On October 5, 2016, the Consumer Financial Protection Bureau issued its final rules for prepaid accounts. The final rules amend both Regulation E and Regulation Z in the case of prepaid cards that also have a credit feature. Compliance with the new rules is mandatory beginning October 1, 2017. There is a section of the rules that requires that a financial institution submit its account agreements regarding prepaid cards to the FDIC or NCUA. That portion of the rules takes effect on October 1, 2018.
The entire issuance by the CFPB consists of 1,689 pages. If you want to read only the new rule itself, it begins on page 1,425. A portion of the preamble to the rule is a discussion of the history of prepaid cards and an anticipation of their future which is pretty interesting. One thing that is discussed is that a prepaid card includes virtual cards that is a prepaid arrangement where no physical card is issued but that the customer may access the account through his or her smart phone or other electronic device.
The principal target of the new rules are reloadable payroll cards, reloadable government benefit accounts and general purpose cards that are labeled or marketed as prepaid and can be used at unaffiliated merchants or ATMs. There are several exceptions to the definition of prepaid account. For most community banks, the most important exception is a prepaid card marketed as a gift card or gift certificate. From the rule, if a financial institution sells a prepaid card (account) whether or not it is reloadable, if it is marketed as “prepaid” then it falls under the new rules; if it is marketed as “gift card or gift certificate”, it does not. Accordingly, all financial institutions that sell prepaid cards that are not reloadable should make sure that their marketing and advertising materials for that product use the word “gift” and avoid any use of the term “prepaid”.
Other exceptions to the definition of prepaid account are health savings arrangements, transit or parking arrangements and disaster relief payments. Also excluded are store gift cards and gift certificates as well as loyalty, award and promotional gift cards.
There are separate disclosure requirements for government benefit accounts from payroll accounts. Both require an initial “short form” disclosure be provided to the consumer before the prepaid account is opened and a “long form” disclosure after account opening. There are sample forms for both disclosures in the Appendix to the regulation. The disclosures for payroll accounts contain much of the same governmental over kill that we have become accustomed to in recent issuances from the CFPB. For example, some fees have to be disclosed as “zero” when the financial institution does not impose the fee. Also, if there are variations on a fee, those must all be disclosed, for example, if a financial institution does or does not impose a fee for an inquiry through an interactive voice response system, that fee, even if zero, must be disclosed. If that financial institution imposes the same fee, a different fee, or no fee for speaking to a real person that fee or lack thereof must also be disclosed. Additionally, the financial institution must separately disclose the two fees that generate or are anticipated to generate the most revenue for the institution.
One other aspect of the new rules that we haven’t seen before is the requirement to provide the account disclosures in a foreign language if the prepaid account was marketed or advertised in that language or if someone could request the account over the telephone in that language.
There is also the concept of a hybrid prepaid card when the card has a credit feature to cover charges over the card balance either through the transfer from another deposit account or through a credit feature. If a card is a hybrid card, then, error resolution is covered under Regulation Z rather than Regulation E.
If your financial institution does not offer reloadable cards, you need to make sure that your cards are advertised and marketed using the words “gift card” or “gift certificate”. If your institution does offer reloadable cards, you have one year to get ready for the changes.
Considering the new HMDA data collection requirements will be on the heel of these prepaid card rules, we recommend you start now rather than later to align your product decisions and ensure your deposit and branch staff are prepared for the new rules well in advance. First, make sure that your card department knows what is coming and when it is coming. One of the things it will want to do is review its card products and make any changes that it wants to make now so that it can prepare itself for the new disclosure requirements come October 2017. Next, get with your vendors to identify when they anticipate having system and card readiness for you. Ensure staff are assigned for October 2017 to monitor the process and issuance of your prepaid and or gift cards. Lending and compliance staff will be knee deep in HMDA process improvements, system testing, HMDA and fair lending risk assessments, and alas, new HMDA training.