One of the updates in the Magento 1.6 version was to change the forgot password email. While in previous versions, the temporary password was sent in the email, the latest version uses a reset link instead. If you have a custom template for the forgot password email, and that was not updated, you might end up with the password sent set to blank. This is obviously not acceptable. One solution is to create a new template incorporating the reset password link.
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Go to System > Transactional Mails
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Load default template: Remind Password
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The template details should appear in the fields when you click on Load Template.
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Edit template content, add:
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Save
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Set forgot password to use this template.
Go to System > Configuration > Customer Configuration > Password Options and update Forgot Email Template to the template you just created.
<p>If you requested this password change, please click on the following link to reset your password:
<a href="{{store url="customer/account/resetpassword/" _query_id=$customer.id _query_token=$customer.rp_token}}">{{store url="customer/account/resetpassword/" _query_id=$customer.id _query_token=$customer.rp_token}}</a>
</p>
<p>If clicking the link does not work, please copy and paste the URL into your browser instead.</p>