Yesterday the CFPB released a final rule that will impose a variety of consumer protection requirements on prepaid products, such as requiring specified disclosures before product purchase and compelling financial institutions to limit consumer losses for lost or stolen cards.  The CFPB had previously released a proposed rule, which we discussed here, and the final rule leaves unchanged many of those proposals.  In announcing the rule, CFPB Director Richard Cordray acknowledged that many prepaid companies already offer some of these protections but argued that uniform requirements are necessary to ensure equal treatment and minimize consumer harm across the board.

The rule covers traditional prepaid products like general purpose reloadable cards, as well as mobile wallets, person-to-person payment products, electronic prepaid accounts, payroll cards, and certain federal, state and local government benefit cards.  The rule itself is 1,689 pages and responds to the 65,000 comments received on the proposed rule.  Highlights include the “Know Before You Owe” disclosures, general consumer protections that mirror those imposed under the Electronic Fund Transfer Act for checking account consumers, and credit-like protections when prepaid issuers extend credit to cover transactions that prepaid products would not fully cover.

“Know Before You Owe” Disclosures

The final rule requires two forms of disclosures: (1) a short form disclosure provided before a consumer acquires a prepaid account that includes information about periodic fees, per purchase fees, ATM withdrawal fees, cash reload fees, and balance inquiry fees, amongst others; and (2) a long form disclosure that includes a comprehensive list of fees and other information associated with the account.   The CFPB provided examples of each disclosure type, which are available here.

Additionally, the rule requires prepaid account issuers to post on their websites prepaid account agreements that are offered to the general public to facilitate comparison shopping.  Issuers must also submit all of their prepaid account agreements, including those not publicly posted, to the Bureau.

Prepaid Protections

The final rule requires issuers to provide a number of consumer protections similar to those imposed under the Electronic Fund Transfer Act and Regulation E, such as:

  • Access to account information.  Rather than require periodic statements as required under Regulation E for checking accounts, the final rule permits institutions to make available to consumers certain methods of accessing information about their prepaid accounts, such as free by telephone, online, or in writing upon request.  Financial institutions are also required to provide summary totals of fees assessed to the consumer on a monthly and annual basis.
  • Limited liability and error resolution.  The final rule extends Regulation E’s protections related to limited liability and error resolution to prepaid accounts.  As to limited liability, the rule limits a consumer’s responsibility for unauthorized changes to $50 so long as the consumer promptly notifies the financial institution of potentially fraudulent conduct.  As to error resolution, the rule requires financial institutions to promptly investigate and resolve incidents, including by restoring missing funds and provisionally crediting the disputed amount while it finishes its investigation.  The requirements generally apply regardless of whether the financial institution has successfully identified and verified the consumer holding the account, except that financial institutions are not required to provisionally credit disputed amounts until the consumer’s identity has been verified.

Credit Protections

The final rule also revises Regulations E and Z to regulate how prepaid accounts offer overdraft credit features.

  • Separate accounts.  For so called “hybrid prepaid-credit card” accounts where the consumer can access both a prepaid account and an overdraft credit feature, the issuer must treat the credit features as distinct from the asset account.  The issuer cannot allow a negative balance directly on the prepaid account except for specified limited circumstances (e.g., where the credit is incidental and de minimis and the issuer does not charge credit-related fees).
  • Ability to pay.  The rule requires prepaid companies to consider the consumer’s ability to pay the balance before opening a separate credit account linked to the consumer’s prepaid account.  Issuers must also wait at least 30 days after a prepaid account is registered before soliciting a consumer to link a covered credit feature to the prepaid account.
  • Limitations on fees.  The rule also extends certain protections under Regulation Z related to fee restrictions, such as limits on fees charged in the first year after account opening and limits on penalty fees.  For example, total fees for credit features cannot exceed 25 percent of the credit limit during the first year a credit account is open.  Moreover, issuers are only permitted to raise interest rates on existing balances if a cardholder misses back-to-back payments and, for new purchases, must provide at least 45 days advance notice of the change in interest rate and allow the consumer to close their account during that time.

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The new rule generally becomes effective October 1, 2017 and financial institutions are not required to pull and replace prepaid account packaging materials prior to that date to comply with disclosure requirements.  Moreover, issuers are not required to submit prepaid account agreements to the Bureau until October 1, 2018.

We expect that the Bureau will issue additional materials to facilitate compliance with the prepaid rule in the coming months and will continue to monitor and post about developments here.

CFPB Director Richard Cordray testified before the House Financial Services Committee today, fielding questions and comments on an array of issues from the CFPB’s data collection practices to the Qualified Mortgage Rule, which went into effect on January 10, 2014. The hearing was scheduled in response to the CFPB’s release of its fourth Semi-Annual Report on November 5, 2013. In his testimony, Director Cordray pointed to the approximately $3 billion collected by the CFPB for consumer restitution in recent enforcement actions as evidence of the CFPB’s producing tangible benefits for consumers.

Responding to questions regarding whether the Qualified Mortgage Rule will have a deterrent effect on mortgage lenders, Director Cordray reprised his position that the rule would not because lenders could rely on exceptions to continue lending to borrowers who do not meet the 43 percent debt-to-income ratio referenced in the rule. For instance, Cordray noted that the rule also permits loans to be considered qualified if they are purchased or guaranteed by a government-sponsored enterprise such as Fannie Mae or Freddie Mac . Committee members, on the other hand, argued that lenders would be unlikely to make certain loans that were not considered qualified under the Rule because such loans would no longer receive the same sort of legal protections as qualified mortgages.

Committee members also questioned certain CFPB data collection practices, including its collection of aggregate data from credit card companies, complaint data generally, and plans to create the National Mortgage Database in conjunction with the Federal Housing Finance Agency (FHFA). Cordray responded that much of the data collected by the CFPB cannot be linked to any particular consumer because of the lack of personally identifiable information (PII) collected. He also noted that the CFPB complies with all laws governing privacy and data security.

Committee members questioned Cordray on a variety of other topics, including regulation of auto lenders and manufactured housing, and expected forthcoming regulations governing debt collection and general purpose reloadable cards. We will continue to monitor CFPB developments and post updates here.

The Consumer Financial Protection Bureau (CFPB) recently released its final determinations concerning whether Maine and Tennessee unclaimed property laws were preempted by the federal gift card law prohibiting expiration of gift card funds within five years of issuance. The decisions represented the first time that the CFPB used its authority to issue preemption determinations. More information, along with other developments in consumer finance law, is available at

http://www.consumerfinancelawblog.com/

Last week, the Consumer Financial Protection Bureau (CFPB) issued its final determination regarding whether Maine and Tennessee unclaimed property laws were preempted by the federal Credit Card Accountability and Responsibility and Disclosure Act of 2009 (“the Credit CARD Act”). Both state laws provided that certain gift cards would be deemed abandoned as early as two years after purchase and thus require the issuer to transfer the value of the card to the state as unclaimed property. The CFPB was tasked with deciding whether those laws conflicted with the requirement under the Credit CARD Act that gift card funds not expire for at least five years after issuance. Gift card issuers and sellers have been watching these matters with the hope that the inconsistency between federal and state gift card law requirements might be eliminated by the CFPB.

The CFPB distinguished the two states laws on the basis of whether the card issuer was required to continue to honor the gift card after the funds were deemed abandoned and turned over to the state. Under Maine law, as interpreted by the Office of the State Treasurer for Maine and communicated to the CFPB, the issuer was required to continue to honor the card even after the issuer had transferred the underlying funds to the state as abandoned property. The CFPB reasoned that “[b]ecause the Maine Act does not interfere with consumers’ ability to use their gift cards at the point-of-sale for at least as long as they are guaranteed that right” under federal law, the Maine law did not conflict with federal law and was not preempted.

While the CFPB acknowledged that the Maine law potentially subjects the card issuer to duplicative liability on the same card, it noted that this was the case notwithstanding the federal provision because “the Maine Act itself requires abandoned gift cards to be honored indefinitely.” The CFPB further explained that it expressed no view on potential constitutional due process issues of requiring an issuer to honor abandoned gift cards when those funds had already been transferred to the state. The CFPB explained that it could not opine on such concerns because its role was limited to a determination on federal preemption.

With regard to the Tennessee law, the CFPB explained that, unlike the Maine law, it did not require the issuer to continue to honor the card after the funds had been transferred to the state. To the contrary, Tennessee law expressly provided that Tennessee assumed custody and responsibility for the underlying funds after transfer and therefore permitted the issuer to decline to honor funds once transferred to the state. As such, the CFPB reasoned that consumers attempting to reclaim their property would be required to submit an unclaimed property claim form to Tennessee’s Department of Treasury. Because such a requirement requiring consumers to seek refund from the state conflicted with the Credit CARD Act’s mandate to permit use of funds for at least five years after card issuance, the Tennessee law was in direct conflict with, and thus preempted by, federal law.

We will continue to monitor the case, as the CFPB’s determinations may be destined for appeal. More information on developments in gift card laws is available at www.adlawaccess.com. 
 

Last year, we discussed a class action lawsuit against Groupon alleging that the company’s deals violate California and federal gift card laws. The plaintiffs argued that Groupon’s deals constitute gift cards, and that the expiration on the deals violate federal and state laws that restrict expiration dates. Although Groupon denies they violated any law, the company recently reached a proposed settlement of several consolidated lawsuits in California.

Under the proposed settlement, class members who purchased Groupon vouchers between November 2008 and December 1, 2011 will be able to redeem expired vouchers, and if they are unable to do so, obtain a refund from an $8.5 million settlement fund. If a merchant refuses to redeem a settlement voucher, the class member will be entitled to receive a refund of the purchase price plus 20% of the promotional value.

Groupon also agreed to make changes to how it structures and advertises its deals. For example, Groupon agreed to clearly and conspicuously that any expiration dates apply only to the promotional value of the deal, and that the purchase price portion of the deal does not expire until the voucher is redeemed or refunded. And they agreed to limit the number of its annual Daily Deals that expire less than 30 days from the date of issuance.

Gift cards and deal vouchers may be subject to a patchwork of laws that are spread out across all states and the federal level, and it’s not always easy to figure out which laws apply or how to comply with them. Plaintiff’s lawyers are taking advantage of this confusion and filing lawsuits against these types of deals. Accordingly, companies should take a close look at any offers that combine pre-payment with an expiration date in order to evaluate their risk of being a target of these types of suits. 

This week, a California Superior Court approved a settlement agreement in a class-action lawsuit alleging that Amway Corporation and its related companies violated gift card laws. Amway’s gift cards included a notation instructing consumers to "redeem before" a certain date. The plaintiffs argued that this notation violated a California law that prohibits expiration dates on gift cards. As part of the settlement, Amway agreed to stop using the “redeem before” language and to allow consumers to redeem or replace more than $20 million worth of expired gift cards.

Approximately half the states have laws that either restrict or prohibit expiration dates, and a federal law mandates that gift cards must be valid for at least five years. As we’ve noted before (click here, for example), consumers and plaintiffs’ lawyers are taking a close look at how gift cards are marketed and sold and have been quick to file lawsuits against perceived violations. Companies should examine their gift card offers in order to evaluate their risk of being a target of these types of suits. 

Last month, consumers filed a class action lawsuit against Groupon, alleging that the company’s deals violate California and federal gift certificate laws. This month, a similar lawsuit was filed against LivingSocial, alleging that the company’s deals violate Washington and federal gift certificate laws.

Approximately half the states have laws that either restrict or prohibit expiration dates. In addition, a recent federal law requires gift certificates to be valid for at least 5 years. The plaintiffs in these cases are arguing that the Groupon and LivingSocial deals constitute gift certificates and that the expiration on the deals violate federal and state laws. In addition, the plaintiffs in the LivingSocial lawsuit are arguing that the no cash back provision on the company’s deals violates a Washington law that requires issuers to give cash back, under certain circumstances.

These lawsuits demonstrate that plaintiff’s lawyers are attempting to stretch gift certificate laws to cover various types of offers that don’t fit the traditional mold of gift certificates. Companies should take a close look at any offers that combine pre-payment with an expiration date in order to evaluate their risk of being a target of these types of suits. 

This is an update to an earlier post regarding the Federal Reserve Board’s final rules implementing the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”). On July 27, 2010, H.R. 5502 was signed into law, extending the effective date of disclosure requirements under the CARD Act from August 22, 2010 to January 31, 2011, for qualifying gift cards produced prior to April 1, 2010. You may recall that the rules restrict fees and expiration dates on various types of gift certificates and cards, and require sellers and issuers to make specific disclosures.

Gift Certificates, Store Gift Cards, and General-Use Prepaid Cards

Generally, the rules restrict fees, expiration dates, and impose certain disclosure requirements for (A) gift certificates, (B) store gift cards, and (C) general-use prepaid cards, as these terms (collectively, “gift cards”) are defined in the CARD Act.

Definitions

(A) Gift Certificates – are defined in the CARD Act as a card, code, or other device that is: (i) redeemable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo; (ii) issued in a specified amount that may not be increased or reloaded; (iii) purchased on a prepaid basis in exchange for payment; and (iv) honored upon presentation by such single merchant or affiliated group of merchants for goods or services.

(B) Store Gift Cards – these types of cards are commonly known as “closed-loop cards”, and are essentially the same as Gift Certificates, but are reloadable or may be increased in value. The CARD Act specifically defines these cards as electronic promises, plastic cards, or other payment codes or devices that are: (i) redeemable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo; (ii) issued in a specified amount, whether or not that amount may be increased in value or reloaded at the request of the holder; (iii) purchased on a prepaid basis in exchange for payment; and (iv) honored upon presentation by such single merchant or affiliated group of merchants for goods or services.

(C) General-Use Prepaid Cards – commonly referred to as “open-loop cards”, are defined in the CARD Act as cards or other payment codes or devices issued by any person that are: (i) redeemable at multiple, unaffiliated merchants or service providers, or automated teller machines; (ii) issued in a requested amount, whether or not that amount may, at the option of the issuer, be increased in value or reloaded if requested by the holder; (iii) purchased or loaded on a prepaid basis; and (iv) honored, upon presentation, by merchants for goods or services or at automated teller machines.

Continue Reading UPDATE: New Gift Card Rules To Take Effect on August 22, 2010 and Disclosure Requirements Will Now Take Effect on January 31, 2011

After working through the night, the Congressional conference committee tasked with negotiating a final financial reform bill voted 27-16 to approve the bill and send it back to each chamber for a final vote on the conference report.

Recaps of the long day and night of negotiations and the final bill are available from Poltico, the Wall Street Journal, and American Banker, among many others.

With regard to certain of the issues we have been following closely here, in the end, auto dealers will be exempt from the purview of the new Consumer Financial Protection Bureau, but payday lenders and other non-bank financial service providers will be subject to the new regulator. In addition, the Federal Reserve will be permitted to cap interchange fees, except for those on cards issued by governments.

The bill includes myriad other important provisions related to mortgage lending, the activities of banks, insurance regulation, corporate governance, and more. The Wall Street Journal provides an overview of some of the “major” provisions. Over the coming weeks and months we will be taking a closer look at certain aspects of the final bill and their implications, for example, increased litigation risk for financial service providers, including merchants and retailers.

On April 29, 2010, Colorado Governor Bill Ritter signed a consumer protection bill which requires gift card issuers to redeem the card, upon request, if the remaining value is $5 or less. In addition, it bans retailers, restaurants and others from selling gift cards that have any type of fee, including a service fee, a dormancy fee, an inactivity fee or a maintenance fee. This new law will apply to gift cards issued on or after August 11, 2010.

Under this law, “gift card” is defined as a prefunded tangible or electronic record of a specific monetary value evidencing an issuer’s agreement to provide goods, services, credit, money, or anything of value. A gift card includes a tangible card, electronic card, stored-value card, or certificate or similar instrument, card, or tangible record, all of which contain a microprocessor chip, magnetic chip, or other means for the storage of information and for which the value is decremented upon each use.

A gift card does not include a prefunded tangible or electronic record issued by, or on behalf of, any government agency, a gift certificate that is issued only on paper, a prepaid telecommunications or technology card, or a card that is donated or sold below face value at a volume discount to an employer or charitable organization for fundraising purposes. Likewise, a card or certificate issued to a consumer pursuant to an awards, loyalty, or promotional program for which no money or other item of monetary value was exchanged is expressly excluded from the definition of a gift card.

In addition, this new law does not apply to gift cards that are usable with multiple sellers of goods or services, but expressly applies to a gift card usable only with affiliated sellers of goods or services.

A violation of this new law will be deemed a violation of Colorado’s deceptive trade practice law.

Once the law is effective, Colorado will join a handful of other states with laws requiring redemption of gift cards with less than a certain cash value. Under California law, as just one example, any gift certificate with a cash value of less than $10 is redeemable in cash for its cash value.