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Executive Summary of My Comments on the CFPB Prepaid Card Rule

Adam Rust's picture

Posted March 24, 2015

A prepaid card is a pre-loadable network-branded open-loop debit account that can receive, hold, and spend currency across multiple merchants. An account defined as a prepaid card does not have to be accompanied by a physical card. While wallets that move money between external bank accounts prior to a "spend account" do not necessarily have to qualify as a prepaid card, those that can transact without re-entering a bank should be considered a prepaid account.  The definition as a prepaid card should apply to student accounts, emergency accounts, re-entry accounts for former prisoners, and to other instances of accounts funded by third-parties that are capable of use across open-loop systems. To that point, if funds are not stored on an acccount or if they are only "non-sale," then such an account is not a prepaid card. 

I oppose overdraft, but if it is approved, then such services should be regulated under both Regulation E and Regulation Z. Overdraft meets all three criteria as open-ended credit: repeat use is possible, issuers can charge additional fees or interest for outstanding debt, and a repayment can replenish the sum available for borrowing. 

As with overdraft, a credit account that is associated with a prepaid card should be covered by Regulation Z. Consumers deserve protection from fee harvesting, APRs above state usury caps, auto-offsets, and penalty fees. Consumers should have at least 21 days after a bill is sent to make a payment and the ability to make a payment from a separate account. Issuers should have to meet ability-to-repay standards in their underwriting. But issuers should not necessarily have to underwrite for fee-free cushion service or for the extension of provisional credit. 

Prepaid cards should offer the same protections against fraud as those that are currently associated with credit cards. 

The presence of a savings account, a savings sub-account, or a separate savings wallet should be published on both the long and short disclosure forms. As they are "like products," issuers should provide statement privileges to full savings accounts. However, accounts that are linked to a traditional spend (wallet, sub-account) can utilize a shared statement with the spend. Issuers should not be able to charge a fee for transfers to and from savings accounts. 

Credit supplied from a virtual account but by a non-bank should be treated as a "like product" to a bank-issued credit card that is directly linked to a prepaid card. This means that all CARD Act privileges (see above) should be accorded. 

When a prepaid card comes with an additional fee because it is attached to a credit account, that cost should be considered a finance charge. However, when an issuer reduces the fee for a prepaid account as an incentive to facilitate a credit account, there should be no discount against APR or fee harvester calculations.

Issuers should have to post updates to prepaid account agreements at the time of the change (as opposed to periodically). Similarly, they should be expected to send the updated agreement to the CFPB with each change. Issuers should not be able to add arbitration agreements after an account is opened. Of course, they should not be able to have arbitration agreements into the terms of any account in the first place.  

Employers should not be able to require that employees take their payments on a specific GPR card. Moreover, this protection against compulsory use should be extended to non-needs tested benefits accounts, student accounts, emergency accounts, and re-entry accounts. 

Application fees for prepaid cards and associated credit card accounts should be applied to fee harvester rule calculations. 

The Bureau should revamp its proposed disclosures. Foremost among those changes should be the use of informational graphics to express various functionalities of cards. For example, cards with a remote deposit function should use some symbol to communicate that aspect. We suggest a simple piggy bank symbol for cards with a savings account. Graphics create multiple points of entry for consumers. This helps to overcome the "No-Reading Problem" common with financial disclosures.

To quote research on disclosures: "Companies that use graphics in financial reports are more likely to attract the attention of readers, as well as increase their memory retention. Normally, visual graphics are a better form of displaying information than using numerical information." Other research has pointed out that graphics can help a disclosure to communicate to consumers who speak languages other than English. 

We have always believed that consumers would benefit from "average cost" information. This is another opportunity for infographics - and ideally one that would overcome the problem of different user types (direct deposit vs. pay-as-you-go) and different transactional volumes. 

My full comments can be seen here

Accounts defined as prepaid cards should have either FDIC or NCUSIF insurance.