Will CFPB’s Pre-Paid Card Rule Increase Consumer Fraud?
As it stands right now, reports of the demise of the CFPB have been greatly exaggerated. It is still diligently going about its business of protecting consumers from themselves even as it continues to insist that its primary goal is to simply insure that consumers are receiving adequate financial information about the products they are purchasing.
Take for instance the CFPB‘s final rule extending Regulation E protections to those prepaid reloadable cards that are becoming an increasingly common way for individuals to transact basic banking services without going thru the hassle or expense of opening an account. The basic idea of the Regulation is that consumers who registered their accounts with the institution that issued the pre-paid cards would receive Regulation E style protections in return for financial institutions being able to perform customer identification checks on these new members. The final rule was to kick in on October 1st.
One area of particular concern has to do with extent to which Regulation E’s liability protection framework should be extended to the holders of pre-paid account cards. Under existing law a consumer who provides notice of an unauthorized use of a debit card within two business days of learning of the theft, or loss of the card can only be held liable of the lesser of $50.00 or the amount of the unauthorized transfer. If notice is received after two business days, the consumer’s liability is capped at no greater than $500.
In the final rule the CFPB decided to extend its one sided liability protections even to consumers who have not yet registered their accounts or for whom CIP protocols have not yet been completed. This approach has not sat well with critics of the CFPB. For example, an article in this morning’s American Banker noted concerns that the new rule has “opened the door to potential fraud by unregistered pre-paid card users” it quotes Ben Jackson, the director of prepaid advisory services at Mercator Advisory Group. Jackson suggests, “The problem only exists once the rule to provide this protection goes into effect, and suddenly unregistered cards might become hugely popular as fraudsters start buying them.” The scenario envisioned by the rule’s critics involves fraudsters buying big ticketed items with unregistered pre-paid cards and then claiming that they were unauthorized. Remember the burden is on the financial institution not the consumer to prove the purchase wasn’t authorized.
The CFPB addressed these concerns by stipulating that consumers don’t have to be provisionally credited for unauthorized payment until a CIP review is completed , but given how difficult it is to prove that a transaction was authorized this a little comfort to pre-paid card issuers.
Given the expended use of reloadable pre-paid cards and electronic devices there is a good chance that this regulation will impact your operations. Even if you don’t issue prepaid card accounts now , you will sometime in the near future . For instance, the definition finalized by the CFPB includes accounts that are issued on a pre-paid basis or capable of being reloaded with funds whose primary function is to conduct transactions with multiple unaffiliated merchants for goods or services, or at ATM’s, including person to person transfers.