CFPB Finalizes Sweeping Prepaid Account Rule

On October 5, 2016, the Consumer Financial Protection Bureau ("CFPB") issued its long-awaited final rule to further regulate prepaid card products, or "prepaid accounts" (the "Final Rule" or "Rule").1 The Final Rule follows the CFPB's December 2014 publication of a Notice of Proposed Rulemaking ("Proposed Rule") on prepaid accounts.2 As discussed below, the Rule generally takes effect on October 1, 2017 (the "Effective Date").

The Final Rule weighs in at nearly 1,700 pages, and we continue to work our way through the rule, the official staff interpretations of the Rule (the "Commentary"), and the supplementary information accompanying the Rule. This summary identifies key provisions of the Final Rule addressing scope, disclosures, error resolution and liability, and provisions regarding so-called "hybrid credit-prepaid cards." A more detailed analysis, including an analysis of the interrelationship between the amendments to Regulation E and Regulation Z, and how those amendments will impact existing prepaid card products and programs, is forthcoming.

The CFPB received approximately 150 unique, detailed comment letters in response to the Proposed Rule from consumer advocacy groups, trade associations, industry representatives, digital wallet providers, virtual currency companies, research and advocacy organizations, governmental officials and individual consumers. The CFPB reported receiving more than 65,000 total comments in response to the Proposed Rule, which included comments received from individual consumers.

SCOPE OF THE PREPAID RULE

Consistent with the Proposed Rule, the Final Rule covers prepaid products beyond conventional network-branded general-purpose reloadable prepaid cards. Specifically, the Final Rule revises the definition of "account" under Regulation E to include prepaid accounts, and the Final Rule restructures the definition of prepaid account from the Proposed Rule to enumerate four categories of prepaid accounts: (1) payroll card accounts currently subject to Regulation E; (2) government benefit accounts currently subject to Regulation E; (3) accounts that are "marketed or labeled as 'prepaid'" that are redeemable upon presentation at multiple unaffiliated merchants for goods or services, or that are usable at ATMs; and (4) accounts that are issued on a prepaid basis or capable of being loaded with funds, whose "primary function" is to conduct transactions with multiple unaffiliated merchants for goods or services or at ATMs, or to conduct P2P transfers, that are not otherwise accounts under Regulation E (i.e., accounts other than checking accounts, share draft accounts, or NOW accounts).

With respect to this fourth "functional" category of prepaid accounts, the Commentary provides guidance regarding the "primary function" test. Specifically, the Commentary provides that an "account's primary function must be to provide consumers with general transaction capability." Accounts that provide such capability only incidentally are excluded from the "functional" category of prepaid accounts. The Commentary provides examples of accounts that meet the primary function test (e.g., prepaid accounts that provide tax refunds or insurance proceeds to consumers, if the accounts can be used, for example, to purchase goods or services at multiple unaffiliated merchants) and accounts that do not meet the primary function test (e.g., brokerage accounts and savings accounts).

Nevertheless, the Final Rule provides for a number of exclusions from the definition of prepaid account, including the following account types:

Health Savings Accounts, Flexible Spending Accounts and similar accounts; Accounts that are directly or indirectly established through a third party and loaded only with qualified disaster relief payments; P2P functionality of an account established by or through the U.S. government whose primary function is to conduct closed-loop transactions at government facilities, including U.S. military installations or vessels; Accounts governed by § 1005.20 (the "Gift Card Rule"), including gift certificates, store gift cards, loyalty, award or promotional gift cards, or general-use prepaid cards that are marketed and labeled as a gift card or gift certificate; and Accounts established for distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency. As in the Proposed Rule, the definition of a prepaid account under the Final Rule is not limited to physical cards. The Final Rule also covers mobile and other electronic prepaid accounts, including digital wallets, that are capable of storing funds that can be used, for example, for purchases at multiple unaffiliated merchants or to conduct P2P transfers. However, a digital wallet that is only capable of storing a consumer's payment credentials (but not storing funds) is not covered by the Rule.

PRE-ACQUISITION DISCLOSURES, BILLING STATEMENTS AND POSTING CARDHOLDER AGREEMENTS

Pre-Acquisition Disclosures. The Final Rule establishes "Know Before You Owe" disclosure requirements, including short-form and long-form disclosures that the consumer must receive "before a consumer acquires a prepaid card account" (i.e...