Re. Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), Docket No.

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1 Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street N.W. Washington, DC Re. Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), Docket No. CFPB Dear Ms. Jackson: These comments are submitted on behalf of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness ( CCMC ). The U.S. Chamber of Commerce (the Chamber ) is the world s largest business federation, representing the interests of more than three million companies of every size, sector, and region. The Chamber created CCMC to promote a modern and effective regulatory structure for capital markets to fully function in a 21 st century economy. CCMC appreciates the opportunity to comment on the proposed rule issued by the Consumer Financial Protection Bureau (the Bureau ) regarding prepaid accounts. Prepaid products have been a great success story over the last decade. Usage has surged, permitting unbanked and underbanked Americans access to mainstream financial services and, thereby, full participation in an increasingly digital economy. Intense competition in the general purpose reloadable ( GPR ) card market has led to very favorable terms for consumers, with pass-through FDIC insurance, errorresolution rights, and clear disclosures of product costs now standard practice within the industry. Competition, coupled with existing state and federal regulation, likewise has ensured that payroll cards provide significant benefits for employees who otherwise would have to rely solely upon alternative financial services. Much of the Bureau s rule would confirm such industry best practices. We are not convinced of the need to require by rule what the marketplace already has

2 Page 2 provided for and likely will improve upon. Nonetheless, we recognize that a rule confirming these standards at least will not disrupt consumers use of these popular and safe products in a significant way. The proposal would go further, however. The Bureau would attempt to steer the future development of this product category by requiring disclosures that do not accurately describe prepaid products, deciding the product features that consumers may use, and imposing ill-fitting regulatory requirements on innovative products. This approach reflects both unwarranted doubt about consumers ability to select financial products in a responsible manner and misplaced suspicion of a product category that has allowed countless Americans to participate in the financial mainstream. We accordingly write to emphasize four points: The Bureau should permit a financial institution to convey an accurate picture of its prepaid products. The Bureau should not impose a de-facto ban on overdraft protections for prepaid products. The Bureau should support the use of payroll cards by underbanked and unbanked Americans. The Bureau should not sweep innovative financial services into an illfitting regulatory regime. (1) The Bureau should permit a financial institution to convey an accurate picture of its prepaid products. The Bureau imposes two new disclosure requirements on financial institutions through amendments to Regulation E. 1 First, a short form disclosure must be provided to consumers prior to their acquisition of a card. Second, a long form disclosure must be provided to consumers prior to acquisition in some contexts (e.g. 1 The term financial institution means a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services, other than a person excluded from coverage of this part by section 1029 of the Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law , 124 Stat Electronic Fund Transfers (Regulation E), 76 Fed. Reg , (Dec. 27, 2011). (The stated exception applies to auto dealers.)

3 Page 3 online) and made available by phone or online in other contexts (e.g. retail). 2 disclosure requirements should be amended in three key respects. These a. The Bureau should permit providers to describe their products accurately. The short form disclosures will be prominently displayed on the products and thus will be central to consumer decision-making. (In contrast, consumers are unlikely to review the long form disclosures. And the Bureau s own research confirms that, even if they do, consumers are likely to suffer information overload. 3 ) It thus is vital that any required short form disclosure provide an accurate description of the product. Because it would require the provision of incomplete and sometimes misleading information, the Bureau s proposal fails this test. The short form disclosure would require a financial institution to disclose only an enumerated set of fees, information and notices. 4 The enumerated fees are: (1) periodic fees; (2) per purchase fees (both with signature and with PIN); (3) ATM withdrawal fees (both in-network and out-of-network); (4) cash reload fees; (5) ATM balance inquiry fees; (6) customer service fees; (7) inactivity fees; and (8) incidencebased fees (the three most frequently incurred fees not otherwise listed). 5 Crucially, the Bureau also requires that, if a fee varies in different contexts, a financial institution must disclose the highest fee it could impose on a consumer for utilizing the service associated with the fee. 6 The Bureau permits the financial institution to add a symbol, such as an asterisk, to indicate that a lower fee might apply, and text explaining that the fee could be lower. 7 The Bureau effectively prevents such text from providing any meaningful detail, however, by requiring that a financial institution use the same symbol and text for all fees that could be lower. 8 Having required a disclosure that will fill the back of standard retail packaging, the Bureau then allows a financial institution to use any other part of the prepaid product s 2 The Bureau nominally gives financial institutions discretion to determine how to provide these disclosures. See Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), 79 Fed. Reg , (Dec. 23, 2014) ( Prepaid Proposal ). The Bureau establishes very specific disclosure requirements, however, including that they be substantially similar to the model forms created by the Bureau. The proposal thus effectively requires financial institutions to use these model forms. 3 See id. at See id. at (proposed 12 C.F.R (b)(2)(i)). 5 See id. (proposed 12 C.F.R (b)(2)(i)(B)). A financial institution also would be required to list the number of fees it may charge in addition to those enumerated fees. See id. at (proposed 12 C.F.R (b)(2)(i)(B)(10)). 6 Id. at (proposed 12 C.F.R (b)(2)(i)(C)). 7 Id. 8 Id.

4 Page 4 packaging material or its Web site to provide more detail about how a specific fee type may be lower. 9 Practically speaking, this treatment of fees ensures that consumers will see only a skewed representation of the prepaid product. 10 For example: A financial institution might offer a prepaid card with a $4.95 monthly fee that it waives if the customer uses direct deposit or maintains a certain balance. But the financial institution would not be able to explain the conditional availability of this zero-monthly-fee option in the short form disclosure. Rather, it would have to disclose a monthly fee of $4.95. A financial institution might decide to provide three free customer care calls a month, but to charge a $1.50 per call fee for additional calls. Or a financial institution might charge a fee for live access to a company representative, but not for access to an interactive voice response system. 11 Here, as before, the financial institution would have to disclose the highest possible fee without appropriate explanation. The Bureau s short form disclosure thus fails the basic test for any disclosure: it will give consumers a misleading and unduly negative impression of the card they are considering. 12 In doing so, it will minimize the significant advantages that a prepaid product holds over alternative financial services. This short form disclosure also will eliminate competition in a way that hurts consumers. Financial institutions compete on product features, but this competition depends on their ability to describe these features to consumers. Consider, for example, two financial institutions that offer prepaid cards with monthly fees of $4.95. Both would have to disclose that $4.95 monthly fee even if one actually waived the fee if a customer used a bill pay or direct deposit feature. That institution would not be able to convey that distinction within the mandatory short form disclosure that would drive consumer comparison shopping. As a result, the financial institution cannot meaningfully compete on this 9 Id. 10 The Bureau also proposes to require a financial institution to disclose the absence of FDIC or NCUSIF insurance, but to prohibit disclosure of the presence of such insurance. Id. (proposed 12 C.F.R. 1005(b)(2)(i)(B)(13)). Again, the Bureau s proposal will confuse consumers while reinforcing only potential concerns about a particular product, not its benefits. 11 See id. at (proposed 12 C.F.R (b)(2)(i)(B)(6)). 12 A consumer who is discouraged from using a prepaid product because of the short form disclosure will not see a long form disclosure inside retail packaging or have reason to visit an issuer s website to seek clarification.

5 Page 5 point. The most likely result: the financial institution would compete on other bases and eliminate the fee waivers. In this example, as in others, consumers ultimately would lose because of the misleading disclosures that the Bureau proposes to require. The Bureau thus should amend its proposal in a way that facilitates transparent competition on the basis of fair and accurate representations of prepaid products. The Bureau should not assume that consumers of prepaid cards will incur the highest fees all of the time. Instead, as the Bureau notes elsewhere, 13 it should recognize that consumers of prepaid cards often are acutely aware of fees for financial services and are likely to use these products in ways that limit fees. The Bureau thus should enable financial institutions to explain under what circumstances a fee may be waived. We believe that it can readily accomplish this goal without significantly changing the anticipated disclosure. Moreover, the CFPB could save space on the short form notice by removing one of the three per-incidence fees or (as we discuss next) the link to the Bureau s website. b. The Bureau should not force providers to include a link to the Bureau s website on their disclosures. The Bureau proposes to require financial institutions to include a link to the Bureau s website in both the short form and long form disclosures. 14 These requirements are misguided. Both will sow doubt in the minds of consumers and may push them towards less safe products. The proposal would require the short form disclosure to include a link to the Bureau s website. This proposal is troubling for two basic reasons. As an initial matter, the model form indicates that this link should be to cfpb.gov/prepaid. This is not an operating webpage, however, and likely would be changed in the future even if it were. It accordingly is impossible to comment on the wisdom of directing consumers to this particular Bureau webpage. More fundamentally, the Bureau should not inject itself into the purchasing process and thereby instill doubt in the consumer s mind about the safety of the product. Questions about the product should be directed to the financial institution in the first instance, not to a regulatory agency. 13 See id. at See id. at (proposed 12 C.F.R (b)(2)(i)(B)(14), pertaining to the short form disclosure); id. at (proposed 12 C.F.R (b)(2)(ii)(E), pertaining to long form disclosure).

6 Page 6 The proposal also would require the long form disclosure to include a link and a phone number that allows the consumer to submit a complaint about the product to the Bureau. Here, again, the Bureau should encourage consumers to raise issues with financial institutions rather than solicit complaints for its own database. Consumers ultimately will be far better served by efforts to support rather than displace financial institutions long-standing and successful customer care functions. The Bureau should focus on strengthening relationships between financial services companies and their customers, not undermining or displacing them. c. The Bureau should not use disclosure rules to discourage exclusivity agreements. The Bureau also seems to wish to use its disclosure proposal to discourage retailers over whom the Bureau lacks authority from choosing to sell only prepaid cards from one financial institution in their stores. The Bureau generally requires financial institutions that provide prepaid cards through retail stores to provide the short form disclosure before acquisition and to make the long form disclosure available online and by phone (but not formally provide it) before acquisition. 15 But apparently concerned that exclusivity agreements may harm consumers in some unidentified way, 16 the Bureau would require provision of the short form and long form disclosures pre-acquisition if a retailer agrees to sell the prepaid products of only one financial institution. As a result, such retailers would have to dedicate valuable space to providing burdensome paper disclosures that could discourage consumers from choosing prepaid cards. The Bureau identifies nothing in the record, however, to support its apparent assumptions that (1) exclusivity agreements harm consumers (as opposed to allowing the relevant institution to offer lower cost products); and (2) imposing an unworkable disclosure regime on cards subject to an exclusivity agreement would be an effective and fair response to this perceived harm. 17 Moreover, the Bureau lacks any legal basis 15 Id. at (proposed 12 C.F.R (b)(1)(ii)). 16 See id. at ( Retailers may not always have a broad selection of GPR cards that consumers can compare while in a particular store, because prepaid card providers can establish exclusive marketing arrangements that may prevent competitors cards from being sold in the same store. ). 17 The Bureau repeats this approach when it requires financial institutions only to disclose the absence of FDIC or NCUSIF insurance. See id. at (proposed 12 C.F.R (b)(2)(i)(B)(13)). There, as here, the Bureau seeks to accomplish a substantive goal (that retailers not enter exclusivity agreements and that funds be insured) through a disclosure policy. The Bureau also appears to take this approach in the prepaid context by requiring a disclosure that will discourage employees from receiving their wages on a payroll card. See id. at (proposed 12 C.F.R (b)(2)(i)(A)). We

7 Page 7 for its efforts to impose this requirement. It purports to do so on the theory that a retailer that enters an exclusivity agreement is an agent of the relevant financial institution. 18 But nothing in the Electronic Fund Transfer Act or Regulation E (which the Bureau amends here) indicates that a retailer could be an agent of the financial institution solely on this basis (even assuming that an agency relationship created some new authority in the Bureau). Indeed, an existing interpretation of Regulation Z acknowledges that questions of agency are determined under state law or contract, not federal law. 19 But the Bureau points to nothing in state law or in prepaid card exclusive marketing contracts that would create an agency relationship between the retailer and the financial institution. The Bureau thus should not purport to sweep retailers within the scope of this rule, but should observe Congress intent to exclude retailers from the Bureau s authority with respect to prepaid products. 20 (2) The Bureau should not impose a de facto ban on overdraft protections for prepaid products. The Bureau s proposal cites various figures demonstrating the remarkable success of general purpose reloadable (GPR) cards. An estimated $98 billion was loaded onto these cards in 2014, for instance, up from $1 billion in Competition among cards and with checking products likewise has ensured robust protections for users of these cards, rendering them a safe and reliable product for millions of Americans. They particularly have benefited unbanked and underbanked Americans. Often lacking the credit history necessary to hold credit cards or checking accounts, these Americans have used GPR cards as a safe and economical means to store their money, to make purchases, and to pay bills. GPR cards thereby have provided access to the financial mainstream to countless Americans. discuss below the value of payroll cards to employees and particularly to underbanked and unbanked employees and the importance of encouraging their use. 18 Id. at (proposed comment 18(b)(1)(ii)-1) ( A retail store that offers one financial institution s prepaid account products exclusively would be considered an agent of the financial institution and, thus, both the short form and the long form disclosure must be provided pre-acquisition pursuant to (b)(1)(i). ). 19 See Official Interpretation to 12 C.F.R (a)(7) (explaining that [b]ecause agency relationships are traditionally defined by contract and by state or other applicable law, the regulation does not define agent ), available at 20 See 12 U.S.C. 5481(15)(A)(v) (excluding a seller that does not exercise substantial control over the terms or conditions of the stored value provided to the consumer from the Bureau s authorities under the Consumer Financial Protection Act). Other statutes enforced by the Bureau also do not reach retailers here. See, e.g., 15 U.S.C. 1693a(9) (provision of the Electronic Fund Transfer Act defining a financial institution to include a State or National bank, a State or Federal savings and loan association, a mutual savings bank, a State or Federal credit union, or any other person who, directly or indirectly, holds an account belonging to a consumer ). 21 Prepaid Proposal, 79 Fed. Reg. at

8 Page 8 Consumer demand has shaped the structure of these products. Most notably, the vast majority of consumers have opted against products with overdraft protections. The Bureau notes, for example, that it appears that many consumers specifically seek to acquire prepaid products that do not offer overdraft services or credit features because they have had negative experiences with credit products, including checking accounts with overdraft features or want to avoid fees related to such products. 22 Likewise, the Bureau notes that financial institutions that issue prepaid accounts typically do not earn their revenue from back-end overdraft fees or NSF fees, 23 and, accordingly, that revenue from overdraft services does not appear to have significantly influenced the pricing structure of prepaid products. 24 And the Bureau recognizes that the cards that offer overdraft protections occupy only a small niche in the overall market. 25 The Bureau nonetheless plans to impose a de facto ban on overdraft protections (or other credit features) for prepaid products. 26 This element of the proposal is a solution in search of a problem and should be abandoned. The Bureau continues to pursue a longstanding review of the use of overdraft products in connection with depository products. 27 To date, the Bureau has not taken regulatory action to limit those overdraft products and would be incorrect to do so. But the Bureau has concluded that overdraft protections must not be offered in connection with prepaid products. This would make it harder for prepaid products to compete with checking products in the future by preventing the development of a category of overdraft-protected products for consumers who want them. The Bureau s rationales for doing so do not withstand scrutiny. The Bureau clearly prefers the statutory regime applicable to credit cards, including various provisions of the CARD Act and the Military Lending 22 Id. at Id. at Id. 25 See id. at ( [T]he Bureau understands that approximately 205,000 consumers currently have a form of overdraft protection on their GPR and payroll cards. ). 26 The Bureau purports not to follow recommendations to ban overdraft. See id. at Were the proposal to be finalized, however, it would no longer be possible to allow a customer to overcharge his or her prepaid account and charge an associated fee. Any such purported credit feature would transform a prepaid card into a credit card and subject it to different regulatory requirements. The Bureau thus effectively proposes to ban overdraft for prepaid products. 27 See, e.g., Consumer Financial Protection Bureau, CFPB Study of Overdraft Programs (June 2013), available at

9 Page 9 Act, but points to no statement by Congress indicating that it believes that overdraft protection is equivalent to a credit card. 28 The Bureau relies on differences between paper checks and prepaid cards as one justification for its rule, but does not explain why overdrafts incurred as a result of debit card transactions should be treated differently. 29 The Bureau relies heavily on the fact that many prepaid products do not offer overdraft protections as a basis for assuming that consumers would be confused and not realize that a prepaid product has an overdraft feature. 30 But any such lack of understanding could be corrected through the type of disclosures that the Bureau contemplates. The Bureau believes that certain consumers should be protected from overdraft protections for a prepaid card. But the Bureau does not explain why consumers who have experienced difficult[y] managing overdraft services on traditional checking accounts and who generally vary, in some degree, from users of traditional deposit products would opt for prepaid cards with features of traditional deposit products, such as overdraft protections. 31 The Bureau also justifies its decision effectively to eliminate overdraft protections on the basis that no prior regulation has previously spoken to overdraft protection for prepaid products. 32 But the presence of a largely blank slate does not give a federal regulator carte blanche to do as it sees fit. The Bureau, moreover, fails to consider the substantial practical challenges associated with its proposed de facto ban on overdraft protections for prepaid cards. Notably, this de facto ban reaches inadvertent overdrafts, which can occur in situations including: 28 See, e.g., Prepaid Proposal, 79 Fed. Reg. at See id. at Id. at Id. at Id. at

10 Page 10 Pre-authorized transactions in which the final purchase amount is not known at the time of the authorization request (e.g., buying gas at the pump, a restaurant bill before the tip is added, hotel bills to which incidental charges may be added, renting a car, etc); Merchant disputes in which a customer is granted a provisional credit that is reversed after the dispute is resolved in the merchant s favor; and Stand-in transactions that allow certain authorizations when regular authorization systems are down. Unless the proposal is amended, its effect will be to change the current transaction experience for prepaid cards users for the worse. Prepaid users likely will have to stop paying at the pump, for example, and otherwise will see the convenience and utility of their cards diminished. The Bureau nonetheless has decided that consumers will be better off if they do not have prepaid cards with overdraft protections. To reach that result, it would reinvent traditional overdraft protections as credit and would transform prepaid cards that offer such protections into credit cards. These contortions are as unwise as they are unnecessary. The Bureau should wait to see whether a significant subcategory of prepaid cards with such protections develops and whether any issues arise that justify further regulatory action. Failing that, the Bureau should have confidence in the ability of informed consumers to identify the products they want and need, rather than in its own ability to shape consumer needs and preferences in the future. At a minimum, the Bureau should not proceed with this aspect of the proposal without explaining how consumers who want access to overdraft products will benefit from their being effectively banned. The docket for this proposal already contains many comments describing the value of overdraft services to the relatively small number of prepaid consumers who use them. These consumers describe how overdraft protection can be helpful at moments of financial distress. If it becomes unavailable, what alternatives would the CFPB direct consumers to?

11 Page 11 (3) The Bureau should support the use of payroll cards by underbanked and unbanked Americans. a. Payroll cards have been a success story for employees and employers. The last ten years has seen a surge in the popularity of payroll cards, particularly among unbanked and underbanked employees. 33 They help replace inefficient payments by paper check and provide significant benefits for employees. These include: Availability: Unlike opening a bank account, employees are not barred from receiving wages on a payroll card because of unfavorable financial history. Cost savings: Payroll cards have a lower cost structure than many alternative financial services. Check cashing charges, for example, can range from 2% to 5% of the value of a paycheck. 34 Convenience: Wages are added directly to a card on payday, allowing the cardholder to withdraw his or her wages from an ATM or to make purchases immediately. Direct payment also ensures that a worker receives his or her pay even after leaving the employer or changing a mailing address. Safety: It is far safer to store funds on a payroll card than for workers to cash, carry, and store the full value of their paychecks. The elimination of paper checks likewise reduces the threat of identity theft. Card replacement: Unlike cash, payroll cards can be replaced without loss of funds. Economic inclusion: Payroll cards allow cardholders to perform financial transactions paying a gas or phone bill, ordering medicine over the phone, applying for a passport quickly and easily. Such transactions are 33 See, e.g., Aite Group, Report Summary, Madeline K. Aufseeser, The Contenders: Prepaid Debit and Payroll Cards Reach Ubiquity (Nov. 2012) (predicting 20% annual growth rate for payroll cards until 2017), available at Center for Financial Services Innovation, Eva Wolkowitz, Financially Underserved Market Size Study 2012, at 3 (Dec. 2013) (describing payroll cards as the fastest growing product category in financially underserved market), available at 34 See, e.g., Use of Financial Services by the Unbanked and Underbanked and the Potential for Mobile Financial Services Adoption, 9/24/12 Fed. Res. Bull., 2012 WLNR

12 Page 12 enormously time consuming for a person relying on cash payment, particularly if it proves necessary to get a money order or if payment must be made in person. In all, payroll cards offer many Americans the opportunity to participate more fully in our nation s economy and to develop wealth for themselves and their families. Payroll cards also are well regulated. Effective 2007, the Federal Reserve subjected payroll cards to the standards for electronic transfers provided by Regulation E. This benefited employers and issuers by substantially reducing regulatory uncertainty, and it benefited employees by ensuring choice of financial institution; 35 disclosure of fees; access to account history; application of limited liability protections; and error resolution rights. The Bureau has reaffirmed the application of Regulation E to payroll card accounts, ensuring that these protections remain enforceable by both relevant agencies and injured consumers. 36 The Federal Deposit Insurance Corporation ( FDIC ) also has acted on payroll cards. In 2008, it concluded that payroll card accounts were eligible for insurance on a pass-through basis if the issuer held the funds in custodial bank accounts, did not own those funds, and maintained accurate records indicating ownership of the funds. 37 Almost all of the leading payroll card providers now protect payroll card owners with FDIC insurance up to $250,000. These federal regulatory actions complement the protections provided by state wage and hour laws. 38 The vast majority of those laws now allow employees to 35 EFTA prohibits requiring an employee to establish an account for receipt of electronic fund transfers with a particular financial institution as a condition of employment. See 15 U.S.C. 1693k(2). The federal government applied this rule to payroll cards by including payroll card accounts in the definition of account. See Final Rule, Electronic Fund Transfers, 71 Fed. Reg , (Aug. 30, 2006). 36 See CFPB Bulletin , Payroll Card Accounts (Regulation E) (Sept. 12, 2013), available at See also 15 U.S.C. 1693m (providing private right of action); id. 1693o (providing for administrative enforcement). 37 The FDIC concluded that the underlying funds were deposits within the meaning of the Federal Deposit Insurance Act, and thus insurable, to the extent that they were held at an insured institution and the standards for pass-through insurance were met. See General Counsel s Opinion No. 8, Insurability of Funds Underlying Stored Value Cards and Other Nontraditional Access Mechanisms, 73 Fed. Reg , (Nov. 13, 2008). The National Credit Union Administration similarly insures accounts associated with payroll cards issued by federal credit unions. 38 These federal regulations also have been complemented by other regulatory action and guidance from other federal agencies, ranging from the application of federal bank secrecy law, see Financial Crimes Enforcement Network, Final Rule, Bank Secrecy Act Regulations Definitions and Other Regulations Relating to Prepaid Access, 76 Fed. Reg (July 29, 2011), to guidance from the Office of the Comptroller of the Currency regarding how banks can reduce their compliance risk in the offering of these products, see Comptroller of the Currency, OCC Advisory Letter, AL , Payroll Card Systems (May 6, 2004).

13 Page 13 choose to receive their wages on a payroll card. Importantly, these laws generally require that an employee has full access to his or her wages without imposition of fees whether in a branch, through an ATM, by using convenience checks, or through other means at least once per pay period without charge. 39 b. The Bureau should revise its proposal to reflect the benefits of payroll cards. The Bureau s proposal appears driven by an unduly skeptical view of payroll cards. The Bureau should reverse this view and make three basic changes to its proposal to encourage the use of payroll cards. 40 First, the Bureau should amend the required disclosures so that they provide a fair and reasonable description of the products. It should apply the general changes discussed above relating to GPR cards. Moreover and most importantly the Bureau should either remove or substantially edit the mandatory disclosure that would sit at the top of the short form disclosure. We understand the Bureau s interest in ensuring that employees know that they are not required to receive their wages on a particular payroll card. However, the Bureau s choice of phrasing in the model form You do not have to accept this payroll card. Ask your employer about other ways to get your wages has a very negative tone and will instill undue alarm in employees. 41 This approach could lead to employees who would benefit from using payroll cards choosing instead to receive paper checks that are riskier and more expensive for the underbanked and unbanked. 42 We accordingly recommend either that the Bureau remove this statement or change it to a neutral phrasing that emphasizes the employee s right to choose among different means of receiving their wages. For example, it could provide: You have choices about how to receive your wages. This payroll card is one of your options. Second, the Bureau should clarify the meaning of acquisition of a payroll card. Many such cards are provided to employees, along with a disclosure packet, as 39 See, e.g., Cal. Lab. Code The Bureau surprisingly declares that [p]ayroll cards are just one type of the network-branded open-loop prepaid products consumers may receive from third parties that disburse funds to consumers by loading the funds onto such accounts. Prepaid Proposal, 79 Fed. Reg. at But surely the Bureau recognizes the significant differences between payroll cards and GPR cards. Payroll cards serve different purposes than GPR cards. As discussed above, these payroll cards also already are subject to different state and federal statutes and regulations than GPR cards. We accordingly recommend that the Bureau treat payroll cards as a distinct product category under its proposal. See, e.g., id. at (proposed 12 C.F.R (a), providing a separate section for electronic fund transfer of government benefits ). 41 See id. at (proposed 12 C.F.R (b)(2)(i)(A)). 42 Such a shift to paper checks also would impose substantial costs upon employers.

14 Page 14 they complete the paperwork at the beginning of their employment. While an employee thus may have acquired the physical card during the very first moments of his or her employment, the card remains a meaningless piece of plastic until the employee decides to receive his or her wages on it. The Bureau can accomplish its purposes by requiring that disclosures be provided to potential users of a payroll card prior to an employee s decision to receive wages on the card. The Bureau accordingly should clarify in any final rule that a financial institution must provide the relevant disclosures in advance of that decision, not prior to receipt of a physical card. Third, the Bureau should abandon its plans to require submission of each customer agreement to the Bureau and publication of each agreement on the websites of both the Bureau and the institution. The Bureau recently proposed pausing its receipt of credit card agreements 43 and should not expand those efforts to cover any of the cards covered by this proposal. That principle applies with particular force to payroll cards because an employee cannot choose the payroll card offered by his or her employer. Comparison with other payroll cards and certainly with GPR cards that have a substantially different fee structure thus is unlikely to be valuable for employees. (The same is true of government benefits cards.) The Bureau s proposal also is likely to be particularly burdensome for an issuer of prepaid cards, who may manage hundreds of individual programs. Accordingly, financial institutions instead should be required to make a copy of the current card agreement available on the institution s website after a consumer logs in to his or her account. (4) The Bureau should not sweep innovative financial services into an ill-fitting regulatory regime. The Bureau proposes a broad definition of prepaid account in an apparent effort to maximize the sweep of its rule. 44 In so doing, the Bureau seemingly captures a host of innovative financial services within the scope of the proposal, ranging from certain mobile wallets to virtual currencies (and as yet unknown future products). The Bureau does so without the benefit of a meaningful record and without a theory of which types of products should be subject to its rule, how its requirements should apply, and whether the benefits of its rule outweigh the costs in that context. Instead, the Bureau twice summarizes its views with the following statement: 43 See Submission of Credit Card Agreements Under the Truth In Lending Act (Regulation Z), 80 Fed. Reg (Feb. 26, 2015). 44 See Prepaid Proposal, 79 Fed. Reg. at (proposed 12 C.F.R (b)(3)(i)).

15 Page 15 The Bureau also recognizes that the proposed rule may have potential application to virtual currency and related products and services. As a general matter, however, the Bureau s analysis of mobile financial products and services, as well as and virtual currencies and related products and services, including the applicability of existing regulations and this proposed regulation to such products and services, is ongoing. 45 The Bureau thus effectively reserves to itself the right to regulate now but to determine what its proposal means later. This is no way to make regulatory policy. Any regulation in this field is premature until the Bureau can identify the digital products it plans to cover with some reasonable degree of specificity and can explain how the regulatory regime it proposes will fit those products (and not burden them with misplaced and ill-fitting requirements). As we explained in our response to the Bureau s earlier request for information regarding mobile financial services, 46 we are concerned by the Bureau s apparent belief that innovation is a threat to consumers. We believe that innovation will be a very significant driver of consumer benefit in the financial services marketplace. Nor are we alone in that view Congress itself tasked the Bureau with supporting innovation in the financial services marketplace. 47 The Bureau will not meet that mission if it imposes substantial new regulatory regimes on innovative financial services while explaining that even the Bureau does not know when and how that regime will apply. The almost certain result of such an approach will be the chilling of innovation and the shift of investment to other markets. We accordingly urge the Bureau to add appropriate exclusions to its proposal so that it only applies to prepaid cards. If the Bureau insists on regulating beyond that clearly defined scope, we urge it to provide a clear analysis of the bounds of its regulation (including whether it would and should stray into other product categories such as payment processors) and a clear statement of its costs and benefits in the context of innovative financial products. 45 See id. at 77121, Separately, the Bureau clarifies that it does not intend for its rule to cover products that do not actually hold funds. See id. at (proposed comments 2(b)(3)(i)-4 and 2(b)(3)(i)-5). 46 See Letter from Jess Sharp to Monica Jackson at 7, Re. Request for Information Regarding the Use of Mobile Financial Services by Consumers and its Potential for Improving the Financial Lives of Economically Vulnerable Consumers, Docket No. CFPB (Sept. 10, 2014). 47 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 1021(b)(5), 124 Stat. 1376, 1980 (2010) (identifying as an objective of the Bureau to exercise its authorities in a way that ensures that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation ).

16 Page 16 Prepaid products have been a great success story for consumers over the past decade. The Bureau should encourage the further adoption of these safe products by amending its proposal to allow well-informed consumers to select the products they want. An alternative approach that substitutes the judgment of the Bureau for consumers informed decisions will have harmful unintended consequences, most notably pushing consumers away from these products to riskier alternative financial services. However the Bureau decides to proceed, we would urge it to provide an adequate implementation period between finalization of its rule and its effective date. The new regulatory regime proposed by the Bureau would require the various providers (e.g. issuers, acquirers, etc.) to make changes at each step of the prepaid transaction chain to ensure a compliant transaction. For example, because of the overdraft rules, issuing banks may require merchants to block pre-authorization transactions (e.g. payment at the pump) so that the full requested amount can be accurately authorized. Such significant changes require coordination, planning, implementation, and testing. They must be accomplished without disrupting customers use of existing prepaid cards or merchants receipt of payments. The Bureau accordingly should provide at least an 18-month implementation period for any final rule along the lines of its proposal. We thank you for your consideration of these comments and would be happy to discuss these issues further with appropriate staff. Sincerely, Jess Sharp Managing Director