR 1026.2(a)(15)(i), that also is an access
device that accesses the prepaid account, or a credit plan could be
accessed by an account number that is a credit card under Regulation Z,
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor offering the
plan. If neither of these two types of credit plans will be offered in
connection with the prepaid account at any point, a statement that no
overdraft or credit-related fees will be charged, in a form
substantially similar to the clause set forth in the Model Form A-10(d)
in appendix A) of this part.
(10) Statement regarding other fees. A statement regarding the
number of fees, other than those listed on the short form pursuant to
paragraphs (b)(2)(i)(B)(1) through (8) of this section, listed in the
long form pursuant to paragraph 18(b)(2)(ii)(A) of this section that
could be imposed upon a consumer, in a form substantially similar to
the clause set forth in Model Forms A-10(a) through (d) in appendix A
of this part.
(11) Telephone number and Web site. A telephone number and the
unique URL of a Web site that a consumer may use to access the
disclosure required under paragraph (b)(2)(ii) of this section, in a
form substantially similar to the clauses set forth in Model Forms A-
10(c) and (d) in appendix A of this part. This disclosure is required
only when a financial institution chooses not to provide a written form
of the disclosures required by paragraph (b)(2)(ii) of this section
before a consumer acquires a prepaid account, as described in paragraph
(b)(1)(ii) of this section.
(12) Statement regarding registration. A statement that
communicates to a consumer that a prepaid account must register with a
financial institution or service provider in order for the funds loaded
into the account to be protected, in a form substantially similar to
the clauses set forth in Model Forms A-10(a) through (d) in appendix A
of this part.
(13) Statement regarding FDIC (or NCUSIF) insurance. If a prepaid
account product is not set up to be eligible for FDIC deposit or NCUSIF
share insurance, a statement that FDIC deposit insurance or NCUSIF
share insurance, as appropriate, does not protect funds loaded into the
prepaid account, in a form substantially similar to the clause set
forth in Model Forms A-10(c) and (d) in appendix A of this part.
(14) CFPB Web site. The URL of the Web site of the Consumer
Financial Protection Bureau, in a form substantially similar to the
clause set forth in Model Forms A-10(a) through (d) in appendix A of
this part.
(C) Disclosing variable fees. If the amount of the fee that a
financial institution imposes for each of the fee types disclosed
pursuant to paragraphs (b)(2)(i)(B) of this section could vary, a
financial institution must disclose the highest fee it could impose on
a consumer for utilizing the service associated with the fee, along
with a symbol, such as an asterisk, to indicate that a lower fee might
apply, and text explaining that the fee could be lower, in a form
substantially similar to the clause set forth in Model Forms A-10(a)
through (d) in appendix A of this part. A financial institution must
use the same symbol and text for all fees that could be lower, but may
use any other part of the prepaid account product's packaging material
or its Web site to provide more detail about how a specific fee type
may be lower. A financial institution must not disclose any additional
third party fees imposed in connection with any of the fees disclosed
pursuant to paragraphs (b)(2)(i)(B)(1) through (8) of this section.
(ii) Long form content requirements. In accordance with paragraph
(b)(1) of this section, a financial institution shall provide the
following disclosures:
(A) Fees. All fees that may be imposed by the financial institution
in connection with a prepaid account. For each fee type, the financial
institution must disclose the amount of the fee, the conditions, if
any, under which the fee may be imposed, waived, or reduced, including,
to the extent known, any third party fee amounts that may apply. If
such third party fees may apply but the amount of those fees are not
known, a financial institution must instead include a statement
indicating that third party fees may apply without specifying the fee
amount. A financial institution may not utilize any symbols, such as
asterisks, to explain conditions under which any fee may be imposed. A
fee imposed by a third party who acts as an agent of the financial
institution for purposes of the prepaid account must always be
disclosed.
(B) Overdraft services and other credit features. The disclosures
described in Regulation Z,12 CFR 1026.60(a), (b), and (c), if, at any
point, a credit plan that would be a credit card account under
Regulation Z, 12 CFR part 1026, may be offered in connection with the
prepaid account. Such a credit plan could be accessed by a credit card
under Regulation Z, 12 CFR 1026.2(a)(15), that also is an access device
that accesses the prepaid account, or a credit plan could be accessed
by an account number that is a credit card under Regulation Z where
extensions of credit are permitted to be deposited directly only into
[[Page 77301]]
particular prepaid accounts specified by the creditor offering the
plan.
(C) Telephone number, Web site and mailing address. The telephone
number, Web site, and mailing address of the person or office that a
consumer may contact to learn about the terms and conditions of the
prepaid account, to obtain prepaid account balance information, to
request a copy of transaction history pursuant to paragraph (c)(1)(iii)
of this section if the financial institution does not provide periodic
statements pursuant to Sec. 1005.9(b), or to notify the person or
office when a consumer believes that an unauthorized electronic fund
transfer occurred as required by Sec. 1005.7(b)(2) and paragraph
(d)(1)(ii) of this section.
(D) Statement regarding FDIC (or NCUSIF) insurance. The disclosure
required under paragraph (b)(2)(i)(B)(13) of this section.
(E) CFPB Web site and telephone number. The URL of the Web site of
the Consumer Financial Protection Bureau, and a telephone number a
consumer can contact and the URL a consumer can visit to submit a
complaint related to a prepaid account.
(3) Form of pre-acquisition disclosures--(i) General--(A) Written
disclosures. Except as provided in paragraphs (b)(3)(i)(B) and (C) of
this section, disclosures required by paragraphs (b)(2)(i) and (ii) of
this section must be in writing.
(B) Electronic disclosures. Disclosures required by paragraphs
(b)(2)(i) and (ii) of this section must be provided in electronic form
when a consumer acquires a prepaid account through the Internet,
including via a mobile application. Disclosures required by paragraphs
(b)(2)(i) and (ii) must be provided electronically in a manner which is
reasonably expected to be accessible in light of how a consumer is
acquiring the prepaid account. These electronic disclosures need not
meet the consumer consent and other applicable provisions of the
Electronic Signatures in Global and National Commerce Act (E-Sign Act)
(15 U.S.C. 7001 et seq.). Disclosures provided to a consumer through a
Web site where required by paragraph (b)(1)(ii)(C) and as described in
paragraph (b)(2)(i)(B)(11) of this section must be made in an
electronic form using a machine-readable text format that is accessible
via both Web browsers and screen readers.
(C) Oral disclosures. Disclosures required by paragraph (b)(2)(i)
of this section must be provided orally when a consumer acquires a
prepaid account orally by telephone as described in paragraph
(b)(2)(iii) of this section. Disclosures provided to a consumer through
the telephone number described in paragraph (b)(2)(i)(B)(11) of this
section also must be made orally.
(ii) Retainable form. Except for disclosures provided to a consumer
through the telephone number described in paragraph (b)(2)(i)(B)(11) of
this section or disclosures provided orally pursuant to paragraph
(b)(1)(iii) of this section, disclosures required by paragraphs
(b)(2)(i) and (ii) of this section must be made in a retainable form.
(iii) Tabular format--(A) General. Except as provided in paragraph
(b)(3)(iii)(B) of this section, disclosures required by paragraph
(b)(2)(i)(B) of this section that are provided in writing or
electronically shall be in the form of a table substantially similar to
Model Forms A-10(a) through (d) in appendix A of this part, as
applicable. Disclosures required by paragraph (b)(2)(ii) of this
section that are provided in writing or electronically shall be in a
form of a table substantially similar to Sample Form A-10(e) in
appendix A of this part.
(B) Disclosures for prepaid account products offering multiple
service plans--(1) Short form. When a financial institution offers
multiple service plans for a particular prepaid account product and
each plan has a different fee schedule, the information required by
paragraphs (b)(2)(i)(B)(1) through (7) of this section may be provided
for each service plan together in one table, in a form substantially
similar to Model Form A-10(f) in appendix A of this part, and must
include descriptions of each service plan included in the table, using
the terms, ``Pay-as-you-go plan,'' ``Monthly plan,'' ``Annual plan,''
or substantially similar terms. When disclosing multiple service plans
on one short form, the information required by paragraph
(b)(2)(i)(B)(8) of this section must only be disclosed once in the
table. Alternatively, a financial institution may disclose the
information required by paragraph (b)(2)(i)(B)(1) through (8) of this
section for only the service plan in which a consumer is enrolled
automatically by default upon acquiring the prepaid account, in the
form of a table substantially similar to Model Forms A-10(c) or (d) in
appendix A of this part. Regardless of whether a financial institution
discloses fee information for all service plans on one form or chooses
only to disclose the service plan in which a consumer is enrolled by
default, the disclosures required by paragraphs (b)(2)(i)(B)(9) through
(14) of this section must be disclosed only once.
(2) Long form. The information required by paragraph (b)(2)(ii) of
this section must be presented for all service plans in the form of a
table substantially similar to the Sample Form in appendix A-10(g) of
this part.
(4) Specific formatting requirements--(i) Grouping--(A) Short form
disclosures. The information required by paragraph (b)(2)(i)(A) of this
section or by Sec. 1005.15(c)(2), when applicable, must be grouped
together. The information required by paragraphs (b)(2)(i)(B)(1)
through (4) of this section must be generally grouped together and in
the order they appear in the form of Model Forms A-10(a) through (d) in
appendix A of this part. The information required by paragraphs
(b)(2)(i)(B)(5) through (9) of this section must be generally grouped
together and in the order they appear in the form of Model Forms A-
10(a) through (d) in appendix A of this part. The textual information
required by paragraphs (b)(2)(i)(B)(10) through (14) of this section
must be generally grouped together and in the order they appear in
Model Forms A-10(a) through (d) in appendix A of this part. The URL of
the Web site disclosed pursuant to paragraph (b)(2)(i)(B)(11) of this
section must not exceed twenty-two characters, and must be meaningfully
named.
(B) Long form disclosures. The information required by paragraph
(b)(2)(ii)(A) of this section must be generally grouped together and
organized by categories of function for which a consumer would utilize
the service associated with each fee. Text describing the conditions
under which a fee may be imposed must appear in the table directly to
the right of the numeric fee amount disclosed pursuant to paragraph
(b)(2)(ii)(A) of this section. The information required by paragraph
(b)(2)(ii)(B) of this section must be generally grouped together. The
information required by paragraphs (b)(2)(ii)(C) through (E) of this
section must be generally grouped together.
(C) Multiple service plan disclosures. When providing disclosures
in compliance with paragraph (b)(3)(iii)(B)(1) of this section and
disclosing the fee schedules of multiple service plans together on one
form, the fees required to be listed pursuant to paragraphs
(b)(2)(i)(B)(1) through (7) of this section that vary among service
plans must be generally grouped together, and the fees that are the
same across all service plans must be grouped together. If the periodic
fee varies between service plans, the financial institution must use
the term ``plan fee,'' or a substantially similar term when disclosing
the periodic fee for each service plan. When providing disclosures for
multiple service plans on
[[Page 77302]]
one short form in compliance with paragraph (b)(3)(iii)(B)(1) of this
section, the fees disclosed pursuant to paragraph (b)(2)(i)(B)(8) of
this section must be grouped with the fees that are the same across all
service plans.
(ii) Prominence and size--(A) General. All text used to disclose
information pursuant to paragraph (b)(2) of this section must be in a
single, easy-to-read typeface. All text included in the tables required
to be disclosed pursuant to paragraph (b)(3)(iii) of this section must
be all black or one color type and printed on a white or other neutral
contrasting background whenever practical.
(B) Short form--(1) Payroll card account and government benefit
account notices. The information required by paragraph (b)(2)(i)(A) of
this section and Sec. 1005.15(c)(2), when applicable, must appear in a
minimum eight-point font or the corresponding pixel size and appear in
no larger a font than what is used for the information required to be
disclosed by paragraphs (b)(2)(i)(B)(1) through (4) of this section.
(2) Fees and other information. Fee amounts disclosed pursuant to
paragraphs (b)(2)(i)(B)(1) through (4) of this section must be more
prominent than the other parts of the disclosures required by paragraph
(b)(2)(i) of this section and appear in a minimum eleven-point font or
the corresponding pixel size. Disclosures required by paragraphs
(b)(2)(i)(B)(5) through (9) of this section must appear in a minimum
eight-point font or the corresponding pixel size and appear in no
larger a font than what is used for the information required to be
disclosed by paragraphs (b)(2)(i)(B)(1) through (4) of this section.
Disclosures required by paragraphs (b)(2)(i)(B)(10) through (14) of
this section must appear in a minimum seven-point font or the
corresponding pixel size and appear in no larger a font than what is
used for the information required to be disclosed by paragraphs
(b)(2)(i)(B)(5) through (8) of this section. Additionally, the
statement disclosed pursuant to paragraph (b)(2)(i)(B)(10) of this
section, and the telephone number and URL disclosed pursuant to
paragraph (b)(2)(i)(B)(11) of this section must be more prominent than
the information disclosed pursuant to paragraphs (b)(2)(i)(B)(12)
through (14) of this section and paragraph (b)(2)(i)(C) of this
section. Text used to distinguish each of the two fees that are
required to be disclosed by paragraphs (b)(2)(i)(B)(2), (3), and (5) of
this section, or to explain the duration of inactivity that triggers a
financial institution to impose an inactivity fee as required by
paragraph (b)(2)(i)(B)(7) of this section must appear in a minimum six-
point font or the corresponding pixel size and appear in no larger a
font than what is used for the information required to be disclosed by
paragraphs (b)(2)(i)(B)(9) through (12) of this section.
(3) Disclosing variable fees. The explanatory text disclosed
pursuant to paragraph (b)(2)(i)(C) of this section, when applicable,
must appear in a minimum seven-point font or the corresponding pixel
size and appear in no larger a font than what is used for the
information required to be disclosed by paragraphs (b)(2)(i)(B)(5)
through (8) of this section.
(C) Long form. Disclosures required by paragraph (b)(2)(ii) of this
section must appear in a minimum eight-point font or the corresponding
pixel size.
(D) Multiple service plan short form. When providing disclosures in
compliance with paragraph (b)(3)(iii)(B)(1) of this section and
disclosing the fee schedules of multiple service plans together in one
form, disclosures required by paragraphs (b)(2)(i)(B)(1) through (9)
must appear in a minimum seven-point font or the corresponding pixel
size. Disclosures required by paragraphs (b)(2)(i)(B)(10) through (14)
of this section must appear in the font sizes set forth in paragraph
(b)(4)(ii)(B)(2) of this section.
(5) Segregation. Disclosures required by this section that are
provided in writing or electronically must be segregated from
everything else and must contain only information that is directly
related to the disclosures required under this section.
(6) Prepaid accounts acquired in foreign languages. If a financial
institution principally uses a foreign language on prepaid account
packaging material, by telephone, in person, or on the Web site a
consumer utilizes to acquire a prepaid account, then disclosures made
pursuant to paragraphs (b)(2)(i) and (b)(2)(ii) of this section must be
provided in that same foreign language. A financial institution must
also provide the information required to be disclosed by paragraph
(b)(2)(ii) of this section in English upon a consumer's request and on
any part of the Web site where it provides the long form disclosure in
a foreign language.
(7) Disclosures on prepaid account access devices. The name of the
financial institution and the URL of the Web site and a telephone
number a consumer can use to contact the financial institution about
the prepaid account must be disclosed on the prepaid account access
device. If a financial institution does not provide a physical access
device in connection with a prepaid account, the disclosure must appear
at the URL or other entry point a consumer must visit to access the
prepaid account electronically. A disclosure made on an accompanying
document, such as a terms and conditions document, on packaging
material surrounding an access device, or on a sticker or other label
affixed to an access device does not constitute a disclosure on the
access device.
(c) Access to prepaid account information--(1) Periodic statement
alternative. A financial institution need not furnish periodic
statements required by Sec. 1005.9(b) if the institution makes
available to the consumer:
(i) The consumer's account balance, through a readily available
telephone line;
(ii) An electronic history of the consumer's account transactions,
such as through a Web site, that covers at least 18 months preceding
the date the consumer electronically accesses the account; and
(iii) A written history of the consumer's account transactions that
is provided promptly in response to an oral or written request and that
covers at least 18 months preceding the date the financial institution
receives the consumer's request.
(2) Information included on electronic or written histories. The
history of account transactions provided under paragraphs (c)(1)(ii)
and (iii) of this section must include the information set forth in
Sec. 1005.9(b).
(3) Inclusion of all fees charged. A periodic statement furnished
pursuant to Sec. 1005.9(b) for a prepaid account, an electronic
history of account transactions whether provided under paragraph
(c)(1)(ii) of this section or otherwise, and a written history of
account transactions provided under paragraph (c)(1)(iii) of this
section must disclose the amount of any fees assessed against the
account, whether for electronic fund transfers or otherwise.
(4) Summary totals of fees, deposits, and debits. A periodic
statement furnished pursuant to Sec. 1005.9(b) for a prepaid account,
an electronic history of account transactions whether provided under
paragraph (c)(1)(ii) of this section or otherwise, and a written
history of account transactions provided under paragraph (c)(1)(iii) of
this section must include a summary total of the amount of all fees
assessed against the consumer's prepaid account, the total amount of
all deposits to the account, and the total amount of all debits from
the account, for the prior calendar month and for the calendar year to
date.
(d) Modified disclosure requirements. A financial institution that
provides information under paragraph (c)(1) of
[[Page 77303]]
this section shall comply with the following:
(1) Initial disclosures. The financial institution shall modify the
disclosures under Sec. 1005.7(b) by disclosing:
(i) Access to account information. A telephone number that the
consumer may call to obtain the account balance, the means by which the
consumer can obtain an electronic account history, such as the address
of a Web site, and a summary of the consumer's right to receive a
written account history upon request (in place of the summary of the
right to receive a periodic statement required by Sec. 1005.7(b)(6)),
including a telephone number to call to request a history. The
disclosure required by this paragraph (d)(1)(i) may be made by
providing a notice substantially similar to the notice contained in
paragraph (a) of appendix A-7 of this part.
(ii) Error resolution. A notice concerning error resolution that is
substantially similar to the notice contained in paragraph (b) of
appendix A-7 of this part, in place of the notice required by Sec.
1005.7(b)(10).
(2) Annual error resolution notice. The financial institution shall
provide an annual notice concerning error resolution that is
substantially similar to the notice contained in paragraph (b) of
appendix A-7 of this part, in place of the notice required by Sec.
1005.8(b). Alternatively, a financial institution may include on or
with each electronic and written history provided in accordance with
paragraph (c)(1) of this section, a notice substantially similar to the
abbreviated notice for periodic statements contained in paragraph (b)
of appendix A-3 of this part, modified as necessary to reflect the
error resolution provisions set forth in paragraph (e) of this section.
(e) Modified limitations on liability and error resolution
requirements--(1) Modified limitations on liability requirements. A
financial institution that provides information under paragraph (c)(1)
of this section shall comply with the following:
(i) For purposes of Sec. 1005.6(b)(3), the 60-day period for
reporting any unauthorized transfer shall begin on the earlier of:
(A) The date the consumer electronically accesses the consumer's
account under paragraph (c)(1)(ii) of this section, provided that the
electronic history made available to the consumer reflects the
unauthorized transfer; or
(B) The date the financial institution sends a written history of
the consumer's account transactions requested by the consumer under
paragraph (c)(1)(iii) of this section in which the unauthorized
transfer is first reflected.
(ii) A financial institution may comply with paragraph (e)(1)(i) of
this section by limiting the consumer's liability for an unauthorized
transfer as provided under Sec. 1005.6(b)(3) for any transfer reported
by the consumer within 120 days after the transfer was credited or
debited to the consumer's account.
(2) Modified error resolution requirements. A financial institution
that provides information under paragraph (c)(1) of this section shall
comply with the following:
(i) The financial institution shall comply with the requirements of
Sec. 1005.11 in response to an oral or written notice of an error from
the consumer that is received by the earlier of:
(A) Sixty days after the date the consumer electronically accesses
the consumer's account under paragraph (c)(1)(ii) of this section,
provided that the electronic history made available to the consumer
reflects the alleged error; or
(B) Sixty days after the date the financial institution sends a
written history of the consumer's account transactions requested by the
consumer under paragraph (c)(1)(iii) of this section in which the
alleged error is first reflected.
(ii) In lieu of following the procedures in paragraph (e)(2)(i) of
this section, a financial institution complies with the requirements
for resolving errors in Sec. 1005.11 if it investigates any oral or
written notice of an error from the consumer that is received by the
institution within 120 days after the transfer allegedly in error was
credited or debited to the consumer's account.
(3) Limitations on liability and error resolution for unverified
accounts. For prepaid accounts that are not payroll card accounts or
government benefit accounts, if a financial institution discloses to
the consumer the risks of not registering a prepaid account using a
notice that is substantially similar to the model notice contained in
paragraph (c) of appendix A-7 of this part, a financial institution is
not required to comply with the liability limits and error resolution
requirements under Sec. Sec. 1005.6 and 1005.11 for any prepaid
account for which it has not completed its collection of consumer
identifying information and identity verification. Once a consumer's
identity has been verified, however, a financial institution must limit
the consumer's liability for unauthorized transfers and resolve any
errors that occurred prior to verification that satisfy the timing
requirements of Sec. Sec. 1005.6 or 1005.11, or the modified timing
requirements in this paragraph (e), as applicable.
(f) Initial disclosure of fees and other key information. In
addition to disclosing any fees imposed by a financial institution for
electronic fund transfers or for the right to make electronic fund
transfers, a financial institution must also include in its initial
disclosures given pursuant to Sec. 1005.7(b)(5) all other fees imposed
by the financial institution in connection with a prepaid account. For
each fee, a financial institution must disclose the amount of the fee,
the conditions, if any, under which the fee may be imposed, waived, or
reduced, and, to the extent known, whether any third party fees may
apply. These disclosures must include all of the information required
to be disclosed pursuant to paragraph (b)(2)(ii)(B) of this section and
must be provided in a form substantially similar to Sample Form A-10(e)
in appendix A of this part.
(g) Credit card plans linked to prepaid accounts--(1) Prohibitions.
A financial institution that establishes or holds a prepaid account
shall not--
(i) Prior to 30 calendar days after the prepaid account has been
registered, open a credit card account subject to Regulation Z (12 CFR
part 1026) for a holder of a prepaid account, or provide a solicitation
or an application to the holder of the prepaid account to open a credit
card account subject to Regulation Z, that would be accessed by an
access device for the prepaid account where the access device is a
credit card subject to Regulation Z or accessed by an account number
that is a credit card under Regulation Z where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor. For purposes of this paragraph, the
term solicitation means an offer by the person to open a credit or
charge card account subject to Regulation Z that does not require the
consumer to complete an application. A ``firm offer of credit'' as
defined in section 603(l) of the Fair Credit Reporting Act (15 U.S.C.
1681a(l)) for a credit or charge card is a solicitation for purposes of
this paragraph.
(ii) Allow a prepaid account access device to access a credit plan
subject to Regulation Z (12 CFR part 1026) that would make the prepaid
account access device into a credit card at any time prior to 30
calendar days after the prepaid account has been registered.
(iii) Prior to 30 calendar days after the prepaid account has been
registered, allow credit extensions from a credit plan subject to
Regulation Z (12 CFR
[[Page 77304]]
part 1026) to be deposited in the prepaid account, where the credit
plan is accessed by an account number that is a credit card under
Regulation Z where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor.
(2) Requirements. Where a credit card plan subject to Regulation Z
(12 CFR part 1026) may be offered at any point to a consumer with
respect to a prepaid account that is accessed by an access device for
the prepaid account where the access device is a credit card under
Regulation Z or is accessed by an account number that is a credit card
where extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor, a financial
institution that establishes or holds such a prepaid account may not
apply different terms and conditions to a consumer's account that do
not relate to an extension of credit, carrying a credit balance, or
credit availability, depending on whether the consumer elects to link
such a credit card plan to the prepaid account.
(h) Compliance dates--(1) Effective date for non-disclosure
requirements and for disclosures on newly created prepaid account
packaging or materials. Except as provided in paragraph (h)(2) of this
section, the requirements of the Act and this subpart, as modified by
this section, apply to prepaid accounts on and after [date that is nine
months from the date a final rule is published in the Federal
Register]. The requirements of paragraphs (b) and (f)(2) of this
section apply to prepaid account packaging, access devices, and other
physical materials that are manufactured, printed, or otherwise
prepared in connection with a prepaid account on and after nine months,
as well as to disclosures and other information made available to
consumers online or by telephone after nine months.
(2) Prohibition on sale or distribution of non-compliant prepaid
account packaging access devices, or other physical materials. After
[date that is 12 months from the date a final rule is published in the
Federal Register], all prepaid accounts and related packaging, access
devices, and other physical materials that are offered, sold, or
otherwise made available to consumers in connection with a prepaid
account must comply with the requirements of this section.
0
8. Add Sec. 1005.19 to read as follows:
Sec. 1005.19 Internet posting of prepaid account agreements.
(a) Definitions--(1) Agreement. For purposes of this section,
``agreement'' or ``prepaid account agreement'' means the written
document or documents evidencing the terms of the legal obligation, or
the prospective legal obligation, between a prepaid account issuer and
a consumer for a prepaid account. ``Agreement'' or ``prepaid account
agreement'' also includes fee information, as defined in paragraph
(a)(3) of this section.
(2) Amends. For purposes of this section, an issuer ``amends'' an
agreement if it makes a substantive change (an ``amendment'') to the
agreement. A change is substantive if it alters the rights or
obligations of the issuer or the consumer under the agreement. Any
change in the fee information, as defined in paragraph (a)(3) of this
section, is deemed to be substantive.
(3) Fee information. For purposes of this section, ``fee
information'' means the information required to be disclosed by Sec.
1005.18(b)(2)(ii).
(4) Issuer. For purposes of this section, ``issuer'' or ``prepaid
account issuer'' means the entity to which a consumer is legally
obligated, or would be legally obligated, under the terms of a prepaid
account agreement.
(5) Offers. For purposes of this section, an issuer ``offers'' or
``offers to the public'' an agreement if the issuer solicits
applications for or otherwise makes available prepaid accounts that
would be subject to that agreement.
(6) Open account. For purposes of this section, a prepaid account
is an ``open account'' or ``open prepaid account'' if (i) there is an
outstanding balance in the account; (ii) the consumer can load funds to
the account even if the account does not currently hold a balance; or
(iii) the consumer can access credit through a credit plan that would
be a credit card account under Regulation Z, 12 CFR part 1026 that is
offered in connection with a prepaid account. A prepaid account that
has been suspended temporarily (for example, due to a report by the
consumer of unauthorized use of the card) is considered an ``open
account'' or ``open prepaid account.''
(7) Prepaid account. For purposes of this section, ``prepaid
account'' means a prepaid account as defined in Sec. 1005.2(b)(3).
(b) Submission of agreements to the Bureau--(1) Quarterly
submissions. An issuer must make quarterly submissions to the Bureau,
in the form and manner specified by the Bureau. Quarterly submissions
must be sent to the Bureau no later than the first business day on or
after January 31, April 30, July 31, and October 31 of each year. Each
submission must contain:
(i) Identifying information about the issuer and the agreements
submitted, including the issuer's name, address, and identifying number
(such as an RSSD ID number or tax identification number), and the name
of the program manager, if any, for each agreement;
(ii) The prepaid account agreements that the issuer offered to the
public as of the last business day of the preceding calendar quarter
that the issuer has not previously submitted to the Bureau;
(iii) Any prepaid account agreement previously submitted to the
Bureau that was amended during the preceding calendar quarter and that
the issuer offered to the public as of the last business day of the
preceding calendar quarter, as described in paragraph (b)(2) of this
section; and
(iv) Notification regarding any prepaid account agreement
previously submitted to the Bureau that the issuer is withdrawing, as
described in paragraphs (b)(3), (4)(iii), and (5)(iii) of this section.
(2) Amended agreements. If a prepaid account agreement has been
submitted to the Bureau, the agreement has not been amended, and the
issuer continues to offer the agreement to the public, no additional
submission regarding that agreement is required. If a prepaid account
agreement that previously has been submitted to the Bureau is amended,
and the issuer offered the amended agreement to the public as of the
last business day of the calendar quarter in which the change became
effective, the issuer must submit the entire amended agreement to the
Bureau, in the form and manner specified by the Bureau, by the first
quarterly submission deadline after the last day of the calendar
quarter in which the change became effective.
(3) Withdrawal of agreements. If an issuer no longer offers to the
public a prepaid account agreement that previously has been submitted
to the Bureau, the issuer must notify the Bureau, in the form and
manner specified by the Bureau, by the first quarterly submission
deadline after the last day of the calendar quarter in which the issuer
ceased to offer the agreement.
(4) De minimis exception. (i) An issuer is not required to submit
any prepaid account agreements to the Bureau if the issuer had fewer
than 3,000 open prepaid accounts as of the last business day of the
calendar quarter.
(ii) If an issuer that previously qualified for the de minimis
exception
[[Page 77305]]
ceases to qualify, the issuer must begin making quarterly submissions
to the Bureau no later than the first quarterly submission deadline
after the date as of which the issuer ceased to qualify.
(iii) If an issuer that did not previously qualify for the de
minimis exception newly qualifies for the de minimis exception, the
issuer must continue to make quarterly submissions to the Bureau until
the issuer notifies the Bureau that it is withdrawing all agreements it
previously submitted to the Bureau.
(5) Product testing exception. (i) An issuer is not required to
submit to the Bureau a prepaid account agreement if, as of the last
business day of the calendar quarter, the agreement:
(A) Is offered as part of a product test offered to only a limited
group of consumers for a limited period of time;
(B) Is used for fewer than 3,000 open prepaid accounts; and
(C) Is not offered to the public other than in connection with such
a product test.
(ii) If an agreement that previously qualified for the product
testing exception ceases to qualify, the issuer must submit the
agreement to the Bureau no later than the first quarterly submission
deadline after the date as of which the agreement ceased to qualify.
(iii) If an agreement that did not previously qualify for the
product testing exception newly qualifies for the exception, the issuer
must continue to make quarterly submissions to the Bureau with respect
to that agreement until the issuer notifies the Bureau that the
agreement is being withdrawn.
(6) Form and content of agreements submitted to the Bureau--(i)
Form and content generally. (A) Each agreement must contain the
provisions of the agreement and the fee information in effect as of the
last business day of the preceding calendar quarter.
(B) Agreements must not include any personally identifiable
information relating to any consumer, such as name, address, telephone
number, or account number.
(C) The following are not deemed to be part of the agreement for
purposes of this section, and therefore are not required to be included
in submissions to the Bureau:
(1) Ancillary disclosures required by state or Federal law, such as
affiliate marketing notices, privacy policies, or disclosures under the
E-Sign Act;
(2) Solicitation or marketing materials;
(3) Periodic statements; and
(4) Documents that may be sent to the consumer along with the
prepaid account or prepaid account agreement such as a cover letter, a
validation sticker on the card, or other information about card
security.
(D) Agreements must be presented in a clear and legible font.
(ii) Fee information. Fee information must be set forth either in
the prepaid account agreement or in a single addendum to that
agreement. The agreement or addendum thereto must contain all of the
fee information, as defined by paragraph (a)(3) of this section.
(iii) Integrated agreement. Issuers may not provide provisions of
the agreement or fee information to the Bureau in the form of change-
in-terms notices or riders (other than the optional fee information
addendum). Changes in provisions or fee information must be integrated
into the text of the agreement, or the optional fee information
addendum, as appropriate.
(7) Bureau posting of prepaid account agreements. The Bureau shall
receive the prepaid account agreements submitted by prepaid account
issuers pursuant to paragraph (b) of this section, and shall post such
agreements on a publicly-available Web site established and maintained
by the Bureau.
(c) Posting of agreements offered to the public. (1) Except as
provided below, an issuer must post and maintain on its publicly
available Web site the prepaid account agreements that the issuer is
required to submit to the Bureau under paragraph (b) of this section.
(2) Agreements posted pursuant to this paragraph (c) must conform
to the form and content requirements for agreements submitted to the
Bureau specified in paragraphs (b)(6)(i)(B) through (D) of this
section.
(3) Agreements posted pursuant to this paragraph (c) must be
accurate and updated whenever changes are made.
(4) Agreements posted pursuant to this paragraph (c) may be posted
in any electronic format that is readily usable by the general public.
Agreements must be placed in a location that is prominent and readily
accessible by the public and must be accessible without submission of
personally identifiable information.
(d) Agreements for all open accounts--(1) Availability of
individual consumer's prepaid account agreement. With respect to any
open prepaid account, unless the prepaid account agreement is provided
to the Bureau pursuant to paragraph (b) of this section and posted to
the issuer's publicly available Web site pursuant to paragraph (c) of
this section, an issuer must either:
(i) Post and maintain the consumer's agreement on its Web site; or
(ii) Promptly provide a copy of the consumer's agreement to the
consumer upon the consumer's request. If the issuer makes an agreement
available upon request, the issuer must provide the consumer with the
ability to request a copy of the agreement by telephone. The issuer
must send to the consumer a copy of the consumer's prepaid account
agreement no later than five business days after the issuer receives
the consumer's request.
(2) Form and content of agreements. (i) Except as provided in this
paragraph (d), agreements posted on the issuer's Web site pursuant to
paragraph (d)(1)(i) of this section or sent to the consumer upon the
consumer's request pursuant to paragraph (d)(1)(ii) of this section
must conform to the form and content requirements for agreements
submitted to the Bureau as specified in paragraph (b)(6) of this
section.
(ii) If the issuer posts an agreement on its Web site under
paragraph (d)(1)(i) of this section, the agreement may be posted in any
electronic format that is readily usable by the general public and must
be placed in a location that is prominent and readily accessible to the
consumer.
(iii) Agreements posted or otherwise provided pursuant to this
paragraph (d) may contain personally identifiable information relating
to the consumer, such as name, address, telephone number, or account
number, provided that the issuer takes appropriate measures to make the
agreement accessible only to the consumer or other authorized persons.
(iv) Agreements posted or otherwise provided pursuant to this
paragraph (d) must set forth the specific provisions and fee
information applicable to the particular consumer.
(v) Agreements posted pursuant to paragraph (d)(1)(i) of this
section must be accurate and updated whenever changes are made.
Agreements provided upon consumer request pursuant to paragraph
(d)(1)(ii) of this section must be accurate as of the date the
agreement is mailed or electronically delivered to the consumer.
(vi) Agreements provided upon consumer request pursuant to
paragraph (d)(1)(ii) of this section must be provided by the issuer in
paper form, unless the consumer agrees to receive the agreement
electronically.
(e) E-Sign Act requirements. Except as otherwise provided in this
section, issuers may provide prepaid account agreements in electronic
form under paragraphs (c) and (d) of this section without regard to the
consumer notice and consent requirements of section 101(c) of the
Electronic Signatures in
[[Page 77306]]
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
0
9. Appendix A to part 1005 is amended by revising A-5 and A-7, adding
new A-10 and reserving A-11 through A-29 as follows:
Appendix A to Part 1005--Model Disclosure Clauses and Forms
* * * * *
A-5--MODEL CLAUSES FOR GOVERNMENT AGENCIES (Sec. 1005.15(e)(1) AND
(2))
(a) Disclosure by government agencies of information about
obtaining account information for government benefit accounts (Sec.
1005.15(e)(1)(i)).
You may obtain information about the amount of benefits you have
remaining by calling [telephone number]. That information is also
available [on the receipt you get when you make a transfer with your
card at (an ATM) (a POS terminal)] [when you make a balance inquiry
at an ATM] [when you make a balance inquiry at specified locations].
This information, along with an 18 month history of account
transactions, is also available online at [Internet address].
You also have the right to obtain at least 18 months of written
history of account transactions by calling [telephone number], or by
writing to us at [address]. You will not be charged a fee for this
information unless you request it more than once per month.
[Optional: Or you may request a written history of account
transactions by contacting your caseworker.]
(b) Disclosure of error resolution procedures for government
agencies that do not provide periodic statements (Sec.
1005.15(e)(1)(ii) and (e)(2)).
In Case of Errors or Questions About Your Electronic Transfers
Telephone us at [telephone number] Write us at [insert address] [or
email us at [insert email address]] as soon as you can, if you think
an error has occurred in your [agency's name for program] account.
We must allow you to report an error until 60 days after the earlier
of the date you electronically access your account, if the error
could be viewed in your electronic history, or the date we sent the
FIRST written history on which the error appeared. You may request a
written history of your transactions at any time by calling us at
[telephone number] or writing us at [address] [optional: Or by
contacting your caseworker]. You will need to tell us:
Your name and [case] [file] number.
Why you believe there is an error, and the dollar
amount involved.
Approximately when the error took place.
If you tell us orally, we may require that you send us your
complaint or question in writing within 10 business days.
We will determine whether an error occurred within 10 business
days after we hear from you and will correct any error promptly. If
we need more time, however, we may take up to 45 days to investigate
your complaint or question. If we decide to do this, we will credit
your account within 10 business days for the amount you think is in
error, so that you will have the use of the money during the time it
takes us to complete our investigation. If we ask you to put your
complaint or question in writing and we do not receive it within 10
business days, we may not credit your account.
For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate
your complaint or question. For new accounts, we may take up to 20
business days to credit your account for the amount you think is in
error.
We will tell you the results within three business days after
completing our investigation. If we decide that there was no error,
we will send you a written explanation.
You may ask for copies of the documents that we used in our
investigation.
If you need more information about our error resolution
procedures, call us at [telephone number][the telephone number shown
above].
* * * * *
A-7--Model Clauses for Financial Institutions Offering Prepaid
Accounts (Sec. 1005.18(d) and (e)(3))
(a) Disclosure by financial institutions of information about
obtaining account information for prepaid accounts (Sec.
1005.18(d)(1)(i)).
You may obtain information about the amount of money you have
remaining in your prepaid account by calling [telephone number].
This information, along with an 18 month history of account
transactions, is also available online at [Internet address].
You also have the right to obtain at least 18 months of written
history of account transactions by calling [telephone number], or by
writing us at [address]. You will not be charged a fee for this
information unless you request it more than once per month.
(b) Disclosure of error-resolution procedures for financial
institutions that do not provide periodic statements (Sec.
1005.18(d)(1)(ii) and (d)(2)).
In Case of Errors or Questions About Your Prepaid Account
Telephone us at [telephone number] or Write us at [address] [or
email us at [email address]] as soon as you can, if you think an
error has occurred in your prepaid account. We must allow you to
report an error until 60 days after the earlier of the date you
electronically access your account, if the error could be viewed in
your electronic history, or the date we sent the FIRST written
history on which the error appeared. You may request a written
history of your transactions at any time by calling us at [telephone
number] or writing us at [address]. You will need to tell us:
Your name and [prepaid account] number.
Why you believe there is an error, and the dollar amount
involved.
Approximately when the error took place.
If you tell us orally, we may require that you send us your
complaint or question in writing within 10 business days.
We will determine whether an error occurred within 10 business
days after we hear from you and will correct any error promptly. If
we need more time, however, we may take up to 45 days to investigate
your complaint or question. If we decide to do this, we will credit
your account within 10 business days for the amount you think is in
error, so that you will have the money during the time it takes us
to complete our investigation. If we ask you to put your complaint
or question in writing and we do not receive it within 10 business
days, we may not credit your account.
For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate
your complaint or question. For new accounts, we may take up to 20
business days to credit your account for the amount you think is in
error.
We will tell you the results within three business days after
completing our investigation. If we decide that there was no error,
we will send you a written explanation.
You may ask for copies of the documents that we used in our
investigation.
If you need more information about our error-resolution
procedures, call us at [telephone number] [the telephone number
shown above] [or visit [Internet address]].
(c) Warning regarding unregistered prepaid accounts (Sec.
1005.18(e)(3)).
It is important to register your prepaid account as soon as
possible. Until you register your account, we are not required to
research or resolve errors regarding your account. To register your
account, go to [Internet address] or call us at [telephone number].
We will ask you for identifying information about yourself
(including your full name, address, date of birth, and [Social
Security Number] [government-issued identification number]), so that
we can verify your identity. Once we have done so, we will address
your complaint or question as set forth above.
* * * * *
A-10--Model Forms and Sample Forms for Financial Institutions
Offering Prepaid Accounts (Sec. 1005.15(c)(2) and Sec.
1005.18(b))
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A-11 through A-29 [Reserved]
* * * * *
0
10. In Supplement I to part 1005:
0
a. Under Section 1005.2 Definitions:
0
i. In subsection 2(b) Account, paragraph 2 is revised and paragraph 3
is removed.
0
ii. Add subsection Paragraph 2(b)(3)(i).
0
iii. Add subsection Paragraph 2(b)(3)(ii).
0
iv. Add subsection Paragraph 2(b)(3)(iv).
0
b. Under Section 1005.10 Preauthorized Transfers:
0
i. In subsection 10(e) Compulsory Use:
0
A. Revise subsection 10(e)(1) Credit.
0
B. In subsection 10(e)(2) Employment or Government Benefit, paragraph 2
is added.
0
c. Under Section 1005.12--Relation to Other Laws:
0
i. Revise subsection 12(a) Relation to Truth in Lending.
0
ii. In subsection 12(b) Preemption of Inconsistent State Laws,
paragraph 2 is revised and paragraphs 3 and 4 are added.
0
d. New Section 1005.15 Electronic Fund Transfer of Government Benefits
is added.
0
e. Under Section 1005.18 Requirements for Financial Institutions
Offering Payroll Card Accounts, the heading is revised.
0
f. Under revised Section 1005.18 Requirements for Financial
Institutions Offering Prepaid Accounts:
0
i. In subsection 18(a) Coverage, paragraphs 1 and 2 are revised.
0
ii. Revise subsection 18(b), including the subheading.
0
iii. Revise subsection 18(c), including the subheading.
0
iv. Add subsection 18(e) Modified Limitations on Liability and Error
Resolution Requirements.
0
v. Add subsection 18(g) Credit Card Plans Linked to Prepaid Accounts.
0
g. New Section 1005.19 Internet Posting of Prepaid Account Agreements
is added.
0
h. Under Section 1005.30 Remittance Transfer Definitions:
0
i. In subsection 30(g) Sender, paragraph 3 is revised.
The revisions, additions, and removals read as follows:
Supplement I to Part 1005--Official Interpretations
Section 1005.2--Definitions
* * * * *
2(b) Account
* * * * *
2. Examples of accounts not covered by Regulation E (12 CFR part
1005) include:
i. Profit-sharing and pension accounts established under a trust
agreement, which are exempt under Sec. 1005.2(b)(2).
ii. Escrow accounts, such as those established to ensure payment
of items such as real estate taxes, insurance premiums, or
completion of repairs or improvements.
iii. Accounts for accumulating funds to purchase U.S. savings
bonds.
* * * * *
Paragraph 2(b)(3)(i)
1. Debit card includes prepaid card. For purposes of subpart A,
except for Sec. 1005.17, the term debit card also includes a
prepaid card.
2. Established primarily for personal, family, or household
purposes. Section 1005.2(b)(3) applies only to cards, codes, or
other devices that are acquired by or provided to a consumer
primarily for personal, family, or household purposes. For
additional guidance, see comments 20(a)-4 and -5.
3. Issued on a prepaid basis. To be issued on a prepaid basis, a
prepaid account must be loaded with funds when it is first provided
to the consumer for use. For example, if a consumer purchases a
prepaid account and provides funds that are loaded onto a card at
the time of purchase, the prepaid account is issued on a prepaid
basis. A prepaid account offered for sale in a retail store is not
issued on a prepaid basis until purchased by the consumer.
4. Capable of being loaded with funds. A prepaid account that is
not issued on a prepaid basis but is capable of being loaded with
funds thereafter includes a prepaid card issued to a consumer with a
zero balance to which funds may be loaded by the consumer or a third
party subsequent to issuance. This does not include a product that
can never store funds, such as a digital wallet that only holds
payment credentials for other accounts.
5. Issued on a prepaid basis or capable of being loaded with
funds. To satisfy Sec. 1005.2(b)(3)(i)(A), a prepaid account must
either be issued on a prepaid basis or be capable of being loaded
with funds. This means that the prepaid account must be capable of
holding funds, rather than merely acting as a pass-through vehicle.
For example, if a product is only capable of storing a consumer's
payment credentials for other accounts but is incapable of having
funds stored on it, such a product is not a prepaid account.
However, if a product allows a consumer to transfer funds, which can
be stored before the consumer designates a destination for the
funds, the product satisfies Sec. 1005.2(b)(3)(i)(A).
6. Not required to be reloadable. Prepaid accounts need not be
reloadable by the consumer or a third party.
7. Redeemable upon presentation at multiple, unaffiliated
merchants. For guidance, see comments 20(a)(3)-1 and -2.
8. Person-to-person transfers. A prepaid account capable of
person-to-person transfers is an account that allows a consumer to
send funds by electronic fund transfer to another consumer or
business. An account may qualify as a prepaid account if it permits
person-to-person transfers even if it is neither redeemable upon
presentation at multiple, unaffiliated merchants for goods or
services, nor usable at automated teller machines. A transaction
involving a store gift card would not be a person-to-person transfer
if it could only be used to make payments to the merchant or
affiliated group of merchants on whose behalf the card was issued.
9. Marketed and labeled as a gift card or gift certificate.
Section 1005.2(b)(3)(i)(C) excludes, among other things, reloadable
general-use prepaid cards that are both marketed and labeled as gift
cards or gift certificates, whereas Sec. 1005.20(b)(2) excludes
such products that are marketed or labeled as gift cards or gift
certificates. Comment 20(b)(2)-2 describes, in part, a network-
branded general purpose reloadable card that is principally
advertised as a less-costly alternative to a bank account but is
promoted in a television, radio, newspaper, or internet
advertisement, or on signage as ``the perfect gift'' during the
holiday season. For purposes of Sec. 1005.20, such a product would
be considered marketed as a gift card or gift certificate because of
this occasional holiday marketing activity. For purposes of Sec.
1005.2(b)(3)(i)(C), however, such a product would not be considered
to be both marketed and labeled as a gift card or gift certificate
and thus would be covered by the definition of prepaid account.
Paragraph 2(b)(3)(ii)
1. Certain employment-related cards not covered as payroll card
accounts. The term ``payroll card account'' does not include a card
used solely to disburse incentive-based payments (other than
commissions which can represent the primary means through which a
consumer is paid), such as bonuses, which are unlikely to be a
consumer's primary source of salary or other compensation. The term
also does not include a card used solely to make disbursements
unrelated to compensation, such as petty cash reimbursements or
travel per diem payments. Similarly, a payroll card account does not
include a card that is used in isolated instances to which an
employer typically does not make recurring payments, such as when
providing final payments or in emergency situations when other
payment methods are unavailable. While such cards would not be
payroll card accounts, such cards could constitute prepaid accounts
generally, provided the other conditions of the definition of that
term in Sec. 1005.2(b)(3) are satisfied. In addition, all
transactions involving the transfer of funds to or from a payroll
card account or prepaid account are covered by the regulation, even
if a particular transaction involves payment of a bonus, other
incentive-based payment, or reimbursement, or the transaction does
not represent a transfer of wages, salary, or other employee
compensation.
Paragraph 2(b)(3)(iv)
1. Excluded health care and employee benefit related prepaid
products. For purposes of Sec. 1005.2(b)(3)(iv), ``health savings
account'' means a health savings account as defined in 26 U.S.C.
223(d); ``flexible spending account'' means a cafeteria plan which
provides health benefits or a health flexible spending arrangement
pursuant to 26 U.S.C. 125; ``medical savings account'' means an
Archer MSA as defined in 26 U.S.C. 220(d); and ``health
reimbursement arrangement'' means a health
[[Page 77314]]
reimbursement arrangement which is treated as employer-provided
coverage under an accident or health plan for purposes of 26 U.S.C.
106.
* * * * *
Section 1005.10 Preauthorized Transfers
* * * * *
10(e) Compulsory Use
10(e)(1) Credit
1. General rule for loan payments. Creditors may not require
repayment of loans by electronic means on a preauthorized, recurring
basis.
2. Overdraft credit plans not tied to prepaid accounts. Section
1005.10(e)(1) provides an exception from the general rule for
overdraft credit plans other than for a credit plan that is a credit
card account accessed by an access device for a prepaid account
where the access device is a credit card under Regulation Z, or is
accessed by an account number that is a credit card under Regulation
Z where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor. See
Regulation Z 12 CFR 1026.2(a)(15)(i) and related commentary for the
definition of credit card. A financial institution may therefore
require the automatic repayment of an overdraft credit plan not tied
to a prepaid account even if the overdraft extension is charged to
an open-end account that may be accessed by the consumer in ways
other than by overdrafts.
3. Applicability to credit accessed by access devices for
prepaid accounts. Under Sec. 1005.10(e)(1), creditors must not
require by electronic means on a preauthorized, recurring basis
repayment of credit extended under a credit plan that is a credit
card account accessed by an access device for a prepaid account
where the access device is a credit card under Regulation Z or by an
account number that is a credit card under Regulation Z where
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor. See
Regulation Z 12 CFR 1026.2(a)(15)(i) and related commentary for the
definition of credit card. The prohibition in Sec. 1005.10(e)(1)
applies to any credit extended under a credit card plan as described
above, including credit arising from transactions not using the
credit card itself but taking place under plans that involve credit
cards. For example, if the consumer writes a check that accesses a
credit card plan as discussed above, the resulting credit is subject
to the prohibition in Sec. 1005.10(e)(1) since it is incurred
through a credit card plan, even though the consumer did not use an
associated credit card. An access device is not a credit card under
Regulation Z 12 CFR 1026.2(a)(15)(i), comment 2(a)(15)-2.i.F if the
access device only accesses credit that is not subject to any
finance charge as defined in Regulation Z Sec. 1026.4 or any fee
described in Regulation Z Sec. 1026.4(c) and is not payable by
written agreement in more than four installments. Thus, the
prohibition in Sec. 1005.10(e)(1) does not apply to credit extended
under an overdraft credit plan that is not a credit card account. An
overdraft credit plan is not a credit card account if it is accessed
only by a prepaid card that only accesses credit that is not subject
to any finance charge as defined in Regulation Z Sec. 1026.4 or any
fee described in Regulation Z Sec. 1026.4(c) and is not payable by
written agreement in more than four installments.
i. Automatic periodic repayment plans for credit accessed by
access devices for prepaid accounts. Under Regulation Z 12 CFR
1026.12(d)(1), a card issuer may not take any action, either before
or after termination of credit card privileges, to offset a
cardholder's indebtedness arising from a consumer credit transaction
under the relevant credit card plan against funds of the cardholder
held on deposit with the card issuer. Under Regulation Z 12 CFR
1026.12(d)(3), with respect to credit card accounts that are
accessed by prepaid cards or by account numbers where extensions of
credit are permitted to be deposited directly only in particular
prepaid accounts specified by the creditor, a card issuer generally
is not prohibited under Sec. 1026.12(d) from periodically deducting
all or part of the cardholder's credit card debt from a deposit
account (such as a prepaid account) held with the card issuer
(subject to the limitations of Regulation Z 12 CFR 1026.13(d)(1))
under a plan that is authorized in writing by the cardholder, so
long as the creditor does not deduct all or part of the cardholder's
credit card debt from the deposit account (such as a prepaid
account) more frequently than once per calendar month, pursuant to
such a plan. A card issuer for such credit card accounts is
prohibited under Sec. 1026.12(d) from automatically deducting all
or part of the cardholder's credit card debt from a deposit account
(such as a prepaid account) held with the card issuer more
frequently than once per calendar month, such as on a daily or
weekly basis, or whenever deposits are made to the deposit account.
Section 1005.10(e)(1) further restricts the card issuer from
requiring payment from a deposit account (including a prepaid
account) of credit card balances by electronic means on a
preauthorized, recurring basis where the credit card account is
accessed by an access device for a prepaid account, or is accessed
by an account number that is a credit card under Regulation Z where
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor.
4. Incentives. A creditor may offer a program with a reduced
annual percentage rate or other cost-related incentive for an
automatic repayment feature, provided the program with the automatic
payment feature is not the only loan program offered by the creditor
for the type of credit involved. Examples include:
i. Mortgages with graduated payments in which a pledged savings
account is automatically debited during an initial period to
supplement the monthly payments made by the borrower.
ii. Mortgage plans calling for preauthorized biweekly payments
that are debited electronically to the consumer's account and
produce a lower total finance charge.
10(e)(2) Employment or Government Benefit
* * * * *
2. Government benefit. A government agency may not require
consumers to receive government benefits by direct deposit to any
particular institution. A government agency may require direct
deposit of benefits by electronic means if recipients are allowed to
choose the institution that will receive the direct deposit.
Alternatively, a government agency may give recipients the choice of
having their benefits deposited at a particular institution
(designated by the government agency) or receiving their benefits by
another means.
* * * * *
Section 1005.12 Relation to Other Laws
12(a) Relation to Truth in Lending
1. Issuance rules for access devices other than access devices
for prepaid accounts. For access devices that also constitute credit
cards (other than access devices for prepaid accounts), the issuance
rules of Regulation E apply if the only credit feature is a
preexisting credit line attached to the asset account to cover
overdrafts (or to maintain a specified minimum balance) or an
overdraft service, as defined in Sec. 1005.17(a). Regulation Z (12
CFR part 1026) rules apply if there is another type of credit
feature; for example, one permitting direct extensions of credit
that do not involve the asset account.
2. Overdraft services (other than for access devices for prepaid
accounts). The addition of an overdraft service, as that term is
defined in Sec. 1005.17(a), to an accepted access device (other
than an access device for a prepaid account) does not constitute the
addition of a credit feature subject to Regulation Z. Instead, the
provisions of Regulation E apply, including the liability
limitations (Sec. 1005.6) and the requirement to obtain consumer
consent to the service before any fees or charges for paying an
overdraft may be assessed on the account (Sec. 1005.17).
3. No initial issuance of prepaid access devices with credit
card accounts subject to Regulation Z. An access device for a
prepaid account may not access a credit card account under
Regulation Z when the access device is issued. Section
1005.18(g)(1)(ii) prohibits a financial institution from allowing an
access device for a prepaid account to access a credit plan subject
to Regulation Z (12 CFR part 1026) that would make the access device
into a credit card at any time prior to 30 calendar days after the
prepaid account is registered. Further, Sec. 1005.18(g)(1)(i) also
prohibits a financial institution from opening a credit card account
subject to Regulation Z (12 CFR part 1026) for a holder of a prepaid
account, or providing a solicitation or application to open a credit
card account to the holder of a prepaid account, prior to 30
calendar days after the prepaid account has been registered, that
would be accessed by the access device for a prepaid account that is
a credit card. Regulation Z, 12 CFR 1026.12(h), also requires a
credit card issuer to wait at least 30 calendar days from prepaid
account registration before opening a credit card account for a
holder of the prepaid account, or providing a solicitation or
application to the holder of the prepaid account to open a credit
card account, that would be accessed by the access device for a
prepaid account that is a credit card.
[[Page 77315]]
4. Addition of a credit card account to an access device for a
prepaid account. Regulation Z governs the addition of any credit
feature or plan to an access device for a prepaid account where the
access device also would be a credit card under Regulation Z (12 CFR
part 1026). Regulation Z (12 CFR 1026.2(a)(20), comment 2(a)(20)-
2.ii) provides guidance on whether a program constitutes a credit
plan. Regulation Z (12 CFR 1026.2(a)(15)(i), comment 2(a)(15))-2)
defines the term credit card and provides examples of cards or
devices that are and are not credit cards.
5. Determining applicable regulation related to liability and
error resolution. i. For an account other than a prepaid account
where credit is extended incident to an electronic fund transfer
under an agreement to extend overdraft credit between the consumer
and the financial institution, Regulation E's liability limitations
and error resolution provisions apply, in addition to Sec.
1026.13(d) and (g) of Regulation Z (which apply because of the
extension of credit associated with the overdraft feature on the
asset account). With respect to an account other than a prepaid
account, incidental credit that is not extended under an agreement
between the consumer and the financial institution where the
financial institution agrees to extend credit is governed solely by
the error resolution procedures in Regulation E and Regulation Z
Sec. 1026.13(d) and (g) do not apply. With respect to a prepaid
account where credit is extended under a credit plan that is subject
to Regulation Z subpart B, Regulation E's liability limitations and
error resolution provisions apply, in addition to Regulation Z Sec.
1026.13(d) and (g) (which apply because of the extension of credit
associated with the overdraft feature on the asset account). A
credit plan is subject to Regulation Z Subpart B if it is accessed
by an access device that is a credit card under Regulation Z or if
it is open-end credit under Regulation Z. An access device for a
prepaid account is not a credit card if the access device only
accesses credit that is not subject to any finance charge described
in Regulation Z Sec. 1026.4 or any fee described in Regulation Z
Sec. 1026.4(c) and is not payable by written agreement in more than
four installments. See Regulation Z comment 2(a)(15))-2.i.F.
Incidental credit under a credit plan that only can be accessed by
an access device for a prepaid account that is not a credit card is
not subject to Regulation Z Subpart B and is governed solely by the
error resolution procedures in Regulation E because the credit plan
is not accessed by a credit card and the plan is not open-end
credit. In this case, Regulation Z Sec. 1026.13(d) and (g) do not
apply.
ii. For transactions involving access devices that also function
as credit cards under Regulation Z, whether Regulation E or
Regulation Z (12 CFR part 1026) applies depends on the nature of the
transaction. For example, if the transaction solely involves an
extension of credit, and does not include a debit to a consumer
asset account, such as a checking account or prepaid account, the
liability limitations and error resolution requirements of
Regulation Z apply. If the transaction debits an asset account only
(with no credit extended), the provisions of Regulation E apply. If
the transaction debits an asset account but also draws on an
overdraft credit plan subject to Regulation Z attached to the
account, Regulation E's liability limitations and error resolution
provisions apply, in addition to Sec. 1026.13(d) and (g) of
Regulation Z (which apply because of the extension of credit
associated with the overdraft feature on the asset account). If a
consumer's access device is also a credit card and the device is
used to make unauthorized withdrawals from an asset account, but
also is used to obtain unauthorized cash advances directly from a
credit plan that is subject to Regulation Z that is separate from
the asset account, both Regulation E and Regulation Z apply.
iii. The following examples illustrate these principles:
A. A consumer has a card that can be used either as a credit
card or an access device that draws on the consumer's checking
account. When used as a credit card, the card does not first access
any funds in the checking account but draws only on a separate
credit card account subject to Regulation Z. If the card is stolen
and used as a credit card to make purchases or to get cash advances
at an ATM from the line of credit, the liability limits and error
resolution provisions of Regulation Z apply; Regulation E does not
apply.
B. In the same situation, if the card is stolen and is used as
an access device to make purchases or to get cash withdrawals at an
ATM from the checking account, the liability limits and error
resolution provisions of Regulation E apply; Regulation Z does not
apply.
C. In the same situation, assume the card is stolen and used
both as an access device for the checking account and as a credit
card; for example, the thief makes some purchases using the card to
access funds in the checking account and other purchases using the
card as a credit card. Here, the liability limits and error
resolution provisions of Regulation E apply to the unauthorized
transactions in which the card was used as an access device for the
checking account, and the corresponding provisions of Regulation Z
apply to the unauthorized transactions in which the card was used as
a credit card.
D. Assume a somewhat different type of card, one that draws on
the consumer's checking account and can also draw on an overdraft
credit plan subject to Regulation Z attached to the checking
account. The overdraft credit plan associated with the card is
accessed only when the consumer uses the card to make a purchase (or
other transaction) for which there are insufficient or unavailable
funds in the checking account. In this situation, if the card is
stolen and used to make purchases funded entirely by available funds
in the checking account, the liability limits and the error
resolution provisions of Regulation E apply. If the use of the card
results in an extension of credit that is incident to an electronic
fund transfer--i.e., if the transaction is funded partially by funds
in the consumer's asset account and partially by credit extended
under the overdraft credit plan--the error resolution provisions of
Sec. 1026.13(d) and (g) of Regulation Z apply in addition to the
Regulation E provisions, but the other liability limit and error
resolution provisions of Regulation Z do not. Relatedly, if the use
of the card is funded entirely by credit extended under the
overdraft credit plan, the transaction is governed solely by the
liability limitations and error resolution requirements of
Regulation Z. See Sec. 1026.13(i).
E. The same principles in comment 12(a))-5.iii.A, B, C, and D
apply to an access device for a prepaid account that also is a
credit card under Regulation Z.
12(b) Preemption of Inconsistent State Laws
* * * * *
2. Preemption determinations generally. The Bureau recognizes
state law preemption determinations made by the Board of Governors
of the Federal Reserve System prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
3. Preemption determination--Michigan. The Board of Governors
determined that certain provisions in the state law of Michigan are
preempted by the Federal law, effective March 30, 1981:
i. Definition of unauthorized use. Section 488.5(4) of the state
law of Michigan, governing electronic fund transfers, is preempted
to the extent that it relates to the section of state law governing
consumer liability for unauthorized use of an access device.
ii. Consumer liability for unauthorized use of an account.
Section 488.14 of the state law of Michigan, governing electronic
fund transfers, is inconsistent with Sec. 1005.6 and is less
protective of the consumer than the Federal law. The state law
places liability on the consumer for the unauthorized use of an
account in cases involving the consumer's negligence. Under the
Federal law, a consumer's liability for unauthorized use is not
related to the consumer's negligence and depends instead on the
consumer's promptness in reporting the loss or theft of the access
device.
iii. Error resolution. Section 488.15 of the state law of
Michigan, governing electronic fund transfers, is preempted because
it is inconsistent with Sec. 1005.11 and is less protective of the
consumer than the Federal law. The state law allows financial
institutions up to 70 days to resolve errors, whereas the Federal
law generally requires errors to be resolved within 45 days.
iv. Receipts and periodic statements. Sections 488.17 and 488.18
of the state law of Michigan, governing electronic fund transfers,
are preempted because they are inconsistent with Sec. 1005.9, other
than for transfers of $15 or less pursuant to Sec. 1005.9(e). The
state provisions require a different disclosure of information than
does the Federal law. The receipt provision is also preempted
because it allows the consumer to be charged for receiving a receipt
if a machine cannot furnish one at the time of a transfer.
4. Preemption determination--Tennessee. The Bureau determined
that the following provision in the state law of Tennessee is
preempted by the Federal law, effective April 25, 2013:
[[Page 77316]]
i. Gift certificates, store gift cards, and stored-value cards.
Section 66-29-116 of Tennessee's Uniform Disposition of Unclaimed
(Personal) Property Act is preempted to the extent that it permits
gift certificates, store gift cards, and stored-value cards, as
defined in Sec. 1005.20(a), to be declined at the point-of-sale
sooner than the gift certificates, store gift cards, or stored-value
cards and their underlying funds are permitted to expire under Sec.
1005.20(e).
* * * * *
Section 1005.15 Electronic Fund Transfer of Government Benefits
15(c) Pre-Acquisition Disclosure Requirements
1. Model forms for pre-acquisition disclosures. Model Form A-
10(a) in Appendix A of this part contains a model form for the pre-
acquisition short disclosure requirements for government benefit
accounts pursuant to Sec. 1005.15(c). Government agencies may use
Sample Form A-10(e) of Appendix A to this part to comply with the
pre-acquisition long form disclosure requirements of Sec.
1005.15(c)(1).
2. Disclosing the short and long form before acquisition.
Section 1005.15(c)(1) requires that, before a consumer acquires an
account governed by Sec. 1005.15, a government agency must comply
with the pre-acquisition disclosure requirements applicable to
prepaid accounts as set forth in Sec. 1005.18(b). Section
1005.18(b)(1)(i) generally requires delivery of both the short form
disclosure required by Sec. 1005.18(b)(2)(i) and the long form
disclosure required by Sec. 1005.18(b)(2)(ii) before a consumer
acquires a prepaid account. The following example illustrates when a
consumer receives disclosures before acquisition of an account for
purposes of Sec. 1005.15(c)(1):
i. A government agency informs a consumer that she can receive
distribution of benefits via government benefit account in the form
of a prepaid card. The consumer receives the short form and long
form disclosures to review at the time the consumer receives
benefits eligibility information from the agency. After receiving
the disclosures, the consumer agrees to receive benefits via the
government benefit account. These disclosures were provided to the
consumer pre-acquisition, and the agency has complied with Sec.
1005.15(c)(1). By contrast, if the consumer does not receive the
short form and long form disclosures to review until the time at
which the consumer receives the prepaid card, these disclosures were
provided to the consumer post-acquisition, and were not provided in
compliance with Sec. 1005.15(c)(1).
3. Enrollment and disclosures given during the same appointment.
The disclosures and notice required by Sec. 1005.15(c)(1) and (2)
may be given in the same process or appointment during which the
consumer acquires or agrees to acquire a government benefit account.
When a consumer receives benefits eligibility information and signs
up or enrolls to receive benefits during the same process or
appointment, a government agency that gives the disclosures and
notice required by Sec. 1005.15(c)(1) and (2) before issuing a
government benefit account complies with the timing requirements of
Sec. 1005.15(c).
15(d) Access to Account Information
1. Access to account information. For guidance, see comments
18(c)-1 through-5.
15(e) Modified Disclosure Requirements
1. Modified limitations on liability and error resolution
requirements. For guidance, see comments 18(e)-1 through-3.
* * * * *
Section 1005.18 Requirements for Financial Institutions Offering
Prepaid Accounts
18(a) Coverage
1. Issuance of access device. Consistent with Sec. 1005.5(a)
and except as provided, as applicable, in Sec. 1005.5(b), a
financial institution may issue an access device only in response to
an oral or written request for the device, or as a renewal or
substitute for an accepted access device. A consumer is deemed to
request an access device for a payroll card account when the
consumer chooses to receive salary or other compensation through a
payroll card account. A consumer is deemed to request an access
device for a prepaid account when, for example, the consumer
acquires a prepaid account offered for sale at a retail store or
acquires a prepaid account by making a request or submitting an
application by telephone or online.
2. Application to employers and service providers. Typically,
employers and third-party service providers do not meet the
definition of a ``financial institution'' subject to the regulation
because they neither hold prepaid accounts (including payroll card
accounts) nor issue prepaid cards and agree with consumers to
provide EFT services in connection with prepaid accounts. However,
to the extent an employer or a service provider undertakes either of
these functions, it would be deemed a financial institution under
the regulation.
18(b) Pre-Acquisition Disclosure Requirements
18(b)(1) Timing of Disclosures
18(b)(1)(i) General
1. Disclosing the short form and long form before acquisition.
Section 1005.18(b)(1)(i) generally requires delivery of both a short
form disclosure as described in Sec. 1005.18(b)(2)(i) and a long
form disclosure as described in Sec. 1005.18(b)(2)(ii) before a
consumer acquires a prepaid account. The following examples
illustrate when a consumer receives disclosures before acquisition
for purposes of Sec. 1005.18(b)(1)(i):
i. A consumer inquires about obtaining a prepaid account at a
branch location of a bank. A consumer then receives printed short
form and long form disclosures related to the prepaid account
product. After receiving the disclosures, a consumer then agrees to
open a prepaid account with the bank. This consumer received the
short form and long form pre-acquisition in accordance with Sec.
1005.18(b)(1)(i).
ii. A consumer learns that he or she can receive wages via a
payroll card account, at which time a consumer is provided with the
short form and long form disclosure to review. A consumer then
agrees to receive wages via a payroll card account. These
disclosures were provided in compliance with Sec. 1005.18(b)(1)(i).
By contrast, if a consumer receives the payroll card or other access
device at the end of the first pay period two weeks later, at which
time a consumer also receives the short form and long form
disclosure to review for the first time, these disclosures were
provided to a consumer post-acquisition, and thus not provided in
compliance with Sec. 1005.18(b)(1)(i).
2. Disclosures provided electronically. When the short form and
long form disclosures required under Sec. 1005.18(b)(2)(i) and (ii)
are presented after a consumer has initiated a purchase for a
prepaid account on a financial institution's Web site, but before a
consumer provides any personal identifying information and agrees to
accept the prepaid account, such disclosures are made pre-
acquisition in accordance with Sec. 1005.18(b)(1)(i). The short
form and long form disclosures required by Sec. 1005.18(b)(2)(i)
and (ii) that are provided electronically when a consumer acquires a
prepaid account on a financial institution's Web site are considered
to be given after a consumer acquires a prepaid account if a
consumer can easily bypass the disclosures before acquiring the
prepaid account. A financial institution can present the short form
and long form disclosures on the same Web page to fulfill the
requirements of Sec. 1005.18(b)(1)(i). A financial institution
could also present the short form disclosure on a Web page and
include a hyperlink to the long form disclosure on that same Web
page, but, if doing so, a consumer must not have to review any
unrelated links before viewing the long form disclosure.
18(b)(1)(ii) Disclosures for Prepaid Accounts Acquired in Retail Stores
1. Retail stores. Section 1005.18(b)(1)(ii) sets forth
alternative disclosure requirements for prepaid accounts acquired in
retail stores. For purposes of Sec. 1005.18(b)(1)(ii), a retail
store is a location where a consumer can obtain a prepaid account in
person and that is operated by an entity other than the financial
institution or by an agent of the financial institution. A bank or
credit union branch is not a retail store. Drug stores and grocery
stores at which a consumer can acquire a prepaid account may be
retail stores. A retail store that offers one financial
institution's prepaid account products exclusively would be
considered an agent of the financial institution and, thus, both the
short form and the long form disclosure must be provided pre-
acquisition pursuant to Sec. 1005.18(b)(1)(i).
2. Disclosures provided inside prepaid account access device
packaging material. Except when providing the long form disclosure
post-acquisition in accordance with the retail store exception set
forth in Sec. 1005.18(b)(1)(ii), the short form and long form
disclosures required by Sec. 1005.18(b)(2)(i) and (ii) must be
provided to a consumer pre-acquisition in compliance with Sec.
1005.18(b)(1)(i). Disclosures are considered to have been provided
post-acquisition if they are inside the packaging material
accompanying a prepaid account
[[Page 77317]]
access device that a consumer cannot see or access before acquiring
the prepaid account, or if it is not readily apparent to a consumer
that he or she has the ability to access the disclosures inside of
the packaging material. For example, if the packaging material is
presented in a way that consumers would assume they must purchase
the prepaid account before they can open the packaging material, the
financial institution would be deemed to have provided disclosures
post-acquisition.
3. Consumers working in retail stores. A payroll card account
offered to and accepted by consumers working in retail stores would
not be considered a prepaid account acquired in a retail store for
purposes of Sec. 1005.18(b)(1)(ii), and thus, a consumer must
receive the short and long form disclosures pre-acquisition pursuant
to the timing requirement set forth in Sec. 1005.18(b)(1)(i).
4. Providing the long form disclosures by telephone in a retail
store. Pursuant to Sec. 1005.18(b)(1)(ii), a financial institution
may provide the disclosures described in Sec. 1005.18(b)(2)(ii)
after a consumer acquires a prepaid account in a retail store, if
the three conditions set forth in Sec. 1005.18(b)(1)(ii)(A) through
(C) are met. Pursuant to Sec. 1005.18(b)(1)(ii)(C), a financial
institution must make the long form accessible to a consumer by
telephone and by a Web site when not providing a printed version of
the long form disclosure to a consumer prior to acquisition of a
prepaid account. A financial institution could, for example, provide
the long form disclosure by telephone using an interactive voice
response or similar system or by using a customer service agent.
18(b)(1)(iii) Disclosures for a Prepaid Account Acquired Orally by
Telephone
1. Prepaid accounts acquired by telephone. Section
1005.18(b)(1)(iii) sets forth requirements for prepaid accounts
acquired orally by telephone. For purposes of Sec.
1005.18(b)(1)(iii), a prepaid account is considered to have been
acquired orally by telephone when a consumer speaks to a customer
service agent or communicates with an automated system, such as an
interactive voice response system, to provide personal identifying
payment information to acquire a prepaid account. Prepaid accounts
acquired using a mobile device without speaking to a customer
service agent or communicating with an automated system are not
considered to have been acquired orally by telephone.
2. Disclosures for prepaid accounts acquired by telephone.
Pursuant to Sec. 1005.18(b)(1)(iii), a financial institution must
disclose the information required by Sec. 1005.18(b)(2)(i) orally
before a consumer acquires a prepaid account orally by telephone. To
comply with the pre-acquisition requirement set forth in Sec.
1005.18(b)(1)(i) for prepaid accounts acquired orally by telephone,
a financial institution may, for example, read the disclosures
required under Sec. 1005.18(b)(2)(i) over the telephone after a
consumer has initiated the purchase of a prepaid account by calling
the financial institution, but before a consumer agrees to acquire
the prepaid account. Although the disclosures required by Sec.
1005.18(b)(2)(ii) are not required to be given pre-acquisition when
a consumer acquires a prepaid account orally by telephone, a
financial institution must communicate to a consumer that the long
form is available upon request, either orally by telephone or on a
Web site. In addition, a financial institution must provide
information on all fees in the terms and conditions as required by
Sec. 1005.7(b)(5), as modified by Sec. 1005.18(f), before the
first electronic fund transfer is made from a consumer's prepaid
account.
18(b)(2) Content of Disclosures
18(b)(2)(i) Short Form Content Requirements
1. Disclosures that are inapplicable. Disclosures required by
Sec. 1005.18(b)(2)(i) must always be provided prior to prepaid
account acquisition, even when a particular disclosure is not
applicable to a specific prepaid account product. For example, if a
financial institution does not charge a fee to a consumer for
withdrawing money at an automated teller machine in the financial
institution's network or an affiliated network, which is a type of
fee that is required to be disclosed pursuant to Sec.
1005.18(b)(2)(i)(B)(3), the financial institution should list ``ATM
withdrawal (in network)'' on the short form disclosure and list
``$0'' as the fee. If, however, the financial institution does not
allow a consumer to withdraw money from automated teller machines
that are either in the financial institution's network or from those
in an affiliated network, the financial institution should still
list ``ATM withdrawal (in-network)'' and ``ATM withdrawal (out-of-
network)'' on the short form disclosure but instead state ``not
offered'' or ``N/A.''
2. Number of fees disclosed per fee type. No more than two fees
may be disclosed for each fee type required to be listed by Sec.
1005.18(b)(2)(i)(B)(2), (3), and (5) in the short form disclosure.
Only one fee may be disclosed for each fee type required to be
listed by Sec. 1005.18(b)(2)(i)(B)(1), (4), (6), (7) and (8),
however, Sec. 1005.18(b)(2)(i)(B)(8) requires the disclosure of up
to three additional fee types. For example, if a financial
institution offers more than one method for loading cash into a
prepaid account, only the fee for the method that will charge the
highest fee should be disclosed, and the financial institution may
use an asterisk or other symbol next to the cash reload fee
disclosed to indicate that the fee may be lower. See comment
18(b)(2)(i)(C)-1.
18(b)(2)(i)(B) Fees and Other Information
18(b)(2)(i)(B)(3) ATM Withdrawal Fees
1. Foreign ATM withdrawal fees. Pursuant to Sec.
1005.18(b)(2)(i)(B)(3), a financial institution must disclose the
fees imposed when a consumer uses an automated teller machine in the
United States to initiate a withdrawal of cash, both within and
outside of the financial institution's network or a network
affiliated with the financial institution, from the prepaid account.
If the fee imposed on a consumer for using an automated teller
machine in a foreign country to initiate a withdrawal of cash is
different from the fee charged for using an automated teller machine
in the United States within or outside the financial institution's
network or a network affiliated with the financial institution, a
financial institution must not disclose the foreign ATM fee pursuant
to Sec. 1005.18(b)(2)(i)(B)(3), but may be required to do so
pursuant to Sec. 1005.18(b)(2)(i)(B)(8), as part of the incidence-
based fee disclosure.
18(b)(2)(i)(B)(4) Cash Reload Fee
1. Cash reload fees. Pursuant to Sec. 1005.18(b)(2)(i)(B)(4), a
financial institution must disclose a fee imposed when a consumer
loads cash into a prepaid account. For example, the cash reload fee
would include the cost of adding cash at a point-of-sale terminal,
the cost of purchasing an additional card or other device on which
cash is loaded and then transferred into a prepaid account, or any
other method a consumer may use to load cash into a prepaid account.
If the financial institution offers more than one method for a
consumer to load cash into the prepaid account, Sec.
1005.18(b)(2)(i)(C) requires that it must only disclose the highest
fee on the short form.
18(b)(2)(i)(B)(5) ATM Balance Inquiry Fees
1. Foreign ATM balance inquiry fees. Pursuant to Sec.
1005.18(b)(2)(i)(B)(5), a financial institution must disclose the
two fees imposed when a consumer uses an automated teller machine in
the United States to check the balance of a consumer's prepaid
account, both within and outside of the financial institution's
network or a network affiliated with the financial institution. If
the fee imposed on a consumer for using an automated teller machine
in a foreign country to check the balance of a consumer's prepaid
account is different from the fee charged for using an automated
teller machine within or outside the financial institution's network
or a network affiliated with the financial institution in the United
States, a financial institution would not disclose the foreign ATM
balance inquiry fee pursuant to Sec. 1005.18(b)(2)(i)(B)(5), but
could do so by Sec. 1005.18 (b)(2)(i)(B)(8).
18(b)(2)(i)(B)(7) Inactivity Fee
1. Relationship between inactivity fees and periodic fees.
Section 1005.18(b)(2)(i)(B)(7) requires disclosure of any fee for
non-use or inactivity on a prepaid account as well as the duration
of inactivity that triggers a financial institution to impose such
an inactivity fee. When disclosing this fee pursuant to Sec.
1005.18(b)(2)(ii)(A) as part of the long form disclosure, a
financial institution should specify whether this inactivity fee is
imposed in lieu of or in addition to the periodic fee disclosed
pursuant to Sec. 1005.18(b)(2)(i)(B)(1).
18(b)(2)(i)(B)(8) Incidence-Based Fee Disclosures
18(b)(2)(i)(B)(8)(I) Generally
1. Incidence-based fee disclosures. Section
1005.18(b)(2)(i)(B)(8) requires the disclosure of up to three fees,
other than any of those disclosed pursuant to Sec.
1005.18(b)(2)(i)(B)(1) through (7), that were incurred most
frequently in the prior 12-month period from that prepaid account
product. If a prepaid account product only has one, two, or three
fees not already disclosed pursuant to Sec. 1005.18(b)(2)(i)(B)(1)
through (7), Sec. 1005.18(b)(2)(i)(B)(8) requires disclosure of
those fees assuming they were incurred by a
[[Page 77318]]
consumer at least once during the prior 12-month period. Conversely,
if a prepaid account has four fees not already disclosed pursuant to
Sec. 1005.18(b)(2)(i)(B)(1) through (7), Sec.
1005.18(b)(2)(i)(B)(8)(I) requires disclosure of the three fees most
frequently incurred. If the disclosures made pursuant to Sec.
1005.18(b)(2)(i)(B)(1) through (7) capture a prepaid account
product's entire fee schedule, a financial institution has no
obligation to disclose additional information on the short form
pursuant to Sec. 1005.18(b)(2)(i)(B)(8)(I).
2. Determining incidence-based fees. Section
1005.18(b)(2)(i)(B)(8)(I) requires financial institutions at the
same time each year, in accordance with the timing requirements of
Sec. 1005.18(h), to total the incidence for each type of fee
incurred during the prior 12-month period by consumers using a
particular prepaid account product. Incidence should be considered
on a total basis across all consumers using a particular prepaid
account product. For example, if a given consumer incurred one fee
type ten times during the prior 12-month period, all ten instances
of that individual consumer's paying such a fee must be factored
into the total incidence calculation for that fee type. If a
financial institution offers more than one prepaid account product,
it must consider consumers' fee incidence for each product
separately and not consolidate the fee incidence across all of its
prepaid account products. The price for purchasing or activating a
prepaid account could be an incidence-based fee for purposes of
Sec. 1005.18(b)(2)(i)(B)(8).
3. Relationship between incidence-based fee assessment and Sec.
1005.18(h). Section 1005.18(b)(2)(i)(B)(8)(I) requires that a
financial institution disclose up to three fees, other than any of
the fees disclosed pursuant to Sec. 1005.18(b)(3)(iii)(B)(1)
through (7). Section 1005.18(h)(2) states that after twelve months,
all prepaid accounts and related packaging material, access devices,
and physical other materials, that are offered, sold, or otherwise
made available to consumers in connection with a prepaid account
must comply with the requirements of this Sec. 1005.18(b). A
financial institution must therefore make its first incidence-based
fee assessment in time to ensure that all prepaid accounts and
related packaging material, access devices, and physical other
materials, that are offered, sold, or otherwise made available to
consumers in connection with a prepaid account include the
incidence-based disclosure within 12 months in accordance with Sec.
1005.18(h)(2). Section 1005.18(h)(1), however, states that within
nine months any newly-created disclosures would have to comply with
the disclosure requirements in Sec. 1005.18(b)(2). Thus, if a
financial institution creates new disclosures within nine months of
the effective date, those disclosures would need to include the
appropriate incidence-based fee disclosure in accordance with
1005.18(h)(1).
4. Multiple service plan prepaid account products. When
disclosing multiple service plans on a short form disclosure as
permitted by Sec. 1005.18(b)(3)(iii)(B)(1), a financial institution
must consider the frequency with which fees are incurred from all of
those plans as a whole to determine which three additional fees to
disclose pursuant to Sec. 1005.18(b)(2)(i)(B)(8)(I). If, however,
the financial institution is disclosing the fee schedule for only
the service plan in which a consumer is enrolled by default upon
acquiring the prepaid account, it would consider the fee incidence
for that service plan. See comment 18(b)(3)(iii)(B)-1 for guidance
on what constitutes multiple service plans.
5. Updating disclosures for retail store packaging. For prepaid
accounts sold in retail stores, Sec. 1005.18(b)(2)(i)(B)(8)(I)
permits a financial institution to implement any necessary updates
to the incidence-based fee disclosures at the time the institution
prints new prepaid account packaging materials. Section
1005.18(b)(2)(i)(B)(8)(I) does not require that financial
institutions immediately destroy existing inventory in retail stores
or elsewhere in the distribution channel, to the extent the
disclosures on such packaging materials are otherwise accurate, to
comply with this requirement. For example, if a financial
institution determines that an incidence-based fee listed on a short
form disclosure in a retail store is no longer one of the most
commonly incurred fees and makes the appropriate change when
printing new disclosures, any packages in retail stores that contain
the previous incidence-based fee disclosure may still be sold and
comply with Sec. 1005.18(b)(2)(i)(B)(8)(I).
18(b)(2)(i)(B)(8)(II) New Prepaid Account Products
1. New prepaid account products. If a particular prepaid account
product was not offered by the financial institution during the
prior 12-month period, Sec. 1005.18(b)(2)(i)(B)(8)(II) requires the
financial institution to disclose up to three fees other than any of
those fees disclosed pursuant to Sec. 1005.18(b)(2)(i)(B)(1)
through (7) that it reasonably anticipates will be incurred by
consumers most frequently during the next 12-month period. The
financial institution should use available data to reasonably
anticipate what fees should be disclosed. For example, if a
financial institution changes the name of its prepaid account
product and develops a new marketing and distribution plan but does
not alter the prepaid account's fee schedule, this would be
considered a new prepaid account product for purposes of Sec.
1005.18(b)(2)(i)(B)(8)(II). Insofar as the fee schedule remains
unchanged, however, and the financial institution reasonably
anticipates that the fees it previously disclosed pursuant to Sec.
1005.18(b)(2)(i)(B)(8)(I) would remain unchanged, the financial
institution should continue to disclose those fees for an additional
12-month period. See comment 18(b)(2)(i)(B)(8)(I)-1 for guidance on
how to determine which three fees to disclose.
18(b)(2)(i)(B)(8)(III) Revised Prepaid Account Products
1. Revised prepaid account products. Section
1005.18(b)(2)(i)(B)(8)(III) requires that if the financial
institution changes an existing prepaid account product's fee
schedule at any point after assessing its incidence-based fee
disclosure for the prior 12-month period pursuant to Sec.
1005.18(b)(2)(i)(B)(8)(I), it must determine whether, after making
such changes, it reasonably anticipates that the existing incidence-
based fee disclosure will represent the most commonly incurred fees
for the remainder of the 12-month period. For example, if a
financial institution changes its card replacement fee from $3.00 to
$4.00 in May after already assessing in January whether the
incidence-based fees need to be updated for the current 12-month
period, this change in the fee schedule would subject the prepaid
account product to Sec. 1005.18(b)(2)(i)(B)(8)(III). In this
example, the financial institution would assess whether it
reasonably anticipates that the existing incidence-based fee
disclosure still lists what will be the most commonly incurred fees
from May until the following January when the financial institution
conducts its next, annual incidence-based fees assessment.
18(b)(2)(i)(B)(9) Overdraft Services and Other Credit Features
1. Short form overdraft disclosure. Section
1005.18(b)(2)(i)(B)(9) requires disclosure of a statement that
credit-related fees may apply if, at any point, a credit plan may be
offered in connection with the prepaid account. This statement would
have to be provided on all short form disclosures, regardless of
whether some consumers may never be solicited to enroll in such a
plan, if such a plan could be offered.
18(b)(2)(i)(B)(10) Statement Regarding Other Fees
1. Statement regarding other fees. Section
1005.18(b)(2)(i)(B)(10) requires a financial institution to include
a statement on the short form disclosing the number of fees, other
than those listed on the short form Sec. 1005.18(b)(2)(i)(B)(1)
through (8), listed in the long form disclosure pursuant to Sec.
1005.18(b)(2)(ii)(A). The following examples illustrate this
concept:
i. A financial institution charges a fee for issuing a consumer
a replacement card, but this fee is not among the top three fees its
consumers incurred most frequently during the prior 12-month period
and therefore would not be disclosed pursuant to Sec.
1005.18(b)(2)(i)(B)(8). This is the only fee the financial
institution imposes that is not required to be disclosed elsewhere
on the short form disclosure. The financial institution would
include a statement on the short form disclosure that it may charge
one other fee not otherwise listed, in a form substantially similar
to the clause set forth in appendix A-10(a) of this part.
ii. A financial institution does not charge any fees other than
those required to be disclosed pursuant to Sec.
1005.18(b)(2)(i)(B)(1) through (8). The financial institution may,
but is not required to, include a statement on the short form
disclosure that it does not charge any other fees not listed on the
short form disclosure.
2. Counting the number of other fees. If the fee a financial
institution imposes might vary, even if the variation is based on a
consumer's choice of how to utilize a particular service, the
financial institution must count each variation of the fee that
[[Page 77319]]
might be imposed as a separate fee. For example, if a financial
institution imposes one fee to issue a replacement card to a
consumer using a standard mail service, but charges a different (and
perhaps higher) fee if a consumer requests expedited delivery of the
replacement card, and neither of these fees are incurred frequently
enough to be disclosed as an incidence-based fee pursuant to Sec.
1005.18(b)(2)(i)(B)(8), then the financial institution would still
count each of these fees separately when determining the total
number of fees to disclose pursuant to Sec.
1005.18(b)(2)(i)(B)(10). Even if a fee could be waived under certain
conditions, it would still be counted in order to comply with Sec.
1005.18(b)(2)(i)(B)(10).
18(b)(2)(i)(B)(11) Telephone Number and Web site
1. Financial institution's telephone number. A financial
institution must make the long form disclosure described in Sec.
1005.18(b)(2)(ii) accessible to a consumer orally via a telephone
number disclosed pursuant to Sec. 1005.18(b)(2)(i)(B)(11) when a
financial institution chooses not to provide a written form of those
disclosures before a consumer acquires a prepaid account, as
described in Sec. 1005.18(b)(1)(ii). For example, a financial
institution could use a customer service agent, or an interactive
voice response system, to provide this disclosure. A consumer must
not incur a fee to call this telephone number before acquiring a
prepaid account. The telephone number disclosed pursuant to Sec.
1005.18(b)(2)(i)(B)(11) could be the same as the customer service
number for which a financial institution may impose a fee on a
consumer to use for other purposes, but a consumer could not incur
any customer service or other transaction fees when calling this
number to access the information set forth in Sec.
1005.18(b)(2)(ii) before acquiring a prepaid account in a retail
store.
2. Financial institution's Web site. Section
1005.18(b)(2)(i)(B)(11) requires disclosure of a unique URL that
must take consumers to the Web page where disclosures described in
Sec. 1005.18(b)(2)(ii) may be viewed when a financial institution
chooses not to provide a written form of those disclosures before a
consumer acquires a prepaid account, as described in Sec.
1005.18(b)(1)(ii). An entered URL that requires a consumer to
navigate various other Web pages before viewing the long form
disclosure would not comply with Sec. 1005.18(b)(2)(i)(B)(11).
18(b)(2)(i)(C) Disclosing Variable Fees
1. Disclosing variable fees in the short form. Section
1005.18(b)(2)(i)(C) requires a financial institution to disclose the
highest fee it could impose upon a consumer for each of the fee
types listed on the short form pursuant to Sec.
1005.18(b)(2)(i)(B)(1), along with a symbol, such as an asterisk, to
indicate that a lower fee might apply, and text explaining that the
fee may be lower, if applicable. For example, if a financial
institution charges a monthly fee of $4.95, but the financial
institution waives this fee if a consumer receives direct deposit
payments into the prepaid account, the financial institution would
list a monthly fee of $4.95 on the short form disclosure with an
asterisk (or other symbol) next to the dollar amount that refers to
a statement that the fee may be lower. If a financial institution
charges a cash reload fee of $3.95 at reload networks that are not
agents of the financial institution, but waives this fee if a
consumer loads money at a point-of-sale terminal operated by a
retailer that is an agent of the financial institution, the
financial institution would disclose a cash reload fee of $3.95 on
the short form disclosure pursuant to Sec. 1005.18(b)(2)(i)(C) with
an asterisk (or other symbol) next to the dollar amount that refers
to the same statement that the fee maybe lower. Section
1005.18(b)(2)(i)(C) does not permit a financial institution to
explain the conditions under which fee may be lower, but a financial
institution could use any other part of the prepaid account
product's packaging material or may use its Web site to disclose
that information. That information is also required to be disclosed
in the long form pursuant to Sec. 1005.18(b)(2)(ii)(A).
2. Third party fees. Section 1005.18(b)(2)(i)(C) states that a
financial institution must not disclose any additional third party
fees imposed in connection with any of the fees disclosed pursuant
to Sec. 1005.18(b)(2)(i)(B)(1) through (7). Third parties could
include service providers and other entities, regardless of whether
the entity is an agent of the financial institution.
18(b)(2)(ii) Long Form Content Requirements
18(b)(2)(ii)(A) Fees
1. Fee disclosure. Section 1005.18(b)(2)(ii)(A) requires a
financial institution to disclose every fee that may be imposed on a
consumer and the conditions, if any, under which the fee may be
imposed, waived, or reduced. For example, if a financial institution
charges a cash reload fee, the financial institution must list the
amount of the cash reload fee and also specify any circumstances
under which a consumer can qualify for a lower fee. Relevant
conditions to disclose could also include, for example, if there is
a limit on the amount of cash a consumer may load into the prepaid
account in a transaction or during a particular time period. Section
1005.18(b)(2)(ii)(A) also explains that a financial institution must
not utilize any symbols to explain conditions under which any fee
may be imposed.
2. Disclosing a service or feature without a charge. A financial
institution may, at its option, choose to disclose pursuant to Sec.
1005.18(b)(2)(ii)(A), any service or feature it provides or offers
even if it does not charge a fee for that service or feature. For
example, a financial institution may choose to list ``online bill
pay service'' and indicate that the fee is ``$0'' or ``free'' when
the financial institution does not charge consumers a fee for that
service or feature. By contrast, where a service or feature is
available without a fee for an introductory period, but where a fee
may be imposed at the conclusion of the introductory period for that
service or feature, the financial institution could not indicate
that the fee is ``$0.'' The financial institution should instead
list the main fee and explain in the separate explanatory column how
the fee could be lower during the introductory period, what that
alterative fee would be, and when it will be imposed. Similarly, if
a consumer must enroll in an additional service to avoid incurring a
fee for another service, neither of those services should disclose a
fee of ``$0,'' but should instead list each fee amount imposed if a
consumer does not enroll. For example, if the monthly fee is waived
once a consumer receives direct deposit payments into the prepaid
account, the monthly fee imposed upon a consumer if they do not
receive direct deposit would be disclosed in the long form, and an
explanation regarding how receiving direct deposit might lower the
fee should be included in the explanatory column in the long form.
3. Third party fees. Section 1005.18(b)(2)(ii)(A) generally
requires disclosure, to the extent known, of any third party fee
amounts that may apply. For example, a financial institution that
offers balance updates to a consumer via text message would disclose
that mobile carrier data charges may apply for each text message a
consumer receives. Section 1005.18(b)(2)(ii)(A) also requires that a
financial institution must always disclose in the long form any fees
imposed by a third party who is acting as an agent of the financial
institution for purposes of the prepaid account product. For
example, any fees that the provider of a cash reload service who has
a relationship with the financial institution may impose would be
disclosed in the long form.
18(b)(2)(ii)(B) Overdraft Services and Other Credit Features
1. Long form disclosure of overdraft services and other credit
features. Section 1005.18(b)(2)(ii)(B) requires that if, at any
point, a credit plan may be offered in connection with the prepaid
account, the disclosures described in Regulation Z, 12 CFR
1026.60(a), (b), and (c) must be provided. These disclosures must
appear in the form required under 12 CFR 1026.60(a), (b), and (c),
and, to the extent possible, on the same printed page or Web page as
the rest of the information required to be listed pursuant to Sec.
1005.18(b)(2)(ii).
18(b)(3) Form of Pre-Acquisition Disclosures
18(b)(3)(i) General
18(b)(3)(i)(B) Electronic Disclosures
1. Disclosing short forms and long forms electronically. Section
1005.18(b)(3)(i)(B) generally requires electronic delivery of the
short form and long form disclosures required by Sec.
1005.18(b)(2)(i) and (ii) when a consumer acquires a prepaid account
through the Internet, including via a mobile application. A
financial institution may, at its option, provide the short form and
long form disclosures on the same Web page or two different Web
pages as long as the disclosures are provided in accordance with the
pre-acquisition disclosure requirements of Sec. 1005.18(b)(1)(i).
2. No requirement of E-Sign consent. Section 1005.18(b)(3)(i)(B)
allows financial institutions to provide disclosures electronically
without regard to a consumer consent and other applicable provisions
of the E-Sign Act, but specifies that disclosures must be provided
electronically in a manner
[[Page 77320]]
which is reasonably expected to be accessible in light of how a
consumer is acquiring the prepaid account. For example, if a
consumer is acquiring the prepaid account using a financial
institution's Web site, it would be reasonable to expect that a
consumer would be able to access pre-acquisition disclosures
provided on a similar Web site.
3. Machine-readable text. Section 1005.18(b)(3)(i)(B) requires
that disclosures provided to a consumer through a Web site where
required by paragraph (b)(1)(ii)(C) and as described in Sec.
1005.18(b)(2)(i)(B)(11) must be made in an electronic form using a
machine-readable text format that is accessible via both Web
browsers and screen readers. A disclosure would not comply with this
requirement if it was not provided in a textual format that can be
read automatically by Internet search engines or other computer
systems.
18(b)(3)(ii) Retainable Form
1. Retainable electronic disclosures. Section 1005.18(b)(3)(ii)
generally requires that, except for disclosures provided to a
consumer through the telephone number described in Sec.
1005.18(b)(2)(i)(B)(11) or disclosures provided orally pursuant to
Sec. 1005.18(b)(1)(iii) disclosures provided to consumers pursuant
to Sec. 1005.18(b)(2)(i) and (b)(2)(ii) be retainable. A financial
institution may satisfy the requirement to provide electronic
disclosures in a retainable form if it provides disclosures on its
Web site in a format that is capable of being printed, saved or
emailed to a consumer.
18(b)(3)(iii) Tabular Format
18(b)(3)(iii)(B) Disclosures for Prepaid Account Products Offering
Multiple Service Plans
1. Multiple service plans. The multiple service plan disclosure
provisions in Sec. 1005.18(b)(3)(iii)(B) apply when a financial
institution offers more than one service plan for a particular
prepaid account product, and each plan has a different fee schedule.
For example, a financial institution might offer a prepaid account
product with one service plan where a consumer pays no periodic fee
but instead pays a fee for each transaction, and another plan that
includes a monthly fee but no per transaction fee. A financial
institution may also offer a prepaid account product with one
service plan for consumers who utilize another one of the financial
institution's non-prepaid services (e.g., a mobile phone service)
and a different plan for consumers who only utilize a financial
institution's prepaid account products. Each of these plans would be
considered a ``service plan'' for purposes of Sec.
1005.18(b)(3)(iii)(B).
18(b)(6) Prepaid Accounts Acquired in a Foreign Language
1. Principally using a foreign language. Section 1005.18(b)(6)
requires that if a financial institution principally uses a foreign
language on a packaging material, by telephone, in person, or on the
Web site a consumer utilizes to acquire a prepaid account, then
disclosures made pursuant to Sec. 1005.18(b)(2)(i) of this section
or Sec. 1005.18(b)(2)(ii) of this section must be provided in that
same foreign language. For example, if a financial institution uses
mostly Spanish on the packaging material of a prepaid account sold
in a retail store, even though a few words appear in English, then
the short form and long form disclosure provided to a consumer must
also be in Spanish. Similarly, if the homepage of the Web site a
consumer visits to acquire a prepaid account is mostly in Spanish,
the short form and long form disclosure a consumer receives pre-
acquisition must also be in Spanish. A consumer who calls a
telephone number to acquire a prepaid account and either speaks to a
customer service agent in Spanish or interacts with an IVR system in
Spanish must also receive the short form and long form disclosure
information in Spanish, in accordance with Sec. 1005.18(b)(2)(ii).
Also, if a consumer speaks with a customer service agent in a
foreign language in a bank branch or credit union location, this
would be considered ``in person,'' and a consumer must receive the
short form disclosure and the long form disclosure information in
that foreign language to comply with Sec. 1005.18(b)(6).
18(b)(7) Disclosures on a Prepaid Account Access Device
1. Web site and telephone number. Section 1005.18(b)(7) requires
that the name of a financial institution and the URL of a Web site
and a telephone number that a consumer can use to contact the
financial institution about the prepaid account must be disclosed on
the prepaid account access device. For example, a consumer might use
this information to contact a financial institution with a question
about a prepaid account's terms and conditions, or to report when an
unauthorized transaction has occurred involving a prepaid account.
18(c) Access to Prepaid Account Information
1. Posted transactions. A history of transactions provided under
Sec. 1005.18(c)(1)(ii) and (iii) shall reflect transfers once they
have been posted to the account. Thus, an institution does not need
to include transactions that have been authorized but that have not
yet posted to the account.
2. Electronic history. The electronic history required under
Sec. 1005.18(c)(1)(ii) must be provided in a form that the consumer
may keep, as required under Sec. 1005.4(a)(1). Financial
institutions may satisfy this requirement if they make the
electronic history available in a format that is capable of being
retained. For example, an institution satisfies the requirement if
it provides a history at a Web site in a format that is capable of
being printed or stored electronically using a web browser.
3. Access to account information. Section 1005.18(c)(1) permits
a financial institution, instead of furnishing periodic statements
under Sec. 1005.9(b), to make available to the consumer the
consumer's account balance by telephone, an electronic history of
the consumer's account transactions that covers at least 18 months
preceding the date the consumer electronically accesses the account,
and a written history of the consumer's account transactions upon
the consumer's oral or written request that covers at least 18
months preceding the date the institution receives the consumer's
request. Requests that exceed the requirements of Sec.
1005.18(c)(1) for providing account information, for which a
financial institution may charge a fee, include the following:
i. A financial institution may assess a fee or charge to a
consumer for responding to subsequent requests for written account
information made in a single calendar month. For example, if a
consumer makes a request for 18 months of written account
transaction history on June 1 and makes a request for 18 months of
written history on August 5, the financial institution may not
assess a fee or charge to the consumer for responding to either
request. However, if the consumer requests 18 months of written
history on June 1 and then makes the same request on June 15, the
financial institution may assess a fee or charge to the consumer for
responding to the request made on June 15, as this is the second
request in the same month.
ii. If a financial institution maintains more than 18 months of
account transaction history, it may assess a fee or charge to the
consumer for providing a written history of the consumer's account
information for transactions occurring more than 18 months prior to
the date the institution receives the consumer's request, provided
the consumer specifically requests the account transaction history
for that time period.
iii. If a financial institution offers a consumer the ability to
request automatic mailings of written history on a monthly or other
periodic basis, it may, at its option, assess a fee or charge for
such automatic mailings but not for account history requested
pursuant to Sec. 1005.18(c)(1)(iii). See comment 18(c)-4.
4. 18 months of account information. Section 1005.18(c)(1)(ii)
requires a financial institution to make available at least 18
months of account transaction information electronically, and Sec.
1005.18(c)(1)(iii) requires the financial institution to provide
that information in writing upon the consumer's request. A financial
institution may provide fewer than 18 months of written account
transaction history if the consumer requests a shorter period of
time. If a prepaid account has been open for fewer than 18 months,
the financial institution need only provide account information
pursuant to Sec. 1005.18(c)(1)(ii) and (iii) since the time of
account opening. If a prepaid account is closed or becomes inactive,
as defined by the financial institution, the financial institution
must continue to provide at least 18 months of account transaction
information from the date the request is received. See comment 9(b)-
3. When a prepaid account has been closed or inactive for 18 months,
the financial institution is no longer required to make available
any account or transaction information.
5. Summary totals of amount of fees, deposits, and debits.
Section 1005.18(c)(4) requires a financial institution to disclose a
summary total of the amount of all fees assessed against a prepaid
account, the total amount of all deposits to the account, and the
total amount of all debits from the account, for the prior calendar
month and for the calendar year to date. The calendar month and
annual fees, deposits, and debits
[[Page 77321]]
information must be disclosed on any periodic statement provided
pursuant to Sec. 1005.9(b), in any electronic history of account
transactions whether provided pursuant to Sec. 1005.18(c)(1)(ii) or
otherwise, and on any written history of account transactions
provided pursuant to Sec. 1005.18(c)(1)(iii). If a financial
institution provides periodic statements pursuant to Sec.
1005.9(b), total fees, deposits, and debits may be disclosed for
each statement period rather than each calendar month, if different.
The fees that must be included in the summary total include those
that are required to be disclosed pursuant to Sec.
1005.18(b)(2)(ii)(A). For example, an institution must include the
fee it charges a consumer for using an out-of-network ATM in the
summary total of fees, but it need not include any fee charged by an
ATM operator with whom the institution has no relationship for the
consumer's use of that operator's ATM. The summary total of fees
should be net of any fee reversals. The total amount of all debits
from the account should be exclusive of fees assessed against the
account. The total deposits and total debits must include all
deposits to and debits from the prepaid account, not just those
deposits and debits that are the result of electronic fund
transfers.
18(e) Modified Limitations on Liability and Error Resolution
Requirements
1. Error resolution safe harbor provision. Institutions that
choose to investigate notices of error provided up to 120 days from
the date a transaction has posted to a consumer's account may still
disclose the error resolution time period required by the regulation
(as set forth in the model clause in paragraph (b) of appendix A-7
of this part). Specifically, an institution may disclose to prepaid
account holders that the institution will investigate any notice of
error provided within 60 days of the consumer electronically
accessing an account or receiving a written history upon request
that reflects the error, even if, for some or all transactions, the
institution investigates any notice of error provided up to 120 days
from the date that the transaction alleged to be in error has posted
to the consumer's account. Similarly, an institution's summary of
the consumer's liability (as required under Sec. 1005.7(b)(1)) may
disclose that liability is based on the consumer providing notice of
error within 60 days of the consumer electronically accessing an
account or receiving a written history reflecting the error, even
if, for some or all transactions, the institution allows a consumer
to assert a notice of error up to 120 days from the date of posting
of the alleged error.
2. Electronic access. A consumer is deemed to have accessed a
prepaid account electronically when the consumer enters a user
identification code or password or otherwise complies with a
security procedure used by an institution to verify the consumer's
identity and to provide access to a Web site or mobile application
through which account information can be viewed. An institution is
not required to determine whether a consumer has in fact accessed
information about specific transactions to trigger the beginning of
the 60-day periods for liability limits and error resolution under
Sec. Sec. 1005.6 and 1005.11. A consumer is not deemed to have
accessed a prepaid account electronically when the consumer receives
an automated text message or other automated account alert, or
checks the account balance by telephone.
3. Untimely notice of error. An institution that provides a
transaction history under Sec. 1005.18(c)(1) is not required to
comply with the requirements of Sec. 1005.11 for any notice of
error from the consumer pertaining to a transfer that occurred more
than 60 days prior to the earlier of the date the consumer
electronically accesses the account or the date the financial
institution sends a written history upon the consumer's request.
(Alternatively, as provided in Sec. 1005.18(e)(2)(ii), an
institution need not comply with the requirements of Sec. 1005.11
with respect to any notice of error received from the consumer more
than 120 days after the date of posting of the transfer allegedly in
error.) Where the consumer's assertion of error involves an
unauthorized EFT, however, the institution must comply with Sec.
1005.6 (including the extension of time limits in Sec.
1005.6(b)(4)) before it may impose any liability on the consumer.
4. Limitations on liability and error resolution for unverified
accounts. Section 1005.18(e)(3) provides that for prepaid accounts
that are not payroll card accounts or government benefit accounts,
if a financial institution discloses to the consumer the risks of
not registering a prepaid account using a notice that is
substantially similar to the model notice contained in paragraph (c)
of appendix A-7 of this part, a financial institution is not
required to comply with the liability limits and error resolution
requirements under Sec. Sec. 1005.6 and 1005.11 for any prepaid
account with respect to which it has not completed its collection of
consumer identifying information and identity verification. Consumer
identifying information may include the consumer's full name,
address, date of birth, and Social Security number or other
government-issued identification number. Section 1005.18(e)(3) also
provides that once a consumer's identity has been verified, a
financial institution must limit the consumer's liability for
unauthorized transactions and resolve any errors that occurred prior
to verification that satisfy the timing requirements of Sec. Sec.
1005.6 or 1005.11, or the modified timing requirements in Sec.
1005.18(e), as applicable. For an unauthorized transfer or an error
asserted on a previously unverified prepaid account, whether a
consumer has timely reported the unauthorized transfer or alleged
error is based on the date the consumer contacts the financial
institution to report the unauthorized transfer or alleged error,
not the date the financial institution completes its customer
identification and verification process. For an error asserted on a
previously unverified prepaid account, the time limits for a
financial institution's investigation of errors pursuant to Sec.
1005.11(c) begin on the day following the date the financial
institution completed its customer identification and verification
process. A financial institution may not delay completing its
customer identification and verification process or refuse to verify
a consumer's identity based on the consumer's assertion of an error.
18(g) Credit Card Plans Linked to Prepaid Accounts
1. Credit card plan subject to Regulation Z. Regulation Z (12
CFR 1026.2(a)(20), comment 2(a)(20)-2.ii) provides guidance on
whether a program constitutes a credit plan. Regulation Z (12 CFR
1026.15(a)(i), comment 2(a)(15)-2.i.F provides guidance on when an
access device for a prepaid account is a credit card, and comment
2(a)(15)-2.i.G provides guidance on when an account number is a
credit card where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor.
2. Variation in account term or conditions. i. Under Sec.
1005.18(g)(2), a financial institution may offer different terms on
different prepaid account products, where the terms may differ
between a prepaid account product where a credit card plan subject
to Regulation Z cannot be linked to the prepaid account, and a
prepaid account product where a credit card plan subject to
Regulation Z can be linked to the prepaid account. However, if with
respect to a prepaid account a credit card plan subject to
Regulation Z may be offered at any point to the consumer and the
plan is accessed by an access device for the prepaid account where
the access device is a credit card under Regulation Z or is accessed
by account number that is a credit card where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, a financial institution that
establishes or holds such a prepaid account may not apply different
terms and conditions that do not relate to an extension of credit,
carrying a credit balance, or credit availability to a consumer's
account, depending on whether the consumer elects to link such a
credit card plan to the prepaid account. In addition, Sec.
1005.18(g)(2) prevents a financial institution from waiving fees or
reducing the amount of fees that do not relate to an extension of
credit, carrying a credit balance, or credit availability if the
consumer elects to link the prepaid account to a credit card plan.
ii. Account terms and conditions subject to Sec. 1005.18(g)(2)
include, but are not limited to:
A. Interest paid on funds deposited into the prepaid account, if
any;
B. Fees assessed on the prepaid account that do not relate to an
extension of credit, carrying a credit balance, or credit
availability, including any one-time or periodic fees imposed for
opening or holding a prepaid account. See Regulation Z Sec.
1026.4(b)(2), comment 4(b)(2)-1.iii and .iv for guidance on fees
that relate to an extension of credit, carrying a credit balance, or
credit availability;
C. The type of prepaid access card provided to the consumer. For
instance, an institution may not provide to consumers a PIN-only
card before a credit plan subject to Regulation Z is linked to the
prepaid account, while providing a prepaid card with both PIN and
signature-debit functionality to
[[Page 77322]]
consumers who have elected to link such a credit plan to the prepaid
account;
D. Minimum balance requirements; or
E. Account features such as online bill payment services.
iii. Account terms and conditions that relate to an extension of
credit, carrying a credit balance, or credit availability and thus
are not subject to Sec. 1005.18(g)(2) include:
A. Fees or charges assessed on the prepaid account applicable to
transactions that access the credit card plan subject to Regulation
Z (12 CFR part 1026), including transactions that access both the
prepaid account and the credit card plan;
B. Annual or other periodic fees assessed on the prepaid account
imposed for the issuance or availability of the credit card plan
subject to Regulation Z (12 CFR part 1026);
C. Any non-periodic fees that relate to the opening of the
credit card plan subject to Regulation Z (12 CFR part 1026); or
D. Other fees described in Regulation Z Sec. 1026.4(b)(2),
comment 4(b)(2)-1.iii.
iv. Examples. For all the examples below, assume that a consumer
has selected a prepaid account where a credit card plan subject to
Regulation Z may be offered to the consumer and the credit plan will
be accessed by an access device for the prepaid account where the
access device is a credit card under Regulation Z or will be
accessed by an account number that is a credit card where extensions
of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor.
A. Assume also that the consumer uses the access device to make
a purchase that only accesses the prepaid account and does not
access a credit card plan. A financial institution is prohibited by
Sec. 1005.18(g)(2) from charging a $2.00 fee for that transaction
if the consumer has not elected to link the prepaid account to the
credit card plan, and charging a $1.00 fee for that transaction
where the consumer has made such an election.
B. Assume instead the consumer has elected to link the prepaid
account to the credit card plan, and the consumer makes a purchase
transaction at point of sale where the transaction using the access
device is either entirely funded from the credit card plan, or
partially funded from the credit card plan. A financial institution
is not prevented by Sec. 1005.18(g)(2) from charging a different
amount of fee for that type of transaction than would be charged for
a transaction that is funded solely from the prepaid account. For
example, a financial institution is not prevented by Sec.
1005.18(g)(2) from charging a $2.00 fee for that transaction,
notwithstanding that only a $1.00 fee would have applied if the
transaction was solely funded from the prepaid account.
C. Assume a financial institution charges a $10 annual fee for
holding the prepaid account. Section 1005.18(g)(2) prevents a
financial institution from charging a different monthly fee for
holding the prepaid account if the consumer elects to link the
prepaid account to the credit card plan. For example, the financial
institution may not waive or discount the annual fee for holding the
prepaid account, if the consumer elects to link the prepaid account
to the credit card plan. Section 1005.18(g)(2), however, does not
prevent the institution from charging an additional fee to open the
credit card plan or for the availability of the credit card plan.
Section 1005.19 Internet Posting of Prepaid Account Agreements
19(a) Definitions
19(a)(1) Agreement
1. Provisions contained in separate documents included. Section
1005.19(a)(1) defines a prepaid account agreement, for purposes of
Sec. 1005.19, as the written document or documents evidencing the
terms of the legal obligation, or the prospective legal obligation,
between a prepaid account issuer and a consumer for a prepaid
account. An agreement may consist of several documents that, taken
together, define the legal obligation between the issuer and
consumer.
19(a)(2) Amends
1. Substantive changes. A change to an agreement is substantive,
and therefore is deemed an amendment of the agreement, if it alters
the rights or obligations of the parties. Section 1005.19(a)(2)
provides that any change in the fee information, as defined in Sec.
1005.19(a)(3), is deemed to be substantive. Examples of other
changes that generally would be considered substantive include:
i. Addition or deletion of a provision giving the issuer or
consumer a right under the agreement, such as a clause that allows
an issuer to unilaterally change the terms of an agreement.
ii. Addition or deletion of a provision giving the issuer or
consumer an obligation under the agreement, such as a clause
requiring the consumer to pay an additional fee.
iii. Changes that may affect the cost of the prepaid account to
the consumer, such as changes in a provision describing how the
prepaid account's monthly fee will be calculated.
iv. Changes that may affect how the terms of the agreement are
construed or applied, such as changes to a choice-of-law provision.
v. Changes that may affect the parties to whom the agreement may
apply, such as provisions regarding authorized users or assignment
of the agreement.
2. Non-substantive changes. Changes that generally would not be
considered substantive include, for example:
i. Correction of typographical errors that do not affect the
meaning of any terms of the agreement.
ii. Changes to the issuer's corporate name, logo, or tagline.
iii. Changes to the format of the agreement, such as conversion
to a booklet from a full-sheet format, changes in font, or changes
in margins.
iv. Changes to the name of the prepaid account to which the
program applies.
v. Reordering sections of the agreement without affecting the
meaning of any terms of the agreement.
vi. Adding, removing, or modifying a table of contents or index.
vii. Changes to titles, headings, section numbers, or captions.
19(a)(4) Issuer
1. Issuer. Section 1005.19(a)(4) provides that, for purposes of
Sec. 1005.19, issuer or prepaid account issuer means the entity to
which a consumer is legally obligated, or would be legally
obligated, under the terms of a prepaid account agreement. For
example, Bank X and Bank Y work together to issue prepaid accounts.
A consumer that obtains a prepaid account issued pursuant to this
arrangement between Bank X and Bank Y is subject to an agreement
that states ``This is an agreement between you, the consumer, and
Bank X that governs the terms of your Bank Y Prepaid Account.'' The
prepaid account issuer in this example is Bank X, because the
agreement creates a legally enforceable obligation between the
consumer and Bank X. Bank X is the issuer even if the consumer
applied for the prepaid account through a link on Bank Y's Web site
and the cards prominently feature the Bank Y logo on the front of
the card.
2. Use of third-party service providers. An issuer has a legal
obligation to comply with the requirements of Sec. 1005.19.
However, an issuer generally may use a third-party service provider
to satisfy its obligations under Sec. 1005.19, provided that the
issuer acts in accordance with regulatory guidance regarding use of
third-party service providers and other applicable regulatory
guidance. In some cases, an issuer may wish to arrange for the
entity with which it partners to issue prepaid accounts to fulfill
the requirements of Sec. 1005.19 on the issuer's behalf. For
example, Program Manager and Bank work together to issue prepaid
accounts. Under the Sec. 1005.19(a)(4) definition, Bank is the
prepaid account issuer for purposes of Sec. 1005.19. However,
Program Manager services the prepaid accounts, including mailing to
consumers account opening materials and providing electronic history
of consumers' account transactions pursuant to Sec.
1005.18(c)(1)(ii). While Bank is responsible for ensuring compliance
with Sec. 1005.19, Bank may arrange for Program Manager (or another
appropriate third-party service provider) to submit prepaid account
agreements to the Bureau under Sec. 1005.19 on Bank's behalf. Bank
must comply with regulatory guidance regarding use of third-party
service providers and other applicable regulatory guidance.
3. Partner institution Web sites. As explained in comment 19(c)-
2, if an issuer provides consumers with access to specific
information about their individual accounts, such as providing
electronic history of consumers' account transactions pursuant to
Sec. 1005.18(c)(1)(ii), through a third-party Web site, the issuer
is deemed to maintain that Web site for purposes of Sec. 1005.19.
Such a Web site is deemed to be maintained by the issuer for
purposes of Sec. 1005.19 even where, for example, an unaffiliated
entity designs the Web site and owns and maintains the information
technology infrastructure that supports the Web site, consumers with
prepaid accounts from multiple issuers can access individual account
information through the same Web site, and the Web site is not
labeled, branded, or otherwise held out
[[Page 77323]]
to the public as belonging to the issuer. A partner institution's
Web site is an example of a third-party Web site that may be deemed
to be maintained by the issuer for purposes of Sec. 1005.19. For
example, Program Manager and Bank work together to issue prepaid
accounts. Under the Sec. 1005.19(a)(4) definition, Bank is the
issuer that issues these prepaid accounts for purposes of Sec.
1005.19. Bank does not maintain a Web site specifically related to
prepaid accounts. However, consumers can access information about
their individual accounts, such as an electronic history of
consumers' account transactions, through a Web site maintained by
Program Manager. Program Manager designs the Web site and owns and
maintains the information technology infrastructure that supports
the Web site. The Web site is branded and held out to the public as
belonging to Program Manager. Because consumers can access
information about their individual accounts through this Web site,
the Web site is deemed to be maintained by Bank for purposes of
Sec. 1005.19. Bank therefore may comply with Sec. 1005.19(c) or
(d)(1) by ensuring that agreements offered to the public are posted
on Program Manager's Web site in accordance with Sec. 1005.19(c) or
(d)(1), respectively. Bank need not create and maintain a Web site
branded and held out to the public as belonging to Bank in order to
comply with Sec. 1005.19(c) and (d) as long as Bank ensures that
Program Manager's Web site complies with these sections.
19(a)(5) Offers
1. Prepaid accounts offered to limited groups. An issuer is
deemed to offer a prepaid account agreement to the public even if
the issuer solicits applications for or otherwise makes available
prepaid accounts only to a limited group of persons. For example, an
issuer may market affinity cards only to students and alumni of a
particular educational institution, or may solicit only residents of
a specific geographic location for a particular prepaid account; in
these cases, the agreement would be considered to be offered to the
public. Similarly, agreements for prepaid accounts issued by a
credit union are considered to be offered to the public even though
such prepaid accounts are available only to credit union members.
Agreements for payroll card accounts, government benefit accounts,
or for prepaid accounts used to distribute student financial aid
disbursements, or property and casualty insurance payouts, and other
similar programs are also considered to be offered to the public.
19(a)(6) Open Account
1. Open account. The definition of open account includes a
prepaid account if (i) there is an outstanding balance in the
account; (ii) the consumer can load more funds to the account even
if the account does not currently hold a balance; or (iii) the
consumer can access credit through a credit plan that would be a
credit card account under Regulation Z, 12 CFR 1026, that is offered
in connection with a prepaid account. Under this definition, an
account that meets either of these criteria is considered to be open
even if the account is considered inactive by the issuer.
19(a)(7) Prepaid Account
1. Prepaid account. Section 1005.19(a)(7) provides that, for
purposes of Sec. 1005.19, the term prepaid account means a prepaid
account as defined in Sec. 1005.2(b)(3). Therefore, for purposes of
Sec. 1005.19, a prepaid account includes, among other things, a
payroll card account as defined in Sec. 1005.2(b)(3)(iii) and an
account established by a government agency for distributing
government benefits to a consumer electronically as defined in Sec.
1005.2(b)(3)(iv) and Sec. 1005.15(a)(2).
19(b) Submission of Agreements to the Bureau
19(b)(1) Quarterly Submissions
1. Quarterly submission requirement. Section 1005.19(b)(1)
requires issuers to send quarterly submissions to the Bureau no
later than the first business day on or after January 31, April 30,
July 31, and October 31 of each year. For additional guidance as to
the quarterly submission timing requirement, see Regulation Z (12
CFR 1026.58) comment 58(c)(1)-1.
2. No quarterly submission required. i. Under Sec.
1005.19(b)(1), an issuer is not required to make any submission to
the Bureau at a particular quarterly submission deadline if, during
the previous calendar quarter, the issuer did not take any of the
following actions:
A. Offering a new prepaid account agreement that was not
submitted to the Bureau previously.
B. Amending an agreement previously submitted to the Bureau.
C. Ceasing to offer an agreement previously submitted to the
Bureau.
ii. For additional guidance as to when a quarterly submission is
not required, see Regulation Z (12 CFR 1026.58) comment 58(c)(1)-
2.ii.
3. Quarterly submission of complete set of updated agreements.
Section 1005.19(b)(1) permits an issuer to submit to the Bureau on a
quarterly basis a complete, updated set of the prepaid account
agreements the issuer offers to the public. For additional guidance
regarding quarterly submission of a complete set of updated
agreements, see Regulation Z (12 CFR 1026.58) comment 58(c)(1)-3.
19(b)(2) Amended Agreements
1. No requirement to resubmit agreements not amended. Under
Sec. 1005.19(b)(2), if a prepaid account agreement has been
submitted to the Bureau, the agreement has not been amended, and the
issuer continues to offer the agreement to the public, no additional
submission regarding that agreement is required. For additional
guidance regarding the lack of a requirement to resubmit agreements
that have not been amended, see Regulation Z (12 CFR 1026.58)
comment 58(c)(3)-1.
2. Submission of amended agreements. If an issuer amends a
prepaid account agreement previously submitted to the Bureau, Sec.
1005.19(b)(2) requires the issuer to submit the entire amended
agreement to the Bureau. The issuer must submit the amended
agreement to the Bureau by the first quarterly submission deadline
after the last day of the calendar quarter in which the change
became effective. However, the issuer is required to submit the
amended agreement to the Bureau only if the issuer offered the
amended agreement to the public as of the last business day of the
calendar quarter in which the change became effective. See comment
19(b)(2)-3. For additional guidance on the submission of amended
agreements, see Regulation Z (12 CFR 1026.58) comment 58(c)(3)-2.
3. Agreements amended but no longer offered to the public. An
issuer should submit an amended agreement to the Bureau under Sec.
1005.19(b)(2) only if the issuer offered the amended agreement to
the public as of the last business day of the calendar quarter in
which the amendment became effective. Agreements that are not
offered to the public as of the last day of the calendar quarter
should not be submitted to the Bureau. For additional guidance on
agreements that have been amended but are no longer offered to the
public, see Regulation Z (12 CFR 1026.58) comment 58(c)(3)-3.
4. Change-in-terms notices not permissible. Section
1005.19(b)(2) requires that if an agreement previously submitted to
the Bureau is amended, the issuer must submit the entire revised
agreement to the Bureau. An issuer may not fulfill this requirement
by submitting a change-in-terms or similar notice covering only the
terms that have changed. In addition, amendments must be integrated
into the text of the agreement (or the optional addendum described
in Sec. 1005.19(b)(6)), not provided as separate riders. For
additional guidance as to submission of revised agreements, see
Regulation Z (12 CFR 1026.58) comment 58(c)(3)-4.
19(b)(3) Withdrawal of Agreements
1. Notice of withdrawal of agreement. Section 1005.19(b)(3)
requires an issuer to notify the Bureau if any agreement previously
submitted to the Bureau by that issuer is no longer offered to the
public by the first quarterly submission deadline after the last day
of the calendar quarter in which the issuer ceased to offer the
agreement. For additional guidance as to notice of withdrawal of
agreements, see Regulation Z (12 CFR 1026.58) comment 58(c)(4)-1.
19(b)(4) De Minimis Exception
1. Relationship to other exceptions. The de minimis exception in
Sec. 1005.19(b)(4) is distinct from the product testing exception
under Sec. 1005.19(b)(5). The de minimis exception provides that an
issuer with fewer than 3,000 open prepaid accounts is not required
to submit any agreements to the Bureau, regardless of whether those
agreements qualify for the product testing exception. In contrast,
the product testing exception provides that an issuer is not
required to submit to the Bureau agreements offered solely in
connection with certain types of prepaid account programs with fewer
than 3,000 open accounts, regardless of the issuer's total number of
open accounts.
2. De minimis exception. Under Sec. 1005.19(b)(4), an issuer is
not required to submit any prepaid account agreements to the Bureau
under Sec. 1005.19(b)(1) if the issuer has fewer than 3,000 open
prepaid accounts
[[Page 77324]]
as of the last business day of the calendar quarter. For additional
guidance on the de minimis exception, see Regulation Z (12 CFR
1026.58) comment 58(c)(5)-2.
3. Date for determining whether issuer qualifies. Whether an
issuer qualifies for the de minimis exception is determined as of
the last business day of each calendar quarter. For additional
guidance on the date for determining whether an issuer qualifies for
the de minimis exception, see Regulation Z (12 CFR 1026.58) comment
58(c)(5)-3.
4. Date for determining whether issuer ceases to qualify.
Whether an issuer has ceased to qualify for the de minimis exception
under Sec. 1005.19(b)(4) is determined as of the last business day
of the calendar quarter. For additional guidance on the date for
determining whether an issuer ceases to qualify for the de minimis
exception, see Regulation Z (12 CFR 1026.58) comment 58(c)(5)-4.
5. Option to withdraw agreements. Section 1005.19(b)(4) provides
that if an issuer that did not previously qualify for the de minimis
exception qualifies for the de minimis exception, the issuer must
continue to make quarterly submissions to the Bureau as required by
Sec. 1005.19(b)(1) until the issuer notifies the Bureau that the
issuer is withdrawing all agreements it previously submitted to the
Bureau. For additional guidance on an issuer's option to withdraw
its agreements submitted to the Bureau, see Regulation Z (12 CFR
1026.58) comment 58(c)(5)-5.
19(b)(6) Form and Content of Agreements Submitted to the Bureau
1. ``As of'' date. Agreements submitted to the Bureau must
contain the provisions of the agreement and fee information in
effect as of the last business day of the preceding calendar
quarter. For example, on June 1, an issuer decides to decrease the
out-of-network ATM withdrawal fee associated with one of the
agreements it offers to the public. The change in that fee will
become effective on August 1. If the issuer submits the agreement to
the Bureau on July 31 (for example, because the agreement has been
otherwise amended), the agreement submitted should not include the
new lower out-of-network ATM withdrawal fee because that lower fee
was not in effect on June 30, the last business day of the preceding
calendar quarter.
2. Fee agreement variations do not constitute separate
agreements. Fee information that may vary from one consumer to
another depending on the consumer's state of residence or other
factors must be disclosed by setting forth all the possible
variations or by providing a range of possible variations. Two
agreements that differ only with respect to variations in the fee
information do not constitute separate agreements for purposes of
this section. For example, an issuer offers two types of prepaid
accounts that differ only with respect to the monthly fee. The
monthly fee for one type of account is $4.95, while the monthly fee
for the other type of account is $0 if the consumer regularly
receives direct deposit to the prepaid account. The provisions of
the agreement and fee information for the two types of accounts are
otherwise identical. The issuer should not submit to the Bureau one
agreement with fee information listing a $4.95 monthly fee and
another agreement with fee information listing a $0 monthly fee.
Instead, the issuer should submit to the Bureau one agreement with
fee information listing possible monthly fees of $4.95 or $0,
including the explanation that the latter fee is dependent upon the
consumer regularly receiving direct deposit.
3. Integrated agreement requirement. Issuers may not provide
provisions of the agreement or fee information in the form of
change-in-terms notices or riders. The only addendum that may be
submitted as part of an agreement is the optional fee information
addendum described in Sec. 1005.19(b)(6)(ii). Changes in provisions
or fee information must be integrated into the body of the agreement
or the optional fee information addendum described in Sec.
1005.19(b)(6)(ii). For example, it would be impermissible for an
issuer to submit to the Bureau an agreement in the form of a terms
and conditions document dated January 1, 2015, four subsequent
change in terms notices, and 2 addenda showing variations in fee
information. Instead, the issuer must submit a document that
integrates the changes made by each of the change in terms notices
into the body of the original terms and conditions document and a
single optional addendum displaying variations in fee information.
19(c) Posting of Agreements Offered to the Public
1. Requirement applies only to agreements submitted to the
Bureau. Issuers are only required to post and maintain on their
publicly available Web site the prepaid account agreements that the
issuer must submit to the Bureau under Sec. 1005.19(b). This
posting requirement is distinct from that of Sec. 1005.7, which
requires an issuer to provide certain disclosures at the time a
consumer contracts for an electronic fund transfer service or before
the first electronic fund transfer is made involving the consumer's
account, as well as the change in terms notice required under Sec.
1005.8(a). This requirement is also distinct from that of Sec.
1005.18(b)(2)(ii), which requires issuers to make the long form
disclosure available to consumers prior to prepaid account
acquisition and which, depending on the methods an issuer offers
prepaid accounts to consumers, may require posting of the long form
disclosure on the issuer's Web site. If, for example, an issuer is
not required to submit any agreements to the Bureau because the
issuer qualifies for the de minimis exception under Sec.
1005.19(b)(4), the issuer is not required to post and maintain any
agreements on its Web site under Sec. 1005.19(c). The issuer is
still required to provide each individual consumer with access to
his or her specific prepaid account agreement under Sec. 1005.19(d)
by posting and maintaining the agreement on the issuer's Web site or
by providing a copy of the agreement upon the consumer's request.
The issuer may also be required to post the long form fee disclosure
required by Sec. 1005.18(b)(2)(ii) online as well, depending on the
methods by which the issuer offers prepaid accounts to consumers.
2. Issuers that do not otherwise maintain Web sites. If an
issuer is required to submit one or more agreements to the Bureau
under Sec. 1005.19(b) that issuer must post those agreements on a
publicly available Web site it maintains. If an issuer provides
consumers with access to specific information about their individual
accounts, such as balance information or copies of statements,
through a third-party Web site, the issuer is considered to maintain
that Web site for purposes of Sec. 1005.19. Such a third-party Web
site is deemed to be maintained by the issuer for purposes of Sec.
1005.19(c) even where, for example, an unaffiliated entity designs
the Web site and owns and maintains the information technology
infrastructure that supports the Web site, consumers with prepaid
accounts from multiple issuers can access individual account
information through the same Web site, and the Web site is not
labeled, branded, or otherwise held out to the public as belonging
to the issuer. Therefore, issuers that provide consumers with access
to account-specific information through a third-party Web site can
comply with Sec. 1005.19(c) by ensuring that the agreements the
issuer submits to the Bureau are posted on the third-party Web site
in accordance with Sec. 1005.19(c).
19(d) Agreements for All Open Accounts
1. Requirement applies to all open accounts. The requirement to
provide access to prepaid account agreements under Sec. 1005.19(d)
applies to all open prepaid accounts, unless the agreements are
required to be submitted to the Bureau pursuant to Sec. 1005.19(b)
and posted on the issuer's Web site pursuant to Sec. 1005.19(c).
For example, an issuer that is not required to submit agreements to
the Bureau because it qualifies for the de minimis exception under
Sec. 1005.19(b)(4) would still be required to provide consumers
with access to their specific agreements under Sec. 1005.19(d).
Similarly, an agreement that is no longer offered to the public
would not be required to be submitted to the Bureau under Sec.
1005.19(b), but would still need to be provided to the consumer to
whom it applies under Sec. 1005.19(d).
* * * * *
Section 1005.30 Remittance Transfer Definitions
* * * * *
30(g) Sender
* * * * *
3. Non-consumer accounts. A transfer that is requested to be
sent from an account that was not established primarily for
personal, family, or household purposes, such as an account that was
established as a business or commercial account or an account held
by a business entity such as a corporation, not-for-profit
corporation, professional corporation, limited liability company,
partnership, or sole proprietorship, is not requested primarily for
personal, family, or household purposes. A consumer requesting a
transfer from such an account therefore is not a sender under Sec.
1005.30(g). Additionally, a transfer that is requested to be sent
from an account held by a financial institution under a bona fide
trust agreement pursuant to Sec. 1005.2(b)(2) is not requested
primarily for personal, family, or household purposes, and
[[Page 77325]]
a consumer requesting a transfer from such an account is therefore
not a sender under Sec. 1005.30(g).
* * * * *
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
11. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 5511,
5512, 5532, 5581; 15
U.S.C. 1601 et seq.
Subpart A--General
0
12. Section 1026.2 is amended by revising paragraph (a)(15) to read as
follows:
Sec. 1026.2 Definitions and rules of construction.
(a) * * *
(15)(i) Credit card means any card, plate, or other single credit
device that may be used from time to time to obtain credit.
(ii) Credit card account under an open-end (not home-secured)
consumer credit plan means any open-end credit account that is accessed
by a credit card, except:
(A) A home-equity plan subject to the requirements of Sec. 1026.40
that is accessed by a credit card;
(B) An overdraft line of credit that is accessed by a debit card;
(C) An overdraft line of credit that is accessed by an account
number, except if:
(1) The account number is a prepaid card that is a credit card; or
(2) The account number is a credit card where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.
(iii) Charge card means a credit card on an account for which no
periodic rate is used to compute a finance charge.
(iv) Debit card means any card, plate, or other single device that
may be used from time to time to access an asset account other than a
prepaid account. The term debit card does not include a prepaid card.
(v) Prepaid card means any card, code, or other device that can be
used to access a prepaid account.
(vi) Prepaid account means a prepaid account as defined in 12 CFR
1005.2(b)(3).
(vii) Account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified by
the creditor means an account number that is not a prepaid card that
may be used from time to time to access a credit plan that allows
deposits directly into particular prepaid accounts specified by the
creditor but does not allow the consumer to deposit directly extensions
of credit from the plan into asset accounts other than particular
prepaid accounts specified by the creditor.
* * * * *
0
13. Section 1026.4 is amended by revising paragraphs (b)(2), (c)(3),
and (c)(4) to read as follows:
Sec. 1026.4 Finance charge.
* * * * *
(b) * * *
(2) Service, transaction, activity, and carrying charges,
including:
(i) Except as provided for prepaid accounts in paragraph (b)(2)(ii)
of this section, any charge imposed on a checking or other transaction
account to the extent that the charge exceeds the charge for a similar
account without a credit feature; and
(ii) Any charge imposed in connection with an extension of credit,
for carrying a credit balance, or for credit availability where that
fee is imposed on a prepaid account in connection with credit accessed
by a prepaid card or accessed by an account number where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, regardless of whether the
creditor imposes the same, greater or lesser charge on the withdrawal
of funds from the prepaid account, to have access to the prepaid
account, or when credit is not extended.
* * * * *
(c) * * *
(3) Charges imposed by a financial institution for paying items
that overdraw an account, unless the payment of such items and the
imposition of the charge were previously agreed upon in writing. This
exception does not apply to credit accessed by a prepaid card or to
credit accessed by an account number where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.
(4) Fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis. This exception does not
apply to credit accessed by a prepaid card or to credit accessed by an
account number where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor.
* * * * *
Subpart B--Open-End Credit
0
14. Section 1026.7 is amended by revising paragraph (b)(11)(ii)(A) to
read as follows:
Sec. 1026.7 Periodic statement.
* * * * *
(b) * * *
(11) * * *
(ii) * * *
(A) Periodic statements provided solely for charge card accounts
except:
(1) A charge card account accessed by a charge card that is a
prepaid card; or
(2) A charge card account accessed by an account number where
extensions of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor; and
* * * * *
0
15. Section 1026.12 is amended by revising paragraph (d) and adding
paragraph (h) to read as follows:
Sec. 1026.12 Special credit card provisions.
* * * * *
(d) Offsets by card issuer prohibited--(1) General rule. A card
issuer may not take any action, either before or after termination of
credit card privileges, to offset a cardholder's indebtedness arising
from a consumer credit transaction under the relevant credit card plan
against funds of the cardholder held on deposit with the card issuer.
(2) Rights of the card issuer. This paragraph does not alter or
affect the right of a card issuer acting under state or Federal law to
do any of the following with regard to funds of a cardholder held on
deposit with the card issuer if the same procedure is constitutionally
available to creditors generally: Obtain or enforce a consensual
security interest in the funds; attach or otherwise levy upon the
funds; or obtain or enforce a court order relating to the funds.
(3) Periodic deductions. (i) This paragraph does not prohibit a
plan, if authorized in writing by the cardholder, under which the card
issuer may periodically deduct all or part of the cardholder's credit
card debt from a deposit account held with the card issuer (subject to
the limitations in Sec. 1026.13(d)(1)).
(ii) With respect to credit cards that are also prepaid cards or
credit cards that are also account numbers where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, for purposes of this paragraph
(d)(3), ``periodically'' means no more frequently than once per
calendar month, such as on a monthly due date
[[Page 77326]]
disclosed on the applicable periodic statement in accordance with the
requirements of Sec. 1026.7(b)(11)(i) or on an earlier date in each
calendar month in accordance with a written authorization signed by the
consumer.
* * * * *
(h) Timing requirement for solicitation or application with respect
to a prepaid cardholder. (1) A card issuer shall not open a credit card
account for a consumer holding a prepaid account, or make a
solicitation or provide an application to a consumer holding a prepaid
card to open a credit or charge card account, accessed by the prepaid
card or by an account number that is a credit card where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, until at least 30 calendar
days after the consumer has registered the prepaid account. If a card
issuer has established an existing credit or charge card account with a
holder of a prepaid card that is accessed by a prepaid card or an
account number where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor, the card issuer shall not allow an additional prepaid card
obtained by the consumer from the card issuer to access the credit or
charge card account, or permit credit from the credit or charge card
account to be deposited into an additional prepaid account, until at
least 30 calendar days after the consumer has registered the additional
prepaid account.
(2) For purposes of paragraph (h) of this section, the term
solicitation means an offer by the card issuer to open a credit or
charge card account that does not require the consumer to complete an
application. A ``firm offer of credit'' as defined in section 603(l) of
the Fair Credit Reporting Act (15 U.S.C. 1681a(l)) for a credit or
charge card is a solicitation for purposes of paragraph (h) of this
section.
0
16. Section 1026.13 is amended by revising paragraph (i) to read as
follows:
Sec. 1026.13 Billing error resolution.
* * * * *
(i) Relation to Electronic Fund Transfer Act and Regulation E. A
creditor shall comply with the requirements of Regulation E, 12 CFR
1005.11 governing error resolution rather than those of paragraphs (a),
(b), (c), (e), (f), and (h) of this section if:
(1) With respect to an asset account other than a prepaid account,
an extension of credit that is incident to an electronic fund transfer
occurs under an agreement between the consumer and a financial
institution to extend credit when the consumer's account is overdrawn
or to maintain a specified minimum balance in the consumer's account;
or
(2) With respect to a credit plan in connection with a prepaid
account, an extension of credit incident to an electronic fund transfer
when the consumer's prepaid account is overdrawn if the credit plan is
subject to subpart B of this regulation.
* * * * *
Subpart G--Special Rules Applicable to Credit Card Accounts and
Open-End Credit Offered to College Students
0
17. Section 1026.52 is amended by revising paragraph (a) to read as
follows:
Sec. 1026.52 Limitations on fees.
(a) Limitations during first year after account opening. * * *
* * * * *
0
18. Section 1026.60 is amended by revising paragraph (a)(5)(iv) to read
as follows:
Sec. 1026.60 Credit and charge card applications and solicitations.
(a) * * *
(5) * * *
(iv) Lines of credit accessed solely by account numbers except
where the account number is a credit card where extensions of credit
are permitted to be deposited directly only into particular prepaid
accounts specified by the creditor;
* * * * *
0
19. In Supplement I to Part 1026:
0
a. Under Section 1026.2--Definitions and Rules of Construction:
0
i. In subsection 2(a)(7) Card Issuer, paragraph 1 is revised and
paragraph 2 is added.
0
ii. In subsection 2(a)(14) Credit, paragraph 3 is added.
0
iii. In subsection Paragraph 2(a)(15):
0
A. Paragraphs 1, 2.i.B, 2.ii.C, 3 and 4 are revised.
0
B. Paragraphs 2.i.F, 2.i.G, 5 and 6 are added.
0
iv. In subsection Paragraph 2(a)(17)(iii), paragraph 2 is added.
0
v. In subsection 2(a)(20) Open-End Credit, paragraphs 2 and 4 are
revised.
0
b. Under Section 1026.4--Finance Charge:
0
i. In subsection 4(a) Definition, paragraphs 4.iii and 4.iv are added.
0
ii. In subsection Paragraph 4(b)(2), paragraph 1 is revised.
0
iii. In subsection Paragraph 4(c)(3), paragraph 1 is revised.
0
iv. In subsection Paragraph 4(c)(4), paragraph 1 is revised.
0
c. Under Section 1026.5--General Disclosure Requirements:
0
i. In subsection 5(b) Time of Disclosures:
0
ii. In subsection 5(b)(2) Periodic Statements:
0
A. In subsection 5(b)(2)(ii) Timing Requirements, paragraph 4.i is
revised.
0
d. Under Section 1026.8--Identifying Transactions on Periodic
Statements:
0
i. In subsection 8(a) Sale Credit, paragraph 2 is revised.
0
ii. In subsection 8(b) Nonsale Credit, paragraphs 1 and 2 are revised.
0
e. Under Section 1026.10--Payments:
0
i. In subsection 10(a) General Rule, paragraph 2.ii is revised.
0
ii. In subsection 10(b) Specific Requirements for Payments, paragraph 1
is revised.
0
f. Under Section 1026.12--Special Credit Card Provisions:
0
i. In subsection 12(a) Issuance of Credit Cards:
0
A. In subsection Paragraph 12(a)(1), paragraphs 2 and 7 are revised.
0
B. In subsection Paragraph 12(a)(2), paragraph 6 is revised.
0
ii. In subsection 12(c) Right of Cardholder to Assert Claims or
Defenses Against Card Issuer, paragraph 5 is added.
0
iii. In subsection 12(c)(1) General Rule, paragraph 1 is revised.
0
iv. In subsection 12(d) Offsets by Card Issuer Prohibited, paragraph 1
is added.
0
v. In subsection Paragraph 12(d)(1), paragraph 2 is revised.
0
vi. In subsection Paragraph 12(d)(2), paragraph 1 is revised.
0
vii. In subsection Paragraph 12(d)(3), paragraph 3 is added.
0
viii. Subsection 12(h) Timing Requirement for Solicitation or
Application With Respect to a Prepaid Cardholder is added.
0
g. Under Section 1026.13--Billing Error Resolution:
0
i. In subsection 13(a) Definition of a Billing Error:
0
A. In subsection Paragraph 13(a)(3), paragraph 2 is revised
0
ii. In subsection 13(i) Relation to Electronic Fund Transfer Act and
Regulation E, paragraphs 1, 2, and 3 are revised and paragraphs 4 and 5
are added.
0
h. Under Section 1026.52--Limitations on Fees:
0
i. In subsection 52(a) Limitations During First Year After Account
Opening:
0
A. In subsection 52(a)(1) General Rule, paragraph 1 is revised and
paragraphs 1.iii and 1.iv are added.
0
ii. In subsection 52(a)(2) Fees Not Subject to Limitations, paragraphs
2 and 3 are revised and paragraphs 4 and 5 are added.
0
iii. In subsection 52(b) Limitations on Penalty Fees:
[[Page 77327]]
0
A. In subsection 52(b)(2) Prohibited fees:
0
B. In subsection 52(b)(2)(i) Fees that Exceed Dollar Amount Associated
with Violation, paragraph 7 is added.
0
i. Under Section 1026.57--Reporting and Marketing Rules for College
Student Open-End Credit:
0
i. In subsection 57(a) Definitions:
0
A. In subsection 57(a)(1) College Student Credit Card, paragraph 1 is
revised.
0
B. In subsection 57(a)(5) College Credit Card Agreement, paragraph 1 is
revised.
0
ii. In subsection 57(b) Public Disclosure of Agreements, paragraph 3 is
added.
0
iii. In subsection 57(c) Prohibited Inducement, paragraph 7 is added.
0
j. Under Section 1026.60--Credit and Charge Card Applications and
Solicitation:
0
i. Paragraph 1 is revised.
0
ii. In subsection 60(b) Required Disclosures:
0
A. In subsection 60(b)(4) Transaction Charges, paragraph 3 is added.
0
B. In subsection 60(b)(8) Cash Advance Fee, paragraphs 4 and 5 are
added.
The revisions and additions read as follows:
SUPPLEMENT I TO PART 1026--OFFICIAL INTERPRETATIONS
Subpart A--General
* * * * *
Section 1026.2 Definitions and Rules of Construction
* * * * *
2(a)(7) Card Issuer
1. Agent. i. An agent of a card issuer is considered a card
issuer. Except as provided in comment 2(a)(7)-1.ii, because agency
relationships are traditionally defined by contract and by state or
other applicable law, the regulation does not define agent. Merely
providing services relating to the production of credit cards or
data processing for others, however, does not make one the agent of
the card issuer. In contrast, a financial institution may become the
agent of the card issuer if an agreement between the institution and
the card issuer provides that the cardholder may use a line of
credit with the financial institution to pay obligations incurred by
use of the credit card.
ii. Under Sec. 1026.2(a)(7), with respect to a prepaid card
that is a credit card where the card accesses a credit plan that is
offered by a third party, a party offering the credit plan that is
accessed by the prepaid card would be an agent of the person issuing
the prepaid card and thus, would be a card issuer with respect to
the prepaid card that is a credit card.
2. Prepaid cards. With respect to credit accessed by a prepaid
card, a person is not a card issuer if the card only accesses credit
that is not subject to any finance charge or any fee described in
Sec. 1026.4(c) and is not payable by written agreement in more than
four installments. For example, a person is not a card issuer if (1)
the prepaid card only accesses credit where the person does not
impose any finance charge or any fee described in Sec. 1026.4(c)
for the credit or for participation in a credit plan; and (2) the
person expects repayment when funds are deposited into the prepaid
account. In this case, the prepaid card is not a credit card and
therefore the person issuing the card is not a card issuer. See
comment 2(a)(15)-2.i.F.
* * * * *
2(a)(14) Credit
* * * * *
3. Transactions on prepaid accounts when there are insufficient
funds. Credit includes an authorized transaction on a prepaid
account where the consumer has insufficient or unavailable funds in
the prepaid account at the time of authorization. It also includes a
paid transaction on a prepaid account where the consumer has
insufficient or unavailable funds in the prepaid account at the time
the transaction is paid. This includes a transaction where the
consumer has sufficient or available funds in the prepaid account to
cover the amount of the transaction at the time the transaction is
authorized but insufficient or unavailable funds in the prepaid
account to cover the amount of the transaction at the time the
transaction is paid.
Paragraph 2(a)(15)
1. Usable from time to time. A credit card must be usable from
time to time. Since this involves the possibility of repeated use of
a single device, checks and similar instruments that can be used
only once to obtain a single credit extension are not credit cards.
With respect to a preauthorized check that is issued on a prepaid
account for which the funds are withdrawn at the time of
preauthorization using the prepaid account number, the credit is
obtained using the prepaid account number and not the check. See
comment 2(a)(15)-2.i.F for discussion of when a prepaid account
number is a credit card.
2. * * *
i. * * *
B. A debit card (other than a debit card that is solely an
account number) that also accesses a credit account (that is, a
debit-credit card). See comment 2(a)(15)-2.ii.C for guidance on
whether a debit card that is solely an account number is a credit
card.
* * * * *
F. A prepaid card (including a prepaid card that is solely an
account number) that is a single device that may be used from time
to time to access a credit plan, except if that prepaid card only
accesses credit that is not subject to any finance charge or any fee
described in Sec. 1026.4(c) and is not payable by written agreement
in more than four installments.
G. An account number described in Sec. 1026.2(a)(15)(vii). For
example, if a creditor provides a consumer with an open-end line of
credit that can be accessed by an account number and funds from that
line of credit are permitted to be deposited directly only into
particular prepaid accounts identified by the creditor (such as a
prepaid account with the same creditor), the account number is a
credit card for purposes of Sec. 1026.2(a)(15)(i). See also Sec.
1026.2(a)(15)(vii) and related commentary for additional guidance on
these account numbers.
ii. * * *
C. Except as provided in comment 2(a)(15)-2.i.F and G, an
account number that accesses a credit account, unless the account
number can access an open-end line of credit to purchase goods or
services. For example, if a creditor provides a consumer with an
open-end line of credit that can be accessed by an account number in
order to transfer funds into another account (such as an asset
account with the same creditor), the account number is not a credit
card for purposes of Sec. 1026.2(a)(15)(i). However, if the account
number can also access the line of credit to purchase goods or
services (such as an account number that can be used to purchase
goods or services on the Internet), the account number is a credit
card for purposes of Sec. 1026.2(a)(15)(i), regardless of whether
the creditor treats such transactions as purchases, cash advances,
or some other type of transaction. Furthermore, if the line of
credit can also be accessed by a card (such as a debit card), that
card is a credit card for purposes of Sec. 1026.2(a)(15)(i).
3. Charge card. i. Charge cards are credit cards where no
periodic rate is used to compute the finance charge. Under the
regulation, a reference to credit cards generally includes charge
cards. In particular, references to credit card accounts under an
open-end (not home-secured) consumer credit plan in Subparts B and G
generally include charge cards. The term charge card is, however,
distinguished from credit card or credit card account under an open-
end (not home-secured) consumer credit plan in Sec. Sec. 1026.60,
1026.6(b)(2)(xiv), 1026.7(b)(11) (except as described in comment
2(a)(15)-3.ii below), 1026.7(b)(12), 1026.9(e), 1026.9(f),
1026.28(d), 1026.52(b)(1)(ii)(C), and Appendices G-10 through G-13.
ii. A prepaid card is a charge card if it also is a credit card
where no periodic rate is used to compute the finance charge. See
comment 2(a)(15)-2.i.F for when a prepaid card is a credit card.
Likewise, an account number where extensions of credit are permitted
to be deposited directly only into particular prepaid accounts
specified by the creditor is a charge card if it is a credit card
where no periodic rate is used to compute the finance charge. See
Sec. 1026.2(a)(15)(vii) and comment 2(a)(15)-2.i.G for when such an
account number is a credit card. Unlike other charge cards, such a
prepaid card or account number that accesses a credit card account
under an open-end (not home-secured) consumer credit plan is subject
to the requirements in Sec. 1026.7(b)(11). Thus, under Sec.
1026.5(b)(2)(ii), for credit card accounts under an open-end (not
home-secured) consumer credit plan, a card issuer of a prepaid card
or account number that meets the definition of a charge card because
it does not impose a finance charge structured as a periodic rate
must adopt reasonable procedures designed to ensure that (1)
periodic statements are mailed or delivered
[[Page 77328]]
at least 21 days prior to the payment due date disclosed on the
statement pursuant to Sec. 1026.7(b)(11)(i)(A), and (2) the card
issuer does not treat as late for any purposes a required minimum
periodic payment received by the card issuer within 21 days after
mailing or delivery of the periodic statement disclosing the due
date for that payment.
4. Credit card account under an open-end (not home-secured)
consumer credit plan. i. An open-end consumer credit account is a
credit card account under an open-end (not home-secured) consumer
credit plan for purposes of Sec. 1026.2(a)(15)(ii) if:
A. The account is accessed by a credit card, as defined in Sec.
1026.2(a)(15)(i); and
B. The account is not excluded under Sec. 1026.2(a)(15)(ii)(A),
(a)(15)(ii)(B) or (a)(15)(ii)(C).
ii. As noted in Sec. 1026.2(a)(15)(ii)(C), the exclusion from
credit card account under an open-end (not home-secured) consumer
credit plan provided by that paragraph does not apply to:
A. An overdraft line of credit that is accessed by a prepaid
card (including a prepaid card that is solely an account number)
that is a credit card; and
B. An overdraft line of credit accessed by an account number
that is a credit card where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified
by the creditor.
5. Account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified
by the creditor. As defined in Sec. 1026.2(a)(15)(vii), this phrase
means an account number that is not a prepaid account that can be
used from time to time to access a credit plan that allows deposits
directly into particular prepaid accounts specified by the creditor
but does not allow the consumer to deposit directly extensions of
credit from the plan into asset accounts other than particular
prepaid accounts specified by the creditor. A credit plan that
permits a consumer to deposit directly extensions of credit into a
checking account would not constitute a credit plan where extensions
of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor. A credit plan
where a consumer could access the credit plan by use of checks or
in-person withdrawals would constitute a credit plan where
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor, so long
as the credit plan allows deposits directly into particular prepaid
accounts specified by the creditor but does not allow the consumer
to deposit directly extensions of credit into asset accounts other
than particular prepaid accounts specified by the creditor. These
account numbers would be credit cards as discussed in comment
2(a)(15)-2.i.G.
6. Definition of prepaid card. The term ``prepaid card'' in
Sec. 1026.2(a)(15)(v) includes any card, code or other device that
can be used to access a prepaid account, including a prepaid account
number or other code. The phrase ``credit accessed by a prepaid
card'' means any credit that is accessed by any card, code or other
device that also can be used to access a prepaid account.
* * * * *
2(a)(17) Creditor
* * * * *
Paragraph 2(a)(17)(iii)
* * * * *
2. Prepaid cards. With respect to credit accessed by a prepaid
card, Sec. 1026.2(a)(17)(iii) does not apply if the card only
accesses credit that is not subject to any finance charge or any fee
described in Sec. 1026.4(c) and is not payable by written agreement
in more than four installments. In this case, the prepaid card is
not a credit card and the person issuing the card is not a card
issuer. See comments 2(a)(15)-2.i.F. For example, a person is not a
creditor if (1) the prepaid card only accesses credit where the
person does not impose any finance charge or any fee described in
Sec. 1026.4(c) for the credit or for participation in a credit
plan; and (2) the person expects repayment when funds are deposited
into the prepaid account.
* * * * *
2(a)(20) Open-End Credit
* * * * *
2. Existence of a plan. i. The definition requires that there be
a plan, which connotes a contractual arrangement between the
creditor and the consumer.
ii. With respect to credit accessed by a prepaid card, a plan
means a program where the consumer is obligated contractually to
repay any credit extended by the creditor. For example, a plan
includes a program under which a creditor routinely pays
transactions when a consumer has insufficient or unavailable funds
in a prepaid account and the consumer is obligated contractually to
repay those transactions. Such a program constitutes a plan
notwithstanding that the creditor retains discretion not to pay such
transactions, the creditor does not pay transactions once the
consumer has exceeded a certain amount of credit, or the creditor
only pays transactions where there were sufficient or available
funds in the prepaid account to cover the amount of the transaction
at the time the transaction was authorized but not sufficient or
available funds in the prepaid account to cover the amount of the
transaction at the time the transaction is paid. For example, a
program constitutes a plan where a creditor will routinely pay a
transaction when the consumer does not have adequate funds in the
prepaid account to cover the full amount of the transaction and the
consumer is obligated contractually to repay that transaction.
iii. With respect to credit accessed by an account number where
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor extending
the credit, a plan means a program where the consumer is obligated
contractually to repay any credit extended by the creditor. For
example, a plan includes a program under which a creditor routinely
will extend credit that is deposited directly into particular
prepaid accounts specified by the creditor and the consumer is
obligated contractually to repay the credit. Such a program
constitutes a plan notwithstanding that the creditor retains
discretion not to extend credit, or the creditor does not extend
credit once the consumer has exceeded a certain amount of credit.
For example, a program constitutes a plan where a creditor routinely
will extend credit that is deposited directly into a particular
prepaid account specified by the creditor when the consumer requests
an extension because the consumer does not have adequate funds in
the prepaid account to cover the full amount of a transaction using
the prepaid card and the consumer is obligated contractually to
repay the credit.
iv. Some creditors offer programs containing a number of
different credit features. The consumer has a single account with
the institution that can be accessed repeatedly via a number of sub-
accounts established for the different program features and rate
structures. Some features of the program might be used repeatedly
(for example, an overdraft line) while others might be used
infrequently (such as the part of the credit line available for
secured credit). If the program as a whole is subject to prescribed
terms and otherwise meets the definition of open-end credit, such a
program would be considered a single, multifeatured plan.
* * * * *
4. Finance charge on an outstanding balance. i. The requirement
that a finance charge may be computed and imposed from time to time
on the outstanding balance means that there is no specific amount
financed for the plan for which the finance charge, total of
payments, and payment schedule can be calculated. A plan may meet
the definition of open-end credit even though a finance charge is
not normally imposed, provided the creditor has the right, under the
plan, to impose a finance charge from time to time on the
outstanding balance. For example, in some plans, a finance charge is
not imposed if the consumer pays all or a specified portion of the
outstanding balance within a given time period. Such a plan could
meet the finance charge criterion, if the creditor has the right to
impose a finance charge, even though the consumer actually pays no
finance charges during the existence of the plan because the
consumer takes advantage of the option to pay the balance (either in
full or in installments) within the time necessary to avoid finance
charges.
ii. With respect to credit accessed by a prepaid card (including
a prepaid card that is solely an account number) or credit accessed
by an account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified
by the creditor, any service, transaction, activity, or carrying
charges imposed on a credit account, and any such charges imposed on
a prepaid account if that charge is related to an extension of
credit, carrying a credit balance, or credit availability, generally
would be a finance charge. See Sec. 1026.4(a), (b)(2), (c)(3) and
(c)(4) and comments 4(a)-4 and 4(b)(2)-1. Such charges would include
periodic participation fees for the credit plan and transaction
charges imposed in connection with a credit extension. With respect
to that credit, such
[[Page 77329]]
service, transaction, activity or carrying charges constitute
finance charges imposed from time to time on an outstanding unpaid
balance if there is no specific amount financed for the plan for
which the finance charge, total of payments, and payment schedule
can be calculated.
* * * * *
Section 1026.4 Finance Charge
4(a) Definition
* * * * *
4. * * *
iii. Any transaction charge imposed on a cardholder by a card
issuer for credit accessed by a prepaid card is a finance charge
regardless of whether the card issuer imposes the same, greater or
lesser charge on the withdrawal of funds from a prepaid account.
iv. Any transaction charge imposed on a cardholder by a card
issuer for credit accessed by an account number that is a credit
card where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor is a finance charge regardless of whether the card issuer
imposes the same, greater or lesser charge on the withdrawal of
funds from a prepaid account.
* * * * *
4(b) Examples of Finance Charges
* * * * *
Paragraph 4(b)(2)
1. Checking or transaction account charges. i. Except for
prepaid accounts as provided in Sec. 1026.4(b)(2)(ii) and in
comment 4(b)(2)-1.ii, .iii and .iv below, a checking or transaction
account charge imposed in connection with a credit feature is a
finance charge under Sec. 1026.4(b)(2)(i) to the extent the charge
exceeds the charge for a similar account without a credit feature.
If a charge for an account with a credit feature does not exceed the
charge for an account without a credit feature, the charge is not a
finance charge under Sec. 1026.4(b)(2)(i). To illustrate:
A. A $5 service charge is imposed on an account with an
overdraft line of credit (where the institution has agreed in
writing to pay an overdraft), while a $3 service charge is imposed
on an account without a credit feature; the $2 difference is a
finance charge. (If the difference is not related to account
activity, however, it may be excludable as a participation fee. See
the commentary to Sec. 1026.4(c)(4).)
B. A $5 service charge is imposed for each item that results in
an overdraft on an account with an overdraft line of credit, while a
$25 service charge is imposed for paying or returning each item on a
similar account without a credit feature; the $5 charge is not a
finance charge.
ii. Under Sec. 1026.4(b)(2)(ii), the term finance charge
includes any service, transaction, activity, or carrying charge
imposed in connection with an extension of credit, for carrying a
credit balance, or for credit availability where that fee is imposed
on a prepaid account in connection with credit accessed by a prepaid
card or credit accessed by an account number where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor, regardless of whether
the creditor imposes the same, greater or lesser charge on the
withdrawal of funds from the prepaid account, to have access to the
prepaid account, or when credit is not extended. To illustrate,
A. A $15 transaction charge is imposed on the prepaid account
each time a consumer uses a prepaid card or an account number
described in Sec. 1026.4(b)(2)(ii) to access an open-end credit
plan. The $15 charge is a finance charge regardless of whether the
creditor imposes the same, greater or lesser charge to withdraw
funds from the prepaid account.
B. A $1.50 transaction charge is imposed on the prepaid account
for each transaction that is made with the prepaid card, including
when the prepaid card is used to access credit where the consumer
has insufficient or unavailable funds in the prepaid account at the
time of authorization or at the time the transaction is paid. The
$1.50 transaction charge is a finance charge when the prepaid card
accesses credit, notwithstanding that a $1.50 transaction charge
also is imposed on transactions that solely access funds in the
prepaid account.
C. A $5 monthly service charge is imposed on the prepaid account
for the availability of an open-end plan that is accessed by a
prepaid card or an account number described in Sec.
1026.4(b)(2)(ii). The $5 monthly service charge is a finance charge
regardless of whether the creditor imposes the same, greater or
lesser monthly service charge to hold the prepaid account.
iii. For purposes of Sec. 1026.4(b)(2)(ii), charges imposed on
a prepaid account in connection with an extension of credit, for
carrying a credit balance, or for credit availability include:
A. Transaction fees for credit extensions;
B. Fees for transferring funds from a credit account to a
prepaid account;
C. A daily, weekly, or monthly (or other periodic) fee assessed
each period a prepaid account is in ``overdraft'' status, or would
be in overdraft status but for funds supplied by a linked line of
credit;
D. A daily, weekly, or monthly (or other periodic) fee assessed
each period a line of credit accessed by a prepaid card or account
number described in Sec. 1026.4(b)(2)(ii) has an outstanding
balance; or
E. Participation fees or other fees that the consumer is
required to pay for the issuance or availability of credit.
iv. Section Sec. 1026.4(b)(2)(ii) does not apply to transaction
fees imposed on the prepaid account that relate to transactions that
only access funds in the prepaid account, fees for opening or
holding the prepaid account, and other fees, such as cash reload
fees and balance inquiry fees, that are not imposed on the prepaid
account because the consumer engaged in a transaction that is funded
in whole or in part by credit, for holding a credit plan, or for
carrying a credit balance. These fees are not considered charges
imposed on a prepaid account in connection with an extension of
credit, for carrying a credit balance, or for credit availability
even if there are not sufficient funds in the prepaid account to pay
the fees at the time they are imposed on the prepaid account.
Nonetheless, any negative balance on the prepaid account, whether
from fees or other transactions, would be a credit extension and if
a fee is imposed for such credit extension, the fee would be a
finance charge under Sec. 1026.4(b)(2)(ii). For example, if a cash-
reload fee is imposed on the prepaid account, there are not
sufficient funds in the prepaid account to pay the fee at the time
it is imposed on the prepaid account, and an additional charge is
imposed on the prepaid account for this credit extension, the
additional charge would be a transaction charge imposed on a prepaid
account in connection with an extension of credit and would be a
finance charge under Sec. 1026.4(b)(2)(ii).
* * * * *
Paragraph 4(c)(3)
1. Assessing interest on an overdraft balance. Except with
respect to credit accessed by a prepaid card or an account number
where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor, a
charge on an overdraft balance computed by applying a rate of
interest to the amount of the overdraft is not a finance charge,
even though the consumer agrees to the charge in the account
agreement, unless the financial institution agrees in writing that
it will pay such items.
Paragraph 4(c)(4)
1. Participation fees--periodic basis. The participation fees
described in Sec. 1026.4(c)(4) do not necessarily have to be formal
membership fees, nor are they limited to credit card plans. Except
as provided in Sec. 1026.4(c)(4) for prepaid accounts, the
provision applies to any credit plan in which payment of a fee is a
condition of access to the plan itself, but it does not apply to
fees imposed separately on individual closed-end transactions. The
fee may be charged on a monthly, annual, or other periodic basis; a
one-time, non-recurring fee imposed at the time an account is opened
is not a fee that is charged on a periodic basis, and may not be
treated as a participation fee.
* * * * *
Section 1026.5 General Disclosure Requirements
* * * * *
5(b)(2)(ii) Timing Requirements
* * * * *
4. Application of Sec. 1026.5(b)(2)(ii) to charge card and
charged-off accounts. i. Charge card accounts. For purposes of Sec.
1026.5(b)(2)(ii)(A)(1), the payment due date for a credit card
account under an open-end (not home-secured) consumer credit plan is
the date the card issuer is required to disclose on the periodic
statement pursuant to Sec. 1026.7(b)(11)(i)(A). Because Sec.
1026.7(b)(11)(ii) provides that Sec. 1026.7(b)(11)(i) does not
apply to periodic statements provided solely for charge card
accounts other than charge card accounts accessed by prepaid cards
or by account numbers where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified
by the
[[Page 77330]]
creditor, Sec. 1026.5(b)(2)(ii)(A)(1) also does not apply to the
mailing or delivery of periodic statements provided solely for such
accounts. However, in these circumstances, Sec.
1026.5(b)(2)(ii)(A)(2) requires the card issuer to have reasonable
procedures designed to ensure that a payment is not treated as late
for any purpose during the 21-day period following mailing or
delivery of the statement. A card issuer that complies with Sec.
1026.5(b)(2)(ii)(A) as discussed above with respect to a charge card
account has also complied with Sec. 1026.5(b)(2)(ii)(B)(2). Section
1026.5(b)(2)(ii)(B)(1) does not apply to charge card accounts
because, for purposes of Sec. 1026.5(b)(2)(ii)(B), a grace period
is a period within which any credit extended may be repaid without
incurring a finance charge due to a periodic interest rate and,
consistent with Sec. 1026.2(a)(15)(iii), charge card accounts do
not impose a finance charge based on a periodic rate.
* * * * *
Section 1026.8 Identifying Transactions on Periodic Statements
8(a) Sale Credit
* * * * *
2. Amount. i. Transactions not billed in full. If sale
transactions are not billed in full on any single statement, but are
billed periodically in precomputed installments, the first periodic
statement reflecting the transaction must show either the full
amount of the transaction together with the date the transaction
actually took place; or the amount of the first installment that was
debited to the account together with the date of the transaction or
the date on which the first installment was debited to the account.
In any event, subsequent periodic statements should reflect each
installment due, together with either any other identifying
information required by Sec. 1026.8(a) (such as the seller's name
and address in a three-party situation) or other appropriate
identifying information relating the transaction to the first
billing. The debiting date for the particular installment, or the
date the transaction took place, may be used as the date of the
transaction on these subsequent statements.
ii. Prepaid cards. The term ``sale credit'' includes a purchase
in which the consumer uses a prepaid card that is a credit card to
obtain goods or services from a merchant and the transaction is
wholly or partially funded by credit, whether or not the merchant is
the card issuer or creditor. If a prepaid card that is a credit card
is used to obtain goods or services from a merchant and the
transaction is partially funded by the consumer's prepaid account,
and partially funded by credit, the amount to be disclosed under
Sec. 1026.8(a) is the amount of the credit extension, not the total
amount of the purchase transaction. For a transaction at point of
sale where credit is accessed by a prepaid card that is a credit
card, and that transaction partially involves the purchase of goods
or services and partially involves other credit such as cash back
given to the cardholder, the creditor must disclose the entire
amount of the credit as sale credit, including the part of the
transaction that does not relate to the purchase of goods or
services.
* * * * *
8(b) Nonsale Credit
1. Nonsale credit. The term ``nonsale credit'' refers to any
form of loan credit including, for example:
i. A cash advance.
ii. An advance on a credit plan that is accessed by overdrafts
on an asset account other than a prepaid account.
iii. The use of a ``supplemental credit device'' in the form of
a check or draft or the use of the overdraft credit plan accessed by
a debit card, even if such use is in connection with a purchase of
goods or services.
iv. Miscellaneous debits to remedy mispostings, returned checks,
and similar entries.
v. An advance at an ATM on a credit plan that is accessed by a
prepaid card that is a credit card. If a prepaid card that is a
credit card is used to obtain an advance at an ATM and the
transaction is partially funded by the consumer's prepaid account,
and partially funded by a credit extension, the amount to be
disclosed under Sec. 1026.8(a) is the amount of the credit
extension, not the total amount of the ATM transaction.
vi. An advance on a credit plan accessed by an account number
where extensions of credit are permitted to be deposited directly
only into particular prepaid accounts specified by the creditor.
2. Amount--overdraft credit plans. If credit is extended under
an overdraft credit plan tied to an asset account other than a
prepaid account or by means of a debit card tied to an overdraft
credit plan:
i. The amount to be disclosed is that of the credit extension,
not the face amount of the check or the total amount of the debit/
credit transaction.
ii. The creditor may disclose the amount of the credit
extensions on a cumulative daily basis, rather than the amount
attributable to each check or each use of the debit card that
accesses the credit plan.
* * * * *
Section 1026.10 Payments
10(a) General Rule
* * * * *
2. * * *
ii. In a payroll deduction plan in which funds are deposited to
an asset account held by the creditor, and from which payments are
made periodically to an open-end credit account, payment is received
on the date when it is debited to the asset account (rather than on
the date of the deposit), provided the payroll deduction method is
voluntary and the consumer retains use of the funds until the
contractual payment date. Section 1026.12(d)(3)(ii) defines
``periodically'' to mean no more frequently than once per calendar
month for payroll deduction plans for prepaid cards that are credit
cards or for account numbers that are credit cards where the
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor. In a
payroll deduction plan in which funds are deposited to a prepaid
account held by the creditor, and from which payments are made on a
monthly basis to a credit card account held by the creditor that is
accessed by a prepaid card that is a credit card, or by account
numbers that are credit cards where the extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, payment is received on the date
when it is debited to the prepaid account (rather than on the date
of the deposit), provided the payroll deduction method is voluntary
and the consumer retains use of the funds until the contractual
payment date.
* * * * *
10(b) Specific Requirements for Payments
1. Payment by electronic fund transfer. A creditor may be
prohibited from specifying payment by preauthorized electronic fund
transfer. See Section 913 of the Electronic Fund Transfer Act and
Regulation E, 12 CFR 1005.10(e).
* * * * *
Section 1026.12 Special Credit Card Provisions
* * * * *
12(a) Issuance of Credit Cards
Paragraph 12(a)(1)
* * * * *
2. Addition of credit features. If the consumer has a non-credit
card, including a prepaid card, the addition of a credit feature or
plan to the card that would make the card into a credit card under
Sec. 1026.2(a)(15)(i) constitutes issuance of a credit card. For
example, the following constitute issuance of a credit card:
i. Granting overdraft privileges on a checking account when the
consumer already has a check guarantee card; or
ii. Allowing a prepaid card to access a credit plan that would
make the card into a credit card under Sec. 1026.2(a)(15)(i).
* * * * *
7. Issuance of non-credit cards. i. Issuance of non-credit cards
other than prepaid cards. A. Under Sec. 1026.12(a)(1), a credit
card cannot be issued except in response to a request or an
application. (See comment 2(a)(15)-2 for examples of cards or
devices that are and are not credit cards.) A non-credit card other
than a prepaid card may be sent on an unsolicited basis by an issuer
that does not propose to connect the card to any credit plan; a
credit feature may be added to a previously issued non-credit card
other than a prepaid card only upon the consumer's specific request.
B. Examples. A purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the
card to any credit plan. An issuer demonstrates that it proposes to
connect the card to a credit plan by, for example, including
promotional materials about credit features or account agreements
and disclosures required by Sec. 1026.6. The issuer will violate
the rule against unsolicited issuance if, for example, at the time
the card is sent a credit plan can be accessed by the card or the
recipient of the unsolicited card has been preapproved for credit
that the recipient can access by contacting the issuer and
activating the card.
ii. Issuance of a prepaid card. Section 1026.12(a)(1) does not
apply to the issuance of a prepaid card where an issuer does not
[[Page 77331]]
connect the card to any credit plan that would make the prepaid card
into a credit card at the time the card is issued and only opens a
credit card account, or provides an application or solicitation to
open a credit or charge card account, that would be accessed by that
card in compliance with Sec. 1026.12(h). A credit card feature may
be added to a previously issued prepaid card only upon the
consumer's specific request and only in compliance with Sec.
1026.12(h). An issuer does not connect a prepaid card to a credit
plan that would make the card into a credit card simply by providing
the disclosures required by Regulation E 12 CFR
1005.18(b)(2)(i)(B)(9) and 18(b)(2)(ii)(B) with the prepaid card.
* * * * *
Paragraph 12(a)(2)
* * * * *
6. One-for-one rule--exceptions. The regulation does not
prohibit the card issuer from:
i. Replacing a single card that is both a debit card and a
credit card with a credit card and a separate debit card with only
debit functions (or debit functions plus an associated overdraft
capability), since the latter card could be issued on an unsolicited
basis under Regulation E.
ii. Replacing a single card that is both a prepaid card and a
credit card with a credit card and a separate prepaid card where the
latter card is not a credit card.
iii. Replacing an accepted card with more than one renewal or
substitute card, provided that:
A. No replacement card accesses any account not accessed by the
accepted card;
B. For terms and conditions required to be disclosed under Sec.
1026.6, all replacement cards are issued subject to the same terms
and conditions, except that a creditor may vary terms for which no
change in terms notice is required under Sec. 1026.9(c); and
C. Under the account's terms the consumer's total liability for
unauthorized use with respect to the account does not increase.
* * * * *
12(c) Right of Cardholder To Assert Claims or Defenses Against Card
Issuer
* * * * *
5. Prepaid cards. Section 1026.12(c) applies to property or
services purchased by a consumer using credit accessed by a credit
card that also is a prepaid card. For a transaction at point of sale
where a prepaid card that is a credit card is used to obtain goods
or services from a merchant and the transaction is partially funded
by the consumer's prepaid account, and partially funded by credit,
the amount of the purchase transaction that is funded by credit
generally would be subject to the requirements of Sec. 1026.12(c).
The amount of the transaction funded from the prepaid account would
not be subject to the requirements of Sec. 1026.12(c).
12(c)(1) General Rule
1. Situations excluded and included. The consumer may assert
claims or defenses only when the goods or services are ``purchased
with the credit card.'' This would include when the goods or
services are purchased by a consumer using credit accessed by a
credit card that also is a prepaid card. This could include mail,
the Internet or telephone orders, if the purchase is charged to the
credit card account. But it would exclude:
i. Use of a credit card to obtain a cash advance, even if the
consumer then uses the money to purchase goods or services. This
includes an advance on a credit plan accessed by an account number
that is a credit card where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified
by the creditor. Such a transaction would not involve ``property or
services purchased with the credit card.''
ii. The purchase of goods or services by use of a check
accessing an overdraft account and a credit card used solely for
identification of the consumer. (On the other hand, if the credit
card is used to make partial payment for the purchase and not merely
for identification, the right to assert claims or defenses would
apply to credit extended via the credit card, although not to credit
extended by the overdraft line on an asset account other than a
prepaid account.)
* * * * *
12(d) Offsets by Card Issuer Prohibited
1. Meaning of funds on deposit. For purposes of Sec.
1026.12(d), funds of the cardholder held on deposit include funds in
a consumer's prepaid account. In addition, for purposes of Sec.
1026.12(d), deposit account includes a prepaid account.
Paragraph 12(d)(1)
* * * * *
2. Funds intended as deposits. If the consumer tenders funds as
a deposit (to a checking account, for example) or if the card issuer
receives funds designated for the consumer's prepaid account with
the issuer, such as by means of an ACH deposit or an electronic
transmittal of funds the consumer submits as cash at a non-bank
location, the card issuer may not apply the funds to repay
indebtedness on the consumer's credit card account.
* * * * *
Paragraph 12(d)(2)
1. Security interest--limitations. In order to qualify for the
exception stated in Sec. 1026.12(d)(2), a security interest must be
affirmatively agreed to by the consumer and must be disclosed in the
issuer's account-opening disclosures under Sec. 1026.6. The
security interest must not be the functional equivalent of a right
of offset; as a result, routinely including in agreements contract
language indicating that consumers are giving a security interest in
any deposit accounts maintained with the issuer does not result in a
security interest that falls within the exception in Sec.
1026.12(d)(2). For a security interest to qualify for the exception
under Sec. 1026.12(d)(2) the following conditions must be met:
i. The consumer must be aware that granting a security interest
is a condition for the credit card account (or for more favorable
account terms) and must specifically intend to grant a security
interest in a deposit account.
ii. For deposit accounts other than prepaid accounts, indicia of
the consumer's awareness and intent to grant a security interest
include at least one of the following (or a substantially similar
procedure that evidences the consumer's awareness and intent):
A. Separate signature or initials on the agreement indicating
that a security interest is being given.
B. Placement of the security agreement on a separate page, or
otherwise separating the security interest provisions from other
contract and disclosure provisions.
C. Reference to a specific amount of deposited funds or to a
specific deposit account number.
iii. For prepaid accounts, in order for a consumer to show
awareness and intent to grant a security interest, all of the
following conditions must be met:
A. In addition to being disclosed in the issuer's account-
opening disclosures under Sec. 1026.6, the security agreement must
be provided to the consumer in a document separate from the prepaid
account agreement and the credit card account agreement;
B. The separate document setting forth the security agreement
must be signed by the consumer;
C. The separate document setting forth the security agreement
must refer to the prepaid account number and to a specific amount of
funds in the prepaid account in which the card issuer is taking a
security interest and these two elements of the document must be
separately signed or initialed by the consumer;
D. The separate document setting forth the security agreement
must specifically enumerate the conditions under which the card
issuer will enforce the security interest and each of those
conditions must be separately signed or initialed by the consumer.
iv. The security interest must be obtainable and enforceable by
creditors generally. If other creditors could not obtain a security
interest in the consumer's deposit accounts to the same extent as
the card issuer, the security interest is prohibited by Sec.
1026.12(d)(2).
* * * * *
Paragraph 12(d)(3)
* * * * *
3. Prepaid accounts. With respect to credit cards that are also
prepaid cards or credit cards that are also account numbers where
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor, a card
issuer is not prohibited under Sec. 1026.12(d) from periodically
deducting all or part of the cardholder's credit card debt from a
deposit account (such as a prepaid account) held with the card
issuer (subject to the limitations of Sec. 1026.13(d)(1)) under a
plan that is authorized in writing by the cardholder, so long as the
creditor does not deduct all or part of the cardholder's credit card
debt from the deposit account (such as a prepaid account) more
frequently than once per calendar month, pursuant to such a plan. To
illustrate, with respect to credit cards that are also prepaid cards
or credit cards that are also account numbers where extensions of
credit are permitted to be deposited directly
[[Page 77332]]
only into particular prepaid accounts specified by the creditor,
assume that a periodic statement is sent out each month to a
cardholder on the first day of the month and the payment due date
for the amount due on that statement is the 25th day of each month.
In this case,
i. The card issuer is not prohibited under Sec. 1026.12(d) from
automatically deducting the amount due on the periodic statement on
the 25th of each month, or on an earlier date in each calendar
month, from a deposit account held by the card issuer, if the
deductions are pursuant to a plan that is authorized in writing by
the cardholder (as discussed in comment 12(d)(3)-1) and comply with
the limitations in Sec. 1026.13(d)(1).
ii. The card issuer is prohibited under Sec. 1026.12(d) from
automatically deducting all or part of the cardholder's credit card
debt from a deposit account (such as a prepaid account) held with
the card issuer more frequently than once per calendar month, such
as on a daily or weekly basis, or whenever deposits are made to the
deposit account.
* * * * *
12(h) Timing Requirement for Solicitation or Application With
Respect to a Prepaid Cardholder
1. Meaning of registration of a prepaid card or prepaid account.
A prepaid card or prepaid account is registered, such that the 30-
day interval required by Sec. 1026.12(h) begins, when the issuer of
the prepaid card or prepaid account successfully completes its
collection of consumer identifying information and identity
verification in accordance with the requirements of applicable
Federal and state law. The beginning of the required 30-day interval
is triggered by successful completion of collection of consumer
identifying information and identity verification, not by the
consumer's mere purchase or obtaining of the card.
2. Unsolicited issuance of credit cards and disclosures related
to applications or solicitations for credit or charge card accounts.
See Sec. 1026.12(a)(1) and comment 12(a)(1)-7 for additional rules
that apply to the addition of a credit or charge card account to a
previously-issued prepaid account. See also Sec. 1026.60 and
related commentary for disclosures that generally must be provided
on or with applications or solicitations to open a credit or charge
card account.
Section 1026.13 Billing Error Resolution
* * * * *
13(a) Definition of a Billing Error
* * * * *
Paragraph 13(a)(3)
* * * * *
2. Application to purchases made using a third-party payment
intermediary and prepaid cards. i. Third-party intermediaries.
Section 1026.13(a)(3) generally applies to disputes about goods and
services that are purchased using a third-party payment
intermediary, such as a person-to-person Internet payment service,
funded through use of a consumer's credit plan when the goods or
services are not accepted by the consumer or not delivered to the
consumer as agreed. However, the extension of credit must be made at
the time the consumer purchases the good or service and match the
amount of the transaction to purchase the good or service (including
ancillary taxes and fees). Under these circumstances, the property
or service for which the extension of credit is made is not the
payment service, but rather the good or service that the consumer
has purchased using the payment service. Thus, for example, Sec.
1026.13(a)(3) would not apply to purchases using a third party
payment intermediary that is funded through use of a credit plan if:
A. The extension of credit is made to fund the third-party
payment intermediary ``account,'' but the consumer does not
contemporaneously use those funds to purchase a good or service at
that time; or
B. The extension of credit is made to fund only a portion of the
purchase amount, and the consumer uses other sources to fund the
remaining amount.
ii. Prepaid cards. Section 1026.13(a)(3) generally applies to
disputes about goods and services that are purchased using a prepaid
card funded through use of a consumer's credit plan accessed by an
account number where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified
by the creditor when the goods or services are not accepted by the
consumer or not delivered to the consumer as agreed. However, the
extension of credit must be made at the time the consumer purchases
the good or service and match the amount of the transaction to
purchase the good or service (including ancillary taxes and fees).
Under these circumstances, the property or service for which the
extension of credit is made is not for funding the prepaid account,
but rather for the good or service that the consumer has purchased
using the prepaid account. Thus, for example, Sec. 1026.13(a)(3)
would not apply to purchases using a prepaid card that is funded
through use of such a credit plan if:
A. The extension of credit is made to fund the prepaid account,
but the consumer does not contemporaneously use those funds to
purchase a good or service at that time; or
B. The extension of credit is made to fund only a portion of the
purchase amount, and the consumer uses other sources to fund the
remaining amount.
* * * * *
13(i) Relation to Electronic Fund Transfer Act and Regulation E
1. Coverage. Credit extended directly from a non-overdraft
credit line is governed solely by Regulation Z, even though a
combined credit card/access device is used to obtain the extension.
With respect to a credit account accessed by an account number where
extensions of credit are permitted to be deposited directly only
into particular prepaid accounts specified by the creditor, Sec.
1026.13(i) does not apply to transfers from that plan to a prepaid
account. The creditor for such transfers must comply with the
billing error provisions in Sec. 1026.13.
2. Incidental credit using a debit card under an agreement. With
respect to an account that is not a prepaid account, for credit
extended incident to an electronic fund transfer under an agreement
between the consumer and the financial institution, Sec. 1026.13(i)
provides that certain error resolution procedures in both this part
and Regulation E apply. Incidental credit that is not extended under
an agreement between the consumer and the financial institution is
governed solely by the error resolution procedures in Regulation E.
For example, credit inadvertently extended incident to an electronic
fund-transfer using a debit card, such as under an overdraft service
not subject to Regulation Z, is governed solely by the Regulation E
error resolution procedures, if the bank and the consumer do not
have an agreement to extend credit when the consumer's account is
overdrawn.
3. Application to debit/credit transactions--examples. If a
consumer uses a debit card to withdraw money at an automated teller
machine and activates an overdraft credit feature on the checking
account:
i. An error asserted with respect to the transaction is subject,
for error resolution purposes, to the applicable Regulation E (12
CFR part 1005) provisions (such as timing and notice) for the entire
transaction.
ii. The creditor need not provisionally credit the consumer's
account, under 12 CFR 1005.11(c)(2)(i), for any portion of the
unpaid extension of credit.
iii. The creditor must credit the consumer's account under Sec.
1005.11(c) with any finance or other charges incurred as a result of
the alleged error.
iv. The provisions of Sec. 1026.13(d) and (g) apply only to the
credit portion of the transaction.
4. Incidental credit under an overdraft credit plan subject to
subpart B. For transactions involving an overdraft credit plan
subject to subpart B in connection with a prepaid account (such as a
credit plan accessed by a prepaid card that is a credit card),
whether Regulation E (12 CFR part 1005) or Regulation Z applies
depends on the nature of the transaction. For example,
i. If the transaction solely involves an extension of credit
under an overdraft plan, and does not include a debit to the prepaid
account, the error resolution requirements of Regulation Z apply.
ii. If the transaction debits a prepaid account only (with no
credit extended under the overdraft plan), the provisions of
Regulation E apply.
iii. If the transaction debits a prepaid account but also draws
on an overdraft plan subject to subpart B in connection with a
prepaid account, a creditor must comply with the requirements of
Regulation E, 12 CFR 1005.11 and 18(c) governing error resolution
rather than those of Sec. 1026.13(a), (b), (c), (e), (f) and (h).
In this case,
A. An error asserted with respect to the transaction is subject,
for error resolution purposes, to the applicable Regulation E (12
CFR part 1005) provisions (such as timing and notice) for the entire
transaction.
B. The creditor need not provisionally credit the consumer's
account, under 12 CFR 1005.11(c)(2)(i), for any portion of the
unpaid extension of credit.
[[Page 77333]]
C. The creditor must credit the consumer's account under Sec.
1005.11(c) with any finance or other charges incurred as a result of
the alleged error.
D. The provisions of Sec. 1026.13(d) and (g) apply only to the
credit portion of the transaction.
5. Incidental credit under a credit plan that is not subject to
subpart B. An overdraft credit plan is not subject to subpart B if
the credit plan is only accessed by a prepaid card that is not a
credit card. A prepaid card is not a credit card if the prepaid card
only accesses credit that is not subject to any finance charge or
fee described in Sec. 1026.4(c) and is not payable by written
agreement in more than four installments. See comment 2(a)(15)-
2.i.F.
* * * * *
Section 1026.52 Limitations on Fees
52(a) Limitations During First Year After Account Opening
52(a)(1) General Rule
1. Application. The 25 percent limit in Sec. 1026.52(a)(1)
applies to fees that the card issuer charges to the account as well
as to fees that the card issuer requires the consumer to pay with
respect to the account through other means (such as through a
payment from the consumer's asset account, including a prepaid
account, to the card issuer or from another credit account provided
by the card issuer). For example:
* * * * *
iii. Assume that a consumer opens a prepaid account accessed by
a prepaid card on January 1 of year one and opens a credit account
accessed by the prepaid card that is a credit card on March 1 of
year one. Assume that, under the terms of the credit account
accessed by the prepaid card, a consumer is required to pay $50 in
fees for the issuance or availability of credit at account opening.
At credit account opening on March 1 of year one, the credit limit
for the account is $200. Section 1026.52(a)(1) permits the card
issuer to charge the $50 in fees to the credit account. However,
Sec. 1026.52(a)(1) prohibits the card issuer from requiring the
consumer to make payments to the card issuer for additional non-
exempt fees with respect to the credit account during the first year
after account opening. Section 1026.52(a)(1) also prohibits the card
issuer from requiring the consumer to open a separate credit account
with the card issuer to fund the payment of additional non-exempt
fees during the first year after the credit card account is opened.
iv. Assume that a consumer opens a prepaid account accessed by a
prepaid card on January 1 of year one and opens a credit account
accessed by the prepaid card that is a credit card on March 1 of
year one. Assume that, under the terms of a credit card account
accessed by the prepaid card, a consumer is required to pay $120 in
fees for the issuance or availability of credit at account opening.
The consumer is also required to pay a cash advance fee that is
equal to five percent of the cash advance and a late payment fee of
$15 if the required minimum periodic payment is not received by the
payment due date (which is the twenty-fifth of the month). At credit
account opening on March 1 of year one, the credit limit for the
account is $500. Section 1026.52(a)(1) permits the card issuer to
charge to the account the $120 in fees for the issuance or
availability of credit at account opening. On April 1 of year one,
the consumer uses the account for a $100 cash advance. Section
1026.52(a)(1) permits the card issuer to charge a $5 cash-advance
fee to the account. On April 26 of year one, the card issuer has not
received the consumer's required minimum periodic payment. Section
1026.52(a)(2) permits the card issuer to charge a $15 late payment
fee to the account. On July 15 of year one, the consumer uses the
account for a $50 cash advance. Section 1026.52(a)(1) does not
permit the card issuer to charge a $2.50 cash advance fee to the
account. Furthermore, Sec. 1026.52(a)(1) prohibits the card issuer
from collecting the $2.50 cash advance fee from the consumer by
other means.
* * * * *
52(a)(2) Fees Not Subject to Limitations
* * * * *
2. Fees related to prepaid cards. Except as provided in Sec.
1026.52(a)(2), Sec. 1026.52(a) applies to any charge or fee, other
than a charge attributable to a periodic interest rate, that the
card issuer will or may require the consumer to pay in connection
with a credit account accessed by a prepaid card that is a credit
card, including fees that are assessed on the prepaid account in
connection with credit accessed by the prepaid card. This includes,
but is not limited to:
i. Per-transaction fees for ``shortages'' or ``overdrafts;''
ii. Fees for transferring funds from a credit account to a
prepaid account that are both accessed by the prepaid card;
iii. A daily, weekly, or monthly (or other periodic) fee (other
than a periodic interest rate) assessed each period a prepaid
account is in ``overdraft'' status, or would be in overdraft status
but for funds supplied by a linked line of credit accessed by the
prepaid card; or
iv. A daily, weekly, or monthly (or other periodic) fee (other
than a periodic interest rate) assessed each period a line of credit
accessed by the prepaid card has an outstanding balance.
3. Fees on credit card accounts where extensions of credit are
deposited directly only in particular prepaid accounts. Except as
provided in Sec. 1026.52(a)(2), Sec. 1026.52(a) applies to any
charge or fee, other than a charge attributable to a periodic
interest rate, that the card issuer will or may require the consumer
to pay in connection with a credit account accessed by an account
number that is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor, including fees that are assessed
on the prepaid account in connection with the credit assessed by the
account number. This includes, but is not limited to:
i. Per-transaction fees for ``shortages'' or ``overdrafts;''
ii. Fees for transferring funds from the credit account to a
prepaid account;
iii. A daily, weekly, or monthly (or other periodic) fee (other
than a periodic interest rate) assessed each period the line of
credit accessed by the account number has an outstanding balance.
4. Fees the consumer is not required to pay. Section
1026.52(a)(2)(ii) provides that Sec. 1026.52(a) does not apply to
fees that the consumer is not required to pay with respect to the
account. For example, Sec. 1026.52(a) generally does not apply to
fees for making an expedited payment (to the extent permitted by
Sec. 1026.10(e)), fees for optional services (such as travel
insurance), fees for reissuing a lost or stolen card, or statement
reproduction fees.
5. Security deposits. A security deposit that is charged to a
credit card account is a fee for purposes of Sec. 1026.52(a). In
contrast, however, a security deposit is not subject to the 25
percent limit in Sec. 1026.52(a)(1) if it is not charged to the
account. For example, Sec. 1026.52(a)(1) does not prohibit a card
issuer from requiring a consumer to provide funds at account opening
pledged as security for the account that exceed 25 percent of the
credit limit at account opening so long as those funds are not
obtained from the account.
* * * * *
52(b) Limitations on Penalty Fees
* * * * *
52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation
* * * * *
7. Declined transaction fees. Section 1026.51(b)(2)(i)(B)(1)
applies to declined transaction fees where an account number is a
credit card where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor. In addition, with respect to a credit card that is a
prepaid card, the prohibition in Sec. 1026.52(b)(2)(i)(B)(1)
applies to the consumer's transactions using the prepaid card where
a declined transaction would have accessed the consumer's credit
account with the card issuer had it been authorized. Fees imposed
for declining a transaction that would have only accessed the
prepaid account and would not have accessed the credit card account
would not be covered by Sec. 1026.52(b)(2)(B)(i)(1).
* * * * *
Section 1026.57 Reporting and Marketing Rules for College Student Open-
End Credit
57(a) Definitions
57(a)(1) College Student Credit Card
1. Definition. The definition of college student credit card
excludes home-equity lines of credit accessed by credit cards and
overdraft lines of credit accessed by debit cards. A college student
credit card includes a college affinity card within the meaning of
TILA section 127(r)(1)(A). In addition, a card may fall within the
scope of the definition regardless of the fact that it is not
intentionally targeted at or marketed to college students. For
example, an agreement between a college and a card issuer may
provide for marketing of credit cards to alumni, faculty, staff, and
other non-student consumers who have a relationship with the
college, but also contain provisions that contemplate the issuance
of cards to
[[Page 77334]]
students. A credit card issued to a student at the college in
connection with such an agreement qualifies as a college student
credit card. The definition of college student credit card includes
a prepaid card that is a credit card, or an account number that is a
credit card where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor, that is issued to any college student under a credit card
account under an open-end (not home-secured) consumer credit plan.
The definition of college student credit card also includes a
prepaid account that is issued to any college student where an open-
end (not home-secured) consumer credit plan may be added in
connection with the prepaid account and the credit account may be
accessed by a prepaid card that is a credit card, or may be accessed
by an account number that is a credit card where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor.
* * * * *
57(a)(5) College Credit Card Agreement
1. Definition. Section 1026.57(a)(5) defines ``college credit
card agreement'' to include any business, marketing or promotional
agreement between a card issuer and a college or university (or an
affiliated organization, such as an alumni club or a foundation) if
the agreement provides for the issuance of credit cards to full-time
or part-time students. Business, marketing or promotional agreements
may include a broad range of arrangements between a card issuer and
an institution of higher education or affiliated organization,
including arrangements that do not meet the criteria to be
considered college affinity card agreements as discussed in TILA
section 127(r)(1)(A). For example, TILA section 127(r)(1)(A)
specifies that under a college affinity card agreement, the card
issuer has agreed to make a donation to the institution or
affiliated organization, the card issuer has agreed to offer
discounted terms to the consumer, or the credit card will display
pictures, symbols, or words identified with the institution or
affiliated organization; even if these conditions are not met, an
agreement may qualify as a college credit card agreement, if the
agreement is a business, marketing or promotional agreement that
contemplates the issuance of college student credit cards to college
students currently enrolled (either full-time or part-time) at the
institution. An agreement may qualify as a college credit card
agreement even if marketing of cards under the agreement is targeted
at alumni, faculty, staff, and other non-student consumers, as long
as cards may also be issued to students in connection with the
agreement. This definition also includes a business, marketing or
promotional agreement between a card issuer and a college or
university (or an affiliated organization, such as an alumni club or
a foundation) if the agreement provides for the addition of open-end
(not home-secured) consumer credit plans to previously issued
prepaid accounts that were issued to full-time or part-time
students, where that credit account would be accessed by a prepaid
card that is a credit card, or may be accessed by an account number
that is a credit card where extensions of credit are permitted to be
deposited directly only into particular prepaid accounts specified
by the creditor. This definition also includes a business, marketing
or promotional agreement between a card issuer and a college or
university (or an affiliated organization, such as an alumni club or
a foundation) if (1) the agreement provides for the issuance of
prepaid accounts to full-time or part-time students; and (2) an
open-end (not home-secured) consumer credit plan may be added in
connection with the prepaid account where that credit account may be
accessed by a prepaid card that is a credit card, or may be accessed
by an account number that is a credit card where extensions of
credit are permitted to be deposited directly only into particular
prepaid accounts specified by the creditor.
57(b) Public Disclosure of Agreements
* * * * *
3. Credit card account in connection with prepaid account.
Section 1026.57(b) applies to any contract or other agreement that
an institution of higher education makes with a card issuer or
creditor for the purpose of marketing either (1) the addition of an
open-end (not home-secured) consumer credit account to previously
issued prepaid accounts that were issued to full-time or part-time
students or (2) new prepaid accounts where a credit account may be
added in connection with the prepaid account, where, in either case,
the credit account would be accessed by a prepaid card that is a
credit card, or may be accessed by an account number that is a
credit card where extensions of credit are permitted to be deposited
directly only into particular prepaid accounts specified by the
creditor. Thus, under Sec. 1026.57(b), an institution of higher
education must publicly disclose such agreements.
57(c) Prohibited Inducements
* * * * *
7. Credit card accounts in connection with prepaid accounts.
Section 1026.57(c) applies to either (1) the application for or
opening of a credit card account that is being added to previously
issued prepaid accounts that were issued to full-time or part-time
students or (2) the application for or opening of a prepaid account
where a credit account may be added in connection with the prepaid
account, where, in either case, the credit account would be accessed
by a prepaid card that is a credit card, or may be accessed by an
account number that is a credit card where extensions of credit are
permitted to be deposited directly only into particular prepaid
accounts specified by the creditor.
* * * * *
Section 1026.60 Credit and Charge Card Applications and Solicitations
1. General. Section 1026.60 generally requires that credit
disclosures be contained in application forms and solicitations
initiated by a card issuer to open a credit or charge card account.
(See Sec. 1026.60(a)(5) and (e)(2) for exceptions; see Sec.
1026.60(a)(1) and accompanying commentary for the definition of
solicitation; see also Sec. 1026.2(a)(15) and accompanying
commentary for the definition of charge card and Sec. 1026.12(h)
for restrictions on when credit or charge card accounts can be added
to previously issued prepaid accounts.)
* * * * *
60(b)(4) Transaction Charges
* * * * *
3. Prepaid cards. If a card issuer assesses a fee (other than a
periodic rate that may be used to compute the finance charge on an
outstanding balance) for credit accessed by a credit card that is a
prepaid card to make a purchase, that fee is a transaction charge
described in Sec. 1026.60(b)(4). This is so whether the fee is a
flat per-transaction fee to make a purchase, a flat fee for each day
(or other period) the consumer has an outstanding balance of
purchase transactions, or a one-time fee for transferring funds from
the consumer's credit account to the consumer's prepaid account to
cover the shortfall in the prepaid account as a result of a purchase
with the prepaid card.
* * * * *
60(b)(8) Cash Advance Fee
* * * * *
4. Prepaid cards. If a card issuer assesses a fee (other than a
periodic rate that may be used to compute the finance charge on an
outstanding balance) for a cash advance accessed by a credit card
that is a prepaid card, such as a cash withdrawal at an ATM, that
fee is a cash advance fee. If the cash advance fee is the same
dollar amount as the transaction charge for purchases described in
Sec. 1026.6(b)(2)(iv), the card issuer may disclose the fee amount
under a heading that indicates the fee applies to both purchase
transactions and cash advances. Examples of how fees for purchase
transactions described in Sec. 1026.60(b)(4) and fees for cash
advances described in Sec. 1026.60(b)(8) must be disclosed are as
follows:
i. A card issuer assesses a $15 fee for credit accessed by a
credit card that is a prepaid card to purchase goods or services at
the point of sale when the consumer has insufficient or unavailable
funds in the prepaid account. The card issuer assesses a $25 fee for
credit accessed by a prepaid card for a cash advance at an ATM when
the consumer has insufficient or unavailable funds in the prepaid
account. In this instance, the card issuer must disclose separately
a purchase transaction charge of $15 and a cash advance fee of $25.
ii. A card issuer assesses a $15 fee for credit accessed by a
credit card that is a prepaid card to purchase goods or services at
the point of sale when the consumer has insufficient or unavailable
funds in the prepaid account. The card issuer assesses a $15 fee for
credit accessed by a credit card that is a prepaid card for
providing cash at an ATM when the consumer has insufficient or
unavailable funds in the prepaid account. In this instance, the card
issuer may disclose the $15 fee under a heading that indicates the
fee applies to both purchase transactions and ATM cash advances.
Alternatively, the card issuer may disclose the $15 fee on two
separate rows, one row indicating that a $15 fee applies to purchase
transactions, and a
[[Page 77335]]
second row indicating that a $15 fee applies to ATM cash advances.
iii. A card issuer assesses a $15 fee for credit accessed by a
credit card that is a prepaid card for providing cash at an ATM when
the consumer has insufficient or unavailable funds in the prepaid
account. The card issuer also assesses a fee of $1.50 for out-of-
network ATM cash withdrawals and $1.00 for in-network ATM cash
withdrawals. The card issuer must disclose the cash advance fee as
$16.50 for out-of-network ATM cash withdrawals, indicating that
$1.50 is for the out-of-network ATM withdrawal fee, such as ``$16.50
(including a $1.50 out-of-network ATM withdrawal fee).'' The card
issuer also must disclose the cash advance fee as $16.00 for in-
network ATM cash withdrawals, indicating that $1.00 is for the in-
network ATM withdrawal fee, such as ``$16 (including a $1.00 in-
network ATM cash withdrawal fee).''
5. Credit card accounts where extensions of credit are deposited
directly only in particular prepaid accounts. With respect to a
credit card account accessed by an account number where extensions
of credit are permitted to be deposited directly only into
particular prepaid accounts specified by the creditor, if a card
issuer assesses a fee (other than a periodic rate that may be used
to compute the finance charge on an outstanding balance) for an
extension of credit that will be deposited into a prepaid account
that fee is a cash advance fee.
* * * * *
Dated: November 10, 2014.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2014-27286 Filed 12-22-14; 8:45 am]
BILLING CODE 4810-AM-P