After several years of rulemaking, amendments, and delays, the CFPB’s Prepaid Rule (the “Rule”) is finally set to take effect on April 1, 2019.  This rapidly approaching effective date means that prepaid issuers have only two months left to confirm that their prepaid programs and materials are fully compliant with the Rules’ complex and specific new requirements.

Ballard Spahr attorneys will hold a webinar, “The Prepaid Rule Takes Effect: Considerations for Properly Implementing the CFPB’s Prepaid Accounts Rule” to discuss key compliance considerations ahead of the Prepaid Rule’s effective date. The webinar will take place on February 27, 2019, from 12:00 p.m. to 1:00 p.m. ET and a registration form is available here.

The Rule brings most prepaid accounts within the consumer protection regime of Reg. E. The Rule also applies certain Reg. Z requirements to prepaid products involving credit features.  On top of the existing complexity of those regulations, the Rule adds provisions unique to prepaid accounts, including rigorous and specific requirements for pre-acquisition short and long form disclosures and disclosures on the prepaid access device itself. Because much of the Rule applies uniformly across the spectrum of prepaid products, many of the Rule’s real-world applications to actual products will require significant analysis beyond the language of the Rule itself, the CFPB’s samples and illustrations, and currently available guidance. This compliance challenge will require deep familiarity with the existing Reg. E and Reg. Z frameworks, the Rule itself and its rulemaking background, the Rule’s commentary in its current form, and the practical and legal implications of prepaid products.

Some of the complicated applications of the Rule include:

  • Proper formatting and wording of the pre-acquisition short and long form disclosure documents. Both formatting and wording require deep analysis where a prepaid product differs from the CFPB’s samples and illustrations.
  • Determining how many and which additional fees and fee types to disclose on the pre-acquisition short form disclosure.
  • Adequately describing each and every fee on the long form disclosure, including appropriate categorization and grouping of fee types.
  • Navigating the provisions and exceptions applicable to retail and telephone acquisition contexts.
  • Understanding other specific requirements and exceptions, including the tests and thresholds applicable to the posting and submission of cardholder agreements and the re-printing of existing consumer disclosure materials.
  • Applying Reg. Z requirements to hybrid prepaid accounts with credit features, including both disclosures and substantive provisions.
  • Determining where changes to the specific provisions for payroll or government benefit cards are required.
  • Harmonizing new terms and references across all existing product materials without jeopardizing compliance with Reg. E and Reg. Z, as amended by the Rule.

Prepaid issuers and other entities involved with the provision of prepaid products should take advantage of the remaining two months to confirm that their prepaid programs and documentation are fully compliant with the Rule. Compliance risks are particularly significant for prepaid programs in which a third-party program manager or similar entity with more limited compliance resources is responsible for preparing disclosures and consumer-facing materials.  It is even more important in such programs to bring adequate expertise into the review process early enough to work through necessary changes.

Confirming complete compliance with the Rule will require more analysis and diligence than many entities are accustomed to performing in the existing and relatively well-defined worlds of Reg. E and Reg. Z. The universe of prepaid products involves countless unusual or unique features that will not fit neatly within the CFPB’s new framework or model forms. In addition, because the Rule is new and interpretive guidance is limited, the compliance challenge it presents will be particularly difficult.  Ballard Spahr’s Consumer Financial Services group possesses the deep experience with prepaid and other consumer financial products necessary to help navigate the Rule’s complexity, its highly nuanced relationship with existing regulatory regimes, and its implications for specific prepaid account characteristics.

Webinar. On February 27, 2019, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The Prepaid Rule Takes Effect: Considerations for Properly Implementing the CFPB’s Prepaid Accounts Rule,” to discuss key compliance considerations ahead of the Prepaid Rule’s effective date. The webinar registration form is available here.

A portion of the Treasury’s report entitled “A Financial System That Creates Economic Opportunities, Nonbank Financials, Fintech, and Innovation,” focuses on payments.  (See our legal alert for a discussion of other portions of the Treasury’s report.)

Current payment methods.  The report notes four primary core payment systems: credit cards, debit cards, automated clearing house (ACH) transfers, and wire transfers.  Among the issues facing such systems is that their regulation is fragmented, with the first two systems subject to significant federal regulation, the ACH system heavily dependent on agreement, and wire transfers primarily subject to uniform state law.  The report, given its focus, ignores the check system, also regulated by uniform state law, and virtual currency payment methods that have yet to reach significant volume as a payment method.

Nonbank Funds Transfers.  The report focuses on nonbank methods of funds transfers between individuals.  It discusses money transmitters that, while subject to federal Bank Secrecy Act regulation, are primarily state-licensed and regulated by diverse state statutes and, for multi-state businesses, are subject to burdensome state licensing.  The report also discusses the Regulation E remittance provisions, P2P and non-P2P transfers, and so-called digital wallets.  The report’s discussion concludes with a review of (1) the effort to encourage faster payments including the Faster Payments Task Force, the Real-Time Payments System of The Clearing House, same day ACH efforts by NACHA and ACH operators, and the challenges these efforts face, and (2) the work of the Secure Payments Task Force.

Recommendations. The Treasury makes the following recommendations:

  • States should work to harmonize money transmitter requirements for licensing and supervisory examinations–a task that may require some federal incentives since the Uniform Money Services Act, requested by Congress that the Uniform Law Commission research and write, has only been enacted by 12 states to date;
  • The CFPB should provide more flexibility regarding the issue of remittance disclosures in Regulation E; and
  • The Federal Reserve should accelerate its efforts to facilitate a faster retail payments system.

Our observations.  While the Treasury’s report is a good start, it could have gone much further.  Noting the complexity in the U.S. payments system, the Treasury might have recommended that efforts be directed at reconciling the credit and debit card systems for similar issues.  For example, the Treasury could encourage the Uniform Law Commission to update Uniform Commercial Code (UCC) payment articles for electronic instruments.  Such a project is already under consideration by the UCC sponsors, the Uniform Law Commission, and the American Law Institute for notes which, when completed, would replace paper instruments as the only payment vehicles covered by the UCC.  Another recommendation could provide support for the Uniform Regulation of Virtual Currency Businesses Act, which supplies what the Treasury’s report characterizes as the need for “adequate prudential regulation and supervision” for that emerging payment method.

On September 20, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr will conduct a webinar, “More Than Just Fintech: What Are the Important Takeaways for All Consumer Financial Services Providers from Treasury’s Sweeping Report?” A link to register is available here.