Last week, the CFPB issued its long-awaited final rule amending Regulation E (Electronic Funds Transfer Act) and Regulation Z (Truth in Lending Act) to create regulations for prepaid financial products (Prepaid Rule). The CFPB’s original proposed rule was issued in 2014. The Prepaid Rule is effective on October 1, 2017, although the requirement to submit prepaid account agreements to the CFPB is not effective until October 1, 2018. Financial institutions do not have to pull prepaid access devices or materials produced prior to October 1, 2017, but will be required to provide consumers with change in terms notices and updated initial disclosures in many cases.

The term “prepaid account” has been added to the definition of “account” under Regulation E, and such accounts (including payroll card accounts and government benefit accounts) must meet two tests for coverage. Certain types of accounts, which meet one or both of these tests, are not considered prepaid accounts and are specifically excluded from coverage, such as gift cards, gift certificates, health savings account cards, and a state benefits distribution cards.

Under Regulation E, certain pre-acquisition disclosures are required to be provided to a consumer generally before the consumer acquires the prepaid account. A consumer acquires a prepaid account by purchasing, opening, or choosing to be paid via prepaid account. The short form disclosure is required to be in a specific format and should contain required fee and other information, including information about linked overdraft features, to help the customer understand the key terms of the account. In close proximity to the short form disclosure, the financial institution name, name of the prepaid account program, any purchase price for the prepaid account, and any fee for activating the prepaid account should also be disclosed.

A long form disclosure containing more comprehensive fee and other information about the prepaid account must also be furnished to the consumer. For prepaid accounts offering an overdraft credit feature, the long form disclosure must also include certain Regulation Z disclosures.

There are also required disclosures for the physical card or other access device.  If no physical access device is provided, the disclosures must be provided on the website, mobile application or other entry point that the consumer uses to access the prepaid account.

Regulation E rules on error resolution and liability generally apply to prepaid accounts regardless of whether the financial institution has completed its customer identification and verification process with respect to an account, but the Prepaid Rule does not require provisional credit to be extended for unverified accounts. Periodic statements are required for prepaid accounts, but not when certain methods of accessing information are made available to the consumer.

Issuers are required to submit to the CFPB their new and amended prepaid account agreements and must notify the CFPB of any withdrawn agreements no later than 30 days after the issuer offers, amends or stops offering the agreement. Prepaid account issuers must also publicly post on their own websites agreements that are offered to the general public.

The Prepaid Rule adds the new term “hybrid prepaid-credit card” to Regulation Z to address overdraft credit features that are offered in connection with prepaid accounts. The Prepaid Rule generally requires prepaid account issuers to structure an overdraft credit feature accessible by a hybrid prepaid-credit card as a separate credit feature, not as a negative balance to a prepaid account. Under the Prepaid Rule, an overdraft credit feature may only be structured as a negative balance on a prepaid account in very limited circumstances.

Because of its broad scope and significant disclosure requirements, issuers should carefully scrutinize the new Prepaid Rule and initiate compliance plans as soon as possible in order to meet the effective date.