The Consumer Financial Protection Bureau (CFPB) released guidance on the agency's forthcoming Prepaid Rule, set to take effect on October 1, 2017. Although described as aimed at "small businesses," the guidance is useful for all participants in the prepaid card space.
Last October, the CFPB finalized the Prepaid Rule, which created new requirements for prepaid accounts under Regulation E of the Electronic Fund Transfer Act as well as Regulation Z of the Truth in Lending Act. Initially proposed in November 2014, the Prepaid Rule was intended to "fill key gaps" for consumers with regard to prepaid products.
Pursuant to the Rule, providers of prepaid products—defined to include payroll card accounts, government benefit accounts, student financial aid disbursement cards and tax refund cards, among others—must protect consumers against fraud and theft (with liability limited to $50 where a consumer promptly notifies the institution of theft), provide consumers with free and easy access to product information (by phone, online or in writing upon request), work with consumers to investigate any errors on covered products (with provisional credit for the dispute during the investigation), and add "Know Before You Owe" prepaid disclosures to highlight key costs associated with the product prior to use (including any periodic fees, balance inquiry fees or fees for inactivity).
In addition, prepaid cards need to adopt certain protections provided to credit cards such as monthly account statements, consideration of whether a consumer has the ability to repay the debt before offering credit, and limits on late fees.
With the rule set to take effect within the year, the CFPB released the Small Entity Compliance Guide for the Prepaid Rule "to provide an easy-to-use summary of the Prepaid Rule and to highlight information that may be helpful when implementing the Prepaid Rule."
The guidance delineates the different types of prepaid accounts, from a government benefit account to prepaid accounts whose primary function is to perform certain transactions, such as accounts that allow a consumer to purchase goods and services at multiple unaffiliated merchants, noting exceptions such as gift cards and gift certificates.
Entities subject to the Prepaid Rule—financial institutions and issuers subject to Regulation E—generally must provide consumers with three forms of disclosures, the guidance explains: a short form disclosure which must appear in a specific format and remain segregated from other disclosures with information about both static and variable fees; certain information disclosed outside but in close proximity to the short form disclosure; and a long form disclosure, "the companion" to the short form disclosure that provides more comprehensive fee information.
The CFPB provided a host of examples of different types of fees and how they need to be calculated and disclosed to consumers. Model forms were also included in the guidance.
Disclosure requirements apply—with slight variations—depending on whether the consumer obtains the information in writing, online or by phone. Some disclosures—e.g., the financial institution's name and contact information—must also appear on the prepaid card or other access devices, the guidance noted.
Entities are required to provide notice to consumers for changes in terms and provide periodic statements pursuant to the Prepaid Rule. The compliance guide walks through the information that must be included in such statements and outlines the alternative option of making account balance information available via telephone and online. A financial institution must provide a written account transaction history dating back 24 months "promptly" in response to a consumer's oral or written request.
Other discussion in the guide focused on error resolution and limitations on liability, overdraft credit features, the need to post prepaid agreements offered to the general public on the issuer's publicly available website, and record retention.
To access the Small Entity Compliance Guide for the Prepaid Rule, click here.
Why it matters
With the October 1, 2017 deadline for compliance with the Prepaid Rule looming, financial institutions should familiarize themselves with the guidance and the new requirements. While the Rule appears to be on the new administration's chopping block (see next story), covered entities may nevertheless desire to be prepared.