CFPB Proposed Rule on Prepaid Accounts. NACHA PAYMENTS 2016 April 20, 2016

Transcription

1 CFPB Proposed Rule on Prepaid Accounts NACHA PAYMENTS 2016 April 20, Network Branded Prepaid Card Association

2 Who We Are EDUCATE. ADVOCATE. PROTECT. PROMOTE. The NBPCA is a nonprofit trade association representing a diverse group of organizations that support network branded prepaid cards and other forms of prepaid access used by consumers, businesses, and governments. Members include prepaid access providers and sellers; financial institutions; card manufacturers; payment networks; processors; program managers; marketing and incentive companies; card distributors; and legal and media firms. What We Do Educate - Consumers, government, businesses, 3 rd parties, and media Advocate - Leading practices for various categories of prepaid products Protect - Consumer choice for a fully featured, and competitive product set Promote Positive benefits of prepaid to all audiences and customers including consumers, government, businesses, 3 rd parties and media 2

3 The views of the presenter(s) should not be attributed to their respective firm or organization. The content of this presentation is designed to provide practical information concerning the subject matter covered and is provided with the understanding that none of the presenter(s) are rendering legal advice or other professional services. This presentation is for informational purposes only and is not a substitute for legal advice or your professional judgment. You should review applicable law in your jurisdiction and consult experienced counsel for legal advice. 3

4 AGENDA Timeline Overview Scope of Prepaid Account Provisional Credit and Unregistered Accounts Limitation of Liability Disclosures Agreement Posting Requirements Transaction History Requirements Overdraft and Credit Features (Reg. Z) Effective Date CFPB Enforcement Activity 4

5 TIMELINE CFPB held a Field Hearing in Wilmington, DE on November 3, 2014 NPRM published on December 23, 2014 and comments were due on March 23, pages long According to a CFPB Blog, the Final Rule is expected in spring 2016, while the regulations.gov website list March 2016 as the expected release date. The CFPB obviously didn t meet the March 2016 date but it could still meet the Spring 2016 date. As a result, we are waiting for the Spring 2016 Rulemaking Agenda to determine the new timeline (released during 3 rd week of May last year) 5

6 OVERVIEW Applies Reg. E Lite to greatly expanded definition of Prepaid Accounts Scope of Proposed Rule is much broader than just GPR cards (compare to 2012 ANPR) Reg. E Lite currently only applies to Payroll Cards and non-needs tested Government Benefit Cards Creates a uniform disclosure regime for prepaid accounts Short form and long form fee disclosures required prior to acquisition of a prepaid account Requires issuers to submit cardholder agreements to the CFPB for posting to its website Stated purpose was for comparison shopping by consumers, but this is hard to reconcile for Payroll Cards, Government Benefit Cards, Student Cards and other products where the consumer doesn t have the ability to choose among providers 6

7 OVERVIEW CONT D Does not cap fees charged for prepaid accounts but restricts certain fees (e.g., free access to transaction history) Applies Reg. E s limitation of liability and error resolution provisions to prepaid accounts when a consumer has been registered/verified Restricts overdraft & credit features associated with prepaid accounts Revised definitions of credit card and finance charge are extremely broad Addresses overdraft on prepaid accounts differently than traditional bank accounts (DDA) Requires compliance with Reg. Z 7

8 Definition: SCOPE OF PREPAID ACCOUNT Card, code or other device (very broad; includes mobile & virtual products) That do not already fall under the general definition of account in Regulation E Primarily for personal, family, or household purposes (interpreted very broadly) Issued on a prepaid basis in specified amount or capable of being loaded with funds after issuance Meets any 1 or more of the following. Allows: Purchases at multiple, unaffiliated merchants ATM Transactions P2P or P2B Transactions 8

9 EXAMPLES OF INCLUDED PRODUCTS General Purpose Reloadable cards Payroll Cards Govt. Benefit Cards (nonneeds tested) Non-reloadable prepaid cards Mobile wallets (open loop) which store funds ATM-only cards Reload packs (closed loop) Reload packs (open loop) Bill payment accounts P-2-P and P-2-B remittance accounts 9

10 EXCLUSIONS TO DEFINITION OF PREPAID ACCOUNT 1. Health savings account, flexible spending account, medical savings account, and health reimbursement arrangement 2. Debit card, DDA, checking, savings or other consumer asset account already defined as an account under Reg. E 3. Store Gift Card & Gift Certificate, as defined in Gift Card Rule (closed loop) 4. Loyalty, Award or Promotional Card, as defined in Gift Card Rule (LAP) 5. General-Use Prepaid Card (as defined in Gift Card Rule) that is both marketed and labeled as a Gift Card or Gift Certificate 10

11 PROVISIONAL CREDIT & UNREGISTERED ACCOUNTS For all prepaid accounts (other than payroll accounts and non-needs tested government benefits accounts), error resolution rights and limitation of liability do not apply if: FI provides a Registration Warning Notice (substantially similar ); and Consumer hasn t registered IMPORTANT: You must allow the consumer to register and after consumer has registered (including verifying identity), you must limit their liability, even for non-cip req d programs Did CFPB intend to require a de facto registration process? Preamble suggests that CFPB assumed that all prepaid accounts will be subject to CIP/KYC requirements Given the broad scope of the definition of Prepaid Account, this assumption is not correct REGISTRATION WARNING NOTICE It is important to register your prepaid account as soon as possible. Until you register your account, we are not required to research or resolve errors regarding your account. To register your account, go to [Internet address] or call us at [telephone number]. We will ask you for identifying information about yourself (including your full name, address, date of birth, and [Social Security Number] [governmentissued identification number]), so that we can verify your identity. Once we have done so, we will address your complaint or question as set forth above. 11

12 LIMITATION OF LIABILITY/ ERROR RESOLUTION Reg. E Lite (providing electronic transaction history in lieu of mailed periodic statements) 60 day period for reporting unauthorized transfers commencing on date: Consumer electronically accesses account FI sends written history upon consumer request Safe Harbor: 120 days after date of transaction/transfer If oral complaint, may require written follow-up within 10 Business Days. If you do not receive written follow-up, you don t have to credit account. Must investigate and determine whether error occurred within 10 Business Days. Provide provisional credit within 10 Business Days for old accounts and 20 Business Days for new accounts and take up to 45 calendar days to investigate. May take up to 90 days to investigate for errors re: new accounts, POS or foreigninitiated transaction. Must inform consumer of results within 3 Business Days after completing investigation. If no error, you must send written explanation. 12

13 DISCLOSURES GENERALLY Types of Disclosures: Short Form Disclosure Long Form Disclosure Formatting Requirements: Specific Format Requirements (font size, type and color) Variety of Model Form Disclosures Disclosure Timing: Online & Non-Exempt Retail Acquisition Methods: Short Form & Long Form must be provided pre-acquisition Telephone & Exempt Retail Acquisition Methods: Short Form must be provided pre-acquisition Long Form may be provided post-acquisition 13

14 SHORT FORM DISCLOSURES Static Fees (7 required) Periodic fees, if any Per-purchase fees ATM withdrawal fees Cash reload fees ATM balance inquiry fees Customer service fees Inactivity fees Incidence-based Fees Up to 3 fees not otherwise disclosed which were incurred most frequently in prior 12-month period for that prepaid account product Annual analysis Any updates required based on change of incidence based fee usage only applies to new packages and not existing inventory For any ATM fees, you are required to list both in-network and outof-network fees. 14

15 SHORT FORM DISCLOSURES CONT D Other Required Terms: Statement regarding whether overdraft or credit related fees may apply Statement regarding number of all other fees (not listed) that could apply Statement that consumer must register card to protect funds CFPB s website for prepaid cards Phone number and website to access the Long Form If applicable, a statement that the product is not FDIC or NCUSIF insured 15

16 SHORT FORM DISCLOSURES COMPULSORY USE WARNING AND HIGHEST FEE Compulsory use warning for Payroll Cards and Government Benefit Cards If any fee types varies, must disclose the highest possible fee PAYROLL CARD WARNING You do not have to accept this payroll card. Ask your employer about other ways to get your wages. GOVERNMENT BENEFIT CARD WARNING You do not have to get your payments on this prepaid card. Ask about other ways to get your payments. 16

17 LONG FORM DISCLOSURES Must include all fees associated with prepaid account and explanation of how they are imposed, waived, or reduced Includes third party fee amounts, to the extent known Fees must be organized by categories of function, e.g., Get Started, Get Cash, Spend Money Reg. Z disclosures if you offer overdraft or credit features Issuer or Program Manager Phone, Website & Address Existence of FDIC Insurance CFPB Phone Number & Website 17

18 LONG FORM DISCLOSURES: TIMING General Rule Online & Non-Exempt Retail = Short & Long Forms pre-acquisition Telephone & Exempt Retail = Long Form post-acquisition Exempt Retail vs. Non-Exempt Retail Exempt Retail: Brick & Mortar. Retail store must be a place that the consumer can acquire the account in person. Physical Device. The consumer must acquire physical access device at store. Non-Exempt Retail: Bank Issuer. A location operated by the financial institution; Bank Agent. A location operated by an agent of the financial institution; or Exclusive Retailer. A location that offers one financial institution s prepaid account products exclusively. The Bureau does not believe consumers would necessarily benefit from receiving only this long form disclosure before acquiring a [P]repaid [A]ccount... In the Bureau s testing, for example, many participants reported feeling overwhelmed by the amount of information included on a prototype long form and they struggled to compare two long form disclosures, even those that listed identical fee types. - CFPB 18

19 LONG FORM DISCLOSURE: RETAIL STORE EXCEPTION What does exclusively mean? Does it require that there be a written exclusivity provision in the agreement? Or is the retail store automatically considered exclusive if it just happens to sell one FI s prepaid accounts? What if retail store sells competing products with different brands and program managers, but both are issued by same issuing bank? What if retail store just starts selling these types of products and doesn t have more than 1 type of product in stores for certain period of time? What if a retail store sells products from 2 issuers, but 1 gets pulled from shelf? Does other issuer now have to ensure long form disclosure is provided? Merchandizing concerns, tracking inventory nightmare Why should exclusive sellers be handled differently? The same rationale for providing an exception to the delivery of a written long form disclosure applies. IMPORTANT: Focus is on whether store sells one financial institution s prepaid accounts exclusively. Gift cards and other excluded prepaid products are not considered. 19

20 AGREEMENT POSTING REQUIREMENTS The Proposed Rule requires issuers of Prepaid Accounts to post cardholder agreements on the issuers websites (or make them available upon request in limited circumstances) and to submit those agreements quarterly to the Bureau for additional posting. The primary benefit cited by the bureau is to facilitate comparison shopping for consumers. This is hard to reconcile for products where consumer choice regarding a particular product being offered is not available such as Payroll Cards (program selected by employer) and Government Benefit Cards (program selected Government agency). 20

21 TRANSACTION HISTORY REQUIREMENTS Free access to 18 months transaction history (compared to existing 60 day requirement under Reg. E) Instead of the rolling transaction/fee history currently required under Reg. E, the Proposed Rule requires the issuer to separately track all fees, deposits and debits to the account on a monthly and year-to-date basis The new requirements are much closer to bank statement requirements 21

22 OVERDRAFT & CREDIT FEATURES; CHANGES TO REG. Z Proposed Rule Applies protections from TILA and Reg. Z Modifies Reg. Z definition of credit and finance charge to capture prepaid accounts where credit extensions are pulled by or pushed to such accounts Pulled Credit = credit that is pulled by the prepaid card to fund a purchase (treats discretionary overdraft features for prepaid as credit - different than treatment for DDAs) Pushed Credit = credit that is pushed into the prepaid account such as micro line of credit where lender provides credit through a separate account number and where the lender directs the funds to be deposited into a specific prepaid account. Narrow Exemption Amends Reg. Z definition of card issuer to exclude persons that issue a prepaid card that accesses credit not subject to any finance charge or fees and not payable in more than 4 installments IMPORTANT: It is not sufficient to exclude finance charges only you must also exclude fees that do not constitute finance charges (e.g. reasonable debt collection costs). 22

23 FORCE-PAY TRANSACTIONS A force-pay transaction occurs when a prepaid account settlement processed through the applicable card network exceeds the amount of the authorization, and brings the account balance below zero. One example occurs when a settled restaurant transaction exceeds the authorization because of the amount of the tip. Another example occurs when a pay-at-the-pump transaction is initially pre-authorized for a nominal amount to ensure that it is a valid card and the settlement amount exceeds the preauthorization amount. As a result of the new definition of credit coupled with the new definition of finance charge in the Proposed Rule, any force-pay transaction could potentially convert a prepaid account into a credit card under the Proposed Rule. 23

24 EXTENDS CREDIT CARD PROTECTIONS FROM REG. Z Issuers of prepaid accounts that have overdraft or credit features must: Conduct ability to repay analysis and credit underwriting; prohibited from opening if not creditworthy Provide monthly periodic statements 21 days prior to payment due date Provide at least 21 days to pay amounts owed in connection with credit feature before charging late fee Total fees ( vs. periodic interest rates) cannot be more than 25% of initial credit limit in first year (a few fees excluded) Cannot increase interest rate unless cardholder has missed two consecutive payments Provide at least 45-day notice of rate increase Can move funds automatically from prepaid account to credit account (i) no more than once a month, and (ii) only if consumer signs written consent. Must offer other means to repay. Issuer must wait at least 30 days after consumer registers a prepaid account before offering or linking a credit feature to the prepaid account (new requirement in Reg. E; not currently in Reg. Z) 24

25 EFFECTIVE DATE With certain exceptions, nine months after publication in the Federal Register. If the account and its packaging material were printed prior to the proposed effective date, the issuer is permitted to continue selling prepaid accounts that do not comply with the final rule s preacquisition disclosure requirements for a period of 12 months after publication in the Federal Register. Most industry commenters have requested a time period between 18 months and 24 months for implementation. Some of the necessary implementation steps would include: Update card packaging and websites at same time as industry-wide EMV card roll out; Perform software development necessary to calculate transactions and fees in the manner described in the Proposed Rule; and Update operational processes necessary to comply with proposed rule 25

26 CFPB ENFORCEMENT ACTIVITY Increased use of enforcement authority FY public enforcement actions FY public enforcement actions FY public enforcement actions January 2012 December public enforcement actions Larger civil money penalty totals FY $185m FY $77m FY 2013 $49m FY 2012 $32m 26

27 CFPB ENFORCEMENT ACTIVITY CONT D Dwolla Enforcement Action First CFPB enforcement action regarding data security practices and one of the first enforcement actions against a Fintech company On March 2 nd, CFPB ordered Dwolla to pay a $100K civil monetary penalty and fix its security practices In this case, a security breach didn t occur The CFPB found, among other issues, that Dwolla misrepresented its data-security practices by falsely claiming: Its data security practices exceed or surpass industry security standards; and Its information is securely encrypted and stored 27

28 CFPB ENFORCEMENT ACTIVITY CONT D Dwolla Enforcement Action cont d Under the Consumer Financial Protection Act, a wide variety of financial laws were transferred from various agencies to the CFPB However, Congress specifically carved out pre-existing data security standards of federal consumer financial laws from the scope of the CFPB s authority including: GLBA data security requirements Red flags under FCRA Through this case, the CFPB has effectively asserted that its UDAAP authority extends to data security 28

29 CFPB ENFORCEMENT ACTIVITY CONT D PHH Corporation v. CFPB Administrative Law Judge (ALJ) assessed a $6M disgorgement penalty for a RESPA violation On initial appeal by PHH, CFPB Director Cordray upheld the ALJ decision, but imposed a significantly larger $109M disgorgement penalty PHH then appealed to the Court of Appeals for the DC Circuit According to PHH, Cordray's ruling clashes with almost 20 years of RESPA interpretation by HUD, which formerly administered RESPA, the CFPB's own rules, and the clear language of the statute 29

30 CFPB ENFORCEMENT ACTIVITY CONT D PHH Corporation v. CFPB cont d Although RESPA sets a three-year statute of limitations, the CFPB took the position that no statute of limitations applies when the CFPB enforces RESPA through an administrative action rather than a court proceeding Under the Dodd-Frank Act, the CFPB retains the choice of enforcement method administrative proceeding or court proceeding The CFPB argued that Director Cordray was entitled to deference under the Chevron Doctrine If the larger disgorgement penalty is upheld, then it will impose a chilling effect on anyone considering an appeal of a CFPB ALJ decision 30

31 QUESTIONS???

32 Brad Fauss NBPCA Chris Daniel Paul Hastings LLP Karen Garrett Stinson Leonard Street LLP Nicole Ibbotson InComm