Not Déjà Vu: Just Another Prepaid Proposal; Programming Note

Written by Stephanie Lyon, Regulatory Compliance Counsel

If you feel like you have heard a lot more about prepaid rules this past year than you would have liked, there's a reason for that. NAFCU's compliance team has blogged, written an article (member-only) and released a final rule alert about the not so final, final prepaid rule and about the rule's delay that pushed the compliance deadline to April 1, 2018. But that is just the start, in the rule's delay announcement, the CFPB stated it would also review a couple of substantive issues through a separate notice and comment rulemaking process. So today's blog focuses on the CFPB's latest proposal to amend the final prepaid rule specifically in regards to the error resolution and limitation of liability sections; credit-related provisions to digital wallets; and certain other clarifications and minor adjustments.

Error Resolution & Liability Limitations

The error resolution section of the final prepaid rule requires credit unions to promptly investigate a member’s notification of unauthorized EFTs on all prepaid accounts. The rule does contain a couple of timing and provisional credit variances if a credit union establishes a member identification and verification process and the member has not concluded or the credit union was unable to verify the member. See, 81 Fed. Reg. 83986. However, the credit union is still supposed to complete the investigation and credit members per the error resolution and liability sections of the rule. The CFPB received many comments from stakeholders on the error resolution and member liability requirements as the current Regulation E process for EFTs is already considered to be expensive and time consuming by many financial institutions.

So the bureau proposed to revise the error resolution and member liability sections to limit the error resolution requirements of Regulation E to verified prepaid accounts and to all verified and unverified prepaid payroll card or government benefit accounts. See, 82 Fed. Reg. 29632.  While helpful, there is a caveat to this limit. If a member is later verified, the credit union would then have to resolve errors with regard to disputed transactions that occurred prior to verification and credit members, consistent with the timing requirements and liability limitations of the prepaid rule. The proposal is attempting to strike a balance between overly burdensome error resolution and liability provisions while still protecting as many consumers from fraudulent transactions. 

Digital Wallets

What are these products exactly? Digital wallets are considered a "card, code, or other device that is capable of accessing two or more payment credentials for purposes of making payment for goods and services at multiple unaffiliated merchants." See, 81 Fed. Reg. 83967. Because of the final prepaid rule's broad definition of prepaid accounts, digital wallets can trigger both Regulation E and certain Regulation Z protections if the technology is capable of holding funds and accessing a separate credit feature. During implementation of the rule, it became apparent that there are some complications with applying the credit provisions of the prepaid rule to credit card accounts linked to digital wallets that can store funds where the credit card accounts are already subject to Regulation Z’s open-end credit card rules.

So the bureau proposed a limited exception in which members using digital wallets linked to a traditional credit card product would continue to receive Regulation Z’s open-end credit protections but would not receive the protections of the credit-related provisions of the prepaid rule (which apply to hybrid-prepaid credit cards) if the following five conditions are met:

1. The credit card account is a credit card account under an open-end (not home- secured) consumer credit plan that a member can access through a traditional credit card.
2. The prepaid account issuer and the card issuer will not allow the prepaid card to draw, transfer, or authorize the draw or transfer of credit from the credit card in the course of authorizing, settling, or otherwise completing transactions conducted with the card to obtain goods or services, obtain cash, or conduct P2P transfers, except where the prepaid account issuer or the card issuer has received from the member a written request that is separately signed or initialized to authorize the prepaid card to access the credit card account as described above.
3. The prepaid account issuer and the card issuer do not condition the acquisition or retention of the prepaid account or the credit card account on whether a member authorizes the prepaid card to access the credit card account as described in proposed section 1026.61(a)(5)(iii)(D)(2).
4. The prepaid account issuer applies the same terms, conditions, or features to the prepaid account when a member authorizes linking the prepaid card to the credit card account as described above in proposed § 1026.61(a)(5)(iii)(D)(2) as it applies to the member's prepaid account when the member does not authorize such a linkage. In addition, the prepaid account issuer applies the same fees to load funds from a credit card account that is linked to the prepaid account as described above as it charges for a comparable load on the member's prepaid account to access a credit feature offered by a person that is not the prepaid account issuer, its affiliate, or a person with which the prepaid account issuer has an arrangement.
5. The card issuer applies the same specified terms and conditions3 to the credit card account when a member authorizes linking the prepaid card to the credit card account as described above in proposed § 1026.61(a)(5)(iii)(D)(2) as it applies to the member's credit card account when the member does not authorize such a linkage. In addition, the card issuer applies the same specified terms and conditions to extensions of credit from the credit card account made with the prepaid card as with the traditional credit card.

See, 82 Fed, Reg. 29649.

Implementation Date

The CFPB's proposed rule would take effect concurrently with the general effective date of the prepaid rule—April 1, 2018. However, the bureau is considering whether this proposal will warrant an additional delay for the implementation of the prepaid rule so that credit unions and other industry stakeholders have time to modify disclosures and procedures or whether the proposed changes would eliminate the need for an additional delay.

These are just some of the proposed changes the bureau is seeking comments. So be sure to read NAFCU's Regulatory Alert (members-only) for more proposed changes and send us your comments so that we can ensure the soon-to-be final final prepaid rule makes sense for your credit union.

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Programming Note.  In recognition of Independence Day, NAFCU's offices will close early today at noon, and we will be closed on Tuesday, July 4. We'll reopen and be back to blogging on Wednesday. Have a safe and enjoyable holiday weekend… I know the Lyon household will be grilling and viewing the amazing D.C. fireworks!