The CFPB has issued a compliance bulletin “to reiterate that the compulsory use prohibition in the [Electronic Fund Transfer Act (EFTA)] applies to government benefit accounts, as defined in Regulation E.”
In the bulletin, the CFPB reviews what constitutes a “government benefit account” subject to the EFTA’s compulsory use prohibition. As implemented by Regulation E, the EFTA provides that no person may require a consumer to establish an account for receipt of an electronic fund transfer (EFT) with a particular financial institution as a condition of receipt of a government benefit. A “government benefit account” is defined as an account established by a government agency for distributing benefits to a consumer electronically. For purposes of Regulation E, such accounts do not include an account for distributing needs-tested benefits in a program established under a state or local law or administered by a state or local agency. However, all accounts used to distribute funds under federally-administered benefit programs, even if the benefits are needs-tested, are government benefit accounts subject to the compulsory use prohibition.
In discussing what is deemed “compulsory use” for purposes of the prohibition, the CFPB indicates that a government agency that requires consumers to receive benefits through direct deposit does not violate the prohibition if it allows consumers to choose the financial institution they want to use to receive the direct deposit. Alternatively, a government agency can allow a consumer to choose whether to have his or her benefits deposited at a particular institution that the agency designates provided the consumer can receive the benefits by another means. The Bureau reiterates its position in the 2016 final prepaid accounts rule that consumers are not provided with a choice when they are required to receive the first payment of government benefits on a prepaid card or otherwise at a particular institution, even if the consumer can later re-direct the payment to any account of his or her choice.
The Bureau also reviews the Regulation E requirements or protections for:
- The three types of disclosures to which consumers are entitled for government benefit accounts consisting of pre-acquisition disclosures, disclosures on the access device or entry point for a government benefit account, and initial disclosures;
- Change-in-terms notices;
- Periodic statements or account history information; and
- Limited liability for unauthorized transfers and error resolution
While the compliance bulletin focuses on the compulsory use prohibition’s application to government benefits, it is important to note that the prohibition has broader application. It also prohibits any person from requiring a consumer to establish an account for receipt of EFTs with a particular financial institution as a condition of employment. And most significantly for consumer financial services providers, it prohibits any person from conditioning the extension of credit to a consumer on such consumer’s repayment by means of preauthorized EFT. We regularly advise creditors on how to navigate the compulsory use prohibition when developing credit products.