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The Shoe Finally Drops: CFPB Makes Final Changes to the Prepaid Account Rule and Delays the Effective Date until 2019

On January 25, 2018, the U.S. CFPB announced that it has finalized changes to its sweeping Final Rule governing most general use prepaid accounts, digital wallets and P2P payment programs.  These changes have been long anticipated, and include a delay of the Final Rule’s effective date (until April 1, 2019), as well as the following notable features:

Error Resolution and Limited Liability

A major bone of contention for the industry was the fact that provisional re-crediting of claims of unauthorized transactions would be required even if the cardholder had not registered or been verified.  Such a requirement would certainly have increased fraud.  Under the new amendments, Regulation E’s error resolution and limited liability requirements will not apply until after the consumer identification and verification process has been completed.  This new limitation does not apply to payroll cards and government benefit accounts, since these cardholders are usually already known to the issuers.

Credit Card Accounts Linked to Prepaid Accounts

Another concern raised by the industry was the onerous consequences should a prepaid account linked to a credit feature be considered a “hybrid prepaid-credit” card, or should a negative balance be deemed to trigger the credit provisions.

  • Regulation Z’s definition of “business partner” was narrowed to exempt business arrangements between prepaid account issuers and traditional credit card issuers since traditional credit card issuers already comply with Regulation Z.
  • Issuers will also be able to provide incidental credit features structured as negative balances without triggering Regulation Z so long as certain conditions are satisfied.

Disclosures

Financial institutions will have greater flexibility in complying with pre-acquisition disclosure requirements.  For example, if the issuer furnishes a pre-acquisition disclosure in writing and the consumer later completes the acquisition process online, such issuer will not be required to provide the disclosure again electronically.

Other Changes

The new amendments also make changes to the requirements regarding disclosures of variable fees, foreign language disclosures and requirements for submission of agreements.

The CFPB rule that sets forth the amendments to the Final Rule is available here.

Copyright 2019 K & L Gates

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About this Author

Eric A. Love, KL Gates, Capital Markets Compliance Lawyer, Treasury Legislation Attorney
Law Clerk

Eric A. Love is a member of K&L Gates’ Public Policy and Law Practice and is based in the Washington, D.C. office. Mr. Love focuses on federal legislative and regulatory policy issues related to financial services and capital markets, with a particular emphasis on securities and corporate governance. 

Prior to joining K&L Gates, Mr. Love served as a special assistant in the Office of Legislative Affairs at the U.S. Department of the Treasury. In this capacity, he worked to help advance Treasury’s legislative agenda on a broad portfolio...

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Judith E. Rinearson, KL Gates, federal consumer protection lawyer, anti money laundering attorney
Partner

Judith Rinearson is a partner in the firm’s New York and London offices. Ms. Rinearson concentrates her practice in prepaid and emerging payment systems, electronic payments, crypto/virtual currencies, reward programs, ACH and check processing. She has more than 25 years of experience in the financial services industry, including 18 years at American Express’s General Counsel’s Office. Her expertise focuses particularly in the areas of emerging payments and compliance with state and federal consumer protection laws, anti-money laundering laws, state money transmitter licensing laws and abandoned property laws. 

Fully experienced in both the “issuing” and “acquiring” side of the payments business, Ms. Rinearson has drafted and negotiated complex agreements with strategic co-branded partners, processors and Independent Sales Organizations (ISOs), ATM networks, major retailers and service providers, prepaid card issuers and program managers, international remittance companies, virtual and mobile payment providers, as well as the Terms and Conditions and disclosures that usually accompany such products. She has hands-on experience in all legal aspects of launching and managing a range of payment products, from prepaid cards of all kinds, to Bitcoin exchanges and miners, wire transfer services, ACH, electronic banking, money orders and credit cards. Her practice includes advising on fraud avoidance and compliance with federal banking and anti-money laundering laws, as well as state money transmitter licensing laws, consumer protection laws and abandoned property laws. On the international level, Ms. Rinearson has supervised the launch of a range of payment and foreign currency products in Europe, Asia and Latin America; met with international regulators; and spoken on the issue of payment regulation. 

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