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Fast-Approaching Effective Date of Prepaid Rule Leaves Little Time to Address Significant Compliance Challenges

After several years of rulemaking, amendments, and delays, the Consumer Financial Protection Bureau's (CFPB) Prepaid 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 Rule's complex and specific new requirements.

The Rule brings most prepaid accounts within the consumer protection regime of the Federal Reserve's Regulation E. The Rule also applies certain Regulation 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 its real-world applications 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 Regulation E and Regulation Z frameworks, the Rule and its rulemaking background, commentary on the Rule's 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 Regulation Z requirements to hybrid prepaid accounts with credit features, including disclosures and substantive provisions;

  • Determining where changes to the specific provisions for payroll or government benefit cards are required; and

  • Harmonizing new terms and references across all existing product materials without jeopardizing compliance with Regulation E and Regulation Z, as amended by the Rule.

Prepaid issuers and other entities involved with the provision of prepaid products should take advantage of the remaining time before the Rule goes into effect to confirm that their prepaid programs and documentation are fully compliant. 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 Regulation E and Regulation 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.

Copyright © by Ballard Spahr LLP


About this Author

Kaplinksy, partner, New York, finance

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

Ronald Vaske, Ballard Spahr Law Firm, Minneapolis, Finance Law Attorney

Ron Vaske focuses on matters involving banking, payment systems, and commercial transactions. He provides advice to banks, service providers, program managers and financial services companies in nearly all areas of their business, including compliance, regulatory supervision and enforcement, privacy, data security, and third party relationships. He also advises on issues related to emerging payment systems such as mobile wallets and the implementation of new financial products.

Ron regularly assists clients in relationships with financial institutions and third party service providers. Several of the clients he advises serve the under-banked and subprime markets.

Ron is an authority on the CARD Act and the Truth in Lending Act, the Equal Credit Opportunity Act; The Electronic Funds Transfer Act; The Dodd-Frank Act; and the Fair Credit Reporting Act.

Jacob Westlund, Ballard Spahr, Business attorney

Jacob Westlund assists banks, bank holding companies, and financial institutions with a range of matters, including transactions, commercial lending, bank lifecycle developments, regulatory requirements, and compliance issues. Jacob approaches his clients' needs with full awareness of the challenging regulatory environment in which financial institutions operate and the importance of efficient, reliable legal advice.

Prior to entering law, Jacob served at a large national bank where he was responsible for conducting a rigorous, enterprise-wide assessment of top...