Summary: Prepaid Final Rule (Executive Summary)

Prepared by the NASCUS Legislative and Regulatory Affairs Department
October 2016

The Consumer Financial Protection Bureau (CFPB) issued a final rule amending Regulations E and Z to provide comprehensive consumer protections for prepaid financial products.  The Bureau has issued an executive summary that provides a high-level review of the rule, which has been summarized below.  The executive summary can be found here.

“Prepaid Account” Defined

The term “prepaid account” has been added to the definition of “account” under Regulation E.  A prepaid account is a product that includes either of the following (unless a specific exclusion applies):

  • An account that is marketed or labeled as “prepaid” and is redeemable upon presentation at multiple, unaffiliated merchants for goods/services or usable at automated teller machines (ATMs); or
  • An account that meets all of the following:
    • Is issued on a prepaid basis in a specified amount or is capable of being loaded with funds after issuance;
    • Whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods/services, to conduct transactions at ATMs, or to conduct person-to-person (P2P) transfers; and
    • Is not a checking account, a share draft account or a “negotiable order of withdrawal” (NOW) account.
  • Certain accounts are not considered prepaid accounts even if they satisfy one or both of the tests above.  Such accounts are as follows:
    • An account loaded only with funds from a health savings account, flexible spending arrangement, medical savings account, health reimbursement arrangement, dependent care assistance program or transit/parking reimbursement arrangement;
    • An account that is directly or indirectly established through a third party and loaded only with qualified disaster relief payments;
    • A gift certificate;
    • A store gift card;
    • A loyalty, award or promotional gift card;\
    • A general-use prepaid card that is both marketed and labeled as a gift card or gift certificate; or
    • An account established for distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency.

    Note, an account is only subject to Regulation E if it is established primarily for a personal, household or family purpose.  Accounts established for commercial purposes or that are held under a bona fide trust agreements are not considered to be prepaid accounts.   

Applicability of Regulation E and Regulation Z to Prepaid Accounts

The final rule modifies Regulation E to create provisions governing disclosures, limited liability, error resolution and periodic statements.  It also addresses overdraft credit features that are covered under Regulation Z. 

Disclosures

  • Pre-acquisition disclosures – institutions are required to provide consumers with certain “pre-acquisition” disclosures such as short form disclosures; certain additional information disclosures provided in “close proximity” to the short form disclosures; and a long form disclosure.
    • Short form disclosure
      • Provides information on certain key fees and other information about the prepaid account (such as linked overdraft credit features, registration, applicable FDIC/NCUA insurance coverage, etc.).
      • Contains statements pertaining to payroll card accounts and government benefit accounts.  For instance, statements advising consumers that they are not required to accept the account and can request payroll/government benefit payments be made by another mechanism.
      • Model forms are provided in the rule.
    • Additional disclosures made in “close proximity” to short form disclosure
      • An institution is required to disclose its name, name of the prepaid account program, any purchase price and activating fees.
    • Long form disclosure
      • Requires an institution to provide comprehensive fee information as well as other key information about the prepaid account. 
      • Must include Regulation Z disclosures (as described in Section 1026.60(e)(1)) for prepaid accounts offering overdraft credit features.

    Timing of disclosures

    Generally, the pre-acquisition disclosures must be provided before a consumer acquires a prepaid account. However, for prepaid accounts sold at retail locations, institutions may provide the long-form disclosure after acquisition IF the short form disclosure contains information enabling the consumer to access the long form disclosure by telephone or website and other requirements are met.
  • Access Device Disclosures/Initial Disclosures
    • Institutions are required to make certain disclosures on the prepaid account access device (such as a card).  If a physical access device is not provided, the institution would be require to provide the disclosures on the website, mobile application or other entry point the consumer would use to access the account.
  • Initial Disclosures
    • Institutions are required to provide Regulation E “initial disclosures” for prepaid accounts.  The initial disclosures must include all information required to be disclosed in the pre-acquisition long form disclosure. 

Error Resolution and Limitations on Liability

Generally, prepaid accounts are required to comply with Regulation E’s limited liability and error resolution requirements with some limited exceptions. 

Periodic statements and periodic statement alternatives

Institutions are required to provide periodic statements for prepaid accounts.  However, an institution is not required to provide a periodic statement if certain information is made available to the consumer.  This information can be provided via a “periodic statement alternative,” which provides the consumer with:

  • Account balance information
  • At least twelve (12) months of electronic account transaction history
  • At least twenty-four (24) months of written account transaction history (upon request)

Internet Posting and Submission of Prepaid Account Agreements

Issuers are required to submit their new and amended prepaid account agreements, as well as notification of withdrawn agreements to the Bureau no later than thirty (30) days after the issuer offers, amends or ceases to offer the agreement. 

Overdraft Credit Features

  • The final rule amends Regulations E and Z to regulate overdraft credit features that are offered in connection with prepaid accounts.  Also, the rule adds the term “hybrid prepaid credit card” to Regulation Z and sets forth specific requirements that apply to those cards.
  • Issuers are required to structure overdraft credit features accessible by a hybrid prepaid credit card as a separate credit feature, not as a negative balance to a prepaid account.
  • Issuers are required to wait at least thirty (30) days after the prepaid account is registered before soliciting a consumer to link a covered separate credit feature to a prepaid account and required to obtain consumer consent to link a credit feature to the prepaid account.
  • Issuers are required to provide consumers with at least twenty-one (21) days to repay the debt insured in connection with the use of a covered separate credit feature on open-end consumer credit plans.

Effective Dates

  • The majority of the final rule’s provisions become effective on October 1, 2017.  The requirement to submit an institution’s prepaid account agreements to the Bureau is not effective until October 1, 2018.  The final rule would not require financial institutions to pull and replace prepaid account access devices or packaging materials that were manufactured, printed or otherwise produced prior to the October 1, 2017 effective date.  However, financial institutions would be required to provide consumers with notice of certain changes in terms and updated initial disclosures that result from the prepaid rule taking effect (in certain circumstances).