New Rules on Prepaid Accounts Require “Know Before You Owe” Disclosures
In the past, prepaid accounts have not been covered by purchase protection and other monitoring benefits. On October 5, 2016, the Consumer Financial Protection Bureau (CFPB) finalized a new rule that provides consumers with strong protections for prepaid accounts. The CFPB began this process by issuing a proposed rule to amend Regulation E and Regulation Z on November 13, 2014, and create comprehensive consumer protections.
The new rule will take effect October 1, 2017, and financial institutions must send their account agreements to the CFPB by October 2018.
This final rule governs disclosures, limited liability and error resolution, and periodic statements. It also adds additional requirements addressing the posting of account agreements. The final rule also contains provisions regulating overdraft credit features on prepaid accounts, which are now covered under Regulation Z and subject to certain limitations.
What is considered a prepaid account?
Financial institutions must address whether they currently offer a product that will be subject to these regulations. Under §1005.2(b)(3)(i), the rule provides a definition of a prepaid account which includes, in part:
- An account that is marketed or labeled as “prepaid” and that is redeemable upon presentation at multiple, unaffiliated merchants for goods or services or usable at automated teller machines
- An account that is issued with a prepaid balance or is capable of being loaded with funds after issuance, that is not a checking account, share draft account, or negotiable order of withdrawal account, with the primary function of conducting transactions with multiple unaffiliated merchants, or at ATMs, or conducting person-to-person transactions
The rule excludes various items, including:
- An account that is loaded only with funds from a health savings account, flexible spending arrangement, medical savings account, health reimbursement arrangement, dependent care assistance program, or transit or parking reimbursement arrangement
- A gift certificate issued on a prepaid basis to a consumer that may not be increased or reloaded and is redeemable at a single merchant or affiliated group of merchants
- A general-use pre-paid card issued to a consumer that may not be increased or reloaded and is redeemable at a multiple, unaffiliated merchants, or at ATMs that is both labeled and marketed as a gift card or gift certificate.
Given these exemptions, a financial institution that issues cards that are not reloadable and are marketed as gift cards would not be providing consumers with a prepaid account. However, if the gift card is reloadable, it would be considered a prepaid account.
“Know Before You Owe” — prepaid disclosures
The final rule requires that the financial institution provide new “Know Before You Owe” disclosures with prepaid accounts. The rule requires two disclosures, a short-form and a long-form, which generally must be given before the consumer purchases, opens, or elects payment through a prepaid account.
There are certain situations, if the prepaid account is acquired at a retail store, where the long form disclosure can be provided after the consumer acquires the prepaid account.This delay in providing the long-form disclosure may also apply if the consumer acquires the prepaid account via telephone.
The final rule includes model and sample versions of the new “know before you owe” short and long form disclosures.
The short-form disclosure highlights certain fee amounts, types of fees, and other information the CFPB believes to be most important to consumers. The long-form disclosure contains a complete list of fees and other information required by the CFPB.
Account information must be provided to consumer
Financial institutions that issue prepaid accounts will now be required to provide prepaid account holders account information similar to that provided to checking account consumers.
Financial institutions can provide the prepaid account consumer with Regulation E statements pursuant to §1005.9(b), or can provide the consumer with access to the account balance through a readily available telephone line, an electronic history of the prepaid accounts transactions for at least 12 months preceding, and a written history that covers at least 24 months in response to an oral or written request. However, a financial institution is not required to provide the written history if the institution does not conduct consumer identification and verification procedures under Regulation E.
Whether the financial institution provides periodic statements or online/written access, they must disclose the amount of any fee assessed against the account. Additionally, it must display a summary total of all fees assessed against the prepaid account in the prior calendar month and the calendar year to date on the periodic statement or online/written access.
Electronic Funds Transfer Act applies to prepaid accounts
In an attempt to protect consumers who use prepaid accounts as an alternative to traditional checking accounts, the rule provides protections under the Electronic Funds Transfer Act (Regulation E) similar to those provided to checking account consumers.
Error resolution requirements and liability limits
Prepaid accounts will also be subject to the Regulation E liability limits and error resolution requirements. This means that financial institutions will be required to work with consumers who discover unauthorized or fraudulent charges, or other errors on their prepaid account. The financial institution must investigate and resolve these incidents, which may include provisional credit and restoration of missing funds.
The rule also protects consumers against withdrawals, purchases, or other transactions in the event that the prepaid account card is stolen or lost. The prepaid account is subject to the same liability limitations under Regulation E that apply to other accounts, so that if a consumer promptly notifies the financial institution of the loss, the consumer’s liability is limited to $50.
The 60-day period for reporting unauthorized transactions will apply to prepaid accounts. For accounts that do not issue periodic statements, the 60-day time period will begin when the consumer electronically accesses the account history addressed above or the date a written history is sent to the consumer.
Provisional credit doesn’t always apply
Prepaid accounts will not be subject to the provisional credit provisions of Regulation E, with some exceptions. If a prepaid account has completed the institution’s identification and verification procedures, the same requirements that apply to other accounts under Regulation E apply to the prepaid account.
For accounts that have not been subject to the consumer identification and verification procedures (including accounts where the financial institution was unable to verify identity or if the institution does not have a verification program), the financial institution may take the full amount of time allowed under Regulation E to conduct an investigation without providing provisional credit.
Overdraft and credit protection
In addition to the new requirements addressed above, the rule provides additional protections if the prepaid account is linked to certain credit products. This extends protections from the Truth in Lending Act and Credit Card Accountability Responsibility and Disclosure Act to prepaid accounts. This also seeks to keep the prepaid account and the credit feature separate by requiring a 30-day waiting period between the issuance of the prepaid account and the offering of any credit feature.
Additionally, similar to credit card issuers, issuers of prepaid accounts must assess a consumer’s ability to pay prior to offering credit. Prepaid accounts with credit features will also receive regular statements that detail fees, interest rate, amount owed, and information related to repayment of the debt. The rule also limits charging late fees (you must allow 21-days for payment) and a limit on total fees for the credit feature (25 percent of credit limit in first year).
Submitting prepaid account agreements to CFPB
Financial institutions that issue prepaid accounts are required under the new rule to submit their account agreements to the CFPB. The CFPB has indicated that it will provide a posting of these agreements to allow consumers to compare them. The effective date to submit agreements to the CFPB is October 1, 2018, which is one year after the effective date of the rule. The issuers must also post and update their prepaid account agreements that are offered to the general public on their websites.
How we can help
CLA has developed a regulatory compliance review program to assist financial institutions with testing, training, monitoring, interviewing staff, and reviewing systems as they relate to federal consumer compliance requirements. We know that testing for compliance can be cumbersome and time-consuming. Our team of dedicated regulatory compliance consultants offers testing both on site and remotely. This way, you can cut back scheduling restrictions and focus on testing for regulatory compliance and preparing your institution for exams.