870 Pages in 90 Minutes:
What the CFPB Prepaid Proposal Means
to Your Business
© Copyright 2014 by K&L Gates LLP. All rights reserved.
David has a national practice advising companies on federal and state financial
laws, with a focus on payments and credit regulation. His practice includes
providing compliance and related business advice, interfacing with regulators on
behalf of clients, negotiating transactions among parties involved in providing
payment services, and defending clients in government investigations and
enforcement proceedings.
David L. Beam, Partner
K&L Gates LLP
1601 K Street NW
Washington, D.C. 20006
202.778.9026
david.beam@klgates.com
The laws on which David advises clients include, for example, state money
service business (money transmitter) laws; state credit card laws; state gift and
prepaid card laws; the federal Electronic Funds Transfer Act and Regulation E;
the Credit CARD Act of 2009; Regulation II (the regulation implementing the
Durbin amendment); and FinCEN regulations under the Bank Secrecy Act.
David’s clients range from startups to some of the world’s largest financial
institutions. His practice embraces both traditional payment systems—such as
plastic card-based systems—and emerging payment technologies.
Super Lawyers magazine named Mr. Beam a rising star in Washington, D.C., in
both 2013 and 2014.
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Steve concentrates his practice in matters related to consumer financial
products. His practice includes:
 Representing clients in federal and state supervisory matters,
investigations and enforcement proceedings;
Steven M. Kaplan, Partner
and Practice Area Leader
— Financial Services
K&L Gates LLP
1601 K Street NW
Washington, D.C. 20006
202.778.9204
steven.kaplan@klgates.com
 Advising clients on compliance with federal and state laws governing
the licensing and practices of financial institutions, mortgage
lenders, consumer finance companies, loan servicers, prepaid card
issuers, payment system providers, and secondary market
participants;
 Acting as regulatory counsel in connection with investments or
acquisitions related to consumer loans and other consumer financial
products;
 Performing specialized regulatory compliance due diligence;
 Assisting with structuring operations and developing compliance
management systems and due diligence programs; and
 Assisting in litigation involving regulatory compliance matters.
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3
Kathryn represents and counsels a broad range of clients in connection with
regulatory compliance matters, including government audits, investigations, and
enforcement proceedings. She concentrates on consumer payment systems and
federal regulatory enforcement issues, particularly those related to federal
mortgage loan insurance/guarantee programs.
With respect to consumer payment systems, Ms. Baugher advises clients on
compliance with a wide range of federal and state laws that regulate payment
systems, including the Electronic Fund Transfer Act and Regulation E, state
money services business (money transmitter) laws, and state gift and prepaid
card laws.
Kathryn M. Baugher,
Associate
K&L Gates LLP
1601 K Street NW
Washington, D.C. 20006
202.778.9435
Ms. Baugher also counsels clients regarding origination and servicing
requirements for FHA-insured, VA-guaranteed, and USDA-guaranteed loans.
Prior to joining K&L Gates, Ms. Baugher worked at the U.S. Department of
Agriculture, where she advised the Rural Housing Service with respect to its
Single Family Housing Guaranteed Loan Program.
kathryn.baugher@klgates.com
klgates.com
Jeremy’s is a national practice that focuses principally on government
enforcement and regulatory compliance for consumer financial products and
services. He counsels a broad range of clients in connection with payment
systems, credit regulation, data privacy, and consumer and commercial lending.
Jeremy M. McLaughlin,
Associate
K&L Gates LLP
4 Embarcadero Center
Suite 1200
San Francisco, CA 94111
415.882.8230
He focuses on regulatory compliance matters, government investigations, and
enforcement proceedings regarding a wide range of federal and state laws,
including the Bank Secrecy Act/Anti-Money laundering requirements, Electronic
Fund Transfer Act, E-Sign Act, Gramm-Leach-Bliley Act, Fair Credit Reporting
Act, and Truth in Lending Act. He also advises financial institutions on federal
preemption of state and local laws regulating financial institutions. In addition,
Jeremy advises national lenders and servicers on compliance with California
state laws governing the financial services industry.
He assists clients in appeals before state and federal courts, including
proceedings involving consumer financial laws. He has handled appeals for
depository and non-depository financial institutions, among other clients,
addressing a broad range of complex issues of law.
jeremy.mclaughlin@klgates.com
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Kara concentrates her practice on federal policy, focusing on financial services,
with an emphasis on the housing finance market, and particular experience with
respect to insurance, consumer financial services, payment systems and
community economic development.
She provides policy analysis and strategic advice to a variety of financial
services companies and trade groups on matters that impact their business. She
also engages in advocacy with the Congress and Executive Branch agencies in
order to advance her clients’ objectives.
Kara M. Ward, Associate
K&L Gates LLP
1601 K Street NW
Washington, D.C. 20006
202.778.9236
kara.ward@klgates.com
Kara works closely on issues involving the House Financial Services Committee,
Senate Banking Committee, as well as the Treasury Department, Consumer
Financial Protection Bureau, the Federal Housing Finance Agency, the
Department of Housing and Urban Development and the Federal Reserve.
Previously, she was an attorney in the Office of the General Counsel at the U.S.
Department of the Treasury.
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BACKGROUND
2006
• Federal Reserve Board amended Regulation E to apply to payroll
cards, with a few modifications (“Reg E Lite”)
• Considered, but declined to extend Reg E Lite to all prepaid cards.
2010
• The Board adopts gift card rules.
• Rules exempt reloadable prepaid products that were not marketed or
labelled as gift cards or gift certificates.
2011
•CFPB issues notice that identifies prepaid cards as one of six markets the
CFPB is considering to include as a “larger participant.”
2012
•CFPB issues Advance Notice of Proposed Rulemaking (“ANPR”) for GPR cards.
•ANPR seeks comment on applying Reg E Lite, creating “Schumer Box”-style
disclosures, and restricting credit features.
2014
• CFPB begins taking complaints about prepaid cards.
• CFPB releases proposed rule for prepaid accounts.
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KEY TAKEAWAYS
Applies “Reg E Lite” to “prepaid
accounts”
Creates a uniform disclosure regime
for prepaid accounts
Restricts credit features associated
with prepaid accounts
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KEY TAKEAWAYS
Requires issuers to submit prepaid account agreements to the
Bureau for publication
Does not impose restrictions on fees that can be charged for
prepaid accounts
Does not define “larger participants” in the prepaid account
market
Applies Reg E’s limited liability and error resolution provisions to
prepaid accounts
Authorizes penalties under Dodd-Frank Act (in addition to Reg
E/EFTA and Reg Z/TILA)
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TIMELINE
 Proposed rule posted on November 13, 2014;
CFPB held field hearings on same day.
 Comments will be due 90 days after publication
in Federal Register.
 Compliance dates will be based on publication
of final rule (“Final Publication”)
 Within nine months of Final Publication, disclosures for newly manufactured
prepaid account materials or information delivered to consumer online or by
telephone must comply with applicable requirements of Regulation E.
 Within twelve months of Final Publication, all prepaid accounts must comply with
the requirements of the rule including its disclosure requirements.
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Scope of the Proposed Rule: What is a “Prepaid
Account”?
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DEFINITION OF “PREPAID ACCOUNT”

A “prepaid account” is a card, code, or other device, not otherwise an account under [the general definition of account in
Regulation E], which is established primarily for personal, family, or household purposes, and which:
(A) is either issued on a prepaid basis to a consumer in a specified amount or not issued on a prepaid basis but
capable of being loaded with funds thereafter;
(B) is redeemable upon presentation at multiple, unaffiliated merchants for goods or services, usable at automated
teller machines, or usable for person-to-person transfers; and
(C) is not: (1) a gift certificate as defined in § 1005.20(a)(1) and (b); (2) a store gift card as defined in §
1005.20(a)(2) and (b); (3) a loyalty, award, or promotional gift card as defined in § 1005.20(a)(4) and (b); or (4) a general-use
prepaid card as defined in § 1005.20(a)(3) and (b) that is both marketed and labeled as a gift card or gift certificate.

The term “prepaid account” includes a “payroll card account,” which is an account that is directly or indirectly established
through an employer and to which electronic fund transfers of the consumer’s wages, salary, or other employee
compensation (such as commissions) are made on a recurring basis, whether the account is operated or managed by the
employer, a third-party payroll processor, a depository institution, or any other person.

The term “prepaid account” includes a “government benefit account,” as defined in § 1005.15(a)(2).

The term “prepaid account” does not include a health savings account, flexible spending account, medical savings account,
or a health reimbursement arrangement.
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DEFINITION OF “PREPAID ACCOUNT”: CARD, CODE,
OR OTHER DEVICE

A prepaid account may be a “a card, code, or other device.”

The definition is not limited to physical cards or devices.

In the preamble to the proposed rule, the Bureau recognizes the existence of what it
refers to as “virtual GPR cards” — prepaid products not linked to a physical card or
device — that consumers may use “to store and transfer funds via the internet, text,
or mobile phone application.”
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DEFINITION OF “PREPAID ACCOUNT”: NOT
OTHERWISE AN ACCOUNT UNDER REGULATION E

The definition of “prepaid account” indicates that if a product is otherwise an account
under the general definition of “account” in Regulation E, then the product is not a
“prepaid account.”

Existing Regulation E defines “account” as, in general, “a demand deposit (checking),
savings, or other consumer asset account (other than an occasional or incidental credit
balance in a credit plan) held directly or indirectly by a financial institution and established
primarily for personal, family, or household purposes.”
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RELATIONSHIP TO GIFT CARD RULES

The definition of “prepaid account” also excludes “(1) a gift certificate as defined in §
1005.20(a)(1) and (b); (2) a store gift card as defined in § 1005.20(a)(2) and (b); (3) a
loyalty, award, or promotional gift card as defined in § 1005.20(a)(4) and (b); [and] (4)
a general-use prepaid card as defined in § 1005.20(a)(3) and (b) that is both
marketed and labeled as a gift card or gift certificate.”



The exemption in the gift card rules (§ 1005.20) for general-use prepaid cards applies to
products that are reloadable and not marketed or labeled as gift cards or gift certificates,
whereas the definition of prepaid account would only exclude GPR cards that are both
marketed and labeled as a gift card.
This distinction was deliberate. The Bureau did this to ensure that products it intended to
include as prepaid accounts would not be excluded due to occasional or incidental marketing
activities.
The proposed official interpretations consider the example of “a network-branded general
purpose reloadable card that is principally advertised as a less-costly alternative to a bank
account but is promoted in a television, radio, newspaper, or internet advertisement, or on
signage as ‘the perfect gift’ during the holiday season. For purposes of § 1005.20, such a
product would be considered marketed as a gift card or gift certificate because of this
occasional holiday marketing activity. For purposes of § 1005.2(b)(3)(i)(C), however, such a
product would not be considered to be both marketed and labeled as a gift card or gift
certificate and thus would be covered by the definition of prepaid account.”
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DEFINITION OF “PREPAID ACCOUNT”: ISSUED ON A
PREPAID BASIS OR CAPABLE OF BEING LOADED
WITH FUNDS

The term “prepaid account” includes:



A prepaid account must be capable of holding funds, not just acting as a passthrough vehicle.




Accounts that are loaded with funds when first provided to a consumer for use; and
Accounts that are issued to a consumer with a zero balance to which funds may be loaded
after issuance.
A product that can never store funds, such as a digital wallet that only holds payment
credentials for other accounts, would not be considered a prepaid account.
However, if funds can be transferred to a product and stored before the consumer designates
a destination for the funds, the product would satisfy this prong of the definition.
The term “prepaid account” includes accounts that are not reloadable by the
consumer or a third party.
The term “funds” is not expressly defined.

The preamble of the proposed rule states that “the proposed rule may have potential
application to virtual currency and related products and services,” but that the Bureau’s
analysis of these issues “is ongoing.”
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DEFINITION OF “PREPAID ACCOUNT”: OPEN-LOOP,
USABLE AT ATMS, OR USABLE FOR P2P TRANSFERS

A prepaid account must be usable for one or more of the following:
Purchases at
multiple,
unaffiliated
merchants
ATM
transactions
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Person-toperson
transfers
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DEFINITION OF “PREPAID ACCOUNT”: OPEN-LOOP,
USABLE AT ATMS, OR USABLE FOR P2P TRANSFERS
(CONT’D)

What does it mean to be redeemable at multiple, unaffiliated merchants?
The proposed official interpretations cross-reference the existing official interpretations of the
gift card rules on this point.
“A card, code, or other device is redeemable
upon presentation at multiple, unaffiliated
merchants if, for example, such merchants agree
to honor the card, code, or device if it bears the
mark, logo, or brand of a payment network,
pursuant to the rules of the payment network.”


Companies can be “affiliated” if they “agree among
themselves, by contract or otherwise, to redeem
cards, codes, or other devices bearing the same
name, mark, or logo (other than the mark, logo, or
brand of a payment network), for the purchase of
goods or services solely at such merchants or
persons.”
The preamble to the proposed rule paraphrases the requirement by stating that “a prepaid account would be
one that is accepted widely at unaffiliated merchants, rather than only a single merchant or specific group of
merchants, such as those located on a college campus or within a mall or defined shopping area.”
An account is capable of person-to-person transfers if the account allows a consumer to send
funds by electronic fund transfer to another consumer or business.

The proposed official interpretations clarify that a transaction involving a store gift card would not be a
person-to-person transfer if the gift card could only be used to make payments to the merchant or affiliated
group of merchants on whose behalf the card was issued.
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Summary of the Proposed Rule’s Substantive
Requirements
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DISCLOSURES: GENERALLY




Short Form Disclosure
Long Form Disclosure
Specific Form Requirements
Variety of Model Form Disclosures
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Short Form Disclosure
 Incidence-based Fees**
 “Static Fees”*





Periodic fees, if any
Per-purchase fees
ATM withdrawal fees
Cash reload fees
ATM balance inquiry
fees
 Customer service fees
 Inactivity fees
 Up to 3 fees not
otherwise disclosed
incurred most frequently
in prior 12-month period
for that prepaid account
 This analysis is required
each year
*If any of the fees can vary, must disclose the highest fee with an explanation that
a lower fee may apply
**Each variable fee must be evaluated and listed separately
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Short Form Disclosure (cont.)
 Other terms
 Statement regarding whether credit services and
related fees may apply
 Statement regarding number of all other fees 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
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Short Form Disclosure
Model Form
•
•
•
•
Discloses variable fees exist
with *
No credit products
Discloses additional fees not
listed
Other Model Forms provided
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Long Form Disclosure
 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”
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Long Form Disclosure
Model Form
•
•
Categories of fees
Other Model Forms provided
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Disclosure Timing
 General Rule: Both provided pre-acquisition
 Two exceptions, in which only short form
disclosure must be provided pre-acquisition:
 Telephone exception
 Retail store exception
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RETAIL STORE EXCEPTION
 To qualify for this exception:
 The retail store must be a place that the consumer can acquire the account in
person;
 The consumer must acquire a physical access device at the location.
 Retail store does not include:
 A location operated by the financial institution;
 A location operated by an agent of the financial institution; or
 A location that offers “one financial institution’s prepaid account products
exclusively.”
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CAN’T BE AN AGENT OF THE FINANCIAL INSTITUTION

A retail store does not include a location that is an agent of the financial
institution.

Retail stores generally sell prepaid products as the agent of somebody—
issuer, program manager, distributor, etc.

Good for Consumers




Ensures that funds belong to the principal as soon as they are received by the retailer.
Protects funds from claims by retailer’s creditors.
Obligates principal to honor funds received by retailer even if retailer does not remit funds.
No Reason to Distinguish


It is no easier for a retailer that is the agent of the financial institution to provide the long form
disclosure than for a retailer that is not.
Challenges arise from the nature of retail sales, not from relationship with issuer.
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NOT A "RETAIL STORE" IF YOU SELL ONE FINANCIAL INSTITUTION’S PRODUCTS
“EXCLUSIVELY”

What does “exclusively” mean?


Does it require that there be an exclusivity agreement?
Or is the store automatically considered an “agent” if it
just happens to sell only one prepaid account?
Focus is on whether store sells
one financial institutions prepaid
accounts exclusively. Gift cards
and other excluded prepaid
products aren’t considered.
If it just means you sell only one,
then . . . .
Retail store that starts selling
prepaid accounts will need to
provide long form disclosure for
first product on shelf (until it gets a
second product).
If a retail store sells two FI’s
products and pulls one from the
shelf (say, due to a dispute), the
other FI is required to ensure long
form disclosure is provided—even
if it didn’t know about the dispute.
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FIs will need to require retail stores
to rep and warrant that they will at
all times sell at least one other FI’s
prepaid products.
29
INVENTORY CYCLING


Because the rule regulates cards and packaging, Bureau recognizes that it needs to
account for inventory replacement cycle.
Initial compliance



Changes to incidence-based fees



9 months to comply with respect to all aspects of the rule except retail packaging disclosures.
12 months to ensure that retail inventory complies with the disclosures.
If the financial institution determines that the three most commonly imposed fees have changed, then new
inventory printed would need to reflect the update.
No requirement to pull old inventory to reflect a change in which fees are most commonly imposed.
Changes to fee amounts
“Though the Bureau is not proposing specific package update requirements for the incidence-based fee
disclosure, the Bureau notes, however, that financial institutions generally must ensure all other fee types and
amounts disclosed pre-acquisition, whether on retail packaging, online, or through other means, are accurate
at the time such disclosures are provided. The Bureau, therefore, does not believe that a general disclosure
update requirement is necessary for non-incidence-based fee disclosures provided before a consumer
acquires a prepaid account, as a financial institution must continue to honor whatever fee schedule it provides
a consumer.”
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REG E LITE: GENERALLY
“Full” Reg E v. “Lite”
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Provisional Crediting Remains



Bureau invited comments and suggestions on whether it should modify the
provisional crediting rule for prepaid accounts.
Bureau recognized increased fraud losses are a problem, but ultimately
concluded that they did not outweigh the interests of consumers.
Bureau, however, sought comment on:



Impact that concern for fraud losses might have on eligibility requirements/initial screening;
Whether institutions might be apt to close accounts that have asserted error claims.
Bureau also asked for alternatives.

Alternatives already suggested to the Bureau include applying provisional crediting rules only
to:




Prepaid accounts that receive direct deposit;
Seasoned accounts; or
Accounts that have maintained a minimum balance.
Bureau asked whether there are indicators that a financial institution could use to evaluate
the risk of fraud with respect to a particular error claim.
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UNREGISTERED ACCOUNTS
 For non-payroll and non-EBT
accounts, error resolution and
liability limits do not apply if:
 Consumer hasn’t registered; and
 FI provides the notice in the sidebar.
 Did CFPB intend to require a
registration process?
 Preamble suggests that CFPB
presupposed that all prepaid accounts
will be subject to KYC requirements.
 But is that the case?
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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.
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Restrictions on Credit Features
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RESTRICTIONS ON OVERDRAFT PROTECTION
& OTHER CREDIT PRODUCTS
 Applies protections from TILA and Reg Z
 Narrow Exemption
 Amends Reg Z definition of “card issuer” to exclude persons that issue a
prepaid card that accesses only credit only not subject to any finance
charge or fees and not payable in more than 4 installments
 BUT: modifies Reg Z definition of “finance charge” to expressly include
“any transaction charge” imposed in connection with extending credit,
carrying a credit balance, or for credit availability if imposed on a
prepaid account—“regardless of whether the creditor imposes the
same, greater or lesser charge on the withdrawal of funds from the
prepaid account, to have access to the prepaid account, or when credit
is not extended.”
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Credit Restrictions: Extends existing credit
card protections from Reg Z
 Conduct ability to repay analysis
 Provide monthly periodic statements
 Provide at least 21 days to pay amounts owed in
connection with credit feature before charging
late fee
 Total fees 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
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Credit Restrictions: Additions to Reg Z
 Issuer must wait at least 30 days after consumer
registers a prepaid product before opening or
soliciting a credit account (note: not “purchases”)
 Applies even if cardholder has existing credit account
and cardholder registers additional prepaid card
 Cannot apply different terms and conditions to
prepaid account based on whether linked to
credit product
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Credit Restrictions: Offset (Reg Z)
 Current general rule: issuer may not offset
cardholder’s indebtedness from credit
transaction against funds of cardholder held on
account with issuer.
 Exception: if authorized in writing by cardholder to
periodically deduct all or part of credit debt from
deposit account held with issuer
 Proposed rule retains general rule, but alters
exception such that deduction cannot occur
more than once a month
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Credit Restrictions: Compulsory Use
(Reg E)
 Current law prohibits person from requiring as a
condition for extending credit repayment by
preauthorized electronic fund transfers
 Exception: preauthorized electronic fund transfer
requirement permitted for overdraft protection plans
 Proposed Rule does not extend the overdraft exception
to prepaid cards, so issuer cannot require repayments of
amounts related to a credit feature (such as overdrafts)
on a preauthorized, recurring basis using amounts
deposited in prepaid account.
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IS CONGRESS LIKELY TO GET INVOLVED?
Sen. Bob Menendez (D-NJ): “Applauds” CFPB Proposal
“Right before consumers swarm to the stores on Black Friday, I’m glad we’re talking about protections
for a form of payment that is soaring in use. As the market for prepaid products continues to grow, the
need for strong consumer protections and clear guidelines grows as well. Companies should not be
able to hide behind the fine print to raise their bottom lines at the expense of responsible consumers. I
look forward to reviewing the proposal and continuing to work with the CFPB to make sure consumers
are not fooled – regardless of whether they’re paying ahead of time or at the cash register.”
Rep. Maxine Waters (D-CA): Supports CFPB Proposal

“Although many lower-income consumers are increasingly turning to prepaid cards to avoid high or
unpredictable bank fees, consumer protections have not kept pace. Today’s announcement ensures
that Americans using prepaid cards are treated equally, and afforded the same consumer protections,
as credit and debit card holders.”
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WHAT IS THE CURRENT CLIMATE IN D.C.?
Senate Banking
Committee
Sen. Richard
Shelby (R-AL)
House Financial
Services
Sen. Sherrod
Brown (D-OH)
Rep. Maxine
Waters (D-CA)
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Rep. Jeb
Hensarling (R-TX)
41
EFFECT ON STATE LAWS?
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