On February 25, the Massachusetts Office of Consumer Affairs and Business Regulation (OCABR) published the results of its survey of prepaid cards. The OCBAR examined 16 different purchasing and use-related fees for 11 randomly-selected prepaid cards, using the fee schedule from each card’s website, which the OCABR stated “were not always easy to find and were quite confusing at times.” The survey identified as the most common fees charged by the prepaid cards surveyed as (i) monthly fees, (ii) ATM withdrawal fees, and (iii) balance inquiry fees, which were each charged by nine of the 11 cards surveyed. The OCABR researchers claim to have discovered “additional types of fees associated with the products”, including fees associated with alternative card payment plans. The OCABR believes such alternative options make it more difficult for consumers to anticipate the cost of having and using a prepaid card.
On March 18, the CFPB announced that it has begun testing two potential model prepaid card disclosures. After holding field tests last month in Baltimore and this week in Los Angeles, the CFPB plans a final field test next month at a location to be determined. The model forms would provide a standard format for disclosing certain fees, including, among others, monthly, reload, per purchase, ATM withdrawal, and inactivity fees. The two models primarily differ in design—the fees included on the two test models are identical, but for a “decline” fee, which appears only on one of the models.
The field testing follows the CFPB’s May 2012 advance notice of proposed rulemaking soliciting comments to evaluate prepaid cards. The CFPB received hundreds of comments in response to that initial inquiry, and since that time, advocacy groups and members of Congress have continued to pressure the CFPB to take action on prepaid cards. For example, in the last several months, Senate Democrats introduced two prepaid card bills that would establish certain disclosure requirements, and the PEW Charitable Trusts released a paper outlining its latest position and model disclosures.
Finally, in addition to the field testing, the CFPB is seeking comments on the model disclosures through its blog, Twitter, Facebook, or email “from anyone who is interested in making prepaid card disclosures better.” Following completion of the testing, the CFPB expects to propose a rule “later this spring.” That timeline matches one laid out in the CFPB’s most recent rulemaking agenda, in which the Bureau anticipated a proposed rule in May 2014.
CFPB Student Loan Ombudsman Questions Marketing Of Student Financial Products; GAO Recommends More Transparency
On February 13, CFPB Student Loan Ombudsman Rohit Chopra published on the CFPB’s blog an update on the CFPB’s review of student financial products and raised concerns about certain marketing arrangements between financial institutions and colleges and universities, and the level of transparency associated with those agreements and the products marketed under them. He specifically questioned financial institutions that “generate a significant amount of their revenue on these products while students are currently in school.” On the same day, the GAO published a report on student debit and prepaid cards and marketing agreements, which recommends that Congress take steps to increase transparency. Read more…
On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.
The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.
Mortgage Rule Implementation / Impact
Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.
The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members. Read more…
On January 9, Senator Mark Warner (D-VA), released the Prepaid Card Disclosure Act of 2014. The bill would amend the Electronic Fund Transfer Act to require any person that offers certain prepaid card accounts to offer with any application a table of fees that (i) can be “easily understood”; (ii) is “clearly and conspicuously” displayed; and (iii) includes, at a minimum, the amount and description of each fee that may be charged in connection with the account. In addition, a toll-free number and website at which the consumer can access the fee disclosure would have to be included on the card or other means of account access. The bill would require the CFPB to establish by rulemaking a format for the fee table and would allow the CFPB to require the placement of a QR code or similar technology on any packaging, card, or other object associated with the account to provide an electronic link to the disclosures. The bill follows the December 2013 introduction of the Prepaid Card Consumer Protection Act, sponsored by Senators Robert Menendez (D-NJ) and Richard Blumenthal (D-CT). The bill includes disclosure requirements similar to the Warner bill, plus a “wallet sized” fee disclosure requirement. In addition, Senator Menendez’s bill would, among other things, prohibit numerous fees and most credit features, and would require that financial institutions and account providers close accounts and refund the balance after 12 months of inactivity or other term of inactivity established by the CFPB, and upon request of the consumer.
On December 12, the CFPB published the preliminary results of its ongoing study of arbitration agreements in consumer finance contracts. Section 1028(a) of the Dodd-Frank Act directs the CFPB to study the use of pre-dispute arbitration contract provisions, and preconditions the CFPB’s exercise of rulemaking authority regarding arbitration agreements on a finding that the regulation is “in the public interest and for the protection of consumers.” The CFPB commenced its arbitration study in early 2012, and expanded its review this year with a proposal to survey credit card holders, and by exercising its authority under Dodd-Frank Act Section 1022 to order some companies to provide template consumer credit agreements, as Director Cordray indicated during a September House Financial Services hearing.
The CFPB reports the following preliminary results, among others:
- Larger banks are more likely to include arbitration clauses in their credit card contracts and checking account contracts than smaller banks and credit unions.
- Just over 50% of credit card loans outstanding are subject to arbitration clauses, while 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
- Arbitration clauses are prevalent across the general purpose reloadable (GPR) prepaid card market, with arbitration clauses appearing in the cardholder contracts for 81% of GPR prepaid cards studied by the CFPB.
- Class action waivers are ubiquitous, appearing in approximately 90% of arbitration provisions.
- A minuscule number of consumers exercise contract carve-outs permitting disputes to be pursued in small claims courts, while credit card issuers are “significantly more likely” to sue consumers in small claims court.
The CFPB did not consider specific policy options at this stage. However, the report outlines numerous additional steps the CFPB plans to take as part of its arbitration study, which may expand to include other financial product markets. For example, in response to stakeholder comments, the CFPB is revising a prior proposal to conduct a survey of consumers that addresses consumer awareness of arbitration clauses and consumer perceptions of and expectations about formal dispute resolution. The CFPB also intends to assess the possible impact of arbitration clauses on the price of consumer financial products. Finally, the CFPB is examining the interrelationship between public enforcement and private aggregate enforcement (i.e., class actions) by conducting an empirical analysis of the types of cases brought by public and private actors, and the relationship between any actions against the same defendants or challenging similar conduct. The report does not provide anticipated timelines for these or any of the other future steps the Bureau describes.
On November 12, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recent Semi-Annual Report to Congress, which covered the period April 1, 2013 through September 30, 2013.
The session covered a range of topics, including mortgage rule implementation, auto finance, student lending, Military Lending Act rulemaking, prepaid cards, Gramm-Leach-Bliley Act privacy notices, and the CFPB’s data collection practices. A summary of the discussion of each of those topics follows. Notably, the hearing did not touch on (i) short-term, small dollar lending (outside of the Military Lending Act), online lending, or the ongoing investigations of payment processors, (ii) the status of the CFPB’s HMDA rulemaking or small business lending rule, or (iii) the CFPB’s integrated mortgage disclosure rule, which is expected later this month. Read more…
On September 12, the CFPB issued a bulletin stating that the Electronic Fund Transfer Act (EFTA) and Regulation E apply to payroll card accounts, which Regulation E defines as “accounts that are established directly or indirectly through an employer, and to which transfers of the consumer’s salary, wages, or other employee compensation are made on a recurring basis.” This bulletin follows pressure from federal legislators on the CFPB to clarify the protections afforded to consumers receiving wages on payroll card accounts and to investigate the fees and practices associated with such accounts, and reports of at least one state-level investigation of payroll card practices.
The bulletin and press release emphasize that the following provisions apply to payroll card accounts:
- Fee disclosures. At account opening or before the first electronic fund transfer (EFT), a payroll card issuer must provide disclosures of any fees imposed by the financial institution for EFTs, limitations on liability, and other required information. The bulletin notes that some state laws dictate that certain information be provided before an employee elects to receive wages via payroll card.
- Account information. A payroll card issuer must provide periodic statements as required by Regulation E generally or, alternatively, must make available to the consumer – (i) by telephone, the consumer’s account balance; (ii) electronically (such as through a website); or (iii) in writing (if requested) – a history of the consumer’s transactions and fees covering the preceding 60 days.
- Unauthorized transfers. With limited exceptions regarding the period within which an unauthorized transfer must be reported, Regulation E’s limited liability protections apply to payroll cards.
- Error resolution. Financial institutions must respond to a consumer’s report of errors regarding a payroll card account if the report is received within 60 days of the consumer either accessing an electronic account history or receiving a written account history on which the error appears, whichever is earlier, or within 120 days after the alleged error occurs.
- Compulsory use. An employer may not require that its employees receive their wages by electronic transfer to a payroll card account at a particular institution. An employer may, however, offer employees the choice of receiving their wages on a payroll card or receiving it by some other means. The bulletin notes that most states’ laws contain additional restrictions on the manner in which employers may make wages available to their employees and that the EFTA and Regulation E preempt state laws “relating to” EFTs, among other things, only to the extent of any inconsistency. A state law is not considered inconsistent with the EFTA and Regulation E if the state law affords consumers greater protections.
Lastly, the bulletin notes the CFPB’s authority to examine supervised entities’ use of third-party service providers and to enforce the EFTA and Regulation E against both financial institutions and employers.
On July 11, a group of Democratic Senators urged the CFPB and the Department of Labor to “take swift action” regarding prepaid payroll cards. The Senators expressed concern that workers do not understand the “excessive fees” and “harmful practices” associated with such cards, and suggested that those fees and practices – specifically, those relating to ATM use, balance inquiry, swipe purchases, overdraft, and inactivity, among others – may violate the Electronic Funds Transfer Act and its implementing regulation, Regulation E. The lawmakers asked the CFPB to conduct a study to better understand these fees and their impact on workers, and to clarify through a rulemaking or other supervisory action the options employers must provide to their employees under Regulation E. The Senators’ letter follows reports of an investigation by New York Attorney General Eric Schneiderman into potential state law violations related to employers’ use of payroll cards.
On July 3, the CFPB released its spring 2013 regulatory agenda. Among the agenda items are three rulemaking activities listed for the first time: (i) “prerule activities” related to payday loans and deposit advance products anticipated for January 2014, (ii) “further action” on debt collection regulations expected in October 2013, and (iii) “prerule activities” related to Gramm-Leach-Bliley Act privacy notices planned for November 2013. The agenda also indicates that the CFPB expects, among other things, to (i) finalize its integrated mortgage disclosures rule in October 2013, (ii) issue a final student loan servicer “larger participant” rule in September 2013, and (iii) propose a rule regarding general purpose reloadable prepaid cards in December 2013. The agenda does not mention any planned activities related to small business lending data collection or auto finance issues.
On May 31, the FDIC announced enforcement actions against a California bank and an affiliated service provider for alleged unfair and deceptive practices in the marketing and servicing of a prepaid reloadable MasterCard. According to the FDIC, the service provider’s website contained a number of misrepresentations while omitting other information. Specifically, the FDIC claimed that the firm deceptively advertised free online bill pay, promoted features that were not available to cardholders, and charged fees that were not clearly disclosed. Additionally, the service provider’s ACH error resolution procedures imposed additional, undisclosed requirements on card holders. Neither the bank nor the service provider admitted the allegations, but they agreed to establish a restitution fund of approximately $1.1 million for over 64,000 card holders, and pay civil money penalties of $600,000 and $110,000, respectively. The consent orders (i) direct both entities not to engage in further violations of law, (ii) establish specific corrective actions, and (iii) require enhanced compliance management systems and periodic reporting to the FDIC. The bank is further required to strengthen its oversight of third parties.
On April 19, the CFPB issued a final preemption determination regarding whether the Electronic Fund Transfer Act (EFTA) and Regulation E preempt certain unclaimed gift card laws in Maine and Tennessee. The EFTA, as implemented by Regulation E, generally prohibits any person from issuing a gift certificate, store gift card, or general-use prepaid card with an expiration date, though under certain conditions, the card may have an expiration date so long as it is at least five years after the date of issuance (or five years after the date that funds were last loaded). The CFPB determined that the Maine law does not interfere with a consumer’s ability to use a gift cards at point-of-sale for at least as long as guaranteed by the EFTA and Regulation E because it requires the issuer to honor the gift card on presentation indefinitely even if the unused value has been transferred to the state. For Tennessee, the CFPB reached the opposite conclusion because the Tennessee provision permits issuers to decline to honor gift cards as soon as two years after issuance. According to the CFPB, the Tennessee law is inconsistent with federal law because, in effect, the provision allows funds to expire sooner than is permitted under EFTA and Regulation E.
On May 24, the CFPB made an advance notice of proposed rulemaking (ANPR) to solicit comments that it will use to evaluate general purpose reloadable (GPR) prepaid cards. According to the ANPR, the CFPB intends to issue a proposal to extend Regulation E requirements to GPR cards. This would mean that issuers of GPR cards would be subject to many of the requirements currently applicable to ATM transactions, POS terminal transfers, telephone bill-payment services, and other electronic funds transfer systems. Comments on the ANPR are due by July 23, 2012.
On May 15, the CFPB published a notice and request for comment regarding its collection of information concerning the costs expected to be incurred by institutions required to comply with CFPB rules. The notice identifies specifically the need to collect information about costs to mortgage and remittance industry participants in connection with upcoming CFPB rules. The notice further states that the CFPB seeks to understand the effect of compliance costs on financial service providers and consumers, but that it is particularly interested in the impact of regulations on the unit costs of delivering specific consumer products and services. The CFPB plans to use structured interviews, focus groups, written questionnaires, and other methods to collect the needed information, and will attempt to collect a representative sample of providers from affected markets. The public is invited to comment on the notice through June 19, 2012.
On May 17, the CFPB announced that it will hold a public hearing to discuss issues in the prepaid cards market. The hearing is scheduled to take place on May 23, 2012 inDurham,NC, and will include remarks from Director Cordray.
On January 31, the Consumer Financial Protection Bureau (CFPB) released its first semi-annual report to Congress and CFPB Director Richard Cordray appeared before the Senate Banking Committee. The report reviews the CFPB’s structure and purpose, and provides a general overview of the CFPB’s activities to date. The report also identifies consumer “shopping challenges” by product category (i.e., challenges that consumers face when shopping for mortgages, credit cards, and student loans), and identifies the CFPB’s planned activities for the next six months.
Issues raised during the Senate hearing included: (i) prepaid card regulation, (ii) the definition of “abusive” as it is used in the Dodd-Frank Act, (iii) the “ability to pay” rule required by Dodd-Frank, and (iv) treatment of privileged information during the examination process. First, the Director acknowledged the importance of innovation in the card market, but also noted that regulation of credit and debit cards likely have pushed the market towards prepaid cards. He noted legislation sponsored by Senator Menendez to regulate the prepaid card market, and said the Bureau would welcome legislation addressing prepaid card issues. Second, consistent with his statements to the House Financial Services Committee, the Director reported that a rulemaking to further define the term “abusive” is not currently on the CFPB’s agenda. Third, Director Cordray did not provide insight into the CFPB’s view of the “ability to repay” rule, noting that at this time the Bureau has not prepared a draft rule. Finally, Director Cordray indicated support for a legislative fix to protect legal privileges applicable to documents and information that could be requested by the CFPB during the course of its examinations.