On October 5, 2016 the Consumer Financial Protection Bureau (CFPB) issued the Prepaid Rule (“The Rule”), amending Regulations E and Z to include Prepaid Accounts and expanding both regulations with additional provisions. The Rule creates additional consumer protections for prepaid financial products, increasing disclosure requirements and lending controls.1
The Prepaid Rule is effective October 1, 2017, although the requirement to submit prepaid account agreements to the CFPB is not effective until October 1, 2018.2
Foundational Regulations3
By finalizing the Rule, amendments have been made to Regulation E – Electronic Fund Transfers (EFT) and Regulation Z – Truth in Lending Act (“TILA”) to expand their requirements to Prepaid Accounts.
Regulation E (EFT) requirements have been modified to create tailored provisions governing disclosures, limited liability and error resolution, and periodic statements. The Rule has also established new reporting requirements, specifically regarding the internet posting and submission to CFPB of prepaid account agreements.
Regulation Z (TILA) requirements have been modified to address overdraft credit features and the newly defined hybrid prepaid-credit card for prepaid accounts.
Defining Prepaid Accounts4
The Rule defines Prepaid accounts and provides a detailed list of accounts that are excluded from the definition and subsequent requirements:
- Card, code or other device (very broad; includes mobile and virtual products)
- Does not fall under the general definition of “account” in Regulation E
- Primarily for personal, family, or household purposes (interpreted very broadly)
- Issued on a prepaid basis in specified amount or capable of being loaded with funds after issuance (this is the “prepaid” aspect)
Importantly, the scope of the Rule is based upon 3 factors and whether any exclusions apply:
As a result of the above mentioned definitions, products covered by the prepaid rule include:
|
|
Many exclusions exist covering, but not limited to, health savings accounts, closed loop cards (store/gift cards), loyalty cards, Demand Deposit Accounts (DDAs) and other consumer asset accounts.
The Rule
As mentioned, the Rule makes changes to Regulations E and Z to include Prepaid Accounts. Key components to the Rule are noted in the table below:
|
Regulation |
General/New requirement |
Tailored/New provisions around |
|
Regulation E |
Subpart A requirements extended to include Prepaid Accounts |
1) Disclosures 2) Limited liability and error resolution 3) Periodic statements 4) Submission to the Bureau of prepaid account agreements 5) Internet posting |
|
Regulation Z |
Hybrid prepaid credit card |
6) Overdraft credit features
|
Source: Accenture analysis
1) Disclosures
The Prepaid Rule requires Regulation E disclosures for prepaid accounts in both the pre-acquisition and initial phases. The Pre-acquisition disclosures (detailed below) should be provided before the consumer acquires the Prepaid account.
Pre-acquisition disclosures:5
A) A short form disclosure
B) Certain information disclosed in close proximity to the short form disclosure
C) A long form disclosure
A) Short Form Disclosure – defines key fees and other information about the prepaid account and presented in a specified format.
Information includes:
- All prepaid fee types, even those which do not apply to the specific prepaid product
- The two fee types that generate the highest revenues from customers during the previous 24 months (above 5%)
- Statements regarding overdraft credit features
- For payroll card accounts and government benefit accounts, a statement that the consumer does not have to accept the Prepaid account and other options for payment
B) Certain information disclosed in close proximity to the short form disclosure – A financial institution should also disclose: its name, the name of the prepaid account program, any purchase price for the prepaid account and any fee for activating the prepaid account.
C) Long Form Disclosure – The long form details comprehensive fee information, information regarding all fees and statements providing various types of information. For prepaid accounts offering an overdraft credit feature, the long form disclosure to also include disclosures outlined in Regulation Z (§ 1026.60(e)(1)).
Accessibility – The Rule also establishes requirements for disclosures on the access device for the prepaid account. If the financial institution does not provide a physical access device, such as a card, it should include these disclosures on another entry point that the consumer uses to electronically access the prepaid account.
2) Limited Liability and Error Resolution6
While prepaid accounts are generally required to comply with Regulation E’s limited liability and error resolution requirements, the Rule does not require provisional credit for unverified accounts. While financial institutions may take longer than ten (10) days to investigate and determine whether an error has occurred, it must provisionally credit the consumer’s account the amount of the alleged error, minus a maximum of $50, thus limiting consumers’ liability for unauthorized charges and creating a timely way for them to get their money back.
3) Periodic Statements7
The Rule requires financial institutions to provide periodic statements for prepaid accounts unless it relies on the periodic statement alternative. Relying on the alternative requires that financial institutions provide the consumer with account balance information, electronic account transaction histories and written account transaction histories.
4) Submission to the Bureau of prepaid account agreements8
In addition, the Rule establishes submission guidelines to the CFPB for new and amended prepaid account agreements, requiring issuers to submit new and amended agreements no later than 30 days after the issuer offers, amends, or ceases to offer the agreement. Notification of withdrawn agreements are also subject to this rule.
5) Internet Posting9
If the issuer is required to submit a prepaid account agreement to the CFPB and the prepaid account agreement is offered to the general public, the issuer would be required to either post the account in a prominent and readily accessible location on its website or provide a consumer with a copy of the consumer’s prepaid account agreement in a timely manner upon receiving the consumer’s request.
6) Hybrid Prepaid-Credit Card / Overdraft Credit Features10
Under the Prepaid Rule, Regulations E and Z regulate credit features offered in connection with prepaid accounts. Regulation Z governs the newly defined “hybrid prepaid-credit card.” Prepaid cards are defined as such if:
- The card can be used from time to time to access credit from a separate credit feature, such as a credit account or credit subaccount that is separate from the prepaid account’s asset feature
- The separate credit feature is offered by the prepaid account issuer, its affiliate or its service providers
- The card can be used to access the separate credit feature in the course of authorizing, settling or otherwise completing transactions conducted with the card to obtain goods or services, to obtain cash or to conduct P2P transfers
Under the Rule, there are clear distinctions between overdraft credit features of a hybrid prepaid-credit card and traditional credit, example no fees, overdraft <$10. If this criteria is not met, the product should be treated under Reg Z as a credit product.
Regulation Z also states that an issuer should wait at least 30 days after the prepaid account is registered before soliciting a consumer to add the credit feature and should obtain the consumer’s consent to do so.
Impact to Financial Institutions
The Prepaid Rule would require financial institutions to assess their controls, processes, and compliance to the regulation. The rule is broad in its impact across the customer lifecycle and the compliance lines of defense.
Strategic and Operational Considerations
The cost to serve of pre-paid products is expected to increase as a result of the rule and with the high level of up front disclosure there may be an impact of revenue generated by them. Financial institutions offering prepaid cards should review their pre-paid product portfolio to evaluate the impact of the new requirements on total margin. An impact or gap analysis should be considered, reviewing affected business unit processes and controls to facilitate compliance with the Prepaid Rule’s provisions. Some institutions may reconsider their product offering, weighing the costs of adjusting their prepaid card offering to the impact of the new regulation.
Smaller/independent P2P and mobile payment providers would face regulation that had previously only impacted major card distributors.
Impact to Training
The high level of disclosures, new processes and documentation required by the rule would in our view require new training across all impacted areas of financial institutions offering prepaid accounts, with the front office being the most heavily impacted. A higher level of contact should also be expected in customer call centers as firms may “…have to help consumers with fraud claims, and they’ll have to hire staff to effectively communicate with users, who primarily are lower-income and don’t deal with banks.”11
Leverage Third Party Providers, Platforms, and Systems
Financial institutions should work with their third-party providers, including payment/credit-card processors, account acquiring platforms, and transactional processing systems, to leverage systems, applications and approaches they are developing to address the requirements of the rule. Expanding systems which currently serve debit/credit card products to accommodate pre-paid products appear to be the most viable option for providing customers with the required accessibility to transaction and reporting information.
Functionality less familiar to mobile wallet and P2P providers such as easy access to all transaction histories, may be required to meet the same transaction and reporting requirements for their products.
Impact to Disclosures and Reporting
Firms are encouraged to establish controls so that all disclosures are provided in a timely manner. New overdraft credit requirements would also require controls so that prepaid accounts are subject to the correct credit features.
Financial institutions should consider reports that need to be integrated and created (both internal and external), such as the periodic statements to customers. Reporting standards may also need to be established to govern these reports, including standards around the requirement to report new and amended prepaid account agreements and notification of withdrawn agreements. In addition, financial institutions are encouraged to implement a system for monitoring customer accounts so that their reports are timely, reliable and compliant with the new rule.
References
1. “Prepaid Accounts under the Electronic Fund Transfer Act (Regulation E) and the Truth In Lending Act (Regulation Z),” Consumer Financial Protection Bureau, Final Rule. Access at: http://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/prepaid-accounts-under-electronic-fund-transfer-act-regulation-e-and-truth-lending-act-regulation-z/
2. Ibid
3. Ibid
4. Ibid
5. Ibid
6. “Prepaid Accounts under the Electronic Fund Transfer Act (Regulation E) and the Truth In Lending Act (Regulation Z),” Consumer Financial Protection Bureau, Final Rule. Access at: http://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/prepaid-accounts-under-electronic-fund-transfer-act-regulation-e-and-truth-lending-act-regulation-z/
7. Ibid
8. Ibid
9. Ibid
10. Ibid
11. “The Morning Risk Report: Prepaid Card Issuers Face Disclosure Regime,” The Wall Street Journal, October 6, 2016. Access at: http://blogs.wsj.com/riskandcompliance/2016/10/06/the-morning-risk-report-prepaid-card-issuers-face-disclosure-regime/
Newsletter Author: Samantha Regan, David Wood, Jae Ko, Jennifer Zink
Newsletter Contact Person: Nghi Pham
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Disclaimer
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