Cheat Sheet: Details of the CFPB's Sweeping Plan to Regulate Prepaid Cards

WASHINGTON — The Consumer Financial Protection Bureau is set to go beyond industry expectations when it unveils a long-awaited proposal Thursday that would establish new requirements for prepaid cards.

The agency's plan, released to the media a day early, is sweeping, covering anticipated areas like the need for better disclosures, while also branching into other terrain such as a cap on how much consumers would pay if their prepaid funds were stolen or the card was lost.

The proposal would also require card issuers to provide consumers with "easy and free access" to account information about the card. Additionally, the plan would apply not just to traditional plastic prepaid cards, but cover a whole range of other prepaid card accounts, including mobile, peer-to-peer payments, payroll, student financial aid and certain government benefits.

"Consumers 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," said CFPB Director Richard Cordray in a press release. "Our proposal 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."

One key element of the proposal is the idea that prepaid card issuers must adhere to other existing credit card protections established under the Truth in Lending Act and Credit Card Accountability Responsibility and Disclosure Act if they offer a credit product in connection with a prepaid account.

That would effectively mean that some prepaid cards will fall under requirements to verify a consumer's ability to repay before credit is extended, as well as limitations on interests and fees.

The plan also spells out a number of other requirements for prepaid accounts, including:

• Prepaid companies must give consumers at least 21 days to repay their debt tied to a prepaid card before charging a late fee that is "reasonable and proportional" to the violation of the account terms.
• The total fees for a prepaid credit during the first year an account is open cannot exceed 25% of the credit limit. The interest rate on new purchases can be increased but companies should give consumers 45 days advance notice in which the consumer can cancel the account during that time.
• Companies cannot offer another credit product until the consumer has first registered the prepaid account for 30 days.
• Prepaid companies are restricted from automatically moving funds from a prepaid account to repay another debt unless the consumer has "affirmatively" allowed it. In such a case, the company cannot withdraw funds more than once per month.

Overall, prepaid card issuers would also be required to investigate and quickly resolve errors.
"Currently, prepaid customers who are double-charged for a transaction or charged an incorrect amount may not be guaranteed a practical way to fix the problem. This proposal would require financial institutions to investigate errors that consumers report on registered accounts and to resolve those errors in a timely manner," the CFPB said in its press release. "If the financial institution cannot resolve an alleged error within a certain period of time, it would be required to temporarily credit the disputed amount to the consumer to use while the institution finishes its investigation."

Consumers also get added protections through the proposal if there is fraudulent activity on their card. The CFPB is proposing that consumers be responsible for no more than $50 of the unauthorized charges so long as they quickly report the activity to the financial institution.

Additionally, the CFPB is looking at requiring issuers to either give periodic statements to the consumer or have account information easily accessible online and for free.

The industry has anticipated rules on prepaid cards since the CFPB unveiled an advance notice of proposed rulemaking two years ago. Consumer groups were hoping the CFPB would take a sweeping approach to setting new rules.

As a result, consumer groups appear poised to support the plan, though they may still push for more.

"The proposed rule requires companies to be honest when they are offering credit and not disguise it as overdraft 'protection' that can balloon into hundreds of dollars of fees a year," said Lauren Saunders, associate director of the National Consumer Law Center, in an emailed statement. "While these rules are a big improvement, overdrafts should be prohibited entirely on prepaid cards. Consumers should be able to rely on a prepaid card being truly 'prepaid' and as a safe way to control spending."

The industry, however, had largely hoped the agency would stick to clearer disclosures.

"Our sense remains that the CFPB's prepaid card rule is likely to focus primarily on the standardization of disclosures," said Isaac Boltansky, an analyst for Compass Point, in a note Monday prior to the proposal's release.

To be sure, the proposal also touched on disclosures, raising concerns that most prepaid cards have the paper disclosure imbedded within the packaging for the card so consumers must first load or purchase the card to see it. The agency also says many disclosures are difficult to find online.

"The current lack of an industry-wide standard on prepaid-card fee disclosures can make it difficult for consumers to comparison shop and make well-informed decisions," the CFPB said.

The proposal would require card issuers to have easy-to-understand disclosures through two forms: one short and the other long. The short form would highlight key information on costs like the monthly fee, fees per purchase and charges to reload the card. The long form would include other potential fees in addition to the ones that are required in the short form. The CFPB plan would also require card issuers to show consumers all of the potential account fees before obtaining the account.

Prepaid card issuers must also post their account agreements on their website and submit it to the CFPB for posting on an agency-maintained website.

The proposal will be open for comment for 90 days after it's published in the Federal Register, which is expected soon.