By Philip Keitel
Although The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 was named for its regulation of credit card issuing practices, several provisions focus not on credit cards but on certain prepaid cards. This article discusses these provisions and how they affect segments of the prepaid card industry.
Title IV of the Act
For those cards that fall under the definitions of "general use prepaid card," "gift certificate" and "store gift card" contained within Title IV of the act, fees and expiration dates are limited. In addition, Title IV sets forth disclosure requirements necessary to implement expiration practices and charge fees addressed by this section of the act. Finally, Title IV assigns a number of responsibilities to the Federal Reserve Board regarding the regulation of prepaid cards. This section first addresses Title IV's limitations on fees and expiration practices, then turns to the disclosure requirements and finally, notes the Board's responsibilities.
Limitations on Fees
Title IV restricts when dormancy fees, inactivity fees or service fees may be charged by prohibiting the assessment of any of these fees unless certain procedures are followed1. In defining the term service fee, Title IV excludes a one-time issuance fee for a general-use prepaid card. This type of fee is, therefore, not subject to Title IV's limitations. Additionally, gift certificates for which no money or other value has been exchanged and which are issued as part of an award, loyalty or promotional program are excluded from the prohibition on fees.
Limitations on Expiration Dates
Title IV prohibits expiration dates unless the terms are clearly stated and the expiration date is no earlier than five years after (1) the issuance of the gift certificate or (2) the date funds were last loaded to a store gift card or general-use prepaid card.
Disclosure Requirements
It is important to highlight that the failure to disclose fees, charges or expiration dates in the manner prescribed under Title IV makes charging these fees or imposing expiration dates illegal. Specifically, Title IV states that "it shall be unlawful for any person to impose a dormancy fee, an inactivity charge or fee or a service fee with respect to a gift certificate, store gift card or general-use prepaid card" and that it shall be unlawful to sell any of the same if they are "subject to an expiration date," unless disclosure requirements are satisfied.
To charge a dormancy, inactivity or service fee, the issuer must inform the purchaser of the fee before the card is purchased. This pre-purchase disclosure must take place regardless of whether the purchase is completed in person, over the Internet or over the phone. In addition, the card or certificate itself must clearly state that a fee may be charged, along with the amount of the fee and how often it may be assessed and that a fee may be charged for inactivity. If a card is subject to an expiration date, Title IV requires that the terms of expiration be clearly and conspicuously stated.
The Role of the Federal ReserveThe Federal Reserve Board, which at present regulates only payroll products under the Electronic Fund Transfer Act and Regulation E, is responsible for prescribing regulations to implement this legislation. Examples of tasks the Board is charged with under Title IV include defining loyalty, award or promotional gift cards for the purpose of excluding them from the definitions of covered prepaid instruments potentially enacting additional requirements that must be met in order for a dormancy, service or inactivity fee to be charged.
Overall, Title IV may affect the prepaid card industry in a number of ways. For many prepaid card issuers, changes may have to be made to how and when fees are charged, when cards expire and the disclosures provided at the point of sale. For some issuers, Title IV's fee limitations may require some alteration of fee models employed by many large prepaid businesses. Fee structures may shift from primarily after-purchase models to up-front models or to a mixed model where both up-front fees and properly structured fees are assessed. However, it is important to note that many large issuers of gift cards have eliminated fees and expiration dates altogether. Nonetheless, the requirements set forth by Title IV may have some impact on issuers' practices with respect to other prepaid products, such as how fees and expiration dates are disclosed.
Title V, Section 503
Title V, section 503 of the act requires the Treasury Department to "issue regulations in final form implementing the Bank Secrecy Act, regarding the sale, issuance, redemption or international transport of stored value, including stored value cards," within 270 days from the date of enactment. In addition, the section notes that the Treasury Department, in crafting these regulations, "may include reporting requirements pursuant to section 5316 of title 31, United States Code." This is a federal law that sets forth reporting requirements for individuals receiving certain monetary instruments or transporting monetary instruments of a certain value into or out of the country. If prepaid cards become subject to this law and are more broadly classified as monetary instruments, banks or their agents would be required to gather information about individuals purchasing card(s) worth more than $30002, and consumers would be required to file a Report of International Transportation of Currency or Monetary Instrument (CMIR) when crossing the border with or sending across the border, a prepaid card or group of cards worth $10,000 or more.
Defining stored-value cards — or prepaid cards as they are called in this article — as monetary instruments is not a new idea to Congress. In fact, this idea was raised in 2007 by U.S. Sen. Charles Grassley (R–Iowa) when he proposed amending the Combating Money Laundering and Terrorist Financing Act of 2007 to define prepaid cards as monetary instruments. In March, Arizona Attorney General Terry Goddard testified before the Senate Judiciary Subcommittee on Crime and Drugs and the Senate Caucus on International Narcotics Control that law enforcement agencies "need legal and investigative tools specifically addressing such new developments as stored value cards." Goddard argued that to combat criminal activity, these cards should be defined as monetary instruments in federal law and that law enforcement agencies should be allowed to access cardholders' identities, track transactions and identify patterns of suspicious activity. Later in March, related to the debate over whether prepaid cards should be defined as monetary instruments under federal law, Senators Susan Collins and Joseph Lieberman questioned senior officials in the Obama administration on what they were doing to prevent criminals from using prepaid cards to launder money, questioning prompted by ongoing violence in Mexican towns near the U.S. border.
Along with recent congressional inquiry into the matter, there is an ongoing debate over whether classifying prepaid cards as monetary instruments will effectively reduce the use of prepaid cards by criminals or whether this approach will instead result in regulations that are difficult to implement. Supporters of defining prepaid cards as monetary instruments argue that observed criminal use of prepaid cards and seizure of cards at border crossings indicate that these cards are used for nefarious purposes and that regulatory change is necessary to combat criminal use of prepaid cards. Opponents make the case that imposing new regulations and reporting requirements may have a chilling effect on the development of the prepaid market: New products will not be brought to market, issuers may eliminate many types of programs and there may be deleterious effects for the industry as a whole.
Prepaid industry analysts note that even if federal agents are able to seize certain cards being sent across the border, it will be difficult for those agents to ascertain the value of funds accessible via those cards because the value is not noted on the cards themselves but rather is maintained by the bank holding the underlying funds. Similarly, consumers may not generally know the exact balance of a prepaid card account at a particular point in time. This may lead to erroneous reporting on CMIRs and may represent an obstacle to implementing reporting requirements that ask consumers to record the value of the prepaid cards they carry.
Another potential obstacle comes from state jurisprudence that gives individuals a right of privacy in their bank records. Essentially, federal agents may not have the ability to force a bank to divulge the balance of an underlying account without a warrant or subpoena. Therefore, should prepaid cards be subject to reporting requirements, the ability to verify the accuracy of an individual's report and seize a card could be hampered. Technology and partnerships with the industry may enable law enforcement agents to make balance inquiries or to seek transaction authorizations with regard to particular cards, thus obtaining an approximation of the true value of underlying funds; however, the question remains as to whether, in certain instances, these inquiries into a person's banking records require a warrant or subpoena. On the other hand, the ability to seize some cards and ascertain the amounts accessible by using the card may be a pragmatic tool in fighting criminals' use of prepaid cards.
The tremendous popularity of prepaid card products among consumers and criminals alike has drawn Congress's attention to these products and to the prepaid card industry. The prepaid provisions of the Credit CARD Act of 2009 represent the first time Congress has acted to protect consumers who use prepaid cards. As the market for this particular payment instrument continues to develop, the industry, consumers and regulators will inevitably need to address new and unanticipated challenges. Nonetheless, including these provisions in the act recognizes the increasing role this type of payment card plays in today's society.
About the Author
Philip Keitel is an industry specialist in the Payment Cards Center of the Federal Reserve Bank of Philadelphia.