EFTA’s Response to CFPB’s Request for Comment on its Proposed Rule Regarding Prepaid Cards
March 23, 2015
Ms. Monica Jackson
Office of the Executive Secretary
Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC 20552
Re: Docket No. CFPB-2014-0031
Dear Ms. Jackson:
This letter is submitted to the Consumer Financial Protection Bureau (the CFPB or the Bureau) by the Electronic Funds Transfer Association (EFTA) in response to the Notice of Proposed Rulemaking with Request for Public Comment published in the Federal Register on December 23, 2014 at 79 FR 77101 (the Proposed Rule). EFTA appreciates the opportunity to comment on the Proposed Rule.
The Electronic Funds Transfer Association is a non-profit, professional association dedicated to the advancement of electronic payments and commerce. Since its founding in 1977, EFTA has represented its members on a range of payments-related topics, from ATM and debit technology to current issues like cybersecurity, data privacy and mobile payments. EFTA membership includes large financial institutions, payment processors, ATM and debit networks, card companies, technology providers, security companies, ATM owners and manufacturers and government agencies.
Our members support strong protection for consumers engaged in electronic commerce of all kinds. We also believe that providing consumers with valuable information about their electronic transactions is critical to product success and has contributed to the high level of trust that consumers have about their electronic transactions, especially payment card transactions.
We are concerned that the Proposed Rule, if adopted in its present form, will have an extremely negative impact on prepaid card programs and other emerging payments. The scope of the Proposed Rule is so broad and the specific requirements proposed by the Bureau so onerous that the viability of many prepaid programs will be threatened and innovation in the space will be stifled. The Proposed Rule has been issued despite a lack of consumer problems, let alone consumer harm. In fact, the supplementary information accompanying the Proposed Rule does not include evidence of the types of consumer protection failures that would justify the issuance of a rule.
SCOPE OF THE PROPOSED RULE
The Proposed Rule will dramatically broaden the scope of the CFPB’s regulation of prepaid products. Notably, non-needs-based government benefit cards, disaster payment cards, and disbursement cards would all be included within the Proposed Rule’s definition of “prepaid account.”
Non-Needs-Based Government Benefit Cards (EBT Cards). EBT Cards should be excluded from the CFPB’s prepaid card rules. The Bureau has not identified any problems with the consumer protections that are now in place for EBT Cards. At present, there are adequate protections in place in Regulation E for such cards that obviate any consumer protection concerns. Making EBT Cards subject to the Proposed Rule will place an unnecessary burden on government agencies and the service providers that support the programs. It will require structural and other changes in programs that currently provide consumers with critical access to the payments system as well as the adequate consumer protections already in place. The compulsory use prohibitions and other requirements of the Proposed Rule are unnecessary and would serve to thwart the purpose and effectiveness of EBT Card programs and would raise the costs of administering the programs for state and federal government agencies.
Disbursement Cards. Disbursement cards should not be subject to the prepaid rules. The CFPB has not cited to any evidence of abuse related to the use of such cards. Subjecting disbursement cards to the requirements of the Proposed Rule, including the compulsory use prohibitions, is therefore unnecessary and would hinder the effectiveness of such cards. Programs for the disbursement of child support, unemployment insurance benefits, foster care, training, and workers compensation are all programs that successfully provide a safety net for consumers. They are currently offered at no cost to the government agency and a minimal (and fully-disclosed) cost to the beneficiary. These programs would need to be reassessed to determine their viability in the event the final rule is adopted as proposed. Should prepaid cards no longer be considered viable by the service providers, government agencies may well be faced with the daunting task of determining how to successfully and timely disburse hundreds of millions of these payments every year. The options are limited. Worst case, government agencies would have to revert to the issuance of checks or warrants, which would significantly increase risk and cost to the program recipients.
Disaster Payment Cards. Disaster payment cards should also be excluded from the definition of “prepaid account.” Disaster payment cards are issued to individuals, the Bureau correctly notes, in the aftermath of natural disasters or other catastrophic events and may provide the only mechanism for the delivery of funds to consumers who may be unable to use or access checking or savings accounts. These individuals rely on the cards as a means by which they can begin to piece their lives back together. These are not cards for which consumers have the desire or the means to do comparison shopping, and applying the requirements of the Proposed Rule to such cards is unnecessary and would thwart their purpose and effectiveness. Subjecting such cards to the prohibition on compulsory use is particularly troublesome; it is difficult to fathom why the CFPB believes that consumers will be helped in any way by the application of the prohibition.
In the wake of natural disasters, entire communities were destroyed and the affected families are often required to relocate under duress. If disaster cards are not made immediately available without prohibition, consumers would have no timely means by which to buy food, clothing and other necessities. The current framework operates seamlessly, is timely and easy to administer. The CFPB should be carefully assessed as to the “costs” vs. “benefits” of burdening government agencies, program managers and issuers by adoption of the rule.
Prior to issuance of the “final rule,” the CFPB may wish to consider holding focus groups comprised of individuals who received disaster payment cards in the aftermath of catastrophic event to determine their level of satisfaction with the manner in which those cards were provided and explained.
THE PROPOSED RULE’S NEGATIVE IMPACT ON INNOVATION
The Bureau is required by the Electronic Fund Transfer Act to “take into account, and allow for, the continuing evolution of electronic banking services and the technology utilized in such services.” 15 U.S.C. § 1693b(a). As such, in a case where a product or service is emerging or still in development, the Bureau should only act if said product or service presents clear and present consumer protection issues.
THE PROPOSED RULE’S DISCLOSURE REQUIREMENTS
The Proposed Rule’s disclosure requirements are also problematic and confusing.
Duplication of Disclosures. As proposed, a prepaid card issuer would be required to make all requisite Regulation E disclosures in addition to the so-called “Schumer Box” disclosures. There is significant duplication between these various disclosures and steps should be taken to minimize the amount of duplication as much as possible. One way to accomplish this would be to make the Schumer Box disclosure more complete, while not requiring a full set of Regulation E disclosures, many of which are not relevant to prepaid cards.
Disclosure of Fees. The Proposed Rule’s requirement that “incidence-based fees” be analyzed, disclosed and updated each year should not be adopted. How often a fee is charged to other consumers is irrelevant to a consumer purchasing a card and will only invite consumer confusion. Consumers do want to know what fees will be charged in connection with the card, which is why a full disclosure of all the fees associated with the card in the Schumer Box will be more meaningful.
The Proposed Rules provides that ATM fees must be disclosed if the network is “affiliated with” the financial institution under the Proposed Rule. We suggest instead that ATM fees must be disclosed only if they are imposed by the issuer. Those are the only fees over which the issuer has control.
Transaction History. While the Bureau correctly recognizes that a requirement to provide traditional monthly periodic statements in hard copy form is impractical in the prepaid card context, the requirement to provide an 18-month written transaction history is too onerous and does not address any identified consumer protection problem. In fact, the Bureau acknowledges that many prepaid account providers presently make between 12-24 months of account history available to consumers online and does not provide any evidence that this electronic alternative does not provide consumers with ample opportunity to review the account history and print copies of that information. Therefore, we recommend that the proposed 18-month period for written periodic statements upon a consumer’s request be reduced to the current Regulation E requirement to provide 60 days of transaction history in writing upon a consumer’s request.
Foreign Language Disclosures. The Proposed Rule’s requirement that disclosures be provided in a foreign language if the transaction is conducted in that language is too broad and poses significant compliance problems. It will be extremely difficult to police this foreign language disclosure requirement when cards are sold at point of sale or even by a program manager (e.g., in the distribution of disaster payment cards). Accordingly, the requirement to provide disclosures in a foreign language should be scaled back to exempt those transactions where it is virtually impossible for a card issuer to identify in advance the language in which the transaction will be conducted.
Real-Time Disclosures of Card Balances. The CFPB has also requested comment on the ability to give real-time disclosures of card balances. A requirement to provide such real-time disclosures would present myriad technical and operational difficulties, particularly with respect to point-of-sale transactions. The interconnectivity between financial institutions, networks, and merchants that is associated with prepaid cards would make implementation of a real-time disclosure requirement extremely burdensome.
OVERDRAFT FEES AND CREDIT
The Proposed Rule’s modification of Regulation Z to consider any fee associated with an overdrawn prepaid card as “credit” under Regulation Z and subject to CARD Act rules flies in the face of more than 40 years of legislative and regulatory precedent under the Truth in Lending Act and is not justified under the Act’s standards. There is no evidence that changing the fundamental nature of the regulatory scheme of Regulation Z is necessary or proper to effectuate the purposes of the Act or to prevent circumvention or evasion thereof, particularly in light of the CFPB’s acknowledgement that most prepaid card issuers do not currently offer an overdraft program.
This major regulatory shift would obviously be very disruptive to the prepaid card industry. The Bureau has failed to acknowledge that there are circumstances in which the processing of transactions may inadvertently cause an account balance to become negative. A per-transaction fee imposed on the account under those circumstances (e.g., a point of sale transaction or ATM fee) should not be treated as a finance charge and should not trigger all the requirements of the CARD Act rules. In other words, inadvertent or technical overdrafts (e.g., forced-post transactions or pre-authorization hold transactions) that cause an account to go negative – and for which no additional fee is assessed for the overdraft — should not be treated as overdraft or credit features. EFTA believes that if the Bureau would like consumers to have protection for overdraft programs, the existing overdraft protections in place for debit cards under Regulation E are sufficient, and should only be applied to prepaid accounts when consumers have clearly opted in to overdraft protection. Inadvertent or technical overdrafts are impossible for prepaid issuers to avoid, and without a clear distinction between intentional overdrafts (for which consumers provide advance consent) and unintentional overdrafts, the economic impact on the prepaid card industry will be extreme, as it will force issuers to redesign programs so that cards are declined before there is any risk of the account going negative because compliance with the CARD Act rules will be too onerous.
The implications of the Bureau’s actions beyond the scope of the Proposed Rule are truly troubling. For example, the CFPB’s position that a charge that is the same for a cash transaction and a “credit” transaction is a finance charge if it is associated with an overdraft is contrary to the consistent interpretation of the term. Will the CFPB now treat all charges imposed in connection with an extension of credit as finance charges, even if the charge is also imposed in cash transactions? And if not, how does the Bureau intend to justify that position? This is only one example of the broader implications of the Bureau’s unjustified and unprecedented position.
EFFECTIVE DATE OF THE FINAL RULE
The CFPB has proposed an effective date for the final prepaid card rules of nine months after the issuance of the final rule. The Proposed Rule is very complex, and the final rule will require extensive adjustment to industry compliance programs. The required changes cannot be accomplished within nine months. Therefore, we believe that the effective date of any final rule should be 24 months after issuance to accommodate the time needed to implement the technical and operational changes necessary to comply with the new rule.
EFTA understands the challenges the Bureau faces in striking a proper balance between consumer protection and market innovation. It is important to keep in mind that prepaid products and services are a direct result of market responses to consumer demand. The changes contemplated in the Proposed Rule will dramatically alter the prepaid landscape and likely result in consumers having fewer prepaid products and services from which to choose.
EFTA appreciates the opportunity to comment on this important subject and we look forward to working with the CFPB to address the issues raised by the Proposed Rule and enhance consumer protections for prepaid financial products and services.
President and Chief Executive Officer