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Consumer Banking and Payments Law: 7.2.4.1 Overview

The Regulation Z provisions that apply to hybrid prepaid-credit cards are too numerous to summarize briefly. Effective April 1, 2019, the rules generally apply to any credit feature that is offered by the prepaid account issuer, its affiliate, or its business partner and can be accessed using the prepaid card.

The following are some of the more noteworthy protections that cover hybrid prepaid-credit cards:

Consumer Banking and Payments Law: 7.2.4.2.1 Prepaid cards that are credit cards: the “hybrid prepaid-credit card”

As part of the prepaid rule, the CFPB created a new category of prepaid cards offering certain types of credit. Called the “hybrid prepaid-credit card,” the term is extensively defined and explained in new section 1026.61 of Regulation Z, effective April 1, 2019. Hybrid prepaid-credit cards are covered by the Truth in Lending Act’s Regulation Z, including the credit card rules as modified slightly for these hybrid cards.

A prepaid card242 is a hybrid prepaid-credit card if it can access credit under the following conditions:

Consumer Banking and Payments Law: 7.2.4.2.2 “Prepaid card” and “prepaid card issuers”

To be a hybrid prepaid-credit card, there must be a “prepaid card.” Somewhat confusingly, Regulation Z has its own definition, separate from Regulation E, of what constitutes a prepaid card for purposes of section 1026.61: “prepaid card” is defined as “any card, code, or other device that can be used to access a prepaid account.”258 “Prepaid account” is defined the same as in Regulation E.259 Thus, a “prepaid card” can include payroll cards and certain government benefits cards.

Consumer Banking and Payments Law: 7.2.4.2.4 When is a “credit feature” considered “covered”?

In order to be considered a hybrid prepaid-credit card, the credit feature accessed by the prepaid card must be a “covered separate credit feature” that meets certain requirements. (Even if it is not “covered” under the special rules for hybrid prepaid-credit cards, the credit feature is still likely to be covered by Regulation Z). The following are elements of a “covered separate credit feature,” discussed in greater length in the sections that follow:

Consumer Banking and Payments Law: 7.2.4.2.6 Affiliate or business partner

In order to be considered a hybrid prepaid-credit card, the credit feature must be offered by the prepaid card issuer itself or the issuer’s affiliate or business partner.315 If the credit is offered by a creditor that is not an affiliate or business partner, then the credit feature is “non-covered” and the card is not considered a hybrid prepaid-credit card, although it is likely separately covered under Regulation Z.316

Consumer Banking and Payments Law: 7.2.4.3.2 Types of incidental overdrafts

With two narrow exceptions discussed below, in order for a credit extension to fall within the exception for incidental overdrafts, the issuer must have an established policy and practice of declining to authorize any transaction for which it reasonably believes there are insufficient funds at the time of authorization.350

Examples of situations in which an incidental overdraft could happen despite funds being sufficient at the time of authorization include the following:

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: