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From Banking and Finance Law Daily, June 15, 2017

CFPB proposes prepaid rule changes to meet industry concerns

By Richard A. Roth, J.D.

The Consumer Financial Protection Bureau is proposing amendments to its prepaid rule that would affect error resolution procedures for unregistered accounts and digital wallet credit cards that are linked to prepaid accounts. The bureau also wants to know if the rule’s effective date should be extended beyond April 1, 2018, if the proposal is adopted. According to the CFPB, the proposed amendments to Reg. E—Electronic Fund Transfers (12 CFR Part 1005) respond to industry concerns over "unanticipated complexities" with the rule.

The prepaid rule was adopted in October 2016 (Banking and Finance Law Daily, Oct. 5, 2016). The CFPB described the rule’s effects as requiring companies to:

  • limit consumer losses from stolen funds or lost cards;
  • investigate and resolve error claims;
  • give consumers easy access to account information;
  • provide consumers with advance disclosures about fees and other account terms; and
  • provide credit card-like protections for prepaid cards that offer credit access.

Error resolution procedures. Under the proposed change to Reg. E’s error resolution provisions, error resolution and limited liability requirements would not apply to prepaid accounts that have not successfully completed the financial institution’s customer identification and verification process. This would include when verification still was in process, when verification of the customer’s identity had failed, or when the account was in a program that did not offer verification. However, if verification later was completed successfully, error resolution procedures and liability limits would apply to disputed transactions that were completed earlier.

Disclosures would be added for programs that do not offer a verification process and related liability limits.

Digital wallets. Some digital wallets that hold a consumer’s credit and debit cards are covered by the prepaid rule because the consumer can store and directly access prepaid funds using the wallet. The Reg. Z—Truth in Lending (12 CFR Part 1026) provisions of the prepaid rule apply credit card protections when a credit card account and prepaid account are linked in the digital wallet.

Under the proposal, business arrangements between prepaid card issuers and credit card issuers would be exempt from the rule’s hybrid prepaid-credit card provisions as long as:

  • the prepaid card cannot access the credit card during a transaction unless the consumer has previously made a separate written request for such a link;
  • acquiring or keeping either card is not conditioned on allowing the two to be linked; and
  • specified account terms are not varied based on the presence or absence of a link.

If the conditions are met, the credit card account would be protected under Reg. Z but the prepaid rule hybrid prepaid-credit card provisions would not apply.

Other amendments. The proposal includes several less significant amendments. These would affect the exclusion of loyalty, award, and promotional gift cards; unsolicited access devices; pre-acquisition disclosures; the submission to the CFPB of account agreements; and the need for an early compliance safe harbor.

Comments will be due 45 days after the proposal is published in the Federal Register.

Small entity compliance guide. The bureau also published an updated edition of its small entity compliance guide for the prepaid rule. The updates note the six-month extension of the original effective date to April 1, 2018, and also offer guidance on "prepaid reload packs," the use of consistent terminology, foreign language disclosures, URL names, transaction histories, and submitting account agreements to the bureau. They also make clear that reversing a provisional credit given during the error resolution process does not trigger coverage under Reg. Z—Truth in Lending (12 CFR Part 1026).

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