January 31, 2018

Update on CFPB's New Era of Rulemaking: Prepaid Rule Amended to Provide Commonsense Approach to Balancing Consumer Protection with Regulatory Burden

3 min

On January 25, 2018, the Consumer Financial Protection Bureau (CFPB) announced final changes to its 2016 prepaid rule. These changes largely respond to concerns raised by the prepaid industry regarding compliance with the 2016 rule, and are in keeping with the tone expressed in Mick Mulvaney's memo to CFPB staff, which was republished as an op-ed. The new CFPB approach will be to regulate more through formal rulemaking and less through enforcement, with a greater emphasis on prioritization of consumer complaints.

The prepaid rule changes fall into three main categories:

  1. Identity verification required to obtain prospective error resolution benefits. The 2016 prepaid rule extended certain fraud and error protection benefits to prepaid cards. These are benefits that consumers already enjoy with credit cards, such as the right to dispute charges and restore stolen funds. The problem with extending this regulatory regime to prepaid cards is that some prepaid cards are unregistered. Ownership in unverified cards is less clear than a credit card issued pursuant to an ability-to-repay analysis and full Know-Your-Customer diligence. In June 2017, the CFPB proposed that consumers be required to register their prepaid cards to receive these error resolution benefits and protections. The proposal also would have required these protections to apply retroactively to suspected thefts or disputes that occurred prior to card registration. The final rule issued today, however, clarifies that error resolution and limited liability protections apply only prospectively after the consumer registers the prepaid card and his or her identity has been confirmed. The CFPB believes this rule will encourage consumers to register their prepaid cards promptly, and facilitate streamlined compliance for financial institutions.
  2. Increased flexibility for credit cards linked to digital wallets. Digital wallets allow electronic payments via stored credit and debit cards, and stored value, such as prepaid accounts. Because digital wallets can hold prepaid accounts, the prepaid rule applies to them. Nevertheless, the credit provisions of the 2016 prepaid rule unintentionally caused complications when applied to credit card accounts linked to digital wallets with stored value, because those credit accounts would ostensibly be treated as hybrid prepaid-credit cards. The CFPB's final rule creates an exclusion for traditional credit cards linked to prepaid accounts, making it easier to link credit cards to digital wallets acting as prepaid accounts, and reduces the associated complications and expense of doing so. It also clarifies that traditional federal credit card protections continue to apply to credit cards stored in digital wallets.
  3. One-year extension time to comply with the rule. Finally, the CFPB acknowledged industry concerns that an April 2018 effective date would not provide sufficient time to implement and comply with the prepaid rule. The CFPB particularly noted the concerns of commenters who need to make changes to physical packaging of prepaid cards sold in retail outlets. As a result, the new effective date has been extended to April 1, 2019.

If you have questions or would like more information on these developments, please contact the authors.