CFPB Adopts Final Rules for Prepaid Accounts

Practical Law Legal Update w-004-8853 (Approx. 7 pages)

CFPB Adopts Final Rules for Prepaid Accounts

by Practical Law Finance

Definition of "Prepaid Account"

The final rules adopt a new definition of "prepaid account" within the Electronic Fund Transfer Act (EFTA) and its implementing Regulation E, as well as a comprehensive consumer protection rules for those accounts. For a discussion of the EFTA, see Practice Note, Electronic Fund Transfer Act: Key Provisions. Payroll card accounts and government benefit accounts are specifically included in the definition of prepaid accounts.

Under the final rules, Regulation E protections would cover prepaid accounts that are cards, codes or other devices established primarily for personal, family or household purposes, and are:

Either issued on a prepaid basis to a consumer in a specified amount, or not issued on a prepaid basis but capable of being loaded with funds.
Usable at multiple, unaffiliated merchants, at automated teller machines or for person-to-person transfers.

The final rules exclude the following from the definition of a prepaid account:

Gift certificates, loyalties, awards, promotional gift cards or general use prepaid cards that are both marketed and labeled as gift cards or gift certificates.
Accounts used for savings or reimbursements for healthcare, dental care, transit, or parking expenses.
Accounts used for the distribution of qualified disaster relief funds.
Accounts used to conduct person-to-person (P2P) closed-loop transactions on US military installations, vessels, or similar government facilities.

Disclosures and Access to Account Information

The final rules modify the disclosure requirements of Regulation E, as they pertain to prepaid cards, by:

Requiring financial institutions to make certain disclosures available to consumers before a consumer agrees to acquire a prepaid account. Acquisition is generally defines in the final rules as the time when the consumer purchases, opens, or chooses to be paid via a prepaid account. Consumer disclosures take two forms, and may be provided in oral, written or electronic form:
- a short form highlighting key fees that the CFPB believes are most important for consumers to know about prior to acquisition; and
- a long form setting forth all of the prepaid account's fees and the conditions under which those fees may be imposed.
Extending to all prepaid accounts the existing Regulation E requirements regarding the provision of transaction information to account-holders. These provisions would allow financial institutions to either provide periodic statements or, alternatively, make available to the consumer:
- the account balance, through a readily-available telephone line;
- an electronic history of account transactions that covers at least eighteen months; and
- a written history of account transactions that covers at least eighteen months upon request.
Requiring financial institutions to disclose monthly and annual summary totals of all fees imposed on a prepaid account, as well as the total amount of all deposits to and debits from a prepaid account when providing a periodic statement or electronic or written account history.
Adopting error resolution and limited liability provisions specific to prepaid accounts.
Prohibiting the requirement that a consumer establish an account for receipt of government benefits.

To facilitate compliance, the CFPB is proposing model forms and sample forms, as well as revisions to existing Regulation E model forms and model clauses to provide model language.

Limited Liability

With regard to unauthorized charges on prepaid accounts, the final rules provide that, if a consumer provides timely notice to the financial institution within two business days after learning of the loss or theft of the prepaid account's access device, the consumer's liability would be the lesser of:

$50.
The amount of unauthorized transfers made before giving notice.

If the consumer does not provide timely notice of unauthorized charges on the prepaid account, the final rules would provide that the consumer's liability would be the lesser of:

$500.
The sum of:
- the lesser of $50 or the amount of unauthorized transfers occurring within two business days of learning of the loss/theft; and
- the amount of unauthorized transfers that occur after two business days but before notice is given to the financial institution.

Total Fees

The final rules also would limit the total amount of fees a consumer may be required to pay with respect to a credit card account under an open-end consumer credit plan during the first year after account opening to 25% of the credit limit in effect when the account was opened. The following would not be subject to the 25% restriction:

Late payment fees.
Over-the-limit fees.
Returned-payment fees.
Fees that the consumer is not required to pay with respect to the account.

Submission of Prepaid Account Agreements

Financial institutions are required to submit their prepaid account agreements to the CFPB and must make publically available on the financial institutions website prepaid account agreements that are available to the general public.

Overdraft Credit Features

The final rules also modify Regulation E and TILA's implementing Regulation Z to address the treatment of overdraft services and other credit features organized in connection with prepaid accounts. Regulation Z is amended so that:

Prepaid account issuers that offer overdraft services or other credit features in connection with those accounts and charge a fee for the service generally would be subject to Regulation Z's credit card rules and disclosure requirements for open-end consumer credit plans.
The credit card rules in Regulation Z would apply to separate lines of credit linked to prepaid accounts.
A consumer would receive a periodic statement not more often than once per month and then have at least 21 days to repay the debt the consumer incurred in connection with using the overdraft service or credit feature.
An issuer would be prohibited from requiring, as terms of the credit feature, that it could immediately take incoming payments to a prepaid account, such as cash loads or direct deposits, to repay and replenish the credit line.

The overdraft provisions of Regulation E are modified so that prepaid account issuers would be:

Prohibited from requiring consumers to set up preauthorized electronic fund transfers to repay credit extended through an overdraft service or credit feature.
Restricted from applying to a consumer's prepaid account different terms and conditions such as charging different fees for accessing funds in a prepaid account, depending on whether the consumer elects to link the prepaid account to an overdraft service or account feature.

Under the final rules, a financial institution may not condition an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance on the consumer's account. It would also prohibit issuers from extending credit in relation to a prepaid account to a consumer without assessing the consumer's ability to pay. The final rules include special regulations for the extension of credit to consumers below the age of 21.

Effective Date

The effective date of the final rule is October 1, 2017.

CFPB Adopts Final Rules for Prepaid Accounts | Practical Law