CFPB Proposes Changes to Prepaid Card Rule

by Manatt, Phelps & Phillips, LLP
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Manatt, Phelps & Phillips, LLP

The Consumer Financial Protection Bureau (CFPB) has requested comment on proposed changes to its prepaid rule, including the potential for another extension of the effective date of the rule. The proposed rule changes are being made as a result of industry feedback of unanticipated complexities in complying with the rule based on industry practices and business models.

What happened

Initially proposed in November 2014, the prepaid rule was finalized in October 2016, imposing significant new requirements for prepaid accounts under Regulation E issued under the Electronic Funds Transfer Act as well as Regulation Z, implementing the Truth in Lending Act. The rule was meant to “fill key gaps” for consumers with regard to prepaid products, the CFPB said.

Pursuant to the rule, providers of prepaid products—broadly defined to include payroll card accounts, government benefit accounts, student financial aid disbursement cards and tax refund cards, among others—must protect consumers against fraud and theft, with liability limited to $50 when a consumer promptly notifies the institution of theft.

In addition, providers must give consumers free and easy access to product information (by phone, online or in writing upon request), work with consumers to investigate any errors on covered products (with provisional credit for the dispute during the course of the investigation), and add “Know Before You Owe” prepaid disclosures to highlight key costs associated with the product prior to use, including periodic fees, balance inquiry fees or inactivity fees.

Prepaid cards must also adopt certain protections provided to credit cards—such as monthly account statements, consideration of whether a consumer has the ability to repay the debt before offering credit, and limits on late fees—to achieve compliance with the rule.

While the rule was originally set to take effect on Oct. 1, 2017, in April the CFPB formally delayed implementation of the rule for six months, making the new effective date April 1, 2018. That action was taken after discussions with industry stakeholders revealed potential difficulties in meeting the Oct. 1 compliance date—in particular, constrained production capacity of the manufacturers of the prepaid card packaging due to the increased demand from the industry, as well as concerns about legal exposure.

Also in its effort to support industry implementation of the rule, the CFPB noted that industry participants revealed they have become aware of unanticipated complexities in compliance with the rule based on the current industry business models and practices.Because the industry did not discuss these concerns in previous comment letters, the CFPB indicated it would use the extension period to consider the need for and desirability of amendments to the rule.

On June 15, the CFPB announced that it was seeking public comment on proposed updates to the prepaid rule in light of the industry feedback it received. Two primary changes to the rule have been proposed.

The first applies to the requirement that financial institutions and issuers provide fraud protection and error resolution rights to customers whose cards are unregistered or whose identities could not be or have not been verified. Under the proposal, the error resolution obligations applicable to the issuer, and the limitation on consumers’ liability, would not apply to unregistered prepaid cards or to prepaid cards where the consumer’s identity was not or could not be verified. These protections would apply, however, if the consumer’s identity was later verified.

The second proposed amendment applies to digital wallets that are linked to credit cards and that are prepaid cards because they are capable of storing funds. The proposed changes would provide a limited exception to the credit-related provisions of Regulation Z for certain business arrangements between digital wallet issuers and issuers of the linked credit cards if certain conditions are met. To qualify, the consumer would have to have authorized the linkage of the accounts, and the linkage could not be a condition imposed on the consumer or subject to varying terms.

In addition to other minor amendments, the CFPB is also seeking comment on whether an additional delay in the effective date of the rule is necessary and whether a safe harbor for early compliance should be added.

To read the CFPB’s proposal with request for comment, click here.

Why it matters

CFPB Director Richard Cordray remains bullish on the rule. “We know that effective implementation helps our rules deliver their intended value to consumers,” Cordray said in a statement. “Today’s request for comment shows we are listening closely to feedback on our rules to decide whether certain adjustments will help achieve that goal.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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