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Prepaid Banking Products To Be Regulated Like Credit Cards

Amidst growing regulatory concern over the exponential growth in the use of prepaid cards and other forms of prepaid accounts, the Consumer Financial Protection Bureau (CFPB) recently issued a final rule (New Regulation) expanding the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) to cover a category of financial products that had not been subject to comprehensive regulation. Spanning nearly 1,700 pages, the New Regulation covers an array of products by defining a “prepaid account”—a term previously undefined in Regulation E—as including:

  • General purpose reloadable cards, meaning prepaid cards available for purchase at various retailers and financial institutions, from which loaded funds can be accessed at point-of-sale terminals, ATMs and online (similar to a debit card, but with no checking account attached);

  • Digital wallets, such as Google Wallet, capable of storing funds that can be used for purchases at multiple unaffiliated merchants;

  • Electronic person-to-person payment products, such as PayPal and its cellphone app Venmo;

  • Payroll cards used to transmit wages from employers to employees;

  • Student financial aid disbursement cards; and

  • Government benefit cards, such as those used to distribute unemployment insurance and child support.

Issuers of these products—and in some cases their affiliates or business partners—will have until October 1, 2017 to implement the consumer protections discussed below.

Expanded Account Accessibility, Fraud Protection and Initial Disclosures

Standards that have historically only applied to checking accounts and credit cards will now be imposed on prepaid accounts. Prepaid account customers will now be entitled to transaction history and other account information at no charge via telephone, online or upon written request. In addition, the New Regulation mandates that consumers who promptly notify the issuer of unauthorized transactions will be held responsible for no more than $50 in fraudulent charges.

The New Regulation also amends Regulation E to require that both short- and long-form “Know Before You Owe” fee disclosures be provided to consumers prior to prepaid account acquisition, with content and delivery requirements varying depending on the specific type of prepaid account and how it is marketed. The New Regulation also calls for issuers to make card user agreements publicly accessible to facilitate comparison shopping among different prepaid account products. Issuers have an extra year, until October 1, 2018 before they must submit prepaid account agreements to the CFPB, which intends to post them on a public, CFPB-maintained website.

Heightened Overdraft Rules

Among the New Regulation’s more controversial provisions is its expansion of Regulation Z’s credit card rules to cover any prepaid account products that allow users to overdraw or otherwise spend a greater amount than is actually in the account. Issuers offering these products, called “hybrid prepaid credit cards,” must implement special underwriting procedures, issue detailed periodic statements and comply with limitations on overdraft and late fees, as well as the timeframe within which such fees may be charged. Moreover, the New Regulation prohibits issuers from taking funds loaded onto a prepaid account to repay any outstanding debt to the issuer without the customer’s written consent.

Particularly challenging are the New Regulation’s provisions requiring issuers offering overdraft services on prepaid accounts to conduct an ability-to-repay analysis (along with the observance of a 30-day waiting period) before activating the credit feature of new prepaid accounts. Essentially, issuers must assess consumers’ creditworthiness as if they were issuing credit cards, and because of this treatment, they must comply with Regulation Z disclosure requirements applicable to credit card issuers.

What the Future Holds

Industry groups have expressed concern over the burdensome compliance measures that lie ahead, particularly in light of the increase in demand for prepaid account products in recent years. The amount of funds put on prepaid cards is projected to exceed $117 billion by 2019. Much of the customer base for prepaid account products is comprised of unbanked consumers, giving rise to concern that, by burdening the offering of prepaid accounts, the CFPB will significantly impede the product offerings available to unbanked consumers by insured depository institutions.

Experienced counsel can help issuers navigate this new regulatory environment in designing their prepaid account products and services to comply both with the specifics of the New Regulation and related dictates of the CFPB.

© 2018 Dinsmore & Shohl LLP. All rights reserved.

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About this Author

Robert Huston Beatty Jr, Dinsmore Shohl Law Natural Resources Litigation, lawyer
Partner

Robert Huston Beatty, Jr. is a member of the Natural Resources Practice Group. Bob represents mine operators before federal and state administrative agencies, federal courts, and state courts. He also provides pre-enforcement consulting services, including comprehensive training for mine managers and safety professionals.

Education

J.D., West Virginia University College of Law (1993)
B.A., West Virginia University (magna cum laude, honors scholar, 1990)

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Richard M. Berman, Dinsmore, Vendor management Lawyer, Cash Management Attorney, Philadelphia, PA
Partner

Richard is a Partner in our Corporate Department and a member of the Financial Services, Regulatory and Enforcement Group (FinsReg). In his more than 25 years of practice, he has gained extensive experience providing legal counsel and advice to national, regional and community based financial institutions as both a law firm partner and in-house counsel.

Richard’s multi-faceted legal experience, coupled with a strategic business sense, allows him to help his clients navigate the many complex legal and business issues that challenge their organizations. He routinely counsels financial services clients on a wide array of matters such as regulation, vendor management, operational matters, cash management, loss prevention and security, claims, litigation, lending and asset recovery. With special concentration on the operational side of the institution, he has assisted his clients in responding to a broad spectrum of issues arising on a daily basis, including interbank payments, internal and external fraud, customer claims, customer transactional issues, retail operations issues, bank security concerns, legal process, lending and vendor management matters. Richard also is skilled in advising financial institutions on matters involving the Uniform Commercial Code (UCC), Electronic Funds Transfer Act/Regulation E, National Automated Clearing House Association (NACHA) Rules, and Expedited Funds Availability Act/Regulation CC.

His flexible, integrated approach to addressing complex issues, transactions, claims, litigation and regulatory matters allows him to guide clients through the multi-dimensional impact of decisions including the impact upon various constituencies. Richard’s ability to assess risks from a strategic and practical view as well as his ability to communicate legal terms in a way his clients understand make him a trusted advisor. 

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Jonathan L. Levin, Dinsmore, banking issues lawyer, Charter Licensing Matters Attorney
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Jonathan Levin is Partner Of Counsel in our Philadelphia office and a member of the Financial Services Regulatory & Enforcement Group (FinsReg) in the Corporate Department. He focuses his practice on providing regulatory counsel to banks and financial companies.

After 21 years in private practice, he joined Bear Stearns & Co. Inc. in October 2006 as Chief Compliance Officer and Chief Regulatory Counsel of their subsidiary bank. Before joining Dinsmore, he maintained his own financial services law practice for seven years.

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Sarah Mattingly, Dinsmore Law Firm, Corporate Attorney
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Sarah Mattingly is a member of our Corporate Department. She focuses her practice in the areas of commercial litigation and banking and finance law, including bankruptcy, foreclosure, workouts and secured transactions.

Sarah litigates on behalf of clients in both state and federal courts. Known for her understanding of commercial law, her cases range from bankruptcy matters to lender liability defense. Sarah’s clients especially appreciate her continued communication, so they are always aware of the progress of their matters.

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Frank A Mayer III, Dinsmore, Financial Services Regulation Lawyer, Enforcement Actions Attorney
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Frank A. Mayer, III is a partner and Chair of the Financial Services Regulatory & Enforcement Group (FinsReg).

Frank advises and defends regulated business enterprises with a special emphasis on financial service organizations, foreign banking organizations, U.S. insured depository institutions, non bank credit providers and mortgage loan product platforms, payment systems and related participants, directors, special board committees and officers in connection with supervisory and enforcement matters as well as mergers and acquisitions. He...

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