Consumer Banking and Payments Law: 7.2.4.5.1 Overview; scope
Regulation Z has a broad scope of coverage in terms of treating hybrid prepaid-credit card fees as finance charges.
Regulation Z has a broad scope of coverage in terms of treating hybrid prepaid-credit card fees as finance charges.
Regulation Z provides that all of the charges listed in section 1026.4(b)(1) through (10) are considered finance charges when imposed on a covered separate credit feature, whether that feature is structured as a credit sub-account of a prepaid account or as a separate credit account.409 These charges include:410
Complex rules govern whether a fee imposed on the asset feature of a hybrid prepaid-credit card is a finance charge. In general, any fee imposed on the asset feature of the prepaid account is a finance charge only to the extent that the fee exceeds comparable fees for prepaid accounts that do not have a covered separate credit feature.429
Regulation Z generally does not count as a finance charge fees charged by creditors to participate in a credit plan, for example, an annual fee for a credit card.441 However, a participation fee for a hybrid prepaid-credit card is considered a finance charge, whether it is imposed on the credit feature or the asset feature.442 The CFPB decided to treat participation fees as finance charges for hybrid prepaid-credit cards because it believed that annual or other periodic fees could present signif
Regulation Z contains a number of special provisions regarding whether an overdraft fee is considered a “finance charge.” In general, for a checking or deposit account:
If a card is covered as a hybrid prepaid-credit card, it is generally subject to all of the credit card rules of the Truth in Lending Act, including the Credit CARD Act and the Fair Credit Billing Act.449 These rules include both disclosure and substantive provisions and are discussed in detail in another volume in this series.450
Disclosures include:
One of the most familiar disclosures for credit cards is the disclosure that must accompany applications and solicitations,481 which is in the format of a table.482 One of the general exceptions to these application/solicitation disclosures is for lines of credit accessed solely by an account number.483 However, hybrid prepaid-credit cards are excluded from this exception and thus must provide the application/solicitation disclosures.
In addition to the applications/solicitations disclosures, credit cards must provide account opening disclosures.493 This requirement is also applicable to other forms of open-end credit that are not credit cards.494 There are two types of account opening disclosures: (1) the disclosures set forth in a table format of specific terms, such as APRs and certain fees; and (2) disclosures made outside the table that contain additional and more detailed information.
The Truth in Lending Act (TILA) generally requires open-end creditors to provide periodic statements disclosing certain information, such as beginning balance, transactions, APRs, due dates, and more.505 An in-depth discussion of Regulation Z’s periodic statement requirements are included in another volume in this series.506
Another exemption from the interchange fee cap governs cards provided pursuant to a federal, state, or local government-administered payment program.607 Such cards are exempt if they are used only to disburse funds under the program608 and if they comply with the overdraft, decline and ATM fee rules.609
Beginning July 21, 2012, a prepaid card issued by a bank with assets over $10 billion will be subject to a cap on the interchange fees that it charges merchants if the card charges either of the following:
Depending on the type of card and how it is used, a number of other federal laws may impact aspects of the card.
The EFTA’s gift card provisions apply to some prepaid cards that are not reloadable, or are labeled or marketed as a gift card, as discussed in § 7.7.2.1, infra.
The federal laws that govern prepaid cards generally do not preempt state laws unless those state laws come into conflict with federal law.641 However, if the prepaid card is issued by a financial institution, federal banking laws and regulations may preempt some state laws as applied to the financial institution, though not necessarily as to other non-bank parties involved with the card.642
Consumers may obtain prepaid cards in a variety of ways. Sometimes consumers formally apply for a prepaid card account. At other times, they are issued a card in connection with a transaction that the consumer may, or may not, know involves a prepaid card. Among some of the many ways that a consumer may obtain a prepaid card, the consumer may:
Prepaid cards can come with a wide array of different fees.
Although prepaid cards with overdraft fees may sound like an oxymoron, some prepaid cards have offered overdraft “protection,” allowing the card to overdraft and incur an overdraft fee. These features have been especially common on prepaid cards sold by payday lenders.688 Effective April 1, 2019, the CFPB’s prepaid rule brings most prepaid card overdraft fees within the scope of Regulation Z and imposes significant limits on those fees.689
Any prepaid card issued by a financial institution with over $10 billion in assets must provide at least one free ATM withdrawal each month if the card charges merchant interchange fees in excess of the cap in Regulation II.700
The TILA, as amended by the Credit CARD Act, contains an important restriction on the amount of fees that a card issuer may charge to a credit card account, limiting the total amount of most fees to 25% of the account’s credit limit during the first year.525 This 25% cap was adopted to curb the abusive nature of “fee-harvester” credit cards that imposed hundreds of dollars in fees while extending minimal available credit—sometimes as little as $50.526
The TILA restricts the ability of creditors to increase any APRs, fees, or finance charges applicable to an existing or “protected” balance or during the first year of an account, with certain exceptions.544 These rules apply to hybrid prepaid-credit cards, including fees imposed on either the credit feature or the asset feature, to the extent that fees for the asset feature are “part of the plan.”545
The TILA restricts the ability of a credit card issuer to “offset” or take the consumer’s funds held on deposit by the issuer to satisfy the issuer’s credit card claims.546 There are several exceptions to this prohibition against offsets, including for consensual security interests and voluntary payment plans using automatic periodic deductions from the deposit account.547 Both exceptions require the consumer to provide a written authorization.548
The TILA provides that a credit card issuer is subject to all claims (except tort claims) and defenses that a consumer has against a merchant when the consumer uses a credit card to pay for goods or services, subject to certain conditions.570 This right applies to purchases made with a hybrid prepaid-credit card, whether the funds are drawn directly to pay for the goods or services or the funds are first transferred to the asset feature before payment.571 However, if the purchase is only partial