CFPB Releases Long-Awaited Proposal On Prepaid Account Products

Summary: On November 13, 2014, the Consumer Financial Protection Bureau ("CFPB") issued a proposed rule to extend certain federal consumer protections to the prepaid market. This proposed rule marks the CFPB's first discretionary rulemaking with respect to consumer financial products and services, after the completion and implementation of the Dodd-Frank Act required rulemakings over the past few years. The most significant aspect of the proposed rule is that it would apply a number of specific federal consumer protections to broad parts of the prepaid market for the first time. The proposed rule would do so by establishing a new definition of "prepaid account" within Regulation E, along with adopting comprehensive consumer protection rules for such accounts.

On November 13, 2014, the Consumer Financial Protection Bureau ("CFPB") issued a proposed rule1 to extend certain federal consumer protections to the prepaid market. This proposed rule marks the CFPB's first discretionary rulemaking with respect to consumer financial products and services, after the completion and implementation of the Dodd-Frank Act required rulemakings over the past few years. Although the CFPB understands that a significant number of prepaid card issuers and program managers already voluntarily comply with Regulation E to a substantial degree, the CFPB believes that comprehensive federal protections in this market are needed.

The most significant aspect of the proposed rule is that it would apply a number of specific federal consumer protections to broad parts of the prepaid market for the first time. The proposed rule would do so by establishing a new definition of "prepaid account" within Regulation E, along with comprehensive consumer protection rules for such accounts.2 The proposed rule would thereby cover traditional plastic prepaid cards, many of which are general purpose reloadable cards ("GPR cards").3 In addition, the proposal would cover:

mobile and other electronic prepaid accounts that can store funds; payroll cards; certain federal, state, and local government benefit cards such as those used to distribute unemployment insurance, child support, and pension payments; student financial aid disbursement cards; tax refund cards; and peer-to-peer payment products/person-to-person ("P2P") transfers. The CFPB suggests that the proposed rule may apply to mobile wallets, virtual currency, and related products and services.4

According to CFPB Director Richard Cordray, "[c]onsumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts." The Bureau's proposed rule "would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment," he stated.

Background

In May 2012, the CFPB issued an advance notice of proposed rulemaking ("ANPRM") to seek comment, data, and information from the public about GPR cards to determine how best to implement consumer protection rules for this product and set the contours of any proposed rulemaking concerning GPR cards.5 In its ANPRM, the CFPB expressed its intent to issue a proposal to extend the Regulation E protections to GPR cards and noted three factors in particular that warrant greater attention: (i) the growth of the market for GPR cards; (ii) consumer use; and (iii) the lack of comprehensive federal regulation.

With respect to consumer use, the CFPB noted in the ANPRM its concern that some consumers may view and use GPR cards as an alternative to traditional checking accounts, as is reflected in the increased number of GPR cards that consumers are loading through direct deposit. The CFPB also observed that some GPR cards are marketed as a substitute for a checking account. According to the CFPB, "[w]hile consumers may be using GPR cards as a substitute for checking accounts, GPR cards do not carry the same protections given to checking accounts and electronic transactions involving checking accounts under federal law."6 The CFPB also noted its concern that the lack of a comprehensive federal regulatory regime may contribute to "market distortions, misaligned incentives, or consumer confusion," as GPR card consumers "may mistakenly assume that they possess rights enforceable under federal law."7 Unlike some other...