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

Federal RegisterNov 22, 2016

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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:

Final rule; official interpretations.

SUMMARY:

The Bureau of Consumer Financial Protection (Bureau or CFPB) is issuing this final rule to create comprehensive consumer protections for prepaid accounts under Regulation E, which implements the Electronic Fund Transfer Act; Regulation Z, which implements the Truth in Lending Act; and the official interpretations to those regulations. The final rule modifies general Regulation E requirements to create tailored provisions governing disclosures, limited liability and error resolution, and periodic statements, and adds new requirements regarding the posting of account agreements. Additionally, the final rule regulates overdraft credit features that may be offered in conjunction with prepaid accounts. Subject to certain exceptions, such credit features will be covered under Regulation Z where the credit feature is offered by the prepaid account issuer, its affiliate, or its business partner and credit can be accessed in the course of a transaction conducted with a prepaid card.

DATES:

This rule is effective on October 1, 2017, except for the addition of § 1005.19(b), which is delayed until October 1, 2018.

FOR FURTHER INFORMATION CONTACT:

Jane Raso, Yaritza Velez, and Shiri Wolf, Counsels; Kristine M. Andreassen, Krista Ayoub, and Marta I. Tanenhaus, Senior Counsels, Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

Regulation E implements the Electronic Fund Transfer Act (EFTA), and Regulation Z implements the Truth in Lending Act (TILA). On November 13, 2014, the Bureau issued a proposed rule to amend Regulations E and Z, which was published in the

Federal Register

on December 23, 2014 (the proposal or the proposed rule).

The Bureau is publishing herein final amendments to extend Regulation E coverage to prepaid accounts and to adopt provisions specific to such accounts, and to generally expand Regulation Z's coverage to overdraft credit features that may be offered in conjunction with prepaid accounts. The Bureau is generally adopting the rule as proposed, with certain modifications based on public comments and other considerations as discussed in detail in part IV below. This final rule represents the culmination of several years of research and analysis by the Bureau regarding prepaid products.

79 FR 77102 (Dec. 23, 2014).

See also

Press Release, CFPB,

CFPB Proposes Strong Federal Protections for Prepaid Products

(Nov. 13, 2014),

available at http://www.consumerfinance.gov/newsroom/cfpb-proposes-strong-federal-protections-for-prepaid-products

. The Bureau had previously published an advance notice of proposed rulemaking (Prepaid ANPR) that posed a series of questions for public comment about how the Bureau might consider regulating GPR cards and other prepaid products. 77 FR 30923 (May 24, 2012).

Scope.

The final rule's definition of prepaid accounts specifically includes payroll card accounts and government benefit accounts that are currently subject to Regulation E. In addition, it covers accounts that are marketed or labeled as “prepaid” that are redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or that are usable at automated teller machines (ATMs). It also covers accounts that are issued on a prepaid basis or capable of being loaded with funds, whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, or at ATMs, or to conduct person-to-person (P2P) transfers, and that are not checking accounts, share draft accounts, or negotiable order of withdrawal (NOW) accounts.

The final rule adopts a number of exclusions from the definition of prepaid account, including for gift cards and gift certificates; accounts used for savings or reimbursements related to certain health, dependent care, and transit or parking expenses; accounts used to distribute qualified disaster relief payments; and the P2P functionality of accounts established by or through the United States government whose primary function is to conduct closed-loop transactions on U.S. military installations or vessels, or similar government facilities.

Pre-acquisition disclosures.

The final rule establishes pre-acquisition disclosure requirements specific to prepaid accounts. Under the final rule, financial institutions must generally provide both a “short form” disclosure and a “long form” disclosure before a consumer acquires a prepaid account. The final rule provides guidance as to what constitutes acquisition for purposes of disclosure delivery; in general, a consumer acquires a prepaid account by purchasing, opening, or choosing to be paid via a prepaid account. The final rule offers an alternative timing regime for the delivery of the long form disclosure for prepaid accounts acquired at retail locations and by telephone, provided certain conditions are met. For this purpose, a retail location is a store or other physical site where a consumer can purchase a prepaid account in person and that is operated by an entity other than the financial institution that issues the prepaid account.

The short form disclosure sets forth the prepaid account's most important fees and certain other information to facilitate consumer understanding of the account's key terms and comparison shopping among prepaid account programs. The long form disclosure, on the other hand, provides a comprehensive list of all of the fees associated with the prepaid account and detailed information on how those fees are assessed, as well as certain other information about the prepaid account program. The final rule also adopts specific content, form, and formatting requirements for both the short form and the long form disclosures.

The first part of the short form contains “static” fees, setting forth standardized fee disclosures that must be provided for all prepaid account programs, even if such fees are $0 or if they relate to features not offered by a particular program. The second part provides information about some additional types of fees that may be charged for that prepaid account program. This includes a statement regarding the number of additional fee types the financial institution may charge consumers; they must also list the two fee types that generate the highest revenue from consumers (excluding certain fees, such as those that fall below a de minimis threshold) for the prepaid account program or across prepaid account programs that share the same fee schedule. The final part of the short form provides certain other key information, including statements regarding registration and Federal Deposit Insurance Corporation (FDIC) deposit or National Credit Union Administration (NCUA) share insurance eligibility, and whether an overdraft credit feature may be offered in conjunction with the account. In addition, the final rule requires that short form disclosures for payroll card accounts and government benefit

accounts include, at the top of the form, a statement regarding alternative wage or benefit payment options.

The long form disclosure, in contrast, sets forth in a table all of the prepaid account's fees and their qualifying conditions, as well as certain other information about the prepaid account program. This includes, for example, more detailed information regarding FDIC or NCUA insurance eligibility and a separate disclosure for the fees associated with any overdraft credit feature that may be offered in conjunction with the prepaid account.

The final rule includes several model short form disclosures that offer a safe harbor to the financial institutions that use them, provided that the model forms are used accurately and appropriately. The final rule also includes one sample long form disclosure as an example of how financial institutions might choose to structure this disclosure.

The final rule also includes requirements to disclose certain information such as any purchase price or activation fee outside, but in close proximity to, the short form disclosure; disclosures required to be printed on the prepaid card itself; and short form and long form disclosure requirements for prepaid accounts with multiple service plans.

The final rule requires financial institutions to provide pre-acquisition disclosures in a foreign language if the financial institution uses that same foreign language in connection with the acquisition of a prepaid account in certain circumstances. The financial institution also must provide the long form disclosure in English upon a consumer's request and on its Web site where it discloses this information in a foreign language.

Access to account information.

The final rule adopts an alternative to Regulation E's periodic statement requirement that permits financial institutions to make available to consumers certain methods for accessing information about their prepaid accounts in lieu of sending periodic statements. The final rule also adopts a requirement that financial institutions provide summary totals of the fees they have assessed against the prepaid account on a monthly and annual basis.

Limited liability and error resolution, including provisional credit.

The final rule extends Regulation E's limited liability and error resolution requirements to all prepaid accounts, regardless of whether the financial institution has completed its consumer identification and verification process with respect to the account, but does not require provisional credit for unverified accounts. Once an account has been verified, the financial institution must comply with the provisional credit requirements, for both errors that occur prior to and after account verification, within the provisional credit timeframe.

Submission and posting of prepaid account agreements.

Under the final rule, prepaid account issuers must submit their prepaid account agreements to the Bureau. The final rule also requires that prepaid account issuers publicly post on their own Web sites prepaid account agreements that are offered to the general public. Financial institutions must make any agreements not posted on their own Web sites available upon request for consumers who have prepaid accounts under those agreements.

Remittance transfers.

The final rule makes several revisions to the rules governing remittance transfers in subpart B of Regulation E that are intended to continue the current application of those rules to prepaid products. Specifically, they clarify that for prepaid accounts other than payroll card accounts and government benefit accounts, the location of these accounts does not determine where funds are being sent to or from for purposes of application of the rules in subpart B. They also clarify that the temporary exception allowing insured institutions to use estimates when providing certain disclosures does not apply to prepaid accounts, unless the prepaid account is a payroll card account or government benefit account.

Overdraft credit features.

The final rule amends Regulations E and Z generally to regulate prepaid accounts that offer overdraft credit features. Specifically, the final rule generally covers under Regulation Z's credit card rules any credit feature offered in conjunction with a prepaid account where the credit feature is offered by the prepaid account issuer, its affiliate, or its business partner and credit can be accessed in the course of a transaction conducted with the prepaid card to obtain goods or services, obtain cash, or conduct P2P transfers. The final rule generally requires that such credit features be distinct from the asset portion of the prepaid account—structured as a separate credit account or a credit sub-account to the asset account—to facilitate transparency and compliance with various Regulation Z requirements. The final rule uses the term “hybrid prepaid-credit card” to refer to a prepaid card that can access both an overdraft credit feature that is subject to the Regulation Z credit card rules and the asset portion of a prepaid account.

An issuer may not extend credit via a negative balance on the prepaid account except in several limited circumstances where the credit is incidental and the issuer generally does not charge credit-related fees for that credit; in these circumstances, the incidental credit is not subject to Regulation Z. These exceptions for incidental credit cover situations where the issuer has a general established policy and practice of declining to authorize transactions when the consumer has insufficient or unavailable funds to cover the transaction but credit is nonetheless extended as a result of so-called “force pay” transactions, transactions that will not take the account negative by more than $10 (

i.e.,

a de minimis “purchase cushion”), or certain transactions that are conducted while incoming deposits to the prepaid account are pending.

The final rule's provisions regarding hybrid prepaid-credit cards are largely housed in new Regulation Z § 1026.61. To effectuate these provisions and provide compliance guidance to industry, the final rule also amends certain other existing credit card provisions in Regulation Z. The final rule does not adopt the proposal's provisions that would have made certain account numbers into credit cards where the credit could only be deposited directly to particular prepaid accounts specified by the creditor.

The final rule subjects overdraft credit features accessible by hybrid prepaid-credit cards to various credit card rules under Regulation Z. For open-end products, this includes rules restricting certain fees charged in the first year after account opening, limitations on penalty fees, and a requirement to assess a consumer's ability to pay. In addition, the final rule requires issuers to wait at least 30 days after a prepaid account is registered before soliciting a consumer to link a covered credit feature to the prepaid account and to obtain consumer consent before linking such a credit feature to a prepaid account. The final rule permits issuers to deduct all or a part of the cardholder's credit card debt automatically from the prepaid account or other deposit account held by the card issuer no more frequently than once per month, pursuant to a signed, written authorization by the cardholder to do so, and requires that issuers allow consumers to have at least 21 days to repay the debt incurred in connection with using such features. It also amends the compulsory use provision under Regulation E so that prepaid account issuers are prohibited from requiring

consumers to set up preauthorized electronic fund transfers (EFTs) to repay credit extended through an overdraft credit feature accessible by a hybrid prepaid-credit card.

Effective date.

The final rule generally becomes effective on October 1, 2017. Financial institutions are not required to pull and replace prepaid account packaging materials prepared in the normal course of business prior to that date that do not comply with the final rule's disclosure requirements. The final rule also contains several additional provisions addressing notices of certain changes in terms and updated initial disclosures as a result of this final rule taking effect in certain circumstances, and for rolling compliance with certain access to account information requirements if financial institutions do not have readily accessible the data necessary to comply with the final rule's requirements as of October 1, 2017. The requirement that issuers submit their prepaid account agreements to the Bureau pursuant to § 1005.19(b) becomes effective on October 1, 2018, as described in § 1005.19(f).

II. Background

A. Prepaid Financial Products

Prepaid products—in various forms—have been 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 study 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://www.frbservices.org/files/communications/pdf/general/2013_fed_res_paymt_study_detailed_rpt.pdf

Id.

at 37.

The U.S. market for prepaid products can largely be categorized into two general market segments: Closed-loop and open-loop products. The total amount of funds loaded onto open-loop and closed-loop prepaid products has grown significantly, from approximately $358 billion in 2009 to approximately $594 billion in 2014.

A consumer or other authorized party can add funds to both closed-loop and open-loop prepaid products; however, typically, consumers can only use funds stored on closed-loop prepaid products at designated locations (

e.g.,

at a specific merchant or group of merchants in the case of certain gift cards; within a specific transportation system in the case of transit cards). In contrast, consumers have more options with respect to how to spend funds held on open-loop prepaid products, because transactions made with these products are typically run on payment network rails (often through point-of-sale (POS) terminals, ATM networks, or both).

As discussed below, a general purpose reloadable (GPR) card is one type of reloadable, open-loop prepaid product. Other open-loop products are used by third parties to distribute funds to consumers, including payroll cards, cards for the disbursement of student loans or insurance proceeds, and cards used to disburse Federal and non-needs based State and local government benefits.

Mercator Advisory Group,

Twelfth Annual U.S. Prepaid Cards Market Forecasts, 2015-2018,

at 8 (Dec. 2015) (Mercator 12th Annual Market Forecasts).

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

As noted in the proposal, certain prepaid products are not reloadable.

See

79 FR 77102, 77104 (Dec. 23, 2014).

Closed-loop and open-loop prepaid products are regulated by at both the Federal and State level. Regulation E, for example, currently contains protections for consumers who use payroll card accounts and certain government benefit accounts, as well as consumers who use certain gift cards and similar products.

However, the status of GPR cards and certain other newer prepaid products such as digital and mobile wallets is less clear under existing regulation. As discussed in greater detail throughout this notice, this final rule imposes a comprehensive regulatory regime for prepaid accounts to ensure that consumers who use them receive consistent protections. This part II.A provides a condensed discussion of the detailed background information contained in the proposal, which the Bureau considered and relied on in preparing this final rule.

See

§§ 1005.18, 1005.15, and 1005.20, respectively.

See

79 FR 77102, 77103-77112 (Dec. 23, 2014).

General Purpose Reloadable Cards

A GPR card is one of the most common and widely available forms of open-loop prepaid products. GPR cards, which can be purchased at retail locations as well as directly from financial institutions, can be loaded with funds through a variety of means and can be used to access loaded funds at POS terminals and ATMs, online, and often through other mechanisms as well. Accordingly, they increasingly can be used as substitutes for traditional checking accounts.

Throughout the supplementary information for this final rule, the term checking account generally also refers to credit union share draft accounts.

The prevalence of GPR cards has grown rapidly. According to estimates by the Mercator Advisory Group, the amount of funds loaded onto GPR cards grew from under $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 Mercator Advisory Group further projects that the total dollar value loaded onto GPR cards will grow annually by 5 percent through 2019, when it will exceed $117 billion.

Mercator Advisory Group,

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

at 13 (Nov. 2014).

Mercator Advisory Group,

Thirteenth Annual U.S. Open-Loop Prepaid Cards Market Forecasts, 2016-2019,

at 9 (Sept. 2016) (Mercator 13th Annual Market Forecasts).

The Bureau notes that the top five GPR card programs (as measured by the total number of cards in circulation) have maximum balance amounts that vary significantly.

To the extent that the cards have a maximum balance cap, the range is between $2,500 and $100,000.

One of these top five GPR card programs does not have a maximum balance amount, but does have a monthly cash deposit limit of $4,000.

See

First Annapolis,

Chase Enhances Competitive Positioning of Liquid

(Sept. 2015),

available at http://www.firstannapolis.com/articles/chase-enhances-competitive-positioning-of-liquid

;

see also

American Express Serve® Prepaid Card Cardholder Agreement,

available at https://serve.com/intuit/pdf/ServeTemp_Card_Agreement.pdf

See

Green Dot Card Cardholder Agreement,

available at https://www.greendot.com/content/docs/Legacy(4-2012).pdf

;

see also

American Express Serve® Prepaid Card Cardholder Agreement,

available at https://serve.com/intuit/pdf/ServeTemp_Card_Agreement.pdf

See

Chase Liquid Agreement,

available at https://www.chase.com/content/dam/chasecom/en/debit-reloadable-cards/documents/chase_liquid_terms_conditions.pdf

Virtual GPR cards.

Prepaid products are not all tied to a physical card or device. Some may exist only electronically; these virtual products are accessible and usable online or at a physical location through a mobile device such as a smartphone. To use these “virtual GPR cards,” consumers receive an account number or other information that they can then use to make purchases using a mobile application or other means. 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 appears to be growing.

See, e.g.,

Mercator Advisory Group,

Consumers and Prepaid: Rising Use, Especially by Mobile,

at 16-18 (Dec. 2014).

GPR Card Functionality

Consumers generally purchase or acquire GPR cards at retail locations, over the telephone, or online. When buying a GPR card at a retail location, consumers typically pay an up-front purchase fee. A GPR card is usually loaded by the retailer at the time of purchase with funds provided by the consumer. Some GPR cards purchased at retail are activated at the time of purchase so that the card can be used immediately for POS purchases and potentially certain other types of transactions; other cards require the consumer to contact the financial institution or program manager online or by phone to activate the card before it can be used. However, in order to take advantage of all of the GPR card's features, including to make ATM withdrawals and to be able to reload the card, consumers are generally required to contact the financial institution or program manager in order to register the card. (Many financial institutions combine the activation and registration process for GPR cards.) After registration, financial institutions often send a permanent card embossed with the consumer's name that, once activated, replaces the temporary card the consumer acquired from the retailer. The process for acquiring GPR cards directly from the financial institution or program manager online or by telephone tends to be more streamlined; financial institutions typically do not charge an up-front purchase fee and registration is completed during the acquisition process before the consumer is mailed a physical card.

Registration is driven both by Bank Secrecy Act (BSA)

requirements and by the financial institution's desire to establish full communications and an ongoing relationship with its customers. In order for financial institutions to satisfy the BSA's Customer Identification Program (CIP) requirements, financial institutions typically require consumers 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) as part of the registration process.

The financial institution or program manager uses the information to verify the consumer's identity. If the consumer's identity cannot be verified, the card is not considered registered; the consumer can typically spend down the card balance at POS but cannot withdraw funds at an ATM and cannot reload the card.

See,

in part, 31 U.S.C. 5311

et seq. See also

31 CFR chapter X.

See

Bd. of Governors of the Fed. Reserve Sys., Fed. Deposit Ins. Corp., Nat'l Credit Union Admin., Office of the Comptroller of the Currency, Fin. Crimes Enforcement Network,

Interagency Guidance to Issuing Banks on Applying Customer Identification Programs to Holders of Prepaid Access Cards

(Mar. 21, 2016),

available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160321a1.pdf

. Among other things, the guidance clarified that a financial institution's CIP should apply to GPR cardholders if the GPR card is issued by the financial institution.

GPR cards can generally be reloaded through a variety of means, including direct deposit of wages, pensions, or government benefits; cash reloads conducted at, for example, retail locations designated by the card issuer or program manager,

or by purchasing a “reload pack” at retail; transfer from another prepaid account, or a checking or savings account; or deposit of a check at a participating check-cashing outlet or via remote deposit capture.

Consumers can typically obtain cash from their GPR cards via ATM withdrawals, bank teller transactions, or by electing to obtain cash back from merchants through POS transactions using a personal identification number (PIN). Additionally, consumers can typically make purchases with their GPR cards wherever the payment network brand appearing on the card is accepted. A number of GPR card 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 to the financial institution or program manager, text messages, email alerts, the program's Web site or mobile application, at ATMs, or by requesting written account histories sent by mail. 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 also incur fees to obtain balance information at ATMs.

See, e.g.,

Green Dot Card Cardholder Agreement,

available at https://www.greendot.com/content/docs/CardholderAgreement-Legacy(4-2012).pdf

The Bureau understands some financial institutions permit consumers to reload GPR cards via paper checks mailed to the financial institution or program manager.

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 a 2012 study of consumer use of prepaid products by the Federal Reserve Bank of Philadelphia, the Bureau believes average cardholder costs for GPR and payroll cards range from approximately $7 to $11 per month, depending on the type and distribution channel of the account.

In a 2014 report, The Pew Charitable Trusts (Pew) estimated that the median consumer using one of the 66 major GPR cards it examined would be charged approximately $10 to $30 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.,

Consumers' Use of Prepaid Cards: A Transaction-Based Analysis,

at 39 (Fed. Reserve Bank of Phila., Discussion Paper, 2012),

available at

http://www.philadelphiafed.org/consumer-credit-and-payments/payment-cards-center/publications/discussion-papers/2012/D-2012-August-Prepaid.pdf

(2012 FRB Philadelphia Study). 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),

available at

http://www.pewtrusts.org/en/research-and-analysis/reports/2014/02/06/consumers-continue-to-load-up-on-prepaid-cards

(2014 Pew Study).

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, with cash withdrawals accounting for about one-third to one-half of the funds taken off a product, depending on the product. The study also concluded that prepaid cards are used primarily to purchase nondurable goods and noted that many of the products studied were also used to pay bills.

Id.

The types of consumers who use GPR cards and their reasons for doing so vary. For consumers who lack access to more established products such as bank accounts and credit cards, GPR cards can be appealing because they are subject to less up-front screening by financial institutions. While CIP requirements for checking and savings

accounts apply to GPR cards as well, banks and credit unions generally review information about prospective checking and savings account customers obtained from specialized reporting agencies that can reveal a prior history of involuntary account closure, unsatisfied balances, and other issues with prior account use. Even where financial institutions do not intend to provide overdraft services to a consumer, they may be motivated to evaluate potential checking account customers for credit risk more closely than for prepaid customers. For example, check deposits may be a more prevalent feature of checking accounts than prepaid accounts and, because a deposited check can be returned unpaid (in contrast to a cash deposit or load), a check deposit may present credit risk to a financial institution. With respect to credit cards, approvals are generally contingent on a consumer successfully navigating an underwriting process to determine whether an applicant is an appropriate credit risk. In contrast, most financial institutions do not engage in screening or underwriting GPR customers (aside from CIP) because the product involves little credit risk.

In light of these distinctions, it is not surprising that consumers who lack access to more established financial products such as bank accounts and credit cards consistently make up a sizeable segment of the consumer base that uses GPR cards on a regular basis. For example, a 2014 Pew survey found that 41 percent of prepaid card users did not have a checking account, and that 26 percent of the consumers in this group believed that they would not be approved for a checking account.

It also found that prepaid card users were much more likely to use an alternative financial product or service, such as a payday loan, compared to consumers in the general population (40 percent vs. 25 percent).

The survey also found that 33 percent of monthly users of open-loop prepaid products have never had a credit card.

A 2015 Pew survey suggested that unbanked prepaid card users tended to be less knowledgeable than consumers with bank accounts about whether their prepaid card had FDIC insurance and about liability limits if their card is lost or stolen.

The Pew Charitable Trusts,

Why Americans Use Prepaid Cards: A Survey of Cardholders' Motivations and Views,

at 7, 14 (Feb. 2014),

available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets//prepaidcardssurveyreportpdf.pdf

(2014 Pew Survey). It appears that the prepaid products discussed in the report included GPR cards, payroll cards, and government benefit cards. The report excluded closed-loop prepaid products.

Id.

at 9.

See Id.

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 applications denied.

The Pew Charitable Trusts,

Banking on Prepaid: Survey of Motivations and Views of Prepaid Card Users,

at 10-12 (June 2015),

available at

http://www.pewtrusts.org/en/research-and-analysis/reports/2015/06/banking-on-prepaid

(2015 Pew Survey).

Consistent with Pew's findings, a 2013 survey by the FDIC found that approximately 33 percent of those who reported using a prepaid card in the 30 days prior to being surveyed were unbanked.

More broadly, the survey found 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 GPR card usage among all households had 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 to 27.1 percent in 2013.

The FDIC survey also found that prepaid card users were more likely than the general population to be young, single mothers, or disabled, and to have incomes below $50,000; they were less likely than the general population to be homeowners, white, have college degrees, and to be employed.

See

Fed. Deposit Ins. Corp.,

2013 FDIC National Survey of Unbanked and Underbanked Households,

at 31 (Oct. 2014),

available at

https://www.fdic.gov/householdsurvey/2013report.pdf

(2013 FDIC Survey). The FDIC survey found, generally, that there are approximately 30 million unbanked and underbanked households in the United States. Like Pew, the FDIC found that unbanked and underbanked consumers are more likely than the general population to use open-loop prepaid products such as GPR cards.

Id.

at 4.

Previously banked households are households that had a bank account in the past. The FDIC survey treats these households as a subset of unbanked households. 2013 FDIC Survey at 29.

Id.

2013 FDIC Survey at 46-47.

For consumers with access to traditional financial products and services, GPR cards may be appealing as a limited-use product instead of as a transaction account substitute.

For example, the Bureau understands that one of the ways in which many consumers use such cards is for a limited purpose such as while traveling or making online purchases, because they may believe that using prepaid cards is safer than using cash, a credit card, or a debit card in those situations.

These consumers may not ever register and reload the card. Instead, they may let the card become dormant or discard it after spending down the initial balance, and then purchase another GPR card at a later date if new needs arise. The Bureau understands that another popular way in which consumers use GPR cards is as a budgeting tool to help them better manage their funds. For example, a family might budget a fixed amount each month for dining out and put those funds on a GPR card, or parents may provide a GPR card, as opposed to a credit card for example, to a child at college to control the child's spending. Pew has found that the majority of both unbanked and banked GPR card users would like their cards to have a feature allowing them to put some of their card balances into savings and a budgeting tool that would track their spending in different categories automatically and alert them if they overspent.

2014 Pew Survey at 7. It found that 59 percent of prepaid card users also have a checking account and that most prepaid card users also have experience using credit cards, with almost half having used a credit card in the past year.

See, e.g.,

2014 Pew Survey at 1, 13.

2015 Pew Survey at 7.

Additionally, for both unbanked and banked consumers, the desire to avoid overdraft services associated with checking accounts appears to motivate many consumers to choose GPR cards over checking accounts. The 2015 Pew Survey reports that most GPR prepaid card users would rather have a purchase denied than overdraft their accounts and incur an overdraft fee.

Its 2014 survey found that 41 percent of prepaid users have closed or lost a checking account due to overdraft fees or bounced check fees.

As discussed further below, in contrast to checking overdraft fees, which are often $35 per item,

GPR cards generally are not offered with an overdraft service nor other credit features, and the few exceptions appear to involve smaller fees.

Indeed, the Bureau has observed that many GPR cards are advertised as a “safe” or “secure” alternative to a

checking account precisely because they do not offer overdraft services.

Id.

2014 Pew Survey at 8.

As part of this rulemaking, the Bureau calculated the median checking account overdraft fee charged as of July 2014 among the 50 largest U.S. banks ranked by consumer checking balances at $35 per item. Nearly all banks the Bureau considered assess overdraft fees on a per-item basis. Among those that do, both the median and modal lowest-tier overdraft fee is $35. Some banks have higher overdraft fees that apply after a certain number of overdraft occurrences. However, the Bureau's analysis considered only the lowest-tier fees a consumer would encounter if de minimis or other policies do not preclude a fee. For banks that charge different amounts in different regions, Bureau staff considered pricing for the region where the bank is headquartered.

See, e.g.,

2014 Pew Study at 4, 9-10.

Based on the Bureau's market research and analysis, the Bureau believes that consumer acceptance of GPR cards will grow. It also believes that some consumers that currently use GPR cards may increasingly find that they no longer want or need to have traditional financial products and services such as a checking account or a credit card in addition to their GPR card as these products continue to evolve. The Bureau notes that GPR card functionality has been expanding. For example, some GPR card programs have started to offer checking account-like features such as the ability to write checks using pre-authorized checks. Similarly, many GPR programs allow third parties to credit the GPR card account via ACH (

e.g.,

through direct deposit) and in more limited circumstances, to debit the GPR card account via ACH. Additionally, many GPR card programs have offered consumers ways to access their account online, including through mobile devices such as smartphones. For example, oftentimes consumers can use smart phone applications to closely monitor their GPR card transactions, balances, and fees; to load funds to their GPR cards; and to transfer funds between accounts. The 2015 Pew Survey found that for both unbanked and banked GPR card users, more than half monitor their account balances through online access.

Lastly, as discussed above, like credit and debit cards, GPR cards provide access to payment networks. Consumers may find this to be an important feature of GPR cards in that some merchants may only accept payment through a card that provides access to one of these networks.

2015 Pew Survey at 13.

Marketing and Sale of GPR Cards

In recent years, the GPR card segment has grown increasingly competitive, which has resulted in a decrease in prices, coupled with an increase in transparency for many products.

Nevertheless, various factors continue to negatively affect consumers' ability to make meaningful comparisons.

Because card packaging is generally designed to be sold in retail stores, the “J-hook package” is no larger than 4 inches by 5.25 inches.

Thus, card packages have limited space in which to explain their product and disclose key features. Consumer groups have also criticized GPR product providers for making comparison shopping challenging by, for example, using different terms to describe similar fees and providing consumers with incomplete information about fees.

In addition to the size limitations on GPR card packaging, certain other aspects of purchasing GPR cards in retail settings may also pose obstacles to comparison shopping. For example, some retail locations may only offer one or a few types of GPR cards.

Some stores may only display prepaid products behind a register, requiring a consumer to ask to see each product individually, and stores may display GPR cards with or near closed-loop products such as prepaid cellular phone plan cards or gift cards. Store personnel may not be sufficiently familiar with the different products to respond accurately to consumer questions. When consumers are purchasing a GPR card along with groceries and convenience items, general time pressures may cause consumers to make decisions quickly and ask fewer questions.

See, e.g.,

Fed. Reserve Bank of St. Louis,

Cards, Cards and More Cards: The Evolution to Prepaid Cards,

Inside the Vault, at 1, 2 (Fall 2011),

available at

http://www.stlouisfed.org/publications/itv/articles/?id=2168

(“Competition among prepaid card issuers and increased volume have helped lower card fees and simplify card terms.”).

See also

2014 Pew Study at 2 (“[O]ur research finds that the providers are competing for business by lowering some fees and are facing pressure from new entrants in the market.”).

2014 Pew Survey at 5, 6.

A j-hook is a looped hook used by retailers to hang prepaid cards (and other products). Retailers often sell prepaid cards on j-hooks in a standalone display rack at the end of an aisle in a store.

See, e.g.,

Consumer Reports,

Prepaid Cards: How They Rate 2014,

at 5 (Nov. 2014),

available at

https://consumersunion.org/wp-content/uploads/2014/11/Prepaid_Cards_How_They_Rate_2014.pdf

Prepaid card providers can establish exclusive marketing arrangements that may prevent competitors' cards from being sold in the same store.

See, e.g.,

Press Release, Blackhawk Network,

Blackhawk Network, Safeway and Blackhawk extend exclusive prepaid card distribution agreement through 2019

(Mar. 7, 2014),

available at

http://blackhawknetwork.com/blackhawk-comments-on-parent-company-safeways-spin-off-announcement/

. The press release announced that Blackhawk Network Holdings, Inc., a major prepaid product provider, extended its exclusive distribution arrangement with Safeway Inc. through 2019.

All of these factors mean that consumers often purchase a card and load initial funds on it before they have an opportunity to review the full terms and conditions. Retail locations often cannot refund the cash loaded onto the card, and the Bureau believes that few consumers are likely to realize that refunds may be available from the GPR card programs. Thus, it is likely far more typical that consumers would spend down the funds initially loaded onto a GPR card and then discard it if they find it to be unsatisfactory as a long-term product. However, monthly maintenance fees may continue to accrue on spent-down cards. Moreover, the 2015 Pew Survey suggests that it can be particularly difficult for unbanked GPR card users to disentangle themselves from their cards. For example, Pew reported that more than 40 percent of unbanked GPR card users put their wages on their GPR cards through direct deposit and approximately 75 percent of them reload their cards regularly.

2015 Pew Survey at 5.

Structure of Typical GPR Card Programs

GPR cards are generally provided by combinations of entities working together rather than by a single, vertically integrated entity operating all aspects of the GPR card program. Although a consumer may only interact with a single entity or limited number of entities, the Bureau believes that the presence of many different companies in the supply chain could expose consumers as well as the entities themselves to greater risks, such as potential losses resulting from the insolvency or malfeasance of a business partner, than those associated with a traditional vertically integrated checking or savings account program. The Bureau discusses the various entities that may be involved in a typical GPR card program below.

Entities involved in a typical GPR card program.

One of the most important entities involved in a GPR card program is the prepaid card issuer, which is typically either a depository institution or credit union. Some of the major payment card networks' rules require that GPR cards bearing their brand be issued by banks or credit unions, although one payment card network that issues its own cards does so through a non-bank entity. Issuers also typically manage the underlying accounts that hold funds loaded onto the cards. Some banks and credit unions are actively involved in all aspects of their GPR card programs, serving as program manager as well as issuer. Other banks and credit unions act as issuers and provide sponsorship into specific payment card networks, but work with a non-bank entity that serves as the program manager. Program managers are generally responsible for designing, managing, marketing, and operating GPR card programs. The Bureau understands that variations in issuers' roles can be driven by the extent to which the program manager performs particular services by itself, as well as

due to the particular features of a specific GPR card program.

In some cases, a white label model is used whereby banks and credit unions rely upon another institution to issue prepaid accounts, which may be branded with the bank or credit union's name. There are a handful of such programs through which banks and credit unions offer prepaid accounts (typically as a convenience to their customers or members).

Program managers typically establish or negotiate a GPR card program's terms and conditions, market the card, assume most of the financial risks associated with the program, and reap the bulk of the revenue from the program.

Some program managers may exercise substantial control over and responsibility for GPR card programs. For example, some program managers maintain the databases that contain cardholder account and transaction histories. They also approve and decline transactions.

The program manager is also, in most cases, the primary consumer-facing party in connection with a GPR card because it is typically the program manager's brand on the card as well as its packaging.

See

Fumiko Hayashi & Emily Cuddy,

General Purpose Reloadable Prepaid Cards: Penetration, Use, Fees, and Fraud Risks,

at 6 (Fed. Reserve Bank of Kan. City, Working Paper No. RWP 14-01, Feb. 2014),

available at

https://www.kansascityfed.org/publicat/reswkpap/pdf/rwp14-01.pdf

(2012 FRB Kansas City Study).

Id.

Id. See also

Aite Group LLC,

Prepaid Debit Card Realities: Cardholder Demographics and Revenue Models,

at 17 (Nov. 2013).

Program managers often contract with other third-party service providers to perform specific functions for a GPR card program. To produce, market, and sell GPR cards, program managers often work with manufacturers that are responsible for printing and assembling the cards and associated packaging. Distributors arrange for GPR cards to be sold through various channels including through retailers, money transfer agents, tax preparers, check cashers, and payday lenders. Further, payment processors often provide many of the back-office processing functions associated with initial account opening (including those related to transitioning from temporary to permanent cards), transaction authorization and processing, and account reporting. Lastly, the payment networks themselves also establish and enforce their own rules and security standards related to payment cards generally and prepaid products such as GPR cards specifically. The networks also facilitate card acceptance, routing, processing, and settling of transactions between merchants and card issuers.

How funds are held.

Prepaid products including GPR cards differ from traditional checking or savings accounts in that the underlying funds are typically held in a pooled account at a depository institution or credit union. This means that rather than establish individual accounts for each cardholder, a program manager may establish a single account at a depository institution or credit union in its own name, but typically title the account to indicate that it is held for the benefit of each individual underlying cardholder. The Bureau understands that the program manager, sometimes in conjunction with the issuing depository institution or credit union or the depository institution or credit union holding the funds, will typically establish policies and procedures and put in place systems to demarcate each cardholder's funds within the pooled account. As discussed in detail below, these pooled accounts may qualify for, as applicable, FDIC pass-through deposit insurance or NCUA pass-through share insurance.

Revenue generation.

The Bureau understands that GPR cards typically generate revenue through the up-front purchase price paid by the consumer where applicable, the assessment of various monthly maintenance and/or transactional fees, and interchange fees collected from merchants by the payment networks. The 2012 FRB Philadelphia Study found that interchange fees paid by a merchant or acquiring bank for the purpose of compensating an issuer for its involvement in prepaid programs account for more than 20 percent of issuer revenues in GPR programs and almost 50 percent of revenues in payroll program.

The Bureau understands that in most cases, publicly available details of how revenue is distributed and expenses are accounted among entities involved in the GPR card supply chain is sparse, although as discussed above, program managers generally reap the bulk of the revenue from GPR card programs. The Bureau believes that allocation of revenue and expenses likely varies across programs.

2012 FRB Philadelphia Study at 6.

Prepaid Products Distributed and Funded by Third Parties

Consumers may also receive network-branded open-loop prepaid products from third parties such as employers, student aid sources, insurance companies, and government agencies that disburse funds to consumers by loading the funds into such accounts. These prepaid products are thus taking the place of distributions to the consumer via paper check, direct deposit into a traditional checking or savings account, or cash. The following discussion highlights some of the most common or fastest growing open-loop prepaid products onto which funds are loaded that are distributed to consumers by third parties.

Payroll cards.

Payroll cards are the most common example of prepaid products used by third parties to distribute funds to consumers. In 2013, over 5 million payroll cards were issued, and $30.6 billion was loaded onto them.

According to the Mercator Advisory Group, payroll cards make up the second largest segment in the U.S. open-loop prepaid product market.

The total amount of funds loaded onto payroll cards is expected to grow on average 6 percent each year through 2019, when it will reach $44.6 billion.

While direct deposit into consumer accounts remains the most popular form of wage distribution overall,

the number of consumers who receive their wages on payroll cards surpassed the number of consumers paid by paper checks for the first time in 2015, and an estimated 12.2 million workers are expected to receive their wages on payroll cards by 2019, compared to an estimated 2.2 million workers who are expected to get paper checks.

See

Mercator Advisory Group,

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

at 32 (Nov. 2014).

Mercator 13th Annual Market Forecasts at 28. The payroll card segment, as measured by the Mercator Advisory Group, is made up of wages paid to employees and 1099 workers using an employer-provided prepaid card.

Id.

at 29.

Aite Group LLC,

Checkmate: U.S. Payroll Cards Trump Paper Checks,

at 5 (Apr. 2015) (reporting that according to the American Payroll Association, 90 percent of all employees currently receive their pay through direct deposit to checking accounts).

Id.

at 6.

An employer generally works with a financial institution to set up a payroll card program. Among other things, the financial institution issues the payroll cards and holds the funds loaded into the payroll card accounts. Section 1005.10(e)(2) of Regulation E prohibits financial institutions and employers from requiring consumers to agree to have their compensation distributed via a payroll card as a condition of employment. As discussed in greater detail below, the Bureau is finalizing specific disclosure requirements as part of the short form disclosure, to make clear § 1005.10(e)(2)'s applicability to payroll card accounts. Where employees choose to participate in a payroll card program, the employer will provide the employee with a network-branded prepaid card issued by the employer's financial institution partner that

accesses a subaccount assigned to the individual employee. On each payday, the employer will transfer the employee's compensation to the payroll card account, instead of providing the employee with a paper check or making a direct deposit of funds to the employee's checking or savings account. The employee can use the payroll card to withdraw funds at an ATM or over-the-counter via a bank teller. The employee can also use the payroll card to make purchases online and at physical retail locations, and may also be able to obtain cash back at POS. Some payroll cards may offer features such as convenience checks and electronic bill payment.

The Bureau understands that employers market payroll cards as an effective means to receive wages for employees who may lack a traditional banking relationship, and that unbanked consumers may find the cards to be a more suitable, cheaper, and safer method of receiving their wages as compared to other methods, such as receiving a check and going to a check-cashing store. Nonetheless, within the last 10 years, there have been increasing concerns raised about payroll cards, with specific focus on potentially harmful fees and practices associated with them. These problematic practices may impact low-income consumers disproportionately, as it has been reported that payroll cards are especially prevalent in industries that have many low-wage, hourly workers.

Nat'l Consumer L. Ctr.,

Rating State Government Payroll Cards,

at 5 (Nov. 2015),

available at

http://www.nclc.org/images/pdf/pr-reports/payroll-card-report.pdf

As explained in greater detail below, the Bureau issued a guidance bulletin in September 2013 to remind employers that they cannot require their employees to receive wages on a payroll card and to explain some of the Regulation E protections that apply to payroll card accounts, such as those pertaining to fee disclosure, access to account history, limited liability for unauthorized use, and error resolution rights.

Although it appears that certain industry stakeholders have worked to develop industry standards incorporating and building upon the guidance given in the bulletin,

concerns persist as to whether and how employers and financial institutions are complying with the compulsory use provision and other provisions of Regulation E, as well as related State laws applicable to the distribution of wages.

For example, employees may not always be aware of the ways in which they may receive their wages because States may have differing and evolving requirements.

CFPB Bulletin 2013-10,

Payroll Card Accounts (Regulation E)

(Sept. 12, 2013),

available at

http://www.consumerfinance.gov/f/201309_cfpb_payroll-card-bulletin.pdf

See, e.g.,

Press Release, MasterCard,

MasterCard Introduces Payroll Card Standards

(Dec. 13, 2013),

available at

http://newsroom.mastercard.com/press-releases/mastercard-introduces-payroll-card-standards/

See, e.g.,

N.Y. St. Att'y Gen., Labor Bureau,

The Impact of Payroll Cards on Low-Wage Workers, available at

http://www.ag.ny.gov/pdfs/Pinched%20by%20Plastic.pdf

See, e.g., http://paycard.americanpayroll.org/compliance-regulations

(listing the various State regulations that apply to payroll cards).

The Bureau additionally believes that payroll card accounts raise transparency issues beyond those addressed by its payroll card accounts guidance bulletin. Employers may offer a payroll card account when an employee starts employment, when it is likely that the question of how the employee is to be paid will be one of many human resource issues confronting the employee during orientation. An employee may be provided with a stack of forms to complete and may not have the time or opportunity to review them. It is also possible that the employee may be unaware that receiving wages via a payroll card account is optional, particularly if the employer does not present the options clearly. The forms the employee may receive from the employer may not always include all of the relevant information regarding the terms and conditions of the payroll card account, such as fees associated with the card and how cardholders can withdraw funds on the card. Employees who want to complete their hiring paperwork in a single setting may not take the opportunity to comparison shop. Separately, some industry observers have raised concerns about the extent to which payroll card providers share program revenue with employers and, if so, whether that revenue sharing has negative consequences for cardholders, for instance by creating incentives to increase the fees on payroll card products.

Campus cards.

Federal law permits Federal financial aid to be disbursed to students via prepaid products.

A number of colleges and universities partner with banks and program managers to market and often disburse student financial aid proceeds into network-branded open-loop prepaid products that are endorsed by those colleges and universities, as a potential alternative to direct deposit into a student or parent's existing checking account, prepaid account, or other means of disbursement. The total amount of funds loaded in the open-loop campus card segment grew by 15 percent in 2015, to $2.72 billion, and is forecasted to have an average annual growth rate of 10 percent through 2019, when it is forecasted to reach $3.98 billion.

See

34 CFR 668.164(c)(2) (treating certain Federal student aid payments disbursed via “an account that underlies a stored-value card” as direct payments to a student or parent).

Mercator 13th Annual Market Forecasts at 16. These figures include campus cards used by colleges and universities, as well as K-12 institutions.

Similar to payroll card accounts, some have raised concerns about the ways in which students are encouraged to obtain an endorsed prepaid product and with the potential incentives created by revenue sharing in connection with prepaid cards provided to students. A 2014 Government Accountability Office (GAO) report found that of the U.S. colleges and universities participating in Federal student aid programs for the 2011-2012 school year that had agreements with banks and program managers to provide debit and prepaid card services for students, approximately 20 percent of such agreements were for prepaid cards.

The report also stated that more than 80 percent of the schools identified in the report with card agreements indicated that students could use their cards to receive financial aid and other funds from the school.

U.S. Gov't Accountability Office,

GAO-14-91, College Debit Cards, Actions Needed to Address ATM Access, Student Choice, Transparency, a Report to the Chairman, Committee on Health, Education, Labor, and Pension, U.S. Senate,

at 8 (Feb. 2014),

available at

http://www.gao.gov/assets/670/660919.pdf

. The GAO found that the rest of the agreements were for debit cards.

Id.

at 9.

Among other things, the GAO noted concerns about the fees on student debit and prepaid cards, as well as the lack of ATM access and the lack of the schools' neutrality toward the card programs.

It found instances in which schools appeared to encourage students to enroll in the school's specific prepaid card program, rather than present neutral information about disbursement options for financial aid.

As discussed in greater detail below, the U.S. Department of Education (ED) issued a final rule in October 2015 that addresses a number of concerns with campus cards that the GAO described in its report.

U.S. Gov't Accountability Office,

GAO Highlights: Highlights of GAO-14-91, a Report to the Chairman, Committee on Health, Education, Labor, and Pension, U.S. Senate

(Feb. 2014),

available at

http://www.gao.gov/assets/670/660920.pdf

Id.

Government benefit cards.

Government entities also distribute

various funds onto prepaid products by partnering with financial institutions and program managers. In its latest annual report to Congress on the prevalence of prepaid card use in Federal, State, and local government-administered payment programs, the Board reports that a number of government entities now mandate that recipients receive payments electronically, through either a prepaid card or direct deposit.

The Board reported that government offices distributed $150 billion through prepaid cards in 2015.

The Federal government and various State governments may use prepaid products to distribute government benefits such as Social Security payments,

unemployment insurance benefits,

and child support payments, as well as a distinct set of disbursements called needs-tested benefits.

Bd. of Governors of the Fed. Reserve Sys.,

Report to the Congress on Government Administered, General-Use Prepaid Cards,

at 3 (July 2016),

available at

http://www.federalreserve.gov/publications/other-reports/files/government-prepaid-report-201607.pdf

(2016 FRB Government Prepaid Cards Report).

Id.

at 1.

The U.S. Department of the Treasury (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

3, 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 unemployment compensation payments).

Most States offer a choice at least between direct deposit to a traditional checking or savings account or a prepaid product for the receipt of unemployment insurance benefits. However, the Bureau is aware that, in the recent past, several States have required the distribution of at least the first payment of such benefits onto prepaid cards.

State and local government programs for distributing needs-tested benefits are typically referred to as electronic benefit transfer (EBT) programs. 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). According to the Board, State agencies administering SNAP disbursed approximately $69 billion onto EBT cards in 2015.

As noted below in the discussion of relevant law, Regulation E does not apply to EBT programs.

2016 FRB Government Prepaid Cards Report at 5.

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

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.

See, e.g.,

Navy Cash/Marine Cash, (

http://fms.treas.gov/navycash/index.html

) and Eagle Cash, (

https://www.fiscal.treasury.gov/fsservices/gov/pmt/eagleCash/eagleCash_home.htm

). 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.

Other open-loop prepaid cards distributed and funded by third parties.

Open-loop prepaid cards are also used by some insurance providers to pay certain insurance claims such as claims related to a property or casualty loss and for emergency payments designed to help consumers get through immediate problems.

During the Bureau's pre-proposal outreach, some insurance providers informed the Bureau that, where permitted by State law, it is faster and more economical to provide workers compensation payments on prepaid cards relative to mailing paper checks. Additionally, after a natural disaster, the disbursement of funds from insurance claims onto prepaid cards may allow funds to be delivered to consumers who may be unable to use or access traditional checking or savings accounts. The Mercator Advisory Group reports that the total amount loaded onto insurance cards is expected to grow at a rate of 3 percent per year through 2019, when loads are expected to exceed $13 billion.

Mercator 12th Annual Market Forecasts at 28.

Mercator 13th Annual Market Forecasts at 26. The insurance category in the report measures funds loaded onto prepaid cards for disbursements of insurance settlements and for emergency payments.

Similarly, taxpayers may direct tax refunds onto prepaid cards provided by tax preparers or arranged by government entities. These cards are typically open-loop and may or may not be reloadable. Other disbursements onto prepaid cards include disbursement of mass transit or other commuting-related funds, which are typically onto restricted closed-loop cards. However, the Bureau understands that new transit payment models are emerging, and these models tend to involve open-loop prepaid cards.

Aid distributed by relief organizations or government agencies in response to natural disasters is usually loaded onto open-loop cards. In some of these cases, the cards may be reloaded by the entity that initially disbursed funds onto the card.

See, e.g.,

Ventra Card,

https://www.ventrachicago.com/

(the city of Chicago's mass transit card has reloadable open-loop features).

See also

SEPTA,

http://www.septa.org/key/

(the city of Philadelphia announced that its mass transit card will also have reloadable open-loop features).

As discussed in greater detail below in the section-by-section analysis of § 1005.2(b)(3)(ii), the final rule excludes from the definition of prepaid account those accounts that are directly or indirectly established through a third party and loaded only with qualified disaster relief payments.

As evidenced by the discussions above in connection with payroll and campus cards, prepaid products loaded by third parties can raise a number of consumer protection concerns. Some of these issues appear to be largely the same as GPR cards on items such as the lack of clear, consistent disclosures about fees and other important terms and conditions. Consumers may use these products as their primary transaction accounts, particularly when the products are loaded with all of the consumers' incoming funds (

e.g.,

wages, unemployment benefits, student loan proceeds). 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.

However, the Bureau believes that some consumer issues may be heightened or unique to particular categories of prepaid products loaded by third parties. For example, in selecting a GPR card, the consumer is making a distinct purchase decision; while some sales channels may be more convenient than others for comparison shopping, the consumer is in any event focused on the transaction as a standalone decision. Where a prepaid product is being provided to a consumer by a third party, however, the consumer may be deciding whether to accept the prepaid product in the course of another activity (such as starting a new job or school term, or dealing with a catastrophic event). Consumers may not understand the extent to which they can reject the product being offered, may not have a practicable option to comparison shop under the circumstances if they do not already have a transaction account to serve as an alternative, and may have concerns about upsetting an employer or other third party by rejecting the option. In addition, where there are revenue sharing arrangements in place, the third party may have a financial incentive to select a product offering with higher fees and to structure the sign-up process in a way that tends to increase participation. Further, the

Bureau understands many of the prepaid accounts that are loaded by third parties 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

A consumer may keep cash, debit and credit cards, GPR cards, and gift cards in a physical wallet or purse. “Digital wallets” and “mobile wallets” (

i.e.,

digital wallets that a consumer could access using a mobile device such as a smartphone) similarly store one or more of the consumer's payment credentials electronically.

These payment credentials may be accessed by the consumer through a Web site or mobile application. The Bureau understands that some, but not all, digital and mobile wallets allow a consumer to store funds in them directly or by funding a prepaid product, and draw down the stored funds. A 2015 survey by the Board suggests that digital wallets serve as an important funding source for mobile payments (

i.e.,

consumer payment for goods and services using mobile phones). The survey reported that 15 percent of mobile payment users reported that they used an account at a non-financial institution such as PayPal to fund their payments.

Aite Group LLC,

Money Goes Mobile

(May 2014).

Bd. of Governors of the Fed. Reserve Sys.,

Consumers and Mobile Financial Services 2015,

at 17 (Mar. 2015),

available at

http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201503.pdf

(2015 FRB Consumers and Mobile Financial Services Survey). The survey was updated in 2016. The percentage of mobile payment users reported that they used an account at a non-financial institution such as PayPal to fund their payments appears to have held steady at 16 percent.

See

Bd. of Governors of the Fed. Reserve Sys.,

Consumers and Mobile Financial Services Survey 2016,

at 17 (Mar. 2016),

available at http://www.federalreserve.gov/econresdata/and-mobile-financial-services-report-201603.pdf

(2016 FRB Consumers and Mobile Financial Services Survey).

Digital and mobile wallets have been marketed as allowing consumers to electronically transmit funds in multiple settings. Currently, such wallets can be used by a consumer for online purchases,

payments at brick-and-mortar retailers through, for example, contactless communication at the point of sale,

as well as person-to-business (

i.e.,

bill pay) and P2P transfers.

The Bureau understands that there may be significant variations in how funds are held in digital and mobile wallets and how payments are processed by such wallets. It also understands that payment processing by digital and mobile wallets is evolving quickly. For instance, some such wallets provide methods for accessing the ACH system to make a payment. A consumer might use such a digital or mobile wallet to pay for an online purchase, and the wallet would facilitate the transfer of funds from the consumer's checking account to fund the transaction. In other cases, the consumer's funds are first transferred to the digital or mobile wallet either by the consumer or the wallet provider, and then transferred to the ultimate payee. For example, it may be possible for a consumer to maintain a positive balance in the digital or mobile wallet through transfers from sources such as a bank account, a credit, debit, or prepaid card, or a P2P transfer. The consumer's digital or mobile wallet balance may be held in the name of the wallet provider. The Bureau expects that variations of digital and mobile wallets will continue to grow and observes that the methods described herein are a few of the funding options available in the current market. As discussed above, the application of EFTA and Regulation E to digital and mobile wallets has been less clear than the application of the statute and the regulation to prepaid products such as payroll card accounts and government benefit accounts.

See, e.g.,

Visa Checkout Terms of Service,

https://secure.checkout.visa.com/pages/terms?country=VUS&locale=en

See, e.g.,

Google Wallet Terms of Service,

https://wallet.google.com/termsOfService?type=BUYER&gl=US

See, e.g.,

Boost Mobile Wallet Terms of Service,

https://boostmobile.wipit.me/legal/terms.aspx

Law360,

PayPal Customers Take Another Stab at $3.2M Class Deal

(Sept. 10, 2015),

available at

http://www.law360.com/articles/701403/paypal-customers-take-another-stab-at-3-2m-class-deal

. The class action was brought by PayPal customers to sue PayPal for, among other things, alleged violations of EFTA in managing the customers' accounts.

Credit Features, Overdraft Programs, and Prepaid Products

As described briefly above, most prepaid products as currently offered and marketed do not generally allow consumers to spend more money than is loaded onto the product. Although there are a few exceptions, most providers of prepaid products do not currently offer overdraft services,

a linked line of credit,

access to a deposit advance product,

or other method of accessing formal credit features in connection with a prepaid product.

Instead, prepaid products, including many GPR cards, are actively marketed as “safe” alternatives to checking accounts with opt-in overdraft services, credit cards, or other credit options.

Prepaid account

balances can nonetheless be taken negative under certain limited circumstances, however. Specifically, so-called “force pay” transactions can occur when the prepaid account issuer either does not receive a request to authorize a transaction in advance or the final transaction amount is higher than the authorized amount, and the prepaid account issuer is required by card network rules to pay the transaction even though there are insufficient or unavailable funds in the prepaid account to cover the transaction at settlement. In such circumstances, prepaid issuers generally are not charging credit-related fees to consumers in connection with force pay transactions.

As discussed further below, overdraft services evolved in the context of checking accounts from ad hoc, discretionary programs in which financial institutions would sometimes cover particular transactions that would otherwise overdraw a checking account as a courtesy to the consumer rather than return the transaction and subject the consumer to a not sufficient-funds fee, merchant fees, and other negative consequences from bounced checks. Overdraft services fees are generally imposed on a per-transaction basis, and the financial institution takes the balance owed as soon as additional funds are deposited into the account. As explained below, the Board exempted overdraft services from regulation under TILA and Regulation Z, unless the payment of items that overdraw an account and the imposition of the charges for paying such items were previously agreed upon in writing. In addition, these programs are not typically subject to traditional underwriting processes used for other credit products. Under Regulation E, financial institutions must obtain an opt-in from the consumer before imposing overdraft fees on ATM and one-time debit card transactions.

See

§ 1005.17(b).

A linked line of credit is a separate line of credit that a financial institution “links” to a deposit account or prepaid product to draw funds automatically where a transaction made using funds from the account or product would otherwise take the balance on the account or product negative. Such a credit feature is generally subject to interest rates, traditional credit underwriting, and TILA and Regulation Z. Similarly, some financial institutions offer consumers an option to link their credit card to a deposit account to provide automatic “pulls” to cover transactions that would otherwise exceed the balance in the account.

A deposit advance product (DAP) is a small-dollar, short-term loan or line of credit that a financial institution makes available to a customer whose deposit account reflects recurring direct deposits. The customer obtains a loan, which is to be repaid from the proceeds of the next direct deposit. DAPs typically do not assess interest and are fee-based products. Repayments are typically collected from ensuing deposits, often in advance of the customer's other bills.

See

CFPB,

Payday and Deposit Advance Products: A White Paper of Initial Data Findings

(Apr. 24, 2013),

available at

http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf

;

see also

FDIC and OCC Final Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products, 78 FR 70552 and 78 FR 70624 (Nov. 26, 2013). Publication of the Bureau's White Paper and the guidance issued by the FDIC and OCC has caused many financial institutions to reevaluate their DAP programs.

For example, a financial institution could offer a product whereby consumers with a credit account access that account and “push” the credit into their prepaid accounts where it can be spent.

See, e.g.,

Network Branded Prepaid Card Ass'n,

Prepaid Card Benefits,

http://www.nbpca.com/en/What-Are-Prepaid-Cards/Prepaid-Card-Benefits.aspx

(last visited Oct. 1, 2016) (“For many Americans, prepaid cards serve as a tool with which to more effectively budget their spending. With a prepaid card, consumers avoid the risk of over-spending or overdraft, thus avoiding the interest, fees and potential negative credit score implications of traditional credit cards. And for parents, prepaid cards provide tools to maintain control over their teens' or college students' spending.”);

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, C.E.O., NetSpend Holdings, Inc.) (“Our customers are typically working Americans who want control. . . .”).

As also discussed above, according to the 2014 Pew Survey, 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.

The survey also reported that a slight majority of participants stated that one of the major reasons that they use prepaid products is that those products help those consumers control their spending.

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

2014 Pew Survey at 1.

Id.

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).

ICF Int'l,

ICF Report: Summary of Findings: Design and Testing of Prepaid Card Fee Disclosures,

at 5 (Nov. 2014),

available at

http://files.consumerfinance.gov/f/201411_cfpb_summary-findings-design-testing-prepaid-card-disclosures.pdf

(ICF Report I).

It also appears that many consumers specifically seek to acquire prepaid products that do not offer overdraft 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. As discussed above, 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, the survey reported that 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.

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 34 percent of prepaid consumers who ever had a checking account say they have closed a checking account themselves because of overdraft or bounced check fees, and 21 percent say they have had a financial institution close their account because of overdraft or bounced check fees.

See

ICF Report I at 5;

see also

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 credit features in connection with their products. The Bureau understands that some prepaid issuers have received guidance from their prudential regulators that has deterred these financial institutions from allowing prepaid cards they issue to offer overdraft 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 offering of deposit advance products in connection with prepaid accounts.

Further, while a number of industry commenters to the Prepaid ANPR expressed interest in offering overdraft 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. In addition, as discussed further below, the Bureau understands that a Dodd-Frank Act provision affecting interchange fees on prepaid products with overdraft features seems to have further discouraged activity.

The Board found that among prepaid cards provided to consumers pursuant to government-administered payment programs, virtually all revenue from overdraft fees disappeared in 2014.

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 debit card interchange restrictions and exemptions thereto are discussed in greater detail in part II.B below.

See

Bd. of Governors of the Fed. Reserve Sys.,

Report to the Congress on Government Administered, General-Use Prepaid Cards,

at 9 (July 2015),

available athttp://www.federalreserve.gov/publications/other-reports/files/government-prepaid-report-201507.pdf

(2015 FRB Government Prepaid Cards Report).

See also

2016 FRB Government Prepaid Cards Report at 8.

The Bureau understands that currently, credit features are generally not being offered on prepaid accounts. When they are offered, the Bureau understands that they are typically structured as overdraft services,

which in some ways appear less expensive as well as more consumer friendly in other respects than their checking account analogs.

100

For example, the programs charge a per transaction fee each time the consumer incurs an overdraft (

e.g.,

one program charges $15), although the fees tend to be lower than those charged for overdraft services on checking accounts (median fee as of July 2014 was $35).

101

Along these lines, one recent study found that for consumers who overdraft, under the currently available programs, GPR cards are significantly less costly than checking accounts. For these consumers, the study found that the average total cost of checking accounts per month ranged between $86 and $112, while GPR cards' monthly costs ranged between $38 and $57.

102

In addition, some

programs will waive the overdraft fee if the consumer repays the overdraft quickly (

e.g.,

within 24 hours) or if the amount by which the account is negative is only for a nominal amount (

e.g.,

$5 or $10). Further, some programs may 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 impose “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.

The Bureau is aware of one prepaid account program where a linked credit service is structured as a line of credit.

100

See

Ctr. for Fin. Services Innovation,

CFSI Prepaid Industry Scorecard: Assessing Quality in the Prepaid Industry with CFSI's Compass Principles,

at 11 (March 2014),

available at

http://www.cfsinnovation.com/CMSPages/GetFile.aspx?guid=b596e5ee-41fe-4d30-82e7-a9cbf407a716

(2014 CFSI Scorecard) (noting that only two in a survey of 18 GPR programs representing 25 percent of the market currently offers an opt-in overdraft service); CFPB,

Study of Overdraft Programs: A White Paper of Initial Data Findings,

at 14 (June 2013),

available at

http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf

(CFPB Overdraft White Paper) (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.

101

As part of this rulemaking, 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.

102

Fumiko Hayashi et al.,

Driver of Choice? The Cost of Financial Products for Unbanked Consumers,

at 20 (Fed. Reserve Bank of Kan. City, Working Paper No. 15-15, Nov. 2015),

available at

https://www.kansascityfed.org/publicat/reswkpap/pdf/rwp15-15.pdf

(the authors assumed that a consumer who overdrafts makes at most one overdraft transaction in a day and each overdraft transaction results in four consecutive days of negative balance in the consumer's account).

Revenue from overdraft services does not appear to have significantly influenced the pricing structure of prepaid products overall, as has happened with traditional checking accounts as discussed further below. Indeed, as noted 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, 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.

103

As a result, banks and credit unions have developed checking accounts to have low (or sometimes no) up-front costs, to add services such as online bill pay

104

at no additional cost, and to rely on “back end” fees such as per transaction overdraft fees and non-sufficient funds (NSF) fees to maintain profitability. The Bureau believes that 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 payment networks.

105

103

According to information supplied to the Bureau as part of its large bank overdraft study and reported in the CFPB 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.

104

Such bill pay services may include not only electronic payments through the ACH network, but also manual generation of checks authorized through the bank or credit union's online bill pay portal.

at 12.

105

For example, in both 2013 and 2014, one major program manager derived approximately 60 percent of its operating revenue from cash-reload fees and interchange fees.

See

Green Dot Corp., 2014 Annual Report, at 29 (2015),

available at

http://phx.corporate-ir.net/phoenix.zhtml?c=235286&p=irol-reportsAnnual

; see also

Green Dot Corp.,

2015 Annual Report, at 30 (2016),

available at

http://phx.corporate-ir.net/phoenix.zhtml?c=235286&p=irol-reportsAnnual

The Bureau understands that program managers of prepaid products with overdraft credit features have structured their products to comply with Regulation E's rules regarding overdraft services. Specifically, the Bureau understands that providers of overdraft programs on GPR and payroll card accounts purport to provide a disclosure similar to Model Form A-9 in appendix A to Regulation E.

106

Model Form A-9 is a model consent form that a financial institution may use to obtain a consumer's opt-in to overdraft services for a fee for one-time debit card or ATM transactions.

107

106

The Bureau understands that prepaid 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.

107

As discussed in greater detail below, the Bureau reviewed publicly available account agreements for prepaid products that appeared to meet the Bureau's proposed definition of the term “prepaid account” and found that some programs' agreements stated 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

CFPB,

Study of Prepaid Account Agreements,

at 24-25 (Nov. 2014),

available at

http://files.consumerfinance.gov/f/201411_cfpb_study-of-prepaid-account-agreements.pdf

(Study of Prepaid Account Agreements). However, the Bureau does not believe such fees are typically charged.

The Bureau understands that prepaid products with overdraft credit features generally offer such features only to those consumers that meet specified criteria, such as evidence of the receipt 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 the provider will claim such funds for the purpose of repaying the overdraft.

B. Existing Regulation of Prepaid Products

Various Federal and State regulations apply to prepaid products. With respect to Federal regulation, there are several Federal regulatory regimes, including those regarding consumer protection, receipt of Federal payments, interchange fees, financial crimes, and Federal student aid disbursement, that apply to some or all types of prepaid products. Some of the most relevant applicable Federal laws and regulations include EFTA and Regulation E; Treasury's rule governing the receipt of Federal payments on prepaid cards;

108

the Board's Regulation II on debit card interchange and routing;

109

the Financial Crime Enforcement Network's (FinCEN) prepaid access rule;

110

and ED's Cash Management Regulation.

111

108

75 FR 80335 (Dec. 22, 2010).

109

12 CFR part 235.

110

76 FR 45403 (July 29, 2011).

111

80 FR 67126 (Oct. 30, 2015).

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, as discussed in greater detail below, both the FDIC and the NCUA have set criteria regarding how prepaid products may qualify for, as applicable, pass-through deposit (or share) insurance. In addition, the Office of the Comptroller of the Currency (OCC) has a bulletin that provides guidance to depository institutions under its supervision with respect to how to assess and manage the risks associated with prepaid access programs.

112

However, as the Bureau noted in the proposal, it 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 EFTA and Regulation E.

112

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/-27.html

EFTA and Related Provisions in 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.” EFTA's primary objective is “the provision of individual consumer rights.”

113

Congress also empowered the Board to promulgate regulations

implementing EFTA.

114

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.

115

113

See

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

114

EFTA section 904(a).

115

Public Law 111-203, section 1084, 124 Stat. 2081 (2010) (codified at 15 U.S.C. 1693a

et seq.

See also

Dodd-Frank Act section 1061(b); 12 U.S.C. 5581(b).

The regulations first promulgated by the Board to implement EFTA now reside in subpart A of Regulation E.

116

These rules provide a broad suite of protections to consumers who make 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.

117

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.

118

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.

119

116

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 described as residing in 12 CFR part 1005 originally were contained in 12 CFR part 205.

117

§ 1005.3(b)(1).

118

44 FR 18468, 18480 (Mar. 28, 1979).

119

§ 1005.2(b)(1).

For covered accounts, Regulation E mandates that consumers receive certain initial disclosures, in writing and in a form that the consumer can keep.

120

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.

121

Regulation E also sets forth substantive provisions on error resolution and imposes limits on a consumer's liability for unauthorized EFTs.

122

Moreover, Regulation E contains, among other things, provisions specific to periodic statements (which generally must be provided in writing),

123

the issuance of access devices,

124

preauthorized EFTs and compulsory use,

125

overdraft services,

126

and ATM disclosures.

127

120

§ 1005.4(a)(1).

121

See generally

§ 1005.7(b).

122

See

§§ 1005.6 and 1005.11.

123

§ 1005.9(b).

124

§ 1005.5. 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).

125

§ 1005.10.

126

§ 1005.17.

127

§ 1005.16. Since the transfer of authorities, the Bureau has amended Regulation E in two substantive respects. First, the Bureau added consumer protections to Regulation E in new subpart B for certain international fund transfers. §§ 1005.30 through 1005.36. Additionally, the Bureau amended Regulation E with respect to certain rules pertaining to ATM fee notices. 78 FR 18221 (Mar. 26, 2013).

As discussed in greater detail in the proposal,

128

between 1994 and 2010, the Board amended Regulation E a number of times to add consumer protection for certain prepaid and other stored-value products. First, the Board adopted consumer protections in the mid 1990s for accounts used to distribute benefits for Federally-administered government benefit programs and non-needs tested State and local government benefit programs, such as employment-related ones.

129

As noted in the proposal, the Board's original rule included needs-tested State and local electronic benefit transfer programs (

e.g.,

benefits such as those provided under SNAP and the Aid to Families with Dependent Children program),

130

but Congress subsequently enacted legislation that 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.”

131

The Board issued updated rules in 1997.

132

128

79 FR 77102, 77113-14 (Dec. 23, 2014).

129

See

current § 1005.15.

130

59 FR 10678 (Mar. 7, 1994).

131

Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Public Law 104-193, 110 Stat. 2105 (1996).

132

62 FR 43467 (Aug. 14, 1997).

In the mid 2000s, the Board expanded Regulation E to provide specific protections for prepaid products that are payroll card accounts established by an employer for providing an employee's compensation on a regular basis.

133

The Payroll Card Rule, among other things, brought payroll card accounts within the definition of account in § 1005.2(b).

134

The Board also tailored certain general Regulation E requirements to the payroll context. For example, the Board allowed providers of payroll card accounts to avoid the general requirement to provide written periodic statements, 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)).

135

Related provisions in § 1005.18(c) modify other requirements of Regulation E with respect to payroll card accounts, including 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.

133

71 FR 51437, 51438 (Aug. 30, 2006). The Board proposed the rule in 2004. 69 FR 55996 (Sept. 17, 2004). The Payroll Card Rule is codified in § 1005.18.

134

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

135

See

§ 1005.18(b).

More recently, the Board adopted a rule in 2010 to implement certain sections of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act)

136

applicable to gift cards, gift certificates, and certain types of general-use prepaid cards that are marketed or labeled as gift cards (the Gift Card Rule).

137

Although the Credit CARD Act explicitly gave the Board the discretionary authority to apply the majority of Regulation E's protections, including provisions regarding periodic statements, liability for unauthorized transactions, and error resolution to covered products,

138

the Board chose only to implement specific statutory provisions governing expiration dates and dormancy or inactivity fees.

139

136

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

137

§ 1005.20.

138

Credit CARD Act section 401; EFTA section 915(d)(1). The Gift Card Rule only covers certain general-use prepaid cards. Consistent with the Credit CARD Act, 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 Credit CARD Act, 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).

139

Id.

The Board considered whether to regulate GPR cards under EFTA and Regulation E several times, both in the course of promulgating these other amendments and independently. For example, when the Board initiated

rulemaking in 1996 to amend its 1994 rule on government benefit accounts to exclude needs-tested programs, it took notice that prepaid cards (at the time referred to as stored-value cards) were beginning to be used by more consumers. The Board explained its belief that facts supported the determination that “accounts” under Regulation E would include stored-value accounts and sought comment on whether to adopt rules specific to prepaid financial products (other than government benefit accounts) pursuant to its authority under EFTA and noted pending legislation in Congress that would address stored-value cards.

140

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.

141

The Board implemented the directive and published its findings in March 1997. It found, among other things, that the market for stored-value products was evolving rapidly and was not yet ripe for regulation.

142

The Board did not finalize its 1996 proposal on stored-value.

140

61 FR 19696 (May 2, 1996); H.R. 2520, 104th Cong., § 443; S. 650, 104th Cong., § 601 (1995). Among the provisions considered in the 1996 proposal on stored-value, 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 1994. The Board also noted pending legislation in Congress that would address stored-value cards.

141

Public Law 104-208, 110 Stat. 3009 (1996).

142

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 again considered whether to regulate stored value cards in the course of issuing the Payroll Card Rule, but decided to focus solely on payroll card accounts because at that time they were more often used as transaction account substitutes than were other types of prepaid products.

143

71 FR 51437, 51441 (Aug 30, 2006). Taking stock of the market 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.”

Id.

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.” 71 FR 1473, 1475 (Jan. 10, 2006). At the time, the Board viewed GPR cards as “generally designed to make one-time or a limited number of payments to consumers and . . . not intended to be used on a long-term basis.”

Id.

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).

144

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, must be set up to meet the requirements for FDIC or NCUA pass-through insurance, and must not have an attached line of credit or loan feature that triggers automatic repayment from the card account. Additionally, 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.

145

144

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.

145

31 CFR 210.5(b)(5)(i).

Based on Bureau research and as explained in the proposal, the Bureau believes that many GPR card providers have chosen to structure their prepaid products generally to comply with the FMS Rule, rather than tailoring compliance only for those accounts that actually receive Federal payments.

146

For example, if, prior to the FMS Rule, a prepaid provider did not maintain error resolution procedures with respect to its prepaid products (or maintained procedures different from Regulation E's error resolution regulations), the provider had to either adjust its processes to provide consumers who receive Federal payments with Regulation E's error resolution rights or ensure that their prepaid products do not receive Federal payments. Rather than provide two different error resolution regimes for individual customers, many providers have opted to apply the same procedures to all cards on their systems.

146

In issuing the FMS Rule, Treasury noted that it expected prepaid card issuers to comply with the FMS Rule (and thus provide Regulation E payroll card protections) to ensure that their products remain eligible to receive Federal payments. 75 FR 80335, 80338 (Dec. 22, 2010).

Pass-Through Deposit (or Share) Insurance

Both the FDIC and NCUA have special rules regarding how the deposit or share insurance they provide generally applies to funds loaded onto prepaid products that are held in pooled accounts at banks and credit unions, as applicable.

147

In the case of the FDIC, 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.

148

First, the account records of the insured depository institution must disclose the existence of the agency or custodial relationship.

149

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).

150 151

147

FDIC deposit insurance generally 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).

See, e.g.,

http://www.fdic.gov/deposit

. The FDIC also has resources for consumers about pass-through deposit insurance for prepaid cards.

See

fdic.gov/deposit/deposits/prepaid.html

. The NCUA administers the National Credit Union Share Insurance Fund (NCUSIF) for the purpose of providing insurance to protect deposits of credit union members of insured credit unions.

See, e.g.,

http://www.ncua.gov/DataApps/Pages/SI-NCUA.aspx

148

FDIC General Counsel Opinion No. 8,

Insurability of Funds Underlying Stored Value Cards and Other Nontraditional Access Mechanisms,

73 FR 67155 (Nov. 13, 2008), internal citations omitted.

149

This requirement can be satisfied by opening the account under a title such as the following: “ABC Company as Custodian for Cardholders.”

See id.

at 67157.

150

Id.

151

The FDIC has also issued guidance on the application of requirements for brokered deposits as applied to prepaid cards.

See, e.g.,

FDIC, Identifying, Accepting and Reporting Brokered Deposits Frequently Asked Questions (updated June 2016),

available at

https://www.fdic.gov/news/news/financial/2016/fil16042b.pdf

Similarly, NCUA regulations generally require that the details of the existence of a relationship which may provide a basis for additional insurance 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.

152

12 CFR 745.2(c)(2).

The Bureau believes that most prepaid products subject to this final rule are set up to be eligible for FDIC or NCUA pass-through insurance. As discussed in greater detail below in the section-by-section analysis of § 1005.18(b)(2)(xi), this final rule requires a financial institution to indicate on the short form disclosure required pursuant to § 1005.18(b)(2) whether a prepaid account is eligible for FDIC or NCUA pass-through insurance.

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.

153

The statute also addresses prepaid cards that operate on debit card networks. Specifically, 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. The statute also provides certain exemptions from the interchange fee limitations for certain cards, including in section 920(a)(7)(A) an exemption for general-use reloadable prepaid (and debit) cards provided to a consumer pursuant to government-administered payment programs and for certain GPR cards. In addition, there is a blanket exemption from the interchange fee limitations for cards of issuers with total assets of less than $10 billion. Thus, interchange fees for transactions made with prepaid cards meeting the criteria for the statutory exemptions are generally not subject to the fee restrictions of EFTA section 920(a). However, the statute also provides a carveback that rescinds the exemption if certain fees, such as an overdraft fee, may be charged with respect to a card listed in section 920(a)(7)(A). There is no such carveback for the cards of issuers with total assets below $10 billion, however. The statute uses the same definition of general-use prepaid card as the Credit CARD Act.

154

In July 2011, the Board promulgated Regulation II (12 CFR part 235) to implement EFTA section 920. The provisions regarding debit card interchange fee restrictions became effective as of October 1 of that year.

155

153

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

Zhu Wang,

Debit Card Interchange Fee Regulation: Some Assessments and Considerations,

98 Econ. Q. 159 (2012),

available at

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_quarterly/2012/q3/pdf/wang.pdf

154

EFTA section 920(c)(2)(B).

155

76 FR 43394 (July 20, 2011); 76 FR 43478 (July 20, 2011);

amended by

77 FR 46258 (Aug. 3, 2012).

FinCEN's Prepaid Access Rule

FinCEN, a bureau of the Treasury, regulates prepaid products pursuant to its mission to safeguard the financial system from illicit use, combat money laundering, and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities. In 2011, pursuant to a mandate under the Credit CARD Act, FinCEN published a final rule to amend BSA regulations applicable to money services businesses with respect to stored value or “prepaid access” (FinCEN's Prepaid Access Rule).

156

The rule regulates prepaid access in a number of ways, including requiring providers or sellers of prepaid access to: (1) File suspicious activity reports; (2) collect and retain certain customer and transactional information; and (3) maintain an anti-money laundering program. The customer identification and verification requirements for providers and sellers of prepaid access under this rule are largely similar to the CIP requirements for banks and credit unions. These BSA requirements are similar to those that apply to other categories of money services businesses.

157

However, consumer protection is not the focus of FinCEN's rules.

156

76 FR 45403 (July 29, 2011). Subject to certain specific exemptions, a “prepaid program” is defined as an “arrangement under which one or more persons acting together provide(s) prepaid access.” 31 CFR 1010.100(ff)(4)(iii). The term “prepaid access” is defined as “access to funds or the value of funds that have been paid in advance and can be retrieved or transferred at some point in the future through an electronic device or vehicle, such as a card, code, electronic serial number, mobile identification number, or personal identification.” 31 CFR 1010.100(ww).

157

76 FR 45403, 45419 (July 29, 2011).

Department of Education's Cash Management Regulations

ED, among other things, regulates the disbursement of Federal financial aid by colleges and universities. In October 2015, it adopted a final rule that amends its cash management regulations by setting forth new criteria that apply to colleges that partner with vendors to distribute Title IV funds and/or sponsor or directly market accounts to their students.

158

Among other things, the rule prohibits colleges and universities that receive Federal financial aid from requiring students or parents to open a certain account into which student aid funds are deposited. Additionally, colleges and universities must provide students with a list of account options that the student may choose from to receive the student's aid disbursement. Each option must be presented neutrally and the student's preexisting bank account must be listed as the first and most prominent option with no account preselected. Further, the final rule bans point-of-sale and overdraft fees on accounts, including prepaid card accounts, that are directly marketed to students by a financial institution with which the student's college or university has an arrangement to disburse Federal financial aid on behalf of the post-secondary institution. Moreover, the final rule requires that college-sponsored accounts provide students with reasonable access to surcharge-free ATMs and deposit insurance.

158

80 FR 67126 (Oct. 30, 2015).

As discussed in greater detail in the Prepaid Proposal and noted above, some colleges and universities partner with third parties to disburse financial aid proceeds into network-branded open-loop prepaid products endorsed by the colleges and universities, and questions have been raised about revenue sharing between the colleges and universities and these third parties.

159

Indeed, in its final rule, ED stated its belief that the new regulations are warranted because of the numerous concerns that have been raised about the practices of certain colleges and universities and third parties with respect to the distribution of Federal student aid. These practices include implying to students that they must sign up for certain accounts to receive Federal student aid and charging students onerous, confusing, or unavoidable fees in order to access student aid funds or otherwise use the account.

160

159

See

79 FR 77102, 77109 (Dec. 23, 2014).

160

See, e.g.,

80 FR 67126, 67129, 67179 (Oct. 30, 2015).

State Laws

As discussed in greater detail in the proposal, many States have passed consumer protection laws or other rules to regulate prepaid products in general, and in particular, certain types of prepaid products such as government benefits cards. For example, in 2013, Illinois imposed pre-acquisition, on-card, and at-the-time-of-purchase disclosure requirements on “general-use reloadable prepaid cards.”

161

Also in 2013, California enacted a law that extended protections similar to the FMS Rule to prepaid products receiving unemployment benefits and basic-needs benefits from the State of California.

162

161

IL SB 1829 (2013), Public Act 098-0545,

codified at

205 Ill. Comp. Stat. 616/10 and 616/46. The Illinois law defines “general use reloadable card” as, among other things, issued for consumer use; can be reloaded; is open-loop; and not marketed or labeled as a gift card or gift certificate. 205 ILCS 616/10.

162

CA A 1820 (2013), ch. 557,

codified at

Cal. Unemp. Ins. Code § 1339.1 and Cal. Welf. & Inst. Code § 11006.2. Similar to the FMS Rule, this law includes provisions requiring that, among other things, such accounts to be set up to be eligible for pass-through deposit or share insurance, not be attached to any credit or overdraft feature that is automatically repaid from the account after delivery of the payment, and compliance not only with the Payroll Card Rule (or other rules subsequently adopted under EFTA that apply to prepaid card accounts).

See also

CA A 2252 (2014), ch. 180,

codified at

Cal. Fam. Code § 17325 (extending similar protections to cards used for distribution of child support payments).

Further, many States have money transmitter laws that may apply to prepaid product providers. The laws vary by State but generally require a company to be licensed and to post a surety bond to cover accountholder losses if it becomes insolvent. Most States further require that the companies hold high-grade investments to back the money in customer accounts. But as noted in the proposal, States vary in the amount of their oversight of companies licensed under the money transmitter laws, and many may not have streamlined processes to pay out funds in the event a prepaid product provider were to file for bankruptcy protection.

163

See, e.g.,

The Pew Charitable Trusts,

Imperfect Protection—Using Money Transmitter Laws to Insure Prepaid Cards

(Mar. 2013),

available at

http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/.pdf

C. Existing Regulation of Credit Products and Overdraft Services Offered in Connection With Transaction Accounts

As discussed further below, this final rule sets forth certain requirements that apply to overdraft credit features offered in connection with prepaid accounts. In crafting a regime to apply to credit accessed by prepaid cards, the Bureau has been conscious of existing regimes for regulating overdraft lines of credit (where there is a written agreement to pay overdrafts) generally under TILA and its implementing Regulation Z and overdraft services in the context of checking accounts (where there is no written agreement to pay overdrafts) under EFTA and Regulation E. Such overdraft services are exempt from Regulation Z but subject to certain parts of Regulation E.

Open-End (Not Home-Secured) Credit Products Under the Truth in Lending Act and the Electronic Fund Transfer Act

Credit products are generally subject to TILA and Regulation Z, although the application of specific provisions of the statute and regulation depends on the attributes of the particular credit product. In 1968, Congress enacted TILA to promote the informed use of consumer credit by requiring disclosures about its terms and cost and to provide standardized disclosures. Congress has revised TILA several times and its purpose now is to “assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him,” to “avoid the uninformed use of credit,” and “to protect the consumer against inaccurate and unfair credit billing and credit card practices.”

164

TILA defines credit broadly to mean the right granted by a creditor to a debtor to defer payment of debt or incur debt and defer its payment.

165

164

15 U.S.C. 1601(a).

165

15 U.S.C. 1602(f). The term creditor in Regulation Z, set forth in § 1026.2(a)(17)(i), generally means a person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract.

Congress has amended TILA on several occasions to provide consumers using certain types of credit products with additional protections. The Fair Credit Billing Act (FCBA),

166

enacted in 1974, added a number of substantive protections for consumers who use open-end credit

167

or use credit cards subject to TILA.

168

For example, the FCBA increased rights and remedies for consumers who assert billing errors and required a minimum 14-day grace period for payments for creditors that offer a grace period, prompt re-crediting of refunds, and refunds of credit balances. Credit cards are also subject to these requirements,

169

but also to a broad range of additional protections. Regulation Z defines the term “credit card” to mean any card, plate, or other single credit device that may be used from time to time to obtain credit.

170

Cognizant that many financial institutions issue credit cards to cardholders with whom they also have a deposit account relationship, Congress in the FCBA also restricted the right of such institutions from taking funds out of a deposit account to satisfy their credit card claims.

171

In 1988, Congress amended TILA through the Fair Credit and Charge Card Disclosure Act, which required issuers of credit cards and charge cards to provide certain disclosures at the time of application and solicitation.

172

166

Public Law 93-495, 88 Stat. 1511 (1974).

167

As discussed in greater detail in the section-by-section analysis of § 1026.2(a)(20), open-end credit exists where there is a plan in which the creditor reasonably contemplates repeated transactions; the creditor may impose a finance charge from time to time on an outstanding unpaid balance; and the amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available (even if not disclosed) to the extent that any outstanding balance is repaid. § 1026.2(a)(20). Closed-end credit is credit that does not meet the definition of open-end credit. § 1026.2(a)(10).

168

Public Law 93-495, 88 Stat. 1511 (1974).

169

Indeed, credit cards are subject to specialized and heightened disclosure requirements in advertisements, at the time of account opening, periodically for each billing cycle (

i.e.,

periodic statements), and when certain terms of the account change. In addition, for credit card accounts disclosures generally are required on or with applications or solicitations. Among the required disclosures for credit cards on or with an application or solicitation is a tabular disclosure setting forth seven different disclosures. § 1026.60. This “Schumer box” must be similar to the model forms in appendix G-10 to Regulation Z and must set forth certain fees, interest rates, transaction charges, and other required charges.

170

See

§ 1026.2(a)(15)(i).

171

See Gardner

Montgomery County Teachers Fed. Credit Union,

864 F.Supp.2d 410 (D. Md. 2012) (providing an overview of the FCBA's no offset provision).

172

A charge card is a credit card on an account for which no periodic rate is used to compute a finance charge. § 1026.2(a)(15)(iii).

In 2009, Congress enhanced protections for credit cards in the Credit CARD Act, which it enacted to “establish fair and transparent practices related to the extension of credit” in the credit card market.

173

The Credit CARD Act, which amended TILA and EFTA, regulates both the underwriting and pricing of credit card accounts. Specifically, it prohibits credit card issuers from extending credit without assessing the consumer's ability to pay and imposes special rules regarding the extension of credit to persons under the age of 21 and to college students. The Credit CARD Act also restricts the fees that an issuer can charge during the first

year after an account is opened, and limits both the instances in which issuers can charge “back-end” penalty fees when a consumer makes a late payment or exceeds his or her credit limit and the amount of such fees. Additionally, the Credit CARD Act restricts the circumstances under which issuers can increase interest rates on credit card accounts and establishes procedures for doing so. The Board generally implemented these provisions in subpart G of Regulation Z. Thus, while all open-end (not home-secured) credit plans receive some of TILA's protections, generally only open-end (not home-secured) credit plans that are accessed by credit cards receive the additional protections of the Credit CARD Act.

173

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

Although EFTA does not generally focus on credit issues, Congress provided a specific credit-related protection in that statute. Known as the compulsory use provision, it provides that no person may “condition the extension of credit to a consumer on such consumer's repayment by means of preauthorized electronic fund transfers.”

174

A preauthorized EFT is an EFT authorized in advance to recur at substantially regular intervals, such as a recurring direct deposit or ACH debit. Where applicable, the compulsory use provision thus prevents a creditor from requiring a particular form of payment, such as a recurring ACH debit to another account, to repay credit. This provides consumers with the ability to control how and when they repay credit and does not allow a creditor to insist on a particular form of repayment. Thus, as implemented in Regulations Z and E, some of these protections are broadly applicable to credit generally while others are specific to particular credit products. For example, open-end lines of credit that consumers can link to a deposit account to pull funds when the account has insufficient funds where there is a written agreement to pay overdrafts generally are subject to certain disclosure requirements under Regulation Z and certain provisions of the FCBA. The Board, however, exempted overdraft lines of credit from the compulsory use provision, as discussed in more detail below). The Board also exempted overdraft lines of credit accessed by a debit card from the Credit CARD Act provisions.

175

174

EFTA section 913(1). As implemented in Regulation E, this provision (§ 1005.10(e)(1)) contains an exception for overdraft credit plans: “No financial institution or other person may condition an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account.”

175

75 FR 7658 (Feb. 22, 2010).

Federal Regulatory Treatment of Deposit Account Overdraft Services

A separate regulatory regime has evolved over the years with regard to treatment of overdraft services, which started as courtesy programs under which financial institutions would decide on a manual, ad hoc basis to cover particular check transactions for which consumers lacked funds in their deposit accounts rather than to return the transactions and subject consumers to a NSF fee, merchant fees, and other negative consequences from bounced checks. Although Congress did not exempt overdraft services or similar programs offered in connection with deposit accounts when it enacted TILA, the Board in issuing Regulation Z in 1969 carved financial institutions' overdraft programs (also then commonly known as “bounce protection programs”) out of the new regulation.

176

The Board distinguished between bounce protection programs where there is no written agreement to pay items that overdraw the account and more formal line-of-credit overdraft programs where there is a written agreement to pay overdrafts. Specifically, the Board exempted informal bounce protection programs but subjected overdraft lines of credit to Regulation Z when the creditor imposes a finance charge.

177

176

34 FR 2002 (Feb. 11, 1969).

See also

Federal Deposit Insurance 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.

201

73 FR 28904 (May 19, 2008).

202

73 FR 28730 (May 19, 2008).

203

74 FR 5584 (Jan. 29, 2009). Specifically, this rule required, among other things, all banks 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 accounts in Regulation E,

204

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.”

205

The rule did not discuss GPR cards, which as noted above, the Board had not expressly subjected to Regulation E coverage.

204

74 FR 59033 (Nov. 17, 2009).

205

Id.

at 59037.

Following the adoption of the Board's overdraft opt-in rule, the FDIC expanded on the previously issued Joint Guidance via a Financial Institution Letter to reaffirm its existing supervisory expectations with respect to overdraft payment programs generally and provide specific guidance with respect to automated overdraft payment programs.

206

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.

207

The OCC withdrew this proposed guidance in 2013.

208

206

Fed. Deposit Ins. Corp., FIL-81-2010,

Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance

(Fin. Inst. Letter, Nov. 24, 2010),

available at

https://www.fdic.gov/news/news//2010/fil10081.html

207

76 FR 33409 (June 8, 2011). The Office of Thrift Supervision also proposed supplemental guidance on overdraft protection programs. 75 FR 22681 (Apr. 29, 2010).

208

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. In early 2012, the Bureau issued a Request For Information 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.

209

In response, the Bureau received over 1,000 comments. The Bureau 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 the CFPB Overdraft White Paper, noted above, and a data point in July 2014.

210

The Bureau is engaged in pre-rule making activities to consider potential regulation of overdraft services on checking accounts.

211

As part of its preparations, the Bureau has begun consumer testing initiatives related to the opt-in process set forth in current Regulation E.

212

209

77 FR 12031 (Feb. 28, 2012).

210

See

CFPB,

Data Point: Checking Account Overdraft

(July 2014),

available at

http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf

211

See

CFPB, Spring 2016 Rulemaking Agenda (May 2016),

available at

http://www.consumerfinance.gov/about-us/blog/spring-2016-rulemaking-agenda/

212

Id.

Other Relevant Federal Regulatory Activity

In addition, several 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, permits Federal payments to be deposited onto a prepaid product only 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.

213

The preamble 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.

214

The Treasury FMS Rule does not, however, directly address the permissibility of overdraft services.

213

See

31 CFR 210.5(b)(5)(i)(C).

214

75 FR 80335 (Dec. 22, 2010).

Second, as discussed above, the Board's Regulation II generally caps interchange fees that may be imposed on debit card transactions. Regulation II provides an exemption from the fee restrictions for cards provided pursuant to a Federal, State, or local government-administered payment program and for certain reloadable prepaid cards.

215

However, Regulation II 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.

216

EFTA and Regulation II provide a separate, blanket exemption for cards of 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.

217

215

See

12 CFR 235.5(b) through (d).

216

12 CFR 235.5(d)(1).

217

See

EFTA section 920(a)(6)(A) and 12 CFR 235.5(a).

Third, as discussed above in part II.B, ED's cash management regulation bans point-of-sale and overdraft fees on accounts, including prepaid card accounts, that are directly marketed to students by a financial institution with which the student's college or university has an arrangement to disburse Federal financial aid on behalf of the post-secondary insti

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