Important Prepaid Card Guidance Issued

March 22, 2016 at 9:06 am Leave a comment

In my ever so humble opinion,  prepaid cards are the most widely used, under regulated financial products in the country.  That’s changing.  The CFPB is examining how best to regulate them and yesterday  federal regulators, including the NCUA,  issued guidance on the applicability of  Customer Identification  requirements to the financial institutions   that issue them.

Of course readers of this blog know that credit unions and banks are responsible for identifying persons for whom they open accounts. The question is:  Do CIP obligations extend to prepaid cards issued by credit unions and banks? The answer depends on the features of the prepaid cards and the role your institution plays in providing them .  Since, as the guidance notes credit unions wishing to offer prepaid cards are  restricted by field of membership constraints, credit unions aren’t as able as banks to get into the prepaid card business.

CIP requirements kick in when a credit union or bank establishes an account relationship. The guidance states that ” When a general purpose prepaid card issued by a bank allows the cardholder to conduct transactions evidencing a formal banking relationship, such as by adding monetary value or accessing credit, the cardholder should be considered to have established an account with the bank for purposes of the CIP rule. Further, the cardholder should be treated as the bank’s customer for purposes of the CIP rule, even if the cardholder is not the named accountholder, but has obtained the card from an intermediary who uses a pooled account with the bank to fund bank-issued cards “ In addition, there is no requirement that a card be tangible.  It could be purchased off a website and downloaded to your member’s smartphone.

If a prepaid card is an account, who is responsible for implementing CIP requirements? The short answer is that any financial institution issuing a prepaid card “account” is ultimately responsible for complying with CIP requirements but it may contract with third- parties to execute this responsibility provided that it exercises  oversight over its vendor. Where a prepaid card has to be activated by a member the guidance advises that the activator (my word) carry out the CIP.

There are many types of prepaid cards ranging from payroll cards-in which an employer opens up a master account from which employee salaries are placed on individual debit cards-to government benefit cards. Does this mean that CIP must be performed on every cardholder? It depends. For example The guidance explains that if only  an  employer has access to the master account than the issuing  institution must only perform CIP on the employer.  In contrast if a government benefit card allows the cardholder  to load funds other than government funds onto the card than an account relationship is established and the receiver of the benefits must be identified.

Here is a link:


Payday Lending

A good article in this Morning’s American Banker succinctly summarizes the  predicament the CFPB finds itself in as it continues to work on a proposed regulation restricting payday loans .

“If the agency goes too far in restricting short-term, small-dollar loans, there will be a huge backlash from payday lenders and on Capitol Hill, from both Republicans and Democrats. But if the agency fails to stop the most abusive practices, consumer groups will view the first national standards on payday loans as a failure. A chief concern is what will replace payday lenders if federal regulations force many to shut down.”


Entry filed under: Compliance, Regulatory. Tags: , .

Is Bathroom Banter Concerted Activity? Court Deadlocks on Lending Lawsuit

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed

Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 503 other followers