What’s a Prepaid Account?

Written by Brandy Bruyere, Director of Regulatory Compliance

On October 5, 2016 the CFPB finalized its rules for prepaid accounts, with most provisions becoming effective on October 1, 2017.  An initial question for determining how the rule may impact a credit union is whether any of the credit union’s products fall within the scope of the rule by meeting the new definition of “prepaid account” in Regulation E. New section 1005.2(b)(3) includes:

• A “payroll card account,” meaning one directly or indirectly established through an employer where a consumer’s wages, salary or other compensation are sent by electronic funds transfer;
• A “government benefit account,” as defined in revised section 1005.15(b)(2) to mean those established by a government agency for distributing government benefits (although not needs-tested benefits) to a consumer electronically;
• An account that is marketed or labeled as “prepaid” and that is redeemable upon presentation at multiple, unaffiliated merchants for goods or services or usable at ATMs; or
• An account that meets the following conditions:
  • Issued on a prepaid basis in a specified amount, or not issued on a prepaid basis but can be loaded with funds later;
  • Has the primary function of conducting transactions with multiple unaffiliated merchants for goods or services, at ATMs, or to conduct person-to-person (P2P) transfers; and
  • Is not a checking account, share draft account or negotiable order of withdrawal account.

There are some exceptions to the definition. If the account is not a payroll card account or government benefit account, then the following accounts are not “prepaid accounts” under section 1005.2(b)(3)(ii):

• An account loaded only with funds from a health savings account, medical savings account, flexible spending arrangement, dependent care assistance program, or transit/parking reimbursement;
• An account directly or indirectly established through a third party that is loaded only with qualified disaster relief payments;
• The P2P function is established through the US government with the primary function to conduct closed-loop transactions on US military installations or similar government facilities;
• Gift certificates as defined in section 1005.20(a)(1) and (b);
• Store gift cards, as defined in section 1005.20(a)(2) and (b);
• Loyalty, award or promotional gift carts, as defined in section 1005.20(a)(4) and (b); or
• A general use prepaid card as defined in section 1005.20(a)(3) and (b), that is marketed 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.

Certain pass-through services are also excluded from the general definition of a prepaid account. Staff comment 1005.2(b)(3)(i)—6 says the following:

6. Prepaid account acting as a pass-through vehicle for funds. To satisfy § 1005.2(b)(3)(i)(D), a prepaid account must be issued on a prepaid basis or be capable of being loaded with funds. This means that the prepaid account must be capable of holding funds, rather than merely acting as a pass-through vehicle. For example, if a product, such as a digital wallet, is only capable of storing a consumer's payment credentials for other accounts but is incapable of having funds stored on it, such a product is not a prepaid account. However, if a product allows a consumer to transfer funds, which can be stored before the consumer designates a destination for the funds, the product satisfies § 1005.2(b)(3)(i)(D).

In other words, if a service merely operates as a digital wallet that stores payment credentials, the member cannot store funds, and the member cannot access the balance then it would not be a prepaid account. However, further commentary clarifies that to meet the definition of prepaid account, it is not necessary that the account be reloadable by the consumer or a third party. Official Interpretation 1005.2(b)(3)(i)—7.

As with many regulations, including existing Regulation E, the commentary is key here, so this blog is really just a glimpse as some of the intricacies in this 1,689 page rule – and does not even get to what products might be a “hybrid prepaid-credit card” that will be subject to certain provisions in Regulation Z.  For more information, NAFCU members can find our Final Regulation summary of this rule here (log in required).

Seem like a lot? The CFPB must have thought so too, since the Bureau created a six page flowchart to help credit unions determine whether a particular product meets the definition of “prepaid account.” You can find it here and other Bureau resources here.

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Black Friday. Instead of scrambling against the crowds at stores for discounts, on the day after Thanksgiving my parents and I took Nolan to nearby Great Falls National Park. He kept trying to climb over the railings, but it was a fun trip. Nolan also learned a new word this weekend - pie!