Prepaid Cards and Overdraft · meaningless unless you also consider costs associated with the likely alternatives to overdraft such as utility reconnection fees and payday loans

Prepaid Cards and

Overdraft Prepaid Card Compliance, January 29, 2015

Christopher D. Trujillo

General Counsel, Corporate Secretary

Galileo Overview

• Recognized industry leader providing our clients with a multitude of

relevant competitive advantages:

• ‘Road tested’ and trusted as the solution provider for some of the

largest financial institutions:

• Experienced and consistent executive team with significant financial

payments and prepaid processing knowledge.

» Flexibility

» Innovation

» Scalability

» Speed to Market

» Reliability

» Increased Profitability

» Customization

» Operations Excellence

» Analytics

» Regulatory

» Audit

» Reporting

» Security

» Compliance

» Testing Rigor

» Extendable Platform

» Full Service or Specialized

» 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.moebs.com/PressReleases/tabid/58/ctl/Details/mid/380/ItemID/197/Default.aspx


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


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


• 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).


• 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.


• 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.


• 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.


• 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.


• 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


» 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

Documents

Prepaid Cards and Overdraft · meaningless unless you also consider costs associated with the likely alternatives to overdraft such as utility reconnection fees and payday loans