Compliance Alerts
The Consumer Financial Protection Bureau (CFPB) issues a final rule for prepaid consumer accounts.
On November 22, 2016, the CFPB issued a final rule under Regulation E (Electronic Fund Transfer Act) and Regulation Z (Truth in Lending Act) to provide consumer protections for prepaid accounts. 81 Fed. Reg. 83,934 (November 22, 2016). Prepaid accounts are defined to include payroll card accounts and government benefit accounts. In addition, prepaid accounts include: 1) an account marketed or labeled as prepaid that can be accepted at multiple unaffiliated merchants for goods and services or usable at automated teller machines (ATMs); and 2) an account issued on a prepaid basis or capable of storing and loading funds, whose primary function is to conduct transactions with multiple unaffiliated merchants for goods or services, to conduct transactions at ATMs, or to conduct person-to-person transfers, and that is not a checking, share draft, or negotiable order of withdrawal account.
Certain accounts are excluded from the definition of prepaid account, including accounts for health savings, flexible spending, medical savings, health reimbursement, dependent care, or transit or parking reimbursement. The rule also does not apply to gift certificates; store gift cards; loyalty, award, or promotional gift cards; and general-use prepaid cards marketed as gift cards or certificates. Gift cards and gift certificates are generally covered by provisions in the Credit Card Accountability, Responsibility and Disclosure Act of 2009, as implemented in §1005.20 of Regulation E. The CFPB determined that the gift card market could be adversely affected if it was also subject to this prepaid rule. The protections in §1005.20, concerning expiration dates and fees, continue to apply to these products.
The final rule includes two new disclosure forms specific to covered prepaid accounts and applies existing Regulation E substantive consumer protections, with some modifications, to these accounts. Before a prepaid product is acquired by a consumer, a financial institution must generally provide both short- and long-form disclosures in a tabular format, although in some cases, the long form can be provided after acquisition. The short form highlights key account information and certain fees, including periodic fees, per purchase fees, ATM withdrawal and balance inquiry fees, cash reload fees, customer service fees, and inactivity fees. The long form must list all fees along with certain other disclosures. If an account is purchased through a retail store, the short-form disclosure must be provided on or visible through the outside packaging material for the prepaid account access device. Model forms are available to facilitate compliance.
The Regulation E substantive protections include error resolution rights, liability limits for unauthorized transactions, and at least 21 days’ advance notice of certain changes to the terms and conditions of the account. The error resolution procedures and liability limits are generally similar to the existing requirements under Regulation E, with some modifications. For example, institutions may take up to 45 days to investigate an error without having to provide provisional credit for an unverified account. Institutions must also provide periodic statements or alternatively can provide all of the following: account balance via telephone, 12 months of account transaction through the Internet, and 24 months of history upon request.
The rule generally requires issuers to submit to the CFPB new and amended prepaid account agreements and notification of withdrawn agreements no later than 30 days after the issuer offers, amends, or ceases to offer the agreement. If an issuer is required to submit a prepaid account agreement to the CFPB, and the prepaid account is offered to the general public, the institution must also post the account agreement in a prominent and readily accessible location on its website. If a prepaid account agreement is not posted on the issuer’s website, the issuer must provide a consumer with a copy of the consumer’s prepaid account agreement no later than five business days after receiving the request.
The rule also provides protections under Regulation Z if the issuer of the prepaid account allows the consumer to access a separate line of credit offered by the issuer, its affiliate, or partner, and the credit can be accessed during a transaction with the card, which the rule identifies as a hybrid prepaid-credit card. Issuers must wait 30 days after a prepaid account is registered before soliciting a credit feature and must obtain the consumer’s consent. Regulation Z’s protections for credit cards apply to hybrid prepaid-credit cards, including the ability-to-repay requirement in §1026.51, monthly billing statements for credit transactions under §1026.7(b), limits on fees during the first year of the account under §1026.52, restrictions on raising rates for an existing balance under §1026.55, and 45-day advance notice of changes to the credit account under §1026.9(c)(2). For prepaid accounts without a credit feature, the Regulation Z credit card protections would not apply.
The rule is effective October 1, 2017, although the requirement to submit prepaid account agreements to the CFPB is not effective until October 1, 2018. The CFPB has created an implementation page, including an executive summary and coverage chart, at www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/prepaid-rule/.
Agencies issue a proposed rulemaking to implement the private flood insurance requirements of the Biggert-Waters Flood Insurance Reform Act (BWA).
On November 7, 2016, the Board of Governors of the Federal Reserve System (Board), the Farm Credit Administration (FCA), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) (agencies) issued a rulemaking proposal to implement the private flood insurance requirements of the BWA. 81 Fed. Reg. 78063 (November 7, 2016) 
. The BWA amended the Flood Disaster Protection Act of 1973 (FDPA) to require lenders to accept a private flood insurance policy in satisfaction of the FDPA’s mandatory flood insurance purchase requirement if the policy meets the statutory definition of "private flood insurance." In the proposal, the agencies define "private flood insurance" as a policy that:
- is issued by an insurance company that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the state or jurisdiction in which the property to be insured is located; or, in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is recognized, or not disapproved, as a surplus lines insurer by the state insurance regulator of the state or jurisdiction in which the property to be insured is located;
- provides coverage at least as broad as the coverage under a standard flood insurance policy (SFIP), when considering deductibles, exclusions, and conditions offered by the insurer;
- requires the insurer to provide written notice 45 days before canceling or not renewing flood insurance coverage;
- provides information about the availability of flood insurance coverage under the National Flood Insurance Program (NFIP);
- includes a mortgage interest clause similar to the clause contained in an SFIP;
- notifies the insured that any lawsuit related to a claim must be filed no later than one year after the date of a written denial for all or part of a claim under a policy; and
- contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.
To facilitate compliance, the proposal includes a compliance aid provision under which a policy would be deemed to be "private flood insurance" if the following conditions are satisfied: 1) the policy includes a written summary that demonstrates how the policy meets the definition of private flood insurance by identifying the provisions of the policy that meet each criterion in the definition and confirms that the insurer is regulated in accordance with that definition; 2) the lender verifies in writing that the policy includes the provisions identified by the insurer in its summary and that these provisions satisfy the criteria included in the definition; and 3) the policy or an endorsement to the policy includes the statement: "This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation."
The proposal also provides guidance on other types of flood insurance policies issued by private insurers that lenders may accept at their discretion, provided the following criteria are met:
- The policy is issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the state or jurisdiction in which the property to be insured is located or, in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator of the state or jurisdiction in which the property to be insured is located;
- The policy covers both the mortgagor(s) and mortgagee(s) as loss payees;
- The policy provides for cancellation after reasonable notice to the borrower only for reasons permitted by FEMA for an SFIP, in any case of nonpayment, or when cancellation is mandated pursuant to state law; and
- The policy is either:
- "at least as broad" as an SFIP; or
- provides coverage that is similar to an SFIP policy, considering deductibles, exclusions, and conditions offered by the insurer; and the lender compares the private policy with an SFIP and documents its finding that the policy provides sufficient protection of the loan.
The proposal also defines the term mutual aid society and would permit a lender to accept a private policy issued through a mutual aid society, if certain conditions are satisfied.
Each regulator determines for the institutions it supervises if a policy issued by a mutual aid society meets the requirements. The proposal states that the Board, FDIC, and NCUA "expect that cases in which they approve policies issued by mutual aid societies to be rare and limited." The OCC and FCA "propose to conduct their own evaluations using the criteria that institutions are expected to consider" under the proposed mutual aid provision.
The comment period closes on January 6, 2017, 60 days after the notice was published in the Federal Register.