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

by Ballard Spahr LLP
Contact

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.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.