Two Sparrows Consulting New Prepaid Card Regulations: What They Are; What They Mean

Transcription

1 New Prepaid Card Regulations: What They Are; What They Mean WACHA s 2017 Electronic Payments Conference March 8,

2 The opinions expressed by Mr. Tomasofsky during this presentation are exclusively their own and subject to change. 2

3 About Two Sparrows Consulting Independent Consulting Firm Payments Specialists Credit Cards, Debit Cards, Prepaid Cards, ACH, Internet Payments, Mobile, EMV Loyalty, Merchant Acquiring, Bill Payment, Electronic Banking Strategy Project Management Product Management Training Marketing and Business Development Association Management 3

4 Agenda Introduction Regulation Background Definitions of Prepaid Regulation Reference Product Descriptions Disclosures: Reference (b) Short form Reg. E Error Resolution Status of Regulation Questions 4

5 Regulation Background CFPB Final Regulation Issued October 5, 2016 Regulation can be found at: Covers all prepaid not just reloadable products. Session will focus on Definitions, Regulation E and Error Resolution, Disclosures 5

6 Prepaid Cards Volume Source: The Federal Reserve 6

7 Top Prepaid Debit Issuers Source: The Nilson Report 7

8 Prepaid Account Defined Prepaid Account means: Account that is marketed or labeled as prepaid and redeemable at multiple unaffiliated merchants for goods or services or useable at ATMs An account that is: Issued on a prepaid basis in a specified amount or capable of being loaded after issuance Primary function to conduct open loop, ATM, or P2P transactions Not a checking account, share draft account or NOW account Payroll / Government Benefit remain covered under existing definitions Goal is to more clearly differentiate products that are subject to the Final Rule from those that are otherwise subject to Regulation E. 8

9 Prepaid Products Covered in the Regulation General Purpose Reloadable Cards - A type of Consumer-funded Prepaid Card, purchased by a consumer for his/her personal use. ( eg. Green Dot, NetSpend, Rush Card) Mobile wallets, person-to-person payment products and other electronic accounts that can store funds A non-card product that is capable of storing and transferring funds. ( e.g. Google Wallet, PayPal s Venmo.) Apple Pay is not covered.) Student Financial Aid Disbursement cards Prepaid Cards upon which Student Financial Aid is disbursed by the University/School. ( e.g. Higher One, Heartland programs) 9

10 Prepaid Products Covered in the Regulation Tax Refund Cards A type of prepaid card used exclusively for disbursing tax refunds. ( H&R Block Emerald Card) Payroll Cards An account that is established through an employer for the electronic distribution of a consumer s wages, salary or commissions deposited on a recurring basis. Does not include one-time payments or disbursements. ( e.g. Bonus, travel per diem payments) Government Benefit Cards - A card onto which a government agency may use to distribute government benefits to a consumer electronically. ( e.g. Direct Express Social Security Payments) 10

11 Prepaid Cards are a type of debit card categorized into three verticals Consumers Corporate Public Sector General Purpose Reloadable ( GPR) Travel Campus/Student Gift Cards ( Open/Closed) Payroll Incentives & rebates Healthcare Insurance Business travel Corporate purchasing Public Benefit & Welfare programs (EBT) Emergency assistance & disaster relief Pension, Social Security Payroll, Campus/Student 11

12 Disclosures General Reference (b) Two forms of disclosure that must be provided preacquisition. Templates are available from CFPB at: Very prescriptive form requirements (e.g. type-face, labels, color of type, usage of foreign language) e.g. must be in a single, easy-to-read type that is all black or one color and printed on a background that provides a clear contrast. A financial institution complies with the color requirements if, for example, it provides the disclosures required by (b)(2), (3)(i) and (ii), and (4) printed in black type on a white background or white type on a black background. 12

13 Disclosures General ( cont d) Timing Both the short-form and the long-form must be provided pre-acquisition except at a retail location and a telephone exception. Retail Exception Must be operated by an entity other than the FI issuing the prepaid account. Other requirements Packaging, telephone number, URL 13

14 Disclosures General ( cont d) Telephone exception three requirements FI communicates orally that Long Form is available via phone and online FI makes the long form available via phone and online Long form is provided after account acquisition 14

15 Long-Form Sample Long Form All fees are required Explains fee assessments, will also include third-party fees to the extent known Fees must be grouped into category functions: Get Started, Monthly Usage, Add Money, Spend Money, etc. 15

16 Short-Form Sample Short Form : Static Fees Additional Fee Types Mandatory Statements 16

17 Regulation E Error Resolution & Account History / Statements 17

18 Limitation of Liability & Error Resolution No material changes from the Proposed Rule: Liability limited to $50 (if consumer notifies bank within 2 business days) or capped at $ day period for reporting unauthorized transaction commences when: Consumer electronically accesses account Bank sends written history upon request Safe Harbor: 120 days after EFT occurs 18

19 Error Resolution for Unverified Accounts? Limited liability and error resolution requirements extend to all prepaid accounts. No provisional crediting for unverified accounts (other than Payroll and Government Benefit). Examples of unverified accounts include: Bank has not completed its registration process (with required registration disclosure) Bank has completed registration process but can t verify consumer (with required registration disclosure) Bank has no registration process (no registration disclosure is required as it is inapplicable in this scenario) 19

20 Modified Requirements for Periodic Statement Alternative Largely mirrors existing requirements, but includes notably changes to transaction history. Under Final Rule, do not have to provide periodic statement if: Account balance information is available through telephone number 12 months of electronic transaction history is available 24 months of written transaction history is available upon request (oral or written) Cannot charge a fee Can provide less than 24 months of history at consumer s request 20

21 Information Required to Appear in Transaction Histories Transaction histories (along with periodic statements) must include: Amount of any fees assessed A summary total of fees assessed for the prior calendar month and for the calendar year to date Other information required by (b) Summary totals of all deposits to and debits from an account not required 21

22 How to Provide Required Notices The Final Rule permits banks to provide certain disclosures without E-Sign consent But, generally, banks must comply with the E-Sign Act when electronically providing other written disclosures including pre-acquisition disclosures if the prepaid account is not acquired online or via a mobile device. 22

23 Submitting & Posting Prepaid Account Terms 23

24 CFPB Requires Submission of Terms Final Rule requires issuers required to submit new and amended prepaid account agreements (or notification of withdrawn agreements) on a rolling basis no later than 30 days after the issuer offers, amends, or ceases to offer the agreement (this is a change from Proposed Rule, which required quarterly submissions of new and amended agreements) Exceptions: De Minimis exception: Fewer than 3,000 open prepaid accounts Product testing exception: offered as part of a product test to a limited group of consumers for a limited period of time Is used for fewer than 3,000 open prepaid accounts Is not offered other than in connection with such a product test 24

25 What s included in submission to CFPB? Agreement / Up to date Fee information No PII No ancillary disclosures, marketing materials, periodic statements, or other documents that may be sent along with the account agreement Agreements must be presented in clear/ legible font 25

26 Additional Requirement to Post Terms In addition to submitting terms to the CFPB, issuers must post and maintain terms on publicly available website if offered to the general public Note: Payroll and Government Benefit agreements not offered to the general public Must be in prominent location, readily accessible to the public without submission of personally identifiable information 26

27 Posting cont d Requirement to make individual s own agreement available: Issuers must post and maintain on website in location prominent and readily accessible to the individual (can include PII if steps taken to make agreement only accessible to consumer or authorized persons) Or, provided promptly upon the individual s request Individual must have ability to request agreement via telephone Issuer must send agreement no later than 5 business days after receiving request 27

28 Credit Features Offered with Prepaid Accounts 28

29 Insufficient Funds (force pay) Would have been under proposed rule To address the issue, the Final Rule creates three exemptions from the general requirements for credit features offered with prepaid accounts: (i) Issuer has policy and practice of declining to authorize transactions where consumer has insufficient funds and does not charge credit related fees; or (ii) Issuer has practice of declining to authorize transactions where consumer has insufficient funds except when the transaction will not overdraft the account by more than $10 (a purchase cushion ) and does not charge credit related fees; or (iii) Issuer has practice of declining to authorize transactions where consumer has insufficient funds except where incoming deposits to the account are pending and does not charge credit related fees 29

30 Treatment of Intentional Overdraft Trigger for Credit Requirements Structured as separate sub-accounts or purses, distinct from the prepaid asset account, to facilitate transparency and compliance with various Regulation Z requirements (not a negative balance on the prepaid account) The Final Rule Adds a new definition under Regulation Z for a hybrid prepaid-credit card Defined as a single device that can be used to access a separate credit feature and: Can be used to access the separate credit feature in the course of authorizing, settling, or otherwise completing transactions conducted with the card to obtain goods or services, to obtain cash, or to conduct P2P transfers The separate credit feature is offered by the issuer, its affiliate, or its business partner 30

31 When are Credit Requirements not Triggered? The credit feature is offered by an unrelated third party that is not the issuer, its affiliate or its business partner The credit feature is offered by the issuer, its affiliate, or its business partner, but cannot be accessed within the course of authorizing, settling, or otherwise completing transactions to obtain goods or services, obtain cash, or conduct person-to-person transfers. 31

32 Requirements Basic requirements include: Account opening disclosures, change in terms notices, other provisions of Regulation Z that currently apply to credit cards 30 day waiting period after the prepaid account is registered before soliciting a consumer to link a covered separate credit feature Ability to repay analysis Consumer consent required Can move funds automatically from the asset account or other deposit account held by the issuer to offset some or all of the credit card debt no more frequently than 1 time per month (pursuant to the consumer s signed, written agreement that the issuer may do so) Must allow 21 days to repay Must provide periodic statements at least 21 days before the payment due date 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 to repay credit extended through a covered separate credit features Imposes Fee Limitations, including: fees in excess of 25% of the credit limit during the first year following the opening of a credit card account under an open-end (not home-secured) consumer credit plan 32

33 More information on 30-Day Waiting Period Issuers must not do any of the following for the first 30 days after prepaid account has been registered: Open a covered separate credit feature that could be accessible by the hybrid prepaid-credit card Make a solicitation or provide an application to open a covered separate credit feature that could be accessible by the hybrid prepaid-credit card Allow an existing credit feature that was opened prior to the consumer obtaining the prepaid account to become a covered separate credit feature accessible by the hybrid prepaid-credit card 33

34 What Does an Issuer do About Error Resolution? Transactions that exclusively draws separate credit feature Regulation Z s limitation of liability and error resolution procedures apply Transaction that solely debit a prepaid card s asset feature and do not draw on a covered separate credit feature Regulation E s liability limitations and error resolution procedures apply Transactions that both debit a prepaid card s asset feature and draw on a covered separate credit feature Regulation E s limitation of liability and error resolution procedures generally apply, with the exception of the error resolution procedures of (d) and (g) of Regulation Z, which apply to the credit portion of the transaction 34

35 Implementation General effective date of October 1, 2017 Delayed effective date of October 1, 2018 for submitting cardholder agreements to the Bureau Pull and replace of account packaging materials prepared in the ordinary course of business not required if initial disclosures are provided to consumers within 30 days of obtaining a consumer s contact information 35

36 Implementation 36

37 Implementation 37

38 Implementation (cont d) 38

39 Implementation 39

40 Summary Prepaid cards continue to grow to serve the underbanked, unbanked and the millennials. FDIC study released in October, 2016 confirms the continued growth. Industry reaction to the regulation mixed, and concerns are noted about the timing of the implementation. What is next Will prepaid be a checkless checking account? Industry is concerned about the ability to make the date and continue to supply product. Products that feature overdraft will most likely be discontinued in the short-term. Congress may assist the industry with legislative support. 40

41 Questions? Paul Tomasofsky President Two Sparrows Consulting, LLC (201)