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Prepaid Cards and
Overdraft Prepaid Card Compliance, January 29, 2015
Christopher D. Trujillo
General Counsel, Corporate Secretary
Galileo Overview
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relevant competitive advantages:
• ‘Road tested’ and trusted as the solution provider for some of the
largest financial institutions:
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payments and prepaid processing knowledge.
» Flexibility
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» Unique Requirements
CFPB Overdraft on Rulemaking History
• May 2012, the CFPB issued its advanced notice of
proposed rule making related to prepaid cards (only 5
uses of word Overdraft).
• On November 13, 2014, CFPB issued Notice of
Proposed Rule Making which in part require issuers of
prepaid accounts with overdraft features tied to them to
be subject to the credit card rules under Reg Z and Reg
E (approximately 800 uses of word Overdraft).
CFPB Overdraft Rulemaking History
• By letter dated January 5, 2015, the NBPCA and
Electronic Transactions Association requested 60 day
extension to respond to NPR citing discussion on
extension of Reg Z to prepaid accounts was not included
in the 2012 notice of proposed rule making and industry
needs time to understand how new rules will affect
industry participants.
• Unless extended, the comment period ends March 31,
2015.
Consumer View of Overdraft Protection
• Market surveys show that consumers “no longer view[]
overdraft as a penalty like a parking ticket, but as a
safety net.” G. Michael Flores & Todd J. Zywicki, Commentary: CFPB Study of
Overdraft Programs 17 (George Mason University Law and Economics Research
Paper Series 13-60) available at
http://www.law.gmu.edu/assets/files/publications/working_papers/1360.pdf
• The CFPB has called overdraft a “costly service.”
However, as Professor Zywicki noted, this observation is
meaningless unless you also consider costs associated
with the likely alternatives to overdraft such as utility
reconnection fees and payday loans. id.
• $15 overdraft fee vs. reconnection fees of $60 or more.
Consumer Demand for Overdraft Protection
• Since the institution of the opt-in requirement, about 75
percent of 130,000,000 of consumer checking account
holders opted into overdraft sending a strong message
that consumers want overdraft protection. Moebs Services, “Banks
Lower Overdraft Fees as Consumers Choose to Opt-In,” Press Release Dec. 8, 2010, http://www.moebs.com/PressReleases/tabid/58/ctl/Details/mid/380/ItemID/197/Default.aspx
• In July 2011, a survey found that 86 percent of elevated
users of overdraft stated that the availability of overdraft
protection was “extremely valuable.” Only 2 percent said
it was “not at all valuable.” G. Michael Flores & Todd J. Zywicki, Commentary:
CFPB Study of Overdraft Programs 17 (George Mason University Law and Economics Research
Paper Series 13-60) available at
http://www.law.gmu.edu/assets/files/publications/working_papers/1360.pdf
Alternatives to Overdraft Protection
• If overdraft were not available to elevated users
of overdraft:
• 56 percent said they would not be able to get money.
• 10 percent said they would use a credit card.
• 24 percent said they would use a payday loan. G. Michael Flores & Todd J. Zywicki, Commentary: CFPB Study of Overdraft
Programs 17 (George Mason University Law and Economics Research Paper
Series 13-60) available at
http://www.law.gmu.edu/assets/files/publications/working_papers/1360.pdf
Overdraft – Traditional Bank Accounts
• Traditional bank account overdraft protection fees:
Bank Overdraft Fee Max Fees per Day Overdraft Protection
Transfer
Bank of America $35 4 $10.00
Note: Extended overdraft fee of $35 charged when account
remains overdrawn for 5 consecutive business days
Capital One $35 4 $10.00
Note: No overdraft fees if account is overdrawn by $5 or less at
the end of the day
Chase $34 3 $10.00
Note:
No overdraft fees if account is overdrawn by $5 or less at the
end of the day
No fee if purchase item is $5 or less
Extended overdraft fee: $15 charged when account remains
overdrawn for 5 consecutive business days
Overdraft Fees at Top U.S. Banks •*Effective beginning August 10, 2013
•http://www.nerdwallet.com/blog/banking/overdraft-fees-what-banks-charge/
Prepaid Card Programs Featuring Overdraft
• The overdraft programs related to prepaid accounts
listed below are competitively priced compared to
overdraft on traditional banking accounts. Each
requires opt-in. Customers understand the fees
they will be charged and when they will apply.
• CFPB noted that overdraft on prepaid mirrors
overdraft on traditional deposit accounts “but in
some ways [is] more consumer friendly,” and “fees
are relatively modest compared to similar fees
associated with checking account overdraft
programs.” NPR pg 38
Prepaid Card Programs Featuring Overdraft
• NetSpend
» Purchase Cushion—no fee for negative balances up
to $10.00.
» After opting into the overdraft protection service, a
cardholder must set up an ACH deposit of at least
$200.00 every 30 days to remain eligible.
» Email notifications are sent whenever a transaction
results in a negative balance (optional text message
alerts).
Prepaid Card Programs Featuring Overdraft
• NetSpend (cont.)
» $15 flat fee for each time a negative balance over
$10.00 occurs with a limit of 3 per calendar month.
» 24 hour grace period to repay.
Prepaid Card Programs Featuring Overdraft
• ACE Elite Prepaid Card
• Requires user to set up an ACH deposit of at least
$200.00 every 30 days and opt-in.
• $15 flat fee for each transaction that overdraws by
more than $10.00 with a limit of 3 per calendar month.
• 24 hour grace period.
Prepaid Card Programs Featuring Overdraft
• Insight Visa
» Requires opt in and at least one deposit of $200 or
more every 35 days.
» No fee for transactions less than $5. No fees until
negative balance exceeds $10.
» 24 hour grace period.
Differences Prepaid Overdraft and Traditional bank account
Overdraft; Knowingly Choose
• Transaction alerts let me know the balance on my
prepaid card immediately after I do a transaction:
Dear XXXXXXXXX Prepaid MasterCard® Cardholder:
A transaction on your XXXXXX Prepaid MasterCard
account for $XX at RICHS BAGELS HOLLADAY UT has
been approved. The current available balance on your
card account is $XXXX.
• I received this alert immediately after the transaction
occurred. I would know precisely when I would go into
overdraft
Differences Prepaid Overdraft and Traditional bank account
Overdraft Knowingly Choose
• NetSpend actually sends out an email and text alert
letting the cardholder know that overdraft protection was
extended and that the cardholder has 24 hours to repay
the overdraft prior to incurring a fee.
• Traditional bank accounts provide a paper statement
after the end of the month or a link to an eStatement
rather than transactional alerts.
• Account holders may not know until the end of the month
that they have gone into overdraft unless they login to
their account before then.
Comments to CFPB on applying Reg Z to Overdraft on
Prepaid
• In the NPR, the CFPB noted that it received many
comments on the permissibility of overdraft to prepaid
accounts:
» Prepaid industry encouraged CFPB not adopt new
regulations noting “that it would be unfair for the
Bureau to prohibit overdraft on prepaid cards while
such features remain permitted on checking
accounts.” NPR pg 384
» Consumer advocates urged CFPB to “ban overdraft
services in connection with prepaid products,
because the overdraft fees and accumulating debt
can be harmful.” NPR 385
Comments to CFPB on applying Reg Z to Overdraft on
Prepaid
»A large financial institution stated that “in its opinion,
GPR Cards should remain “prepaid,” without being
linked or having access to overdraft services.” id.
»Consumers who responded to the CFPB voiced
support for overdraft because it allowed them to bridge
“cash shortfalls between paychecks and fulfill short-term
credit needs.” id.
CFPB Basis for applying Reg Z to Overdraft on Prepaid
• Open End Credit subject to TILA has the following
elements:
» Plan in which the creditor reasonably contemplates
repeated transactions;
» The creditor may impose a finance charge from time
to time on the outstanding balance;
» Credit is generally replenished to the extent any
outstanding balance is repaid.
CFPB Basis for applying Reg Z to Overdraft on Prepaid
• Traditional bank accounts with overdraft services would
qualify as Open End Credit.
• However, in 1969 the Board granted an exclusion to the
definition of “finance charge” to exclude fees related to
overdraft provided no written agreement is in place that
requires payment in more than four installments.
• If no finance charge is assessed then the issuer is not a
creditor.
CFPB Basis for applying Reg Z to Overdraft on Prepaid
• The CFPB considered but was not willing to extend the
exception granted for overdraft on traditional deposit
accounts to overdraft on prepaid accounts for the
following reasons:
» Need for disclosure of credits terms on overdraft
» Historical basis for exclusion no longer applies, one
time courtesy on checks, and overdraft is automated
» Historical marketing of prepaid cards as mechanism
to control spending
CFPB Basis for applying Reg Z to Overdraft on Prepaid
» Consumers would benefit from Reg Z protections
» Few prepaid programs offer overdraft so there would
not be as big a disruption as adopting new regulation
on overdraft on traditional bank accounts See NPR pgs 402-411
CFBP Basis for applying Reg Z to Overdraft on Prepaid
• To be perfectly clear of its intent, the CFPB modified the
definition of finance charge to include any fee imposed
on a cardholder for credit accessed by a prepaid card. See Section 1026.4
• It modified the exclusion granted on overdraft to
traditional bank accounts to indicate that such exclusion
does not apply to overdraft accessed by prepaid
accounts. See Section 1026.2(a)(15)
• The definition of “credit card” would also be modified to
include a prepaid card if it can use used to access a
credit plan unless it is not subject to a finance charge. See
cmt to Section 1026.2(a)(15)(i)
Force Post Transactions
• As currently written, the proposed rules could even apply
to a prepaid program that does not expressly offer
overdraft protection.
• The proposed rules modification to the comments on the
definition of “credit” would include “a transaction where
the consumer has sufficient or available funds in the
prepaid account to cover the amount of the transaction
at the time the transaction is authorized but insufficient
or available funds in the prepaid account to cover the
amount of the transaction at the time the transaction is
paid.” See Cmt 2(a)(14)-3.
Force Post Transactions
• All prepaid programs receive force post transactions
when a merchant does not receive an authorization and
“forces” the transaction through. Depending on the
amount of funds available vs. the amount of the
transaction, a force post transaction could fit into the
definition of credit.
• As mentioned earlier, a finance change would be
required to make this transaction qualify as credit,
however if a negative balance arises any transaction
fees could be viewed as a finance charge under the
proposed rules.
Impact of Extending Reg Z to Overdraft on Prepaid Accounts
• Overdraft cannot be offered until 30 calendar days after
the cardholder registers the prepaid card
• Issuers must perform an ability to pay analysis on
cardholder prior to extension of credit (consider income,
assets and obligations)
• Issuers must comply with Reg Z monthly periodic
statement requirements
Impact of Extending Reg Z to Overdraft on Prepaid
Accounts
• Cardholder who accesses overdraft has 21 days to
repay the debt, due date must be the same each month
• Cap on fees that can be charged during the first year; 25
percent of initial credit limit
• Late fees must be reasonable and proportional (i.e. late
fee would be the lesser of some amount or minimum
monthly fee)
Impact of Extending Reg Z to Overdraft on Prepaid
Accounts
• 45 day notice required to be provided to cardholders on
rate increases
• Issuers may only attempt to collect overdraft from funds
in prepaid account once per month
• Issuers may not require as a condition for extending
credit payment by preauthorized electronic transfer from
a prepaid account
• Issuers may not charge different fees for program if
cardholder chooses not to opt in for overdraft
Conclusion (my opinion)
• There is a need and a demand for overdraft
• Overdraft is already highly regulated. Prepaid programs
that offer overdraft do it in an almost identical manner as
traditional bank accounts, but as noted by the CFPB,
with lower fees and added convenience.
• Applying Reg Z to overdraft on prepaid without applying
it to traditional bank accounts is not justified and will
create confusion.
• Regulation should not stifle innovation.
Thank you