Electronic Fund Transfers (Regulation E), 30923-30925 [2012-12565]

Agencies

• BUREAU OF CONSUMER FINANCIAL PROTECTION

[Federal Register Volume 77, Number 101 (Thursday, May 24, 2012)]
[Proposed Rules]
[Pages 30923-30925]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12565]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 77, No. 101 / Thursday, May 24, 2012 / 
Proposed Rules

[[Page 30923]]



BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1005

[Docket No. CFPB-2012-0019]
RIN 3170-AA22


Electronic Fund Transfers (Regulation E)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB or the Bureau) 
is seeking comment, data, and information from the public about general 
purpose reloadable (GPR) prepaid cards (GPR cards). GPR cards are a 
prepaid financial product that have been increasing in popularity and 
that some consumers now use in a manner similar to a debit card that is 
linked to a traditional checking account. The Bureau is particularly 
interested in learning more about this product, including its costs, 
benefits, and risks to consumers. The Bureau intends to issue a 
proposal to extend the Regulation E protections to GPR cards. Your 
comments, in conjunction with other outreach and analysis, will help 
the Bureau better understand and evaluate any potential consumer 
protection issues raised by the current design, marketing, and use of 
this product. This advance notice of proposed rulemaking (ANPR) asks 
ten broad questions about GPR cards.

DATES: Comments on this ANPR must be received by July 23, 2012.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-
20120019 or Regulatory Identification Number (RIN) 3170-AA22, by any of 
the following methods:
     Electronic: https://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, 
DC 20552.
     Hand Delivery/Courier in Lieu of Mail: Monica Jackson, 
Office of the Executive Secretary, Bureau of Consumer Financial 
Protection, 1700 G Street NW., Washington, DC 20552.
    Instructions: All submissions must include the agency name and 
docket number or RIN for this rulemaking. In general, all comments 
received will be posted without change to https://www.regulations.gov. 
In addition, comments will be available for public inspection and 
copying at 1700 G Street NW., Washington, DC 20552, on official 
business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You 
can make an appointment to inspect the documents by calling (202) 435-
7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or social 
security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Dan Quan, Financial Analyst; Gregory 
Evans, Counsel; Bureau of Consumer Financial Protection, 1700 G Street 
NW., Washington, DC 20552, at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Background

A. General Purpose Reloadable Prepaid Cards

    Prepaid cards are one of the fastest growing payment instruments in 
the United States. The prepaid card market consists of a wide variety 
of products. Some cards are ``closed-loop cards,'' which a consumer can 
use only at a specific merchant or group of merchants. Other cards are 
``open-loop cards,'' which a consumer can use anywhere that accepts 
payment from a retail electronic payments network, such as Visa, 
MasterCard, American Express, or Discover. A prepaid card also may or 
may not be ``reloadable,'' meaning that the consumer, or other 
authorized party, can add money to the card after the card is issued.
    This ANPR is seeking information about a specific type of prepaid 
card known as a general purpose reloadable (GPR) card (GPR card). 
According to projections by the Mercator Advisory Group, the total 
dollar value of amounts loaded onto GPR cards is expected to reach $167 
billion in 2014, far in excess of the amount for 2007 of $12 
billion.\1\ A GPR card is issued for a set amount in exchange for 
payment made by a consumer. A GPR card is reloadable, meaning the 
consumer can add funds to the card. While this ANPR refers to a 
``card,'' these devices may include other mechanisms, such as a key fob 
or cell phone application, that access a financial account. This ANPR 
does not seek information about ``closed loop'' cards, debit cards 
linked to a traditional checking account, non-reloadable cards, payroll 
cards, electronic benefit transfers (EBTs), or gift cards.
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    \1\ Mercator Advisory Group, Prepaid Card Market Forecast, 
November 2011.
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    The GPR card market is one of the fastest growing segments of the 
overall prepaid market. According to the Mercator Advisory Group, the 
total dollar value of funds loaded to GPR cards is expected to grow at 
an average annual rate of 42% from 2010 to 2014.\2\ Both depository and 
non-depository institutions participate in the GPR card market. 
Recently, the GPR card market has benefited from competition and 
economies of scale, leading many market participants to voluntarily 
provide some protections for consumers. The Bureau is gathering 
information about GPR cards, however, in order to ensure that consumers 
are protected regardless of the economic environment. Three factors in 
particular command greater attention to GPR cards: The growth of the 
market for GPR cards, consumer use, and the lack of comprehensive 
federal regulation. First, the number of GPR card users is growing 
rapidly, as the two largest issuers report that the number of active 
GPR cards more than doubled from nearly 3.4 million cards active as of 
the first quarter of 2009 to over 7.0 million active cards as of the 
first quarter of 2012.\3\ Given this rapid growth and projections for 
continued growth, the

[[Page 30924]]

need to evaluate and address potential risks to consumers will 
increase.
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    \2\ ld.
    \3\ NetSpend Holdings, Inc. Form 10-Q, filed May 8, 2012 for the 
period ending March 31, 2012; NetSpend Holdings, Inc. Form S-1, 
filed July 15, 2010; Green Dot Corporation Form 10-Q, filed May 10, 
2012 for the period ending March 31, 2012; Green Dot Corporation 
Form S-1/A, filed June 2, 2010.
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    Second, some consumers may view and use GPR cards as an alternative 
to traditional checking accounts. This possibility is reflected in the 
increase in the number of GPR cards that consumers are loading through 
direct deposit. The second largest GPR card program manager reported 
that nearly 42% of its cardholders had direct deposit as of December 
31, 2011, as compared to about 14% as of December 31, 2007.\4\ The 
largest GPR card program manager reported a 69% year-over-year increase 
in the funds loaded via direct deposit during the fourth quarter of 
2011.\5\ The Bureau has also observed some GPR cards marketed as a 
substitute for a checking account. While consumers may be using GPR 
cards as a substitute for checking accounts, GPR cards do not carry the 
same protections given to checking accounts and electronic transactions 
involving checking accounts under federal law.
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    \4\ NetSpend Holdings, Inc. Form 10-K, filed February 4, 2012 
for the period ending December 31, 2011, available at https://files.shareholder.com/downloads/ABEA-56BIQV/1684506713x0xS1047469-12-1472/1496623/filing.pdf; NetSpend Holdings, Inc. Form 10-K, filed 
March 2, 2011 for the period ending December 31, 2010, available at 
https://files.shareholder.com/downloads/ABEA-56BIQV/1684506713x0xS1047469-11-1638/1496623/filing.pdf.
    \5\ Green Dot Corporation, Q4 2011 Earnings Conference Call 
Supplemental Materials, January 26, 2012, available at https://ir.greendot.com/phoenix.zhtml?c=235286&p=irol-EventDetails&EventId=4701441.
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    Third, the lack of a comprehensive federal regulatory regime may 
contribute to market distortions, misaligned incentives, or consumer 
confusion, as GPR card consumers may mistakenly assume that they 
possess rights enforceable under federal law. Unlike some other 
``general-use prepaid cards'' such as payroll cards, Regulation E 
generally does not apply to GPR cards. Many GPR card market 
participants offer contractual protections similar to those provided in 
Regulation E for payroll cards, though such provisions may vary, and 
are subject to unilateral change.
    Given the growth in the GPR card market and risk of consumer harm, 
the Bureau is seeking information to determine how best to implement 
consumer protection rules for this product. This information will help 
inform the Bureau as to the contours of any proposed rulemaking 
concerning GPR cards.

B. Current Regulation

    The Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) (EFTA), 
enacted in 1978, provides a basic framework establishing the rights, 
liabilities, and responsibilities of participants in electronic fund 
transfer (EFT) systems. Historically, the EFTA was implemented in 
Regulation E of the Board of Governors of the Federal Reserve System 
(Board), 12 CFR part 205. The Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) amended a number of consumer 
financial protection laws, including the EFTA. Public Law 111-203,124 
Stat. 1376 (2010). In addition to certain substantive amendments, the 
Dodd-Frank Act generally transferred the Board's rulemaking authority 
for the EFTA to the Bureau, effective July 21, 2011.\6\ See sections 
1061 and 1084 of the Dodd-Frank Act. Pursuant to the Dodd-Frank Act and 
EFTA, as amended, in December 2011 the Bureau republished Regulation E 
as an interim final rule, 12 CFR part 1005. 76 FR 81020 (Dec. 27, 
2011).
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    \6\ The Dodd-Frank Act generally excludes from this transfer of 
authority, subject to certain exceptions, any rulemaking authority 
over a motor vehicle dealer that is predominantly engaged in the 
sale and servicing of motor vehicles, the leasing and servicing of 
motor vehicles, or both. See Dodd-Frank Act, sections 1029, 1084(3). 
The Dodd-Frank Act also leaves to the Board rulemaking authority 
under section 920 of EFTA, which deals with debit card interchange 
fees, network arrangements, and routing restrictions. See Dodd-Frank 
Act, sections 1002(12)(C), 1084(3); 12 CFR part 235.
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    Regulation E generally applies to electronic fund transfers 
authorizing a financial institution to debit or credit a consumer's 
account. Examples of types of transfers covered by the Act and 
regulation include transfers initiated through an automated teller 
machine (ATM), point-of-sale (POS) terminal, automated clearinghouse 
(ACH) transactions, telephone bill-payment plans, and remote banking 
service. Regulation E defines an ``account'' as ``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.'' 12 CFR 1005.2(b)(1).
    In March 1994, the Board amended Regulation E to extend coverage to 
electronic benefit transfers (EBTs) issued by government agencies. 59 
FR 10678 (March 7, 1994). The Board also amended Regulation E to deem a 
government agency an ``institution'' for purposes of the regulation. 12 
CFR 1005.15(a). While EBTs became subject to most of the requirements 
of Regulation E, the Board exempted government agencies providing EBTs 
from the requirement of providing a periodic statement, so long as the 
agency makes the consumer's account balance readily available by 
telephone line and electronically, and the agency provides a written 
sixty day account history upon request. In response to the Work 
Opportunity Reconciliation Act of 1996, the Board published a final 
rule in August 1997 to exempt needs-tested benefits, those based on a 
person or family's income, from Regulation E. Public Law 104-193, 110 
Stat. 2105 (1996); 62 FR 43467, 43468 (Aug. 14, 1997).
    In August 2006, the Board published a final rule amending 
Regulation E to address payroll card accounts. 71 FR 51437 (Aug. 30, 
2006); 12 CFR 1005.2(b)(2). The Board's final rule generally did not 
define employers and third-party service providers as ``financial 
institutions.'' The Board's final rule limited Regulation E's 
applicability to payroll card accounts to those established directly or 
indirectly through an employer. 12 CFR 1005.2(b)(2). While the Board 
received comments from consumer groups ``urg[ing] the Board to initiate 
a separate rulemaking to cover additional cards used to deliver 
important household funds, such as emergency benefit payments, income 
tax refunds, or loan proceeds, as well as other cards marketed or used 
as deposit account substitutes,'' the Board elected not to do so. The 
Board was of the view that GPR cards ``may only be used for limited 
purposes or on a short-term basis, and * * * may hold minimal funds'' 
and based on that premise the Board reasoned that ``[c]onsumers would 
derive little benefit from receiving full Regulation E protections for 
cards * * *, while the issuer's costs of compliance with Regulation E 
might be significant.'' 71 FR 51437, 51440-41. Thus, GPR cards were not 
included within the definition of ``account.''
    On May 22, 2009, the Credit Card Accountability Responsibility and 
Disclosure Act of 2009 (CARD Act) was signed into law. Public Law 111-
24, 123 Stat. 1734 (2009). The CARD Act amended the EFTA to impose 
restrictions on a person's ability to impose dormancy fees, service 
fees, or expiration dates on gift cards, which might take the form of a 
gift certificate, store gift card, or what was termed a general-use 
prepaid card. In April 2010, the Board published a final rule to 
implement these provisions. 75 FR 16580 (Aug. 22, 2010). The Board 
defined the term ``general-use prepaid card,'' as a ``a card, code, or 
other device that is: (i) [I]ssued on a prepaid basis primarily for 
personal, family, or household purposes to a consumer in a

[[Page 30925]]

specified amount, whether or not that amount may be increased or 
reloaded, in exchange for payment; and (ii) [r]edeemable upon 
presentation at multiple, unaffiliated merchants for goods or services, 
or usable at automated teller machines.'' EFTA Section 915(a)(2)(A); 12 
CFR 1005.20(a)(3)(i)-(ii). Because the CARD Act restrictions applied 
only to gift cards, however, the Board was careful to note that a 
general-use prepaid card did not include a device that was 
``[r]eloadable and not marketed or labeled as a gift card or gift 
certificate.'' 12 CFR 1005.20(b)(2). Thus, the CARD Act restrictions 
regarding dormancy fees, service fees, or expiration dates on gift 
cards applied solely to general-purpose cards intended as gifts, not to 
those used more generally as replacement products for checking or 
deposit accounts. Moreover, the definition of ``account'' in Regulation 
E remained unaltered.

II. Request for Comment

    The Bureau is seeking information from the public with respect to 
GPR cards, including their costs, benefits, and risks to consumers. 
These comments, in conjunction with other outreach and analysis, will 
help the Bureau better understand and evaluate potential consumer 
protection issues for this product. The Bureau will carefully consider 
the public's input as it formulates a proposal to regulate GPR cards. 
The Bureau's goals are to ensure that consistent minimum standards 
apply across similar consumer financial products, to allow consumers to 
easily compare financial products by ensuring transparent fee 
disclosure, and to allocate the risks of fraud or loss appropriately. 
In pursuing these goals, the Bureau will be mindful of avoiding any 
unnecessary burden on industry.
    The Bureau has grouped questions on GPR cards into four broad 
categories: (A) Regulatory coverage of products by some or all of 
Regulation E, (B) product fees and disclosures, (C) product features, 
and (D) other information on GPR cards.

A. Regulatory Coverage of Products

    1. How should the CFPB define GPR cards in the context of 
Regulation E? Should certain prepaid products not be included in this 
definition, such as cards that may serve a limited purpose (e.g., 
university cards or health spending cards)? Why or why not?
    2. Should only certain aspects of Regulation E be applied to GPR 
cards? For example, as Regulation E is currently applied to payroll 
cards, consumers are not guaranteed a periodic paper statement. If 
possible, please explain why a GPR card's use or structure makes any 
such modification appropriate. If the Bureau were to propose 
modifications to the Regulation E protections, what alternative 
protections or requirements, if any, should the Bureau propose?

B. Product Fees and Disclosures

    3. What steps could the Bureau take to most effectively regulate 
these products to provide the consumer with transparent, useful, and 
timely fee disclosures? Should market participants be required to 
provide disclosure pre-sale, post-sale, or both?
    4. How can the Bureau best enable a consumer to compare various GPR 
cards, or other payment products, that may have different fee 
structures or be offered through various distribution channels? Many 
GPR cards offer limited space to disclose contract terms. How should 
market participants convey the most important contractual terms to 
consumers to enable them to make educated purchase decisions?
    5. Many, but not all, GPR card accounts are insured by Federal 
Deposit Insurance Corporation (FDIC) pass-through insurance (coverage 
that ``passes through'' the agent to the holders of the accounts).\7\ 
Other GPR cards may provide alternative security mechanisms, but do not 
offer FDIC pass-through insurance. Should the existence, or lack 
thereof, of FDIC pass-through insurance associated with a GPR card be 
disclosed to the consumer? If so, how and when should the existence of 
FDIC pass-through insurance be disclosed?
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    \7\  See FDIC General Counsel's Opinion Number 8, 74 FR 67155, 
available at https://www.fdic.gov/regulations/laws/rules/5500-500.html.
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C. Product Features

    6. Currently, most GPR cards do not offer credit features, such as 
an ``overdraft'' feature that may be offered with a debit card that is 
linked to a traditional checking account. While an overdraft can occur 
in unusual circumstances, as when a small-item transaction is submitted 
for settlement without prior authorization or when a submitted 
transaction exceeds the authorized amount, generally speaking most GPR 
cardholders may not be able to withdraw or spend more than the funds 
loaded on the card. Nonetheless, some GPR card programs do allow 
cardholders to opt in to an overdraft program in which the issuer may 
authorize overdrafts and charges an overdraft transaction fee. The 
Bureau seeks public input on the costs, benefits, and consumer 
protection issues related to any credit features that may be offered by 
GPR cards.
    7. Currently, most GPR cards do not offer a savings account 
associated with the card. The Bureau seeks public input on the costs, 
and benefits, and consumer protection issues related to savings 
features offered with GPR cards.
    8. Currently some GPR cards include a feature that claims to offer 
consumers the opportunity to improve or build credit. Consumers 
generally need to opt in to this feature, which involves the reporting 
of certain information to credit reporting agencies. The Bureau seeks 
public input and data concerning the efficacy of credit reporting 
features on GPR cards in enabling consumers to improve or build credit. 
The Bureau also seeks information on whether regulatory provisions 
should address how such services are marketed to consumers.

D. Other Information on GPR Cards

    9. Through what methods, and under what circumstances, do market 
participants communicate a change of contract terms, or other 
information, to cardholders? Are there inventory replacement cycles 
that drive the printing of cards to stock distribution outlets? Do 
market participants conduct periodic maintenance of systems during 
which updating compliance systems would impose less of a burden? If so, 
how often does this maintenance occur? Are there other issues with 
respect to the cost of regulatory compliance about which the CFPB 
should be aware?
    10. Is there any other information relevant to GPR cards that will 
help inform the Bureau as it considers how best to address these 
products or other issues the Bureau should consider in this regard?

    Dated: May 17, 2012.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2012-12565 Filed 5-23-12; 8:45 am]
BILLING CODE 4810-AM-P