Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z)

Federal RegisterDec 23, 2014

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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.

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: FederalRegisterComments@cfpb.gov.

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

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.

Among other

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).

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

Id.

at 37.

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

§ 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.

Payment networks include Visa, MasterCard, American Express, and Discover; ATM networks include NYCE, PULSE, STAR and Cirrus.

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.

As described in more detail below, payroll card accounts and cards used to distribute certain government benefit payments are currently regulated by Regulation E.

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.

Mercator Advisory Grp.,

Eleventh Annual U.S. Prepaid Cards Market Forecasts, 2014-2017

at 13 (Nov. 2014).

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.

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

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.

The Bureau understands that in limited circumstances, a consumer can reload a GPR card via paper check.

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.

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.

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.

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.

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

2012 FRB Philadelphia Study, at 6.

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.

Id.

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,

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.

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.

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.

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.

2014 Pew Survey, at 7-8, 11.

Id.

at 10-11.

Id.

at 14.

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.

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.

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

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.

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).

Mercator Advisory Grp.,

Customer Identification Programs in Prepaid: Best Practices,

at 2 (July 2013).

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.

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.

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.

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

greater depositor credit risk such as the risk that a deposited check never clears.

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.

Id.

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

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.

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).

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.

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.

2013 FDIC Survey, at 4.

2013 FDIC Survey, at 35-36.

2013 FDIC Survey, at 29.

2013 FDIC Survey appendix, at 46-47.

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.

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.

By contrast, except for a few exceptions discussed below, GPR cards are generally not offered with an overdraft service nor other credit features.

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.

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.

2014 Pew Survey, at 8;

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,

unemployment insurance benefits,

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.

With respect to other government benefits, as noted below in the discussion of relevant law, Regulation E does not apply to EBT programs.

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.

The features of and fees charged in connection with these cards may vary.

Treasury has established the Direct Express program for the distribution of government benefits such as Social Security payments.

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).

Id.

at 1.

See

EFTA section 904(d)(2)(B); Regulation E § 1005.15(a)(2).

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.

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.

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.

Aite Grp. LLC,

Money Goes Mobile,

(May 2014),

available at

http://www.aitegroup.com/report/money-goes-mobile

Id.

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

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. . . .”).

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.

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.

Similarly, the Bureau's own focus groups also found that many consumers choose prepaid products because they help them control their spending.

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.

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).

2014 Pew Survey, at 13-14.

ICF Report, at 5.

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.

Relatedly, prepaid products are often used by consumers who cannot obtain a checking account due to bad credit or other issues.

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.

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.

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”).

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).

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).

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.

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.

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

The Bureau understands that the only credit features being offered on prepaid accounts currently are structured as overdraft services.

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

charges $15) although the fee tends to be lower than fees typically charged for checking accounts (median fee as of July 2014 is $35).

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.

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.

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.

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.

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.

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.

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

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

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.

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.

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.

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;

the Board's Regulation II on debit card interchange and routing (12 CFR part 235); and FinCEN's prepaid access rule.

75 FR 80335 (Dec. 22, 2010).

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.

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.

However, as

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.

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).

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

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.”

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.

See

Dodd-Frank Act sections 1061(b) and 1084; 12 U.S.C. 5581(b); 15 U.S.C. 1693a

et seq.

See

Public Law 95-630; 92 Stat. 3728 (1978).

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.

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. § 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.

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. § 1005.2(b)(1).

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.

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. § 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

§ 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

§§ 1005.6 and 1005.11. Moreover, Regulation E contains, among other things, provisions specific to periodic statements that generally must be provided in writing (§ 1005.9(b)), the issuance of access devices (§ 1005.5),

preauthorized EFTs and compulsory use (§ 1005.10), requirements for overdraft services (§ 1005.17), and ATM disclosures (§ 1005.16).

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. § 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.

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.

78 FR 18221 (Mar. 26, 2013).

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).

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.

59 FR 10678 (Mar. 7, 1994).

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.”

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.

62 FR 3242, 3243 (Jan. 22, 1997).

62 FR 43467 (Aug. 14, 1997).

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).

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

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., § 443; S. 650, 104th Cong., § 601 (1995).

61 FR 19696 (May 2, 1996).

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

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

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 § 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

§ 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 § 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 § 1005.9(b)).

See

§ 1005.18(b). Related provisions in § 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 § 1005.8(b)), and error resolution and limitations on liability, in recognition of the modified periodic statement requirement.

104

71 FR 51437, 51438 (Aug. 30, 2006).

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

71 FR 51437, 51441 (Aug 30, 2006).

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

106

71 FR 1473, 1475 (Jan. 10, 2006).

107

Id.

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 § 1005.20 of current Regulation E (Gift Card Rule).

109

108

Public Law 111-24, 123 Stat. 1734 (2009).

109

75 FR 16580 (Apr. 1, 2010).

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

§ 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. § 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. § 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. § 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).

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.

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).

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

113

See, e.g., http://www.fdic.gov/deposit/deposits/dis/

114

See, e.g., http://www.ncua.gov/DataApps/Pages/SI-NCUA.aspx

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

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 § 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

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

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

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.

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

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.

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.

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

157

74 FR 59033 (Nov. 17, 2009).

158

Id.

at 59037.

159

Id.

at 59040.

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

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).

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

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/.

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

See http://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201404&RIN=3170-AA42

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).

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

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

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 § 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

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 colle

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