CFPB Issues Compliance Bulletin on the Compulsory Use Prohibition and Government Benefit Accounts
The Consumer Financial Protection Bureau (bureau) recently issued a compliance bulletin reemphasizing “no person may [not] require a customer to establish an account for receipt of electronic fund transfers with a particular financial institution as a condition of receipt of a government benefit.” Generally, the compulsory use prohibition forbids organizations including credit unions and government agencies from conditioning the distribution or transfer of funds on the type of financial institution the recipient uses.
Under the compulsory use prohibition, a “government agency may not require consumers to receive government benefits by direct deposit to any particular institution.” A government agency may require direct deposit of government benefits if the recipient is allowed to choose the financial institution. The government may also give government benefit recipients the choice between depositing benefits at an institution or receiving the benefits another way. The purpose behind the compulsory use prohibition is to prohibit the conditioning of government benefits on the use of a particular financial institution.
The bureau stresses the “compulsory use prohibition ensures that consumers receiving the government benefits…have a choice with respect to how they receive their funds.” The bureau believes, highlighting discussions in the final 2016 Prepaid Accounts Rule, a consumer, who receives a prepaid cards to use for their first government benefit payment, is limited in what institution the consumer can use because the prepaid card is linked to a particular financial institution. As a result, the consumer is then required to establish an account as a condition of receiving the funds. The Prepaid Accounts Rule included commentary that clarified the compulsory use prohibition also applied to government benefits to avoid this issue. Regulation E’s compulsory use prohibition in response provides a consumer a choice in the institution the consumer may use as well as certain disclosures notifying the consumer of how to receive the government benefit payments.
The bureau issued this compliance bulletin to serve as a reminder that the compulsory use prohibition also applies to government benefit accounts. A government benefit account is “an account established by a government agency for distributing government benefits to a consumer electronically.” One caveat is the government benefit account definition “does not include an account for distributing needs-tested benefits in a program established under State or local law or administered by a State or local agency.” This is an important distinction as needs-tested is not defined under both the EFTA and Regulation E and this distinction limits the compulsory use prohibition’s application on the state and local level to government-benefit accounts that are not needs-tested. For example, the compulsory use prohibition applies to government benefit accounts administered on the state and local level such as unemployment insurance because those accounts are not needs-tested, but not government benefit accounts on the state and local level that are needs-tested. The compulsory use prohibition also applies to accounts that distribute “federally-administered benefits…even if those benefits are needs-tested” such as social security payments because these accounts are considered government benefit accounts under federal law.
The bulletin also highlights other ways Regulation E protects government benefit accounts. Regulation E requires three types of disclosures for government benefit accounts. These disclosures relate to how and where a consumer may access the government benefit account, disclosures prior to receiving the first government benefit payment, and the initial disclosures outlining the fee information. Regulation E also requires change-in-terms notices, periodic statements, and limited liability for error resolution issues and unauthorized transfers.
The bureau’s compliance bulletin may be found here.
About the Author
Justin joined NAFCU as a regulatory compliance counsel in August 2021. As part of the Regulatory Compliance Team, he provides daily compliance assistance to member credit unions on a variety of topics.