CFPB Readies Limited Liability on Prepaid Cards

(CN) – The Consumer Financial Protection Bureau plans to limit liability for prepaid credit cards where the financial institution has not completed its consumer verification.

The CFPB has proposed amendments to its November final rule on prepaid accounts, and seeks public comment. One of the potential changes involves error resolution and limits on liability for prepaid accounts where the financial institution has not completed its consumer identification and verification process. Another change would apply the rule’s credit-related provisions to digital wallets capable of storing funds.

The prepaid accounts final rule implements parts of the Truth in Lending Act (Regulation Z), the Electronic Fund Transfer Act (Regulation E) and Title X of the Dodd-Frank Act.

The CFPB is in charge of issuing rules meant to ensure consumer financial products or services have full and accurate disclosure, allowing consumers to understand the costs, benefits, and risks associated with the product or service, according to the proposal’s preamble. It’s rules also are meant to “enable the bureau to administer and carry out the purposes and objectives of the federal consumer financial laws, and to prevent evasions.”

Under the CFPB’s proposed amendments to the prepaid accounts final rule:

“Error resolution and limited liability requirements do not extend to prepaid accounts that have not successfully completed the financial institution’s consumer identification and verification process (i.e., accounts that have not concluded the process, accounts where the process is concluded but the consumer’s identity could not be verified, and accounts in programs for which there is no such process). However, for accounts where the consumer’s identity is later verified, financial institutions would be required to resolve errors and limit liability with regard to disputed transactions that occurred prior to verification, consistent with the general timing limitations in the prepaid accounts rule.

“The bureau is also proposing related changes to model language and to require that, for … programs where there is no verification process, financial institutions explain in their initial disclosures their error resolution process and limitations on consumers’ liability for unauthorized transfers, or explain that there is none, and comply with the process (if any) that they disclose.” (Parentheses in original; ellipsis added.)

Additionally, the proposal states:

“The bureau is proposing to create a limited exception to the credit-related provisions of the prepaid accounts rule for certain business arrangements between prepaid account issuers and credit card issuers that offer traditional credit card products. This exception is designed to address certain complications in applying the credit provisions of the prepaid accounts rule to credit card accounts linked to digital wallets that can store funds where the credit card accounts are already subject to Regulation Z’s open-end credit card rules in circumstances that appear to pose lower risks to consumers.”

The CFPB’s proposed revisions to two rule comments would clarify how provisions regarding unsolicited issuance of access devices, usually cards, and the timing of pre-acquisition disclosures would apply to prepaid products where a financial institution or third party making a disbursement via a prepaid account does not offer any alternative means to receive the funds.

To avoid requiring institutions to spend money creating alternative methods of payment, such as by using bank checks, where they are currently solely using prepaid accounts, for example to provide prison release cards, jury duty cards, and certain types of refund cards, the financial institution need only inform consumers that they have no other means by which to receive any funds in the prepaid account if the consumer disposes of the prepaid card.

CFPB rules still prohibit requiring that employees receive payroll, and government benefit recipients receive payouts on prepaid cards.

The prepaid accounts rule generally requires a financial institution to provide a consumer with both a “short form” and a “long form” disclosure before a consumer acquires a prepaid account.

Concerned about the potential increased costs to financial institutions to put the long form disclosures on a retail prepaid card package, the CFPB has proposed allowing long form “pre-acquisition” disclosures to be available to the consumer after purchase, electronically, by mail, or within the closed package.

The short form disclosure must be provided on or visible through an outward-facing, external surface of the access device’s packaging material, and it must include information that allows a consumer to access the information required to be disclosed in the long form by telephone and website.

The CFPB’s proposal provides that the prepaid accounts rule does not apply to certain loyalty, award, or promotional gift cards that are not marketed to the general public.

Additionally, the bureau seeks comment on whether a further delay of the effective date would be necessary and appropriate in light of the specific amendments to the prepaid accounts rule proposed.

The CFPB also has published an updated version of the Prepaid Rule Small Entity Compliance Guide. The guide includes updates to reflect the delayed effective date set forth in the amendment to the prepaid accounts final rule published in April, as well as other clarifications. The updated guide does not address the content of the prepaid account proposal discussed above.

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