Regulation E is a consumer-friendly regulation which is overseen by the CFPB (Consumer Financial Protection Bureau), a consumer-friendly agency. You might anticipate that what comes next is going to be something favorable to consumers, and with good reason.
There has been some debate over whether certain types of transactions are subject to Regulation E, specifically the section relating to error resolution. We all know that Regulation E could benefit from an update to clarify with more precision which types of transactions are covered. Since an update doesn’t look to be on the horizon, the most conservative interpretation is to include more transactions, even when the regulation is unclear about whether they’re to be included.
The latest out of CFPB Headquarters in Washington D.C. is no different. The current debate is over pandemic benefits, such as those extended under the CARES Act, when administered through a state agency, such as how unemployment benefits are handled. When these types of benefits are loaded onto a prepaid debit card, are transactions subject to Regulation E protections?
Perhaps it would be beneficial to review the Reg. E rules pertaining to prepaid cards. Certain categories of these prepaid accounts can fall into the Reg. E definition of account, and are therefore subject to the regulation, including the error resolution portion. Accounts such as payroll card accounts, government benefit accounts, and prepaid cards that can be used as multiple unaffiliated locations for goods or services all meet the requirements of being subject to Regulation E.
Some notable exceptions to the regulation include an account that only has funds from an HSA (Health Savings Account), FSA (Flexible Spending Account), or other medical savings account. Additionally, if the card is considered to be a gift certificate, a store gift card, or a general prepaid card that is marketed/labeled as a gift card, those are also not subject to Regulation E. Finally, accounts established through a third-party and loaded with disaster relief payments or accounts established for distributing needs-tested benefits administered by a state or local agency are also exempt from Regulation E.
As might be evident from the previous two paragraphs, when it comes to unemployment benefits administered through a state agency, but resulting from a disaster such as the pandemic, which rule applies? Are these treated as government benefit accounts subject to Regulation E? Or are these treated as disaster relief payments or need-tested benefits that are not subject to Regulation E?
In taking the conservative approach, the CFPB has recently argued in federal court that these are government benefit accounts because unemployment benefits accounts are set up by the state for the purpose of distributing government benefits which are not need-tested benefits (as unemployment benefits do not take into consideration income or other assets to determine the appropriate level of benefits). In determining that these are government benefit accounts, it’s unnecessary to further make a determination whether these accounts are receiving disaster relief payments, as the Reg. E exemptions for prepaid accounts do not apply if the account is considered a government benefit account. So, once it’s determined to be a government benefit account, none of the exceptions 12 CFR § 1005.2(b)(3)(ii) could apply.
Although this debate now seems settled, many Regulation E transaction debates continue. Whenever you have a Reg. E error resolution question, feel free to reach out to us on the hotline, as sometimes we can provide black and white answers, and other times we can help you navigate the gray areas.