CFPB finalizes prepaid account (payroll card) regulations

The Consumer Financial Protection Bureau (CFPB) has created significant protections for consumers who use prepaid cards, including prepaid cards that allow credit transactions. The rules apply to payroll cards (see PAYROLL MANAGEMENT Report Letter 2382, December. 2, 2014). The final rule’s definition of prepaid accounts specifically includes payroll card accounts and government benefit accounts that are currently subject to Regulation E. In addition, the final rule requires that short form disclosures for payroll card accounts and government benefit accounts include, at the top of the form, a statement regarding alternative wage or benefit payment options.

Generally, an employer works with a financial institution to set up a payroll card program. Among other things, the financial institution issues the payroll cards and holds the funds loaded into the payroll card accounts. Section 1005.10(e)(2) of Regulation E prohibits financial institutions and employers from requiring consumers to agree to have their compensation distributed via a payroll card as a condition of employment. The Bureau is finalizing specific disclosure requirements as part of the short form disclosure, to make clear Sec. 1005.10(e)(2)’s applicability to payroll card accounts. Where employees choose to participate in a payroll card program, the employer will provide the employee with a network-branded prepaid card issued by the employer’s financial institution partner that accesses a subaccount assigned to the individual employee. On each payday, the employer will transfer the employee’s compensation to the payroll card account, instead of providing the employee with a paper check or making a direct deposit of funds to the employee’s checking or savings account. The employee can use the payroll card to withdraw funds at an ATM or over-the-counter via a bank teller. The employee can also use the payroll card to make purchases online and at physical retail locations, and may also be able to obtain cash back at a merchant’s point-of-sale (POS) terminal. Some payroll cards may offer features such as convenience checks and electronic bill payment.

Other highlights

• Financial institutions that do not provide periodic statements must make certain account information available free by telephone, online, and in writing upon request.

• Consumers must be given complaint and error resolution rights that include provisional credits in some cases.

• Consumers’ liability for unauthorized charges is limited to $50 if the institution was given proper notice.

• Consumers are entitled to specified fee and term disclosures.

• Institutions must post their account agreements on their websites and provide copies to the CFPB.

Institutions that permit prepaid cards to be used for credit transactions must:

• engage in an ability-to-repay analysis;

• provide monthly account statements;

• give consumers at least 21 days to make required payments before charging a late fee and limit late fees to those that are reasonable and proportional to the account term violation;

• limit fees to no more than 25 percent of the credit limit during the first year of the account;

• increase interest rates on existing balances only after two consecutive payments have been missed; and

• increase interest rates on future charges only after giving 45 days advance notice.
Most of the rule takes effect Oct. 1, 2017, but the account agreement submission provision takes effect Oct. 1, 2018. (CFPB Press Release CFPB Finalizes Strong Federal Protections for Prepaid Account Consumers New Rule Includes “Know Before You Owe” Prepaid Disclosures OCT 05, 2016; http://www.consumerfinance.gov/prepaid-rule/.)

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