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Consumer Banking and Payments Law: 7.2.4.3.3 Fee restrictions

In order to take advantage of the exception for incidental overdrafts, the issuer is not permitted to charge any overdraft fees or other fees that are only imposed when that credit is extended.365 This includes overdraft fees, periodic interest on the overdraft, late payment fees, or any fees for delinquency or default.366 There is an exception that allows the issuer to impose a charge for the actual costs of collecting the credit, such as attorney fees, if otherwise permitted by law.

Consumer Banking and Payments Law: 7.2.4.4 Thirty-Day Waiting Period Before Adding a Credit Feature

In general, a card issuer cannot issue a credit card to a consumer on an unsolicited basis.378 Credit cards must only be issued in response to a consumer’s request.379 Allowing a prepaid card to access a credit feature that is “covered” makes that card into a hybrid prepaid-credit card and constitutes issuance of a credit card.380 Thus, the CFPB has noted that a prepaid card sold at retail locations cannot automatically access a credit feature that

Consumer Banking and Payments Law: 7.2.4.5.3 Higher fees on the asset feature

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

Consumer Banking and Payments Law: 7.2.4.5.4 Participation fees

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

Consumer Banking and Payments Law: 7.2.4.6.1 Overview of special provisions

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:

Consumer Banking and Payments Law: 7.2.4.6.2 Application and solicitation disclosures

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.

Consumer Banking and Payments Law: 7.2.4.6.3 Account opening 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.

Consumer Banking and Payments Law: 7.2.4.6.4 Periodic statements

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

Consumer Banking and Payments Law: 7.2.5.4 State Laws Affecting Prepaid Cards

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

Consumer Banking and Payments Law: 7.2.6 Account Opening and Issuance of Prepaid Cards

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:

Consumer Banking and Payments Law: 7.2.9.2 Overdraft 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

Consumer Banking and Payments Law: 7.2.4.6.5 Application of the 25% cap on fees in the first year of the account

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

Consumer Banking and Payments Law: 7.2.4.6.7 Application of the limitations on interest rate or fee increases

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

Consumer Banking and Payments Law: 7.2.4.6.8 Special rules for offsets, voluntary automatic periodic deductions, and security interests

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