CFPB proposes further changes to the Prepaid Account Rule in response to industry feedback

by Ballard Spahr LLP

As we previewed earlier this year, the CFPB, on June 15, proposed substantive changes to the Prepaid Final Rule (the “Rule”).  The proposed changes are generally positive for prepaid providers and incorporate feedback and comments from industry representatives.  The proposal, however, does not lift the onerous restrictions on credit features currently in the Rule.  Because the proposal invites comments regarding extending the effective date, we expect the effective date, which was originally set for October 1, 2017 and then delayed to April 1, 2018, to be further delayed.

The proposal would reverse two controversial aspects of the Rule, and make several other changes:

  • Error Resolution and Limitation of Liability. One of the existing Rule’s most controversial mandates requires error resolution and limited liability protections on unregistered accounts (e., accounts that have not concluded the verification process, accounts where the process is concluded but the consumer’s identity could not be verified, and accounts in programs for which there is no such verification process).  The CFPB has apparently acknowledged these concerns engendered by this mandate, as the proposed rule would no longer require financial institutions to resolve errors or limit consumers’ liability on unregistered prepaid accounts.  The proposal would impose these obligations after a financial institution successfully completes its consumer identification and verification process.  The requirements would also apply retroactively to disputed transactions that occurred before verification was completed and that fell within the general timing requirements of the Rule.  If no verification process is available, financial institutions would be required to disclose to consumers the absence of, or limitations on, such protections.
  • Digital Wallets. The proposed rule also narrows the definition of “business partner” under Regulation Z to clarify the Rule’s application to digital wallets and to alleviate burdens for digital wallet providers.  Under the existing Rule, requirements such as a 30-day waiting period and additional disclosures are required to link a credit card issued by a business partner to a digital wallet, but these requirements do not apply to non-business partners, thereby creating disparity between credit cards in the wallet, as well as customer confusion.  Under the proposed rule, business arrangements between prepaid account issuers and issuers of traditional credit cards would be excluded from coverage under the Rule’s hybrid prepaid-credit card provisions as long as (1) the prepaid card cannot access credit from the credit card account during a prepaid card transaction without written consent to link the two accounts, (2) the acquisition or retention of either account is not conditioned on whether the consumer authorizes such a connection, and (3) the parties do not vary certain terms and conditions based on whether the two accounts are linked.  This change may not go as far as some would like because it does not completely exclude digital wallets that can store funds, or person-to-person (“P2P”) payment products from the Rule, but it does benefit digital wallets providers that allow consumers to link their debit and credit cards and to store and access funds.
  • Loyalty, award, and promotional gift cards. The existing Rule provides that loyalty, award, or promotional gift cards are excluded from the definition of “prepaid account” if the cards contain disclosures required by the Gift Card Rule.  But the Rule is not clear on how to treat loyalty, award, or promotional gift cards that are not marketed to the general public, and are therefore exempted from the Gift Card Rule’s disclosure requirements.  The proposed rule clarifies that loyalty, award, or promotional gift cards that are not marketed to the general public are not covered by the Rule, regardless of whether they provide disclosures under the Gift Card Rule.
  • Unsolicited Issuance. Regulation E provides that a financial institution may issue an access device for an account to a consumer only when solicited to do so by the consumer in response to an oral or written request for the device, or as a renewal of, or in substitution for, an accepted access device, or on an unsolicited basis in accordance with certain requirements. The current Rule raises questions about how the unsolicited issuance rules of Regulation E apply to prepaid accounts used for making disbursements where the consumer is given no other option but to receive the disbursement via a prepaid account, such as prison release cards, jury duty cards, and certain types of refund cards.  The proposed rule seeks to provide clarification – if an access device for a prepaid account is provided on an unsolicited basis where the prepaid account is used for disbursing funds to a consumer, and there are no alternative means for the consumer to receive those funds, the financial institution can comply with the unsolicited issuance rule by informing the consumer that there is no other way to access funds in the prepaid account if the consumer disposes of the access device.
  • Retail Location Exception. The existing Rule requires a financial institution to provide a long form disclosure after a consumer acquires a prepaid account at a retail location, and also requires the underlying information from this long form disclosure to be provided via the mandatory initial disclosures.  These initial disclosures must be provided at the time a consumer contracts for an electronic funds transfer (“EFT”) service or before the first EFT is made, and are thus typically provided inside the packaging of prepaid accounts sold at retail.  The CFPB considered feedback about this requirement from a trade association, which explained that, for at least some institutions, this requirement might necessitate a substantial increase in the size of the packages in order to accommodate the long form disclosure, thus requiring retooling of their “J-hook” packaging used at retail. The trade association suggested alternative methods of delivery such as sending the long form disclosure to the consumer by mail, or providing the disclosure electronically without E-Sign consent.  In response to these suggestions, the proposed rule provides that financial institutions that qualify for the retail location exception may deliver the long form disclosure after acquisition without E-Sign consent, “if it is not provided inside the prepaid account packaging material, and the financial institution is not otherwise mailing or delivering to the consumer written account-related communications within 30 days of obtaining the consumer’s contact information.”  The CFPB seeks comments on this proposal, and on whether financial institutions were, in fact, planning to include in their retail packaging the long form disclosure, and whether there are other accommodations the CFPB could make to the retail location exception to facilitate financial institutions’ inclusion of the long form disclosure inside retail packaging.
  • Pre-acquisition Disclosures. One of the primary reasons the CFPB opted to delay implementation of the existing Rule was its concern over the compliance burden posed by the Rule’s pre-acquisition disclosure requirements.  The proposed rule seeks to narrow the scope of several disclosure provisions to facilitate compliance and reduce burdens.  First, according to the CFPB, “if a financial institution provides pre-acquisition disclosures in writing, and a consumer subsequently completes the acquisition process online or by telephone, the financial institution need not provide the disclosures again electronically or orally.”  Second, financial institutions disclosing additional fee types with three or more fee variations would be able “to consolidate those variations into two categories and allow those two categories to be disclosed on the short form.”  Third, foreign language pre-acquisition disclosures would not be “required for payroll card accounts and government benefit accounts, where the foreign language is offered by telephone only via a real-time language interpretation service provided by a third party.”
  • Submission of Agreements. The proposed rule would make several changes to the Rule’s requirements regarding submission of prepaid account agreements to the CFPB to reduce compliance burdens:  (1) issuers could “delay submitting a change in the names of other relevant parties to a prepaid account agreement (such as employers for a payroll card agreement) until the issuer is submitting other agreement changes”; and (2) short form and long form disclosures could be provided as separate addenda to the agreement, rather than integrated into the agreement or provided as a single addendum.  The latter change is proposed due to recognition of the fact that, given the form and content requirements of the short form and long form disclosures, many issuers will likely create two separate documents, making the task of combining the documents into the agreement or a single addendum potentially “unnecessarily complex.”

The CFPB is also seeking comment on whether these proposed amendments would make a further delay of the Rule’s effective date (originally October 1, 2017, currently April 1, 2018) necessary or appropriate, and whether any conflict(s) exist between the Rule as amended and current federal regulation governing prepaid accounts, such that a safe harbor provision addressing compliance with the final Rule before its effective date is needed.

Comments are due 45 days after the proposed rule is published in the Federal Register.

With this proposed rule, the CFPB concurrently announced an updated version of its previously issued small entity compliance guide, which reflects the April 1, 2018 effective date and provides clarification on several issues.  For example, the guide clarifies that reversing a provisional credit does not otherwise trigger Regulation Z coverage under the Rule, and states that if a financial institution makes 12 months of account transaction history available through its website and also offers a mobile application, the mobile application need not provide a full 12 months of history.

While the Senate did not reject the Prepaid Final Rule under the Congressional Review Act (“CRA”), it is unclear whether this proposal, if adopted, would be subject to the CRA.  The CRA’s plain language, and at least one prior use of the CRA, suggests that the proposed amendments would be subject to review.  However, because the proposal largely favors industry participants, we think it unlikely that there will be a significant push for rejection under the CRA.

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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