Leveling the Prepaid Playing Field? CFPB Issues Advance Notice of Proposed Rulemaking On Prepaid Card Products, Holds Public Hearing

Consumer Financial Protection Bureau (CFPB) Director Richard Cordray announced on Wednesday that the CFPB will seek public comment on general purpose reloadable (“GPR”) prepaid cards in advance of a proposed rulemaking that would seek to extend federal Regulation E protections to such products.  If finalized, this increasingly popular alternative to traditional checking accounts would be subject to more of the consumer protections that currently apply to debit cards. (As discussed in our prior posts here and here, “prepaid access” devices are already subject to anti-money laundering obligations under the Bank Secrecy Act and FinCEN regulations.) Among its provisions, Regulation E imposes limits on overdraft fees, and requires debit card issuers to fully disclose such fees to consumers. In addition, Regulation E imposes liability limits, mandates error resolution and recrediting procedures, and prescribes additional disclosures throughout the life of the card. GPRs have been aggressively marketed by both traditional financial institutions and non-banks as an alternative to checking and credit card accounts, and now represent a market that is expected to top $160 billion by 2014, according to the Mercator Advisory Group.

The Advanced Notice of Public Rulemaking (ANPR) issued by the CFPB (available here) seeks comment on the following topics:

• Regulatory Coverage of GPR Products: whether all types of prepaid cards, such as prepaid health spending cards, should be subject to Regulation E and whether prepaid card products should be subject to all or merely portions of Regulation E.
• Product Fees and Disclosures: methods for providing consumers with transparent, useful, and timely disclosures regarding GPR card fees, providing consumers the ability to compare competing card products; and arguments as to whether the presence or lack of pass-through FDIC insurance on prepaid card balances should be disclosed.
• Product Features: discussion of the risks, benefits, and costs of consumer protection rules related to any card features, in particular overdraft credit protection and fees, savings accounts attached to prepaid cards, and purported credit building and reporting card features.
• Other Information on GPR Cards: methods for communicating changes in terms to card features, the cost and projected impact on market participants from the imposition of new regulations, and other information regarding the cost of compliance.

Speaking later at a public hearing in Durham, NC, Cordray emphasized that the CFPB would focus on two issues surrounding prepaid cards: safety and transparency.

“Although the networks that process prepaid card transactions – such as Visa, MasterCard, American Express, and Discover – do require prepaid card issuers to provide contractual protections to cardholders, those protections are not as strong as those for debit cards and credit cards and they are subject to change at any time.”

Consumer advocates and GPR card industry representatives present at the hearing welcomed the announcement, recognizing that because the cards are used in the same manner and over the same networks as debit and credit cards, consumer confusion is common.

While recognizing the many benefits of prepaid cards to consumers, Cordray outlined the complaints lodged by consumer advocacy groups, such as:

• Unclear and variable fee structures among competing card offerings for basic services such as loading money onto a card and accessing customer service
•  Inadequate disclosure of overdraft fees provisions
• Difficulty comparing competing prepaid plans when full consumer disclosures are provided after a consumer has purchased the card
• Confusion over whether prepaid cards are FDIC-insured

The CFPB’s inquiry will focus on finding ways to make the risks and benefits of GPR cards more apparent to consumers without imposing a regulatory framework that undermines the market. Cordray also announced the launch of “Ask CFPB: Prepaid Cards”, an online resource that will provide answers to frequently asked consumer questions.

If the CFPB extends parts of Regulation E to the prepaid card market, larger card issuers accustomed to Regulation E’s provisions and those who already voluntarily abide by them may have an advantage over prepaid card issuers unfamiliar with the regulatory landscape. However, the notion of applying portions of Regulation E to GPR cards should come as no surprise to market participants. Federal regulators considered doing so as long ago as 1996. More recently, the Federal Reserve Board applied Regulation E to payroll prepaid cards in 2007, but excluded Regulation E’s disclosure rules and periodic statement requirements. 12 C.F.R. 205.2(B)(2) and 205.18. Because more and more consumers have begun adopting prepaid cards as a primary means of access to funds, the CFPB will likely take a similar approach and select from among Regulation E’s consumer protection provisions, focusing on clear fee and card feature disclosures, periodic statement requirements, and timely notice of changes in prepaid card terms.

Interested parties will have 60 days from publication of today’s ANPR in the Federal Register to submit comments.  Comments can be submitted electronically at http://www.regulations.gov