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Monday, January 29, 2018

CFPB amends prepaid rule, extends effective date

T he Consumer Financial Protection Bureau is providing more time for prepaid debit card companies to prepare for upcoming new regulations. The bureau also has taken a scalpel to the controversial new rule set, narrowing the application of error resolution requirements and adjusting compliance requirements for providers of digital wallets.

The CFPB's prepaid card rules were crafted in an effort to extend to prepaid debit card accounts disclosure requirements and other consumer protections that already apply to debit and credit card accounts. Adopted in 2016, they were supposed to take effect in October 2017. But the bureau began backpedaling last June, moving the implementation date to April 2018 and requesting new input on what were considered particularly controversial provisions of the rule set. A new "update" to the prepaid rules, issued by the CFPB on January 25, 2018, addresses those controversial provisions, and extends the effective date for the entire rule set to April 2019.

One of the more controversial provisions in the original rules extended error resolution and limited liability protections to all prepaid cardholders, regardless of whether accountholders had registered their cards with issuers and issuers had been able to verify those accountholders. The amended rule bows to industry concerns about fraud, and clarifies that those protections don't kick in until a card has been registered and the issuer has completed the accountholder identity verification process.

The amended rule also narrows provisions that apply to "hybrid" accounts where both prepaid cards and credit cards are linked in digital wallets. The change eases compliance burdens on digital wallet providers that allow consumers to link their cards and draw on credit balances to cover negative balances on their prepaid accounts. "The rule changes ensure that consumer continue to receive full federal credit card protections on their traditional credit card accounts while making it easier for them to link those accounts to digital wallets," the CFPB wrote.

The immediate response to the CFPB's action was positive. "We applaud the CFPB in extending the overall effective date," said Electronic Transactions Association CEO Jason Oxman.

But as Pavitra Bacon, an attorney with Ballard Spahr LLP wrote in an analysis, the pending rule set may still prove a tough pill to swallow for some. "The amended Rule still contains onerous restrictions on credit features and complicated disclosure requirements, but the changes are generally positive for prepaid providers," she wrote in an analysis. For example, Bacon noted that the changes "do not completely exclude digital wallets that can store funds, or person-to-person payment products from the Rule," although she added, "it does ease compliance burdens on digital wallet providers."

Time of change for CFPB

The updated prepaid card rule – while in the works since last June – appear to reflect a new attitude at the CFPB, ushered in by Acting Director Mick Mulvaney. Mulvaney, formerly Director of the Office of Management and Budget and previously a vocal opponent of the CFPB, was appointed by President Trump to replace the Bureau's original director, Richard Cordray, whose departure late in 2017 launched a court battle over who should run the CFPB.

Mulvaney's appointment was upheld by a U.S. District Court judge, leaving Mulvaney to make his mark on the bureau, which was created as a consumer watchdog agency in the wake of the 2008 financial meltdown.

A memo recently sent by Mulvaney to CFPB staffers, leaked by the investigative journalism organization ProPublica, suggested Mulvaney wants less focus by the CFPB on enforcement and more on working with the industry on regulations going forward.

"We are government employees," the memo reads in part. "We don't just work for the government, we work for the people. And that means everyone: those who use credit cards, and those who provide those cards; those who take loans, and those who make them." Mulvaney described a new "mission" for the CFPB. "[W]e will exercise with humility and prudence, the most unparalleled power given to us to faithfully enforce the law in furtherance of the mandate given us by Congress," he wrote. "But we go no further. Simply put, the days of aggressively 'pushing the envelope' of the law in the name of the mission are over."

What does that mean? "When it comes to enforcement, we will be focusing on quantifiable and unavoidable harm to the consumer," the leaked memo further stated. "If we find that exists, you can count on us to vigorously pursue the appropriate remedies. If it doesn't, we won't go looking for excuses to bring lawsuits."

The memo also said the bureau will be "prioritizing" its work, stating that in 2016, "almost a third of complaints to this office related to debt collection. Only 0.9 percent related to prepaid cards and 2% to payday lending. Data like that should, and will, guide our actions."


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