CFPB Focuses on Regulation of Reloadable Prepaid Cards

by Ballard Spahr LLP
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The Consumer Financial Protection Bureau has issued an Advance Notice of Proposed Rulemaking (ANPR) that proposes to extend Regulation E protections to general purpose reloadable prepaid cards or GPR cards. The comment period on the ANPR will be open until July 23, 2012.

Issued on May 23, 2012, and coinciding with the CFPB’s scheduled hearing on the same subject in Durham, North Carolina, the ANPR seeks a variety of information bearing on the issue of whether to extend Regulation E protections to GPR cards, as well as the CFPB’s consideration of potential regulations with regard to various features and products associated with these cards, such as overdraft protection, fee disclosures, etc.

In the ANPR, the CFPB acknowledges that “many market participants [already] … voluntarily provide some protections for consumers.”  Indeed, we have seen many GPR card issuers and other market participants create cards that are both consumer-friendly and competitive with other payment products. The industry’s success in doing so is underlined by the dramatic growth of the GPR card market as consumers rapidly adopt GPR cards.

Nevertheless, the CFPB stated that its goal is to “ensure that consistent minimum standards apply across similar consumer financial products by ensuring transparent fee disclosure, and to allocate the risks of fraud or loss appropriately.”

The CFPB set forth 10 specific questions on which it seeks comment, organized into the following four broad categories: 1) regulatory coverage of products by some or all of Regulation E, 2) product fees and disclosures, 3) product features, and 4) other information on GPR cards.

The following are summaries of the 10 specific questions posed by the CFPB:

  • How should the CFPB define GPR cards in the context of  Regulation E? Should some products be excluded, such as cards that serve a limited purpose?
  • Should only certain aspects of Regulation E be applied to GPR cards? If so, explain why and how a GPR card’s use or structure makes any such modification appropriate. If the Bureau does propose any modifications to Regulation E, what alternative protections or requirements should it also propose?
  • What steps can the CFPB take to effectively regulate these products to ensure consumers receive “transparent, useful, and timely fee disclosures?” Should market participants be required to provide disclosure pre-sale, post-sale, or both?
  • How can the CFPB enable consumers to compare various GPR cards and other payment products that may have different fee structures or which are offered through different distribution channels? How should market participants convey the most important contractual terms to consumers to enable them to make an educated purchase decision since many GPR cards offer limited disclosure space?
  • Should the existence (or lack thereof) of FDIC pass-through insurance in connection with a GPR card be disclosed to the consumer? If so, how and when?
  • While recognizing that consumers generally cannot “overdraft” a GPR card, the CFPB noted that some GPR cards do allow cardholders to opt in to an overdraft program/offer a small line of credit, in connection with which the issuer may authorize overdrafts and charge an overdraft fee. Accordingly, the CFPB seeks input on the costs, benefits, and consumer protection issues related to any such “credit features” that may be offered in conjunction with a GPR card.
  • Although most GPR cards currently do not offer a linked savings account, the CFPB seeks input on the costs, benefits, and consumer protection issues related to any savings features offered with GPR cards.
  • Some GPR cards include a feature that “claims to offer” consumers the opportunity to improve/build credit, which consumers can opt into and which involves credit reporting to reporting agencies. The CFPB seeks public input and data concerning the efficacy of these credit reporting features and information on whether regulatory provisions should address how such services are marketed.
  • Through what methods and under what circumstances do market participants communicate changes in contract terms or other information to cardholders? Are there inventory replacement cycles that drive the printing of cards to stock distribution outlets? Do market participants conduct periodic maintenance of systems during which updating compliance systems would impose less of a burden? If so, how often does such maintenance occur? Are there “other issues” with respect to the costs of regulatory compliance about which the CFPB should be aware?
  • Is there any other information relevant to GPR cards that will help inform the CFPB as it considers how best to address these products or other issues that should be considered in this regard?

Notably, the ANPR does not seek information about closed-loop cards, debit cards linked to traditional checking accounts, non-reloadable cards, payroll cards, EBTs (electronic benefit transfers), or gift cards. But within the definition of “GPR cards,” the ANPR does include “other mechanisms” including “key fobs or cell phone applications that access a financial account.”

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). 

The group also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.  For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com; Mercedes Kelley Tunstall at 202.661.2221 or tunstallm@ballardspahr.com; Barbara S. Mishkin at 215.864.8528 or mishkinb@ballardspahr.com; Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com, or Stefanie H. Jackman at 678.420.9490 or jackmans@ballardspahr.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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