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 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.
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