CFPB’s Relaxed ‘Prepaid Accounts Rule’ Fixes Key Problems

Financial Services Law

Mick Mulvaney’s CFPB has now issued final changes to its Prepaid Rule, and the payments industry receives a huge reprieve from some of the more draconian elements of the original rule as issued in 2016.

What happened

The Bureau of Consumer Financial Protection (CFPB) has now amended Regulation E, which implements the Electronic Fund Transfer Act (EFTA), and Regulation Z, which implements the Truth in Lending Act (TILA). This new rulemaking materially revises the then-final rule published in the Federal Register on Nov. 22, 2016, as amended on April 25, 2017, regarding prepaid accounts under Regulations E and Z. In so doing, the CFPB is finalizing modifications to several aspects of that rule, including with respect to error resolution and limitations on liability for prepaid accounts where the financial institution has not successfully completed its consumer identification and verification process; application of the rule’s credit-related provisions to digital wallets that are capable of storing funds; certain other clarifications and minor adjustments; technical corrections; and an extension of the overall effective date to April 1, 2019.

As we previously reported, in early 2017, the CFPB issued guidance on the rule as finalized in 2016. In mid-2017, the CFPB requested comments on proposed changes to the rule based on industry feedback. Based on feedback received by the CFPB through its outreach efforts to industry regarding implementation of the 2016 Final Rule as well as in comments received on the 2017 effective date proposal, the CFPB proposed to amend several provisions of the 2016 Final Rule (June 2017 Proposal). After reviewing comments received on the proposal, the CFPB has now finalized the rule as originally proposed in June 2017, but with some additional modifications that further address industry concerns. Among the fixes, the CFPB is:

  • Revising the error resolution and limited liability provisions of the Prepaid Accounts Rule in Regulation E to provide that financial institutions are not required to resolve errors or limit consumers’ liability on unverified prepaid accounts. For accounts where the consumer’s identity is later verified, financial institutions are not required to limit liability and resolve errors with regard to disputed transactions that occurred prior to verification.
  • Creating a limited exception to the credit-related provisions of the Prepaid Accounts Rule in Regulation Z for certain business arrangements between prepaid account issuers and credit card issuers that offer traditional credit card products. This exception is designed to address certain complications in applying the credit provisions of the Prepaid Accounts 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 in circumstances that appear to pose lower risks to consumers. This final rule also expands the situations in which prepaid account issuers are permitted to allow negative balances on prepaid accounts without triggering Regulation Z, provided certain conditions are met.
  • Making clarifications or minor adjustments to provisions of the Prepaid Accounts Rule in Regulation E related to an exclusion from the definition of prepaid account, unsolicited issuance of access devices, several aspects of the rule’s pre-acquisition disclosure requirements, and submission of prepaid account agreements to the CFPB.

Why it matters

The revised final rule fixes some of the most heavily disputed provisions in the Prepaid Rule. It is a welcome sign that a “kinder, gentler” CFPB is taking a more pragmatic approach to industry concerns.