CFPB Issues Final Prepaid Rule

Written by Pamela Yu, Special Counsel for Compliance and Research

Happy Wednesday!  I hope you all had a pleasant Columbus Day weekend, or, as we like to call it in my expat-Canadian household, Thanksgiving weekend.  Yes, that’s right. Canadian Thanksgiving is in October.  What else is different about Thanksgiving in Canada versus in the U.S.?  Not much—just like in America, it’s all about turkey coma and pumpkin pie.  Except instead of watching football we watch the Toronto Blue Jays sweep the Texas Rangers to advance to the American League Championship Series (Go Jays!). 

Now that NAFCU’s Compliance team is back in the office, it’s time to start diving into CFPB’s new final rule on prepaid accounts (Prepaid Rule).  The Prepaid Rule, which is a healthy 1,689 pages, mandates comprehensive consumer protections for prepaid accounts under Regulation E, which implements the Electronic Fund Transfer Act; Regulation Z, which implements the Truth in Lending Act; and the official interpretations to those regulations.

The final rule modifies Regulation E to create prepaid account provisions governing disclosures, limited liability and error resolution, and periodic statements.  It also adds new requirements regarding the posting of account agreements.  Additionally, the final rule regulates overdraft credit features that may be offered in conjunction with prepaid accounts.  Such credit features, with some exceptions, will be covered under Regulation Z where the credit feature is offered by the prepaid account issuer, its affiliate, or its business partner and credit can be accessed in the course of a transaction conducted with a prepaid card. 

The rule is effective October 1, 2017.  However, the requirement (in § 1005.19(b)) for prepaid account issuers to submit their prepaid account agreements, which must satisfy the rule’s form and content requirements, to the CFPB for posting on its website is delayed until October 1, 2018.

The final rule was issued by the CFPB last Wednesday and NAFCU’s Regulatory Affairs team will be providing a detailed summary of the final rule shortly, which will be available to NAFCU members on our website (member login required).  NAFCU issued a Regulatory Alert on the proposed rule in late 2014, which is currently available to members on our website (14-EA-27).  The CFPB has also provided a new implementation web page.  In the meantime, this post will provide a high-level overview of the scope of the “prepaid account” definition in the final rule.

The Prepaid Rule adds the term “prepaid account” to the definition of “account” in Regulation E. Accounts within the scope of the rule’s definition of prepaid account are subject to various requirements under amended Regulation E.  

Definition. The criteria for whether an account is a prepaid account under the final rule are set forth in 12 CFR 1005.2(b)(3). See p. 1425-1427 of the Prepaid Rule.

Under the rule, payroll card accounts and government benefit accounts are prepaid accounts.  Additionally, a prepaid account includes a product that is either of the following, unless a specific regulatory exclusion applies:

• An account that is marketed or labeled as “prepaid” and is redeemable upon presentation at multiple, unaffiliated merchants for goods and services or usable at automated teller machines (ATMs); or
• An account that meets all of the following: (1) Is issued on a prepaid basis in a specified amount or is capable of being loaded with funds after issuance; (2) Whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, to conduct transactions at ATMs, or to conduct person-to-person (P2P) transfers; and (3) Is not a checking account, a share draft account, or a negotiable order of withdrawal (NOW) account.

Exclusions. An account that satisfies one or both of the above tests is not a prepaid account for the purposes of the rule if it is any of the following:

• An account loaded only with funds from a health savings account, flexible spending arrangement, medical savings account, health reimbursement arrangement, dependent care assistance program, or transit or parking reimbursement arrangement;
• An account that is directly or indirectly established through a third party and loaded only with qualified disaster relief payments;
• A gift certificate;
• A store gift card;
• A loyalty, award, or promotional gift card;
• A general-use prepaid card that is both marketed and labeled as a gift card or gift certificate; or
• An account established for distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency.

Additionally, the P2P functionality of an account established by or through the U.S. government is not a prepaid account under the rule if the account’s primary function is to conduct closed-loop transactions on U.S. military installations or vessels, or similar government facilities.

Also, an account established for a commercial purpose is not a prepaid account because, under the existing definition of account in Regulation E, an account is subject to Regulation E only if it is established primarily for a personal, household, or family purpose.  In addition, under the existing definition in Regulation E, an account held under a bona fide trust agreement is not an account subject to Regulation E; therefore, an account held under a bona fide trust agreement is also not a prepaid account.

It is important to note, however, that the definition of prepaid account is not limited to general purpose reloadable cards or prepaid products that otherwise function as transaction account substitutes. 

CFPB has provided a flow chart that may help credit unions to determine if an account is a prepaid account under the final rule.

NAFCU’s Regulatory Compliance team is continuing to analyze the new Prepaid Rule to understand its full impact on credit unions.  Stay tuned for more information in the coming weeks.  

Comments

[DJ]

Our credit union sells AMEX prepaid gift cards to our members but we do not monitor the use of the card or reload once purchased. These cards are "redeemable upon presentation at multiple, unaffiliated merchants for goods and services." However, the rule seems to dictate application to prepaid ACCOUNTS vs a prepaid gift card. Do you read this rule to apply to this type of product?

[DJ]

I commented too quickly ... the flow chart yielded an exclusion to this product in
12 CFR 1005.20(a)(3)and(b). This section defines General-use prepaid card-

“General-use prepaid card” means a card, code, or other device that is:

(i) Issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in a specified amount, whether or not that amount may be increased or reloaded, in exchange for payment; and

(ii) Redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or usable at automated teller machines.