Compliance Bulletin

Federal Benefits Payments May Be Delivered Via Prepaid Debit Cards
January 24, 2011

The U.S. Department of the Treasury’s Fiscal Management Service has amended its regulation to permit the delivery of federal payments through prepaid debit cards as long as four conditions are met. The first is that the account is held at an FDIC-insured depository financial institution. The second is that the card provides the cardholder with pass-through deposit insurance [1].

Third, the card account may not have an attached line of credit or loan feature that triggers automatic repayment from the card account. The purpose of this restriction is to prevent arrangements in which a bank or creditor advances funds to a cardholder’s account and then repay itself for the advance through debits of the cardholder’s next deposit.

Finally, the issuer must provide the cardholder with all of the consumer protections that apply to a payroll card under Regulation E. For cards that do not constitute payroll cards as defined in Regulation E, this means that the issuer must voluntarily provide the protections that apply to payroll cards. If a financial institution holds an account for or on behalf of another issuer, the institution is responsible for ensuring that the requirements are met.

The regulation does not prescribe a fee structure or a range of acceptable fees. However, the FMS expects that the fees for such cards will be “transparent to the recipient, adequately disclosed, and reasonable by industry standards.”

To address the challenge of complying with the costly Regulation E statement requirements in providing prepaid cards, the FMS notes that Regulation E permits an issuer to make account balance information available by phone and also to make certain transaction activity available upon the consumer’s request. (See 12 CFR 205.18(b)).

The final rule is effective January 21, 2011. The FMS interim final rule is available here.

Here is the full text of the changes effect at 31 CFR Part 210:

PART 210—FEDERAL GOVERNMENT
PARTICIPATION IN THE AUTOMATED
CLEARING HOUSE

*** In § 210.5, redesignate paragraph (b)(5) as (b)(6) and add a new paragraph (b)(5) to read as follows:

§ 210.5 Account requirements for Federal payments.
* * * * *
(b) * * *
(5)(i) Where a Federal payment is to be deposited to an account accessed by the recipient through a prepaid card that meets the following requirements:
(A) The account is held at an insured financial institution;
(B) The account is set up to meet the requirements for pass-through deposit or share insurance such that the funds accessible through the card are insured for the benefit of the recipient by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund in accordance with applicable law (12 CFR part 330 or 12 CFR part 745);
© The account is not attached to a line of credit or loan agreement under which repayment from the account is triggered upon delivery of the Federal payments; and
(D) The issuer of the card complies with all of the requirements, and provides the holder of the card with all of the consumer protections, that apply to a payroll card account under the rules implementing the Electronic Fund Transfer Act, as amended.
(ii) No person or entity may issue a prepaid card that receives Federal payments in violation of this subsection, and no financial institution may maintain an account for or on behalf of an issuer of a prepaid card that receives Federal payments if the issuer violates this paragraph.
(iii) For the purposes of this paragraph (b)(5), the term—
(A) ‘‘Payroll card account’’ shall have the same meaning as that term is defined in the rules implementing the Electronic Fund Transfer Act;
(B) ‘‘Prepaid card’’ means a card, code, or other means of access to funds of a recipient; and
© ‘‘Issuer’’ means a person or entity that issues a prepaid card.

  1. In accordance with the FDIC’s General Counsel Opinion No. 8, three conditions must be met if stored value cardholders enjoy FDIC deposit insurance coverage: (i) the account records of the depository institution discloses the existence of the agency or custodial relationship; (ii) the records of the institution, custodian or other party discloses the identities of the actual owners and the amount owned by each owner; and (iii) the funds in the account actually must be owned by the purported owners and not by the custodian (or other party). According to the Opinion, the first requirement can be satisfied by opening the account under a title such as the following: “ABC Company as Custodian for Cardholders.”

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.

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