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Consumer Banking and Payments Law: 7.2.4.6.10 Right to withhold payment for claims and defenses against a merchant
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
Consumer Banking and Payments Law: 7.2.4.6.11 College student credit cards
The TILA, as amended by the Credit CARD Act, has a number of protections for college students,573 such as public disclosure of agreements between colleges and issuers and restrictions on an issuer providing inducements to students to apply for a credit card.574 These prohibitions not only apply to hybrid prepaid-credit cards but to prepaid accounts to which a covered separate credit feature that is a credit card account covered under the Credit CARD Act may be added in the future to the prepaid
Consumer Banking and Payments Law: 7.2.5.1 Application of EFTA and Regulation E Before April 1, 2019
As set out in § 7.2.3, supra, a new Consumer Financial Protection Bureau (CFPB) rule, effective April 1, 2019, brings most prepaid accounts within the scope of the Electronic Fund Transfer Act (EFTA) and its Regulation E, though with some modifications from the rules that apply to bank account debit cards.
Consumer Banking and Payments Law: 7.2.5.2.1 Overview
Separate from Regulation E, another regulation under the EFTA, Regulation II, has several provisions that impact the consumer fees and functionality of some prepaid cards. Those aspects of Regulation II are discussed in this section.
Consumer Banking and Payments Law: 7.2.5.2.2 General-use prepaid cards with limited features
General-use prepaid cards are exempt from the Regulation II interchange fee cap on four conditions.
Consumer Banking and Payments Law: 7.2.9.4 Limits on Other Types of Prepaid Card Fees
Beyond overdraft fees, there are few specific limits on other types of fees besides those rules that govern particular types of cards. The CFPB’s prepaid rule will limit certain fees, particularly in the first year, that are assessed on hybrid prepaid-credit card accounts.713 Bank fees in general are discussed in § 2.8, supra.
Consumer Banking and Payments Law: 7.2.10 Loading or Depositing Funds to a Prepaid Card
Prepaid cards may be “loaded” with funds in a variety of ways. The different mechanisms pose different issues.
Consumer Banking and Payments Law: 7.2.11 Using the Prepaid Card and Accessing Funds
Prepaid cards work in virtually the same fashion as bank account debit cards. They can be used for purchases at merchants, online, over the telephone, and to withdraw cash at ATMs. Fees, however, may apply.
Consumers who wish to “cash” an entire payment deposited on their prepaid card may be frustrated by daily withdrawal limits on some ATMs and by fees for multiple ATM withdrawals. Two other methods of withdrawing cash may help with those limits and fees (though separate fees may apply, depending on the card).
Consumer Banking and Payments Law: 7.2.12 Account Holds and Inability to Access Funds
Under various circumstances, consumers may be temporarily or permanently unable to access their funds when the funds are frozen or the account is closed. The account agreements for some prepaid cards and mobile payment systems contain clauses in the account agreements that permit the provider to place a hold on funds under certain circumstances.
Consumer Banking and Payments Law: 7.2.13 Access to Statements and Account Information
Traditional bank accounts are required by Regulation E to provide periodic statements in any period in which an electronic fund transfer is made into or out of the account.757 The CFPB’s prepaid rule, effective April 1, 2019, extends this requirement to most types of prepaid cards but does offer an alternative that allows for statements to be provided orally when requested via the telephone and posted online for the consumer’s review.758
Consumer Banking and Payments Law: 7.2.14 Lost Cards, Unauthorized Charges, Disputes, and Error Resolution
The CFPB’s prepaid rule, effective April 1, 2019, applicable to most types of prepaid card accounts, extends Regulation E error resolution and unauthorized-charge protections to these accounts, with some minor variations.759 Those procedures that govern liability for unauthorized charges and the procedures that the card issuer must follow to resolve disputes and errors are detailed in
Consumer Banking and Payments Law: 7.2.15 Redemption of Unused Value; Card Expiration
Consumers often fail to use all of the funds on their prepaid cards. It can be particularly difficult to use the last few dollars. Amounts under $20 cannot be withdrawn from an ATM and might not be enough for a purchase.765 Some merchants permit consumers to do a “split tender,” paying part of a purchase with a prepaid card and the remainder in another manner. Some card networks, such as Visa, require all of their cards to support partial authorization.
Consumer Banking and Payments Law: 7.2.16.1 Overview
Consumer bank accounts are protected by FDIC insurance up to $250,000 if a bank becomes insolvent. The protection that a holder of a prepaid card has if the card provider becomes insolvent is more complicated.
Consumer Banking and Payments Law: 7.2.16.2 Deposit Insurance
For most general-use prepaid cards, the funds are held in an account at a bank.779 However, some prepaid accounts, such as PayPal, generally hold the funds on their own books without deposit insurance, though funds may be held at a bank under certain circumstances, such as for direct deposit of government benefits.
Consumer Banking and Payments Law: 7.2.17.1 Overview
Although credit on a prepaid card may sound like an oxymoron, some prepaid cards can be used to access various forms of credit. For example, a prepaid card may permit the consumer to complete a transaction, when the account lacks funds, by accessing linked credit or by permitting the card to be overdrawn.
Consumer Banking and Payments Law: 7.2.17.2 Other Federal Laws Regulating Credit on Prepaid Cards
The provisions of the main federal regulation that will govern credit features on prepaid cards, effective April 1, 2019, are discussed in depth in § 7.2.4, supra.
Consumer Banking and Payments Law: 7.2.17.3 Federal Regulator Actions Involving Credit on Prepaid Cards
In 2012, the OCC took a supervisory action that resulted in the elimination of two different credit features on Insight prepaid cards issued by Urban Trust Bank. The cards were being used by the payday lender CheckSmart to evade the payday loan laws of Arizona, Ohio, and other states. In one version, the consumer could opt in to overdraft coverage, resulting in “negative balance” fees on the prepaid card that effectively amounted to a $15 per $100 payday loan.
Consumer Banking and Payments Law: 7.2.18 Credit Reporting and Prepaid Cards
Prepaid card issuers may claim or imply that using a prepaid card will help build consumer credit history or credit reports. Prepaid card issuers typically do not report routine transactions to credit reporting agencies (CRAs). Thus, the cards do not lead to or impact credit reports any more than bank accounts do.
Consumer Banking and Payments Law: 7.3.1 Description; No Mandatory Use
Payroll cards are a type of prepaid card account809 used by employers to pay their employees. Although many employers pay most of their workers through direct deposit to bank accounts, not all employees have bank accounts or are willing to provide their employer with the information necessary to enroll in direct deposit. Payroll cards provide employers with an alternative to cash or paper checks for those employees.
Consumer Banking and Payments Law: 7.3.2 EFTA/Regulation E Coverage and Modifications for Payroll Cards
Payroll cards have been covered by Regulation E since 2007.817 The CFPB’s prepaid rule, effective April 1, 2019, extends the payroll card rule to a broader array of prepaid accounts.
Consumer Banking and Payments Law: 7.3.3 Regulation II Restrictions on Fees and Functionality of Payroll Cards
Regulation II, which implements the interchange fee cap in the EFTA, has some provisions that could affect the fees and functionality of payroll cards, depending on how the accounts are set up.827
Consumer Banking and Payments Law: 7.3.4 OCC Advisory Letter
In a 2005 Advisory Letter, the OCC has identified the risks to consumers posed by payroll cards.832 The advisory letter was written before Regulation E was amended to include payroll cards,833 and before the FDIC issued an opinion permitting pass-through deposit insurance for payroll cardholders.834 Thus, some of the issues in the letter may no longer be relevant, but some may still be.