July 2, 2012
Authored by: Bryan Cave Leighton Paisner
As a precursor to further regulation of general purpose reloadable (GPR) cards, the Consumer Financial Protection Bureau (CFPB) is seeking responses to 10 questions before July 23, 2012.
The CFPB recently released an advance notice of proposed rulemaking (ANPR) seeking comments, data and information regarding GPR cards, including questions regarding costs, benefits and risks to consumers. The ANPR is the first step in the long-anticipated process of regulation by the CFPB over “open loop” or “general use” prepaid cards.
While the ANPR specifically discusses “cards,” other mechanisms that access a prepaid financial account are also encompassed, including key fobs and cell phone apps. The ANPR is focused on GPR cards which the CFPB defines loosely as a general use prepaid card “issued for a set amount in exchange for payment made by a consumer” that is reloadable by the consumer, “meaning the consumer can add funds to the card.” The ANPR is not seeking information about corporate-funded cards, closed-loop prepaid cards, traditional debit cards, non-reloadable cards, payroll cards, EBT cards or gift cards.
The ANPR states that there are three factors driving the CFPB’s focus on GPR cards:
- Rapid growth in the GPR market;
- The fact that some consumers view and use GPR cards as an alternative to traditional checking accounts; and
- The “lack of a comprehensive regulatory regime” which the CFPB suggests could “contribute to market distortions, misaligned incentives or consumer confusion” because consumers may “mistakenly assume that they possess rights enforceable under federal law.”
In taking this first step toward regulation, the CFPB articulates its goals as:
- Ensuring that “consistent minimum standards apply across all similar consumer products to allow consumers to easily compare financial products by ensuring transparent fee disclosure and to allocate the risks of fraud or loss appropriately,” and
- At the same time, “to be mindful of avoiding any unnecessary burden on industry.”
To that end, the ANPR asks 10 broad questions about GPR cards in a range of different categories. The questions are summarized below.
1. How should GPR cards be defined for Reg E? Should certain products be excluded, such as those that serve a limited purpose?
2. Should only certain aspects of Reg E apply to GPR cards? What alternative protections or requirements, if any, should apply?
3. What steps could the CFPB take to most effectively regulate GPR cards to provide consumers with transparent, useful and timely fee disclosures? Should disclosures be required pre-sale, post-sale or both?
4. How can the CFPB best enable consumers to compare various GPR cards that may have different fee structures or that are offered through various distribution channels? How should important contractual terms be conveyed to consumers?
5. Should FDIC “pass-through” insurance, or lack thereof, be disclosed to consumers? If so, how and when should it be disclosed?
(Note: Under the FDIC’s General Counsel Opinion No. 8, the FDIC will recognize each individual holder of the GPR card as the “owner” of the deposit (thereby providing significantly greater insurance protection to each cardholder) provided that the FDIC’s standard requirements for “pass-through” insurance coverage have been met.)
COSTS AND BENEFITS OF SPECIFIC FEATURES
6. What are the costs, benefits and consumer protection issues related to any credit features that may be offered on GPR cards?
7. What are the costs, benefits and consumer protection issues related to savings features offered with GPR cards?
8. What is the efficacy of credit reporting features on GPR cards in enabling consumers to improve or build credit? Should regulatory provisions address how such services are marketed to consumers?
9. When and how do market participants communicate changes in contract terms, or other information, to cardholders? Should the CFPB be aware of any other issues with respect to the cost of regulatory compliance?
10. Is there any other information about GPR cards that will help inform the CFPB as it considers how best to address these products? Are there any other issues that the CFPB should consider in this regard?
Overall, we believe that this is an appropriate first step for the CFPB to take before imposing additional regulation on payment products already subject to substantial federal and state regulation. We would urge prepaid card issuers, providers, vendors and sellers to respond to the ANPR in order to ensure that the concerns of industry, government and consumers are all taken into account before any new regulations are proposed.
Comments on the ANPR are due July 23, 2012.