December 2014 Newsletters

CFPB Proposes Expansive Rules for Prepaid Products, Could be Effective by Next Holiday Season

On Nov. 13, 2014, the Consumer Financial Protection Bureau (CFPB) proposed rules regarding electronic funds transactions to prepaid cards. While the rules are not effective yet, they are important to review and keep in mind, especially in light of one of the busiest times of the year for retailers.

Prepaid cards can be purchased at retailers or online, and are conveniently loaded with funds by a consumer, employer, government agency or another third party. They are among the fastest growing payment methods and have billions of dollars placed on them each year. According to the CFPB, the dollar value loaded onto them this year is expected to reach $100 billion by the end of this holiday season.

These cards are useful to people trying to stick to a budget and avoid overdraft fees, and are particularly popular during the heightened spending of the holidays. Often, parents will give teens or college-age children prepaid cards as gifts to monitor how they are spending money. The cards are also a spending option for those without bank accounts.

Consumer advocates have been critical of prepaid cards because they can include many fees for routine transactions, such as for checking balances or using an out-of-network ATM, without the fees being clearly disclosed. Such advocates argue the lack of information also makes it harder for consumers to comparison shop.

The CFPB’s proposed rules for prepaid cards would require customers to receive online statements and easy access to account information. The rules would also limit consumer liability for lost, stolen or fraudulently used cards, similar to current credit card and checking account protections, and would establish error resolution procedures. The CFPB also proposed new “Know Before You Owe” prepaid disclosures that would require clear information about the costs and risks of prepaid products upfront.

But the rules cover much more than these cards commonly used as gifts. The rules cover any account loaded with consumer funds on a prepaid basis that can be accessed for payments, ATM withdrawals or peer-to-peer transactions. The rule also applies to many mobile wallets and virtual currency products, as well as payroll cards, certain federal, state and local government benefit cards that distribute unemployment insurance, child support and pension payments, student financial aid disbursement cards and tax refund cards. There are exclusions for health savings accounts and mobile apps that only store payment credentials for other accounts are not covered.

Although the rules are only proposed as of now, once effective, they could create significant compliance requirements worthy of immediate consideration, especially during the holidays and other popular times for retailers.