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Government watch
Navigating the Regulatory Waters
The issue for prepaid is whether the sale or distribution of network branded prepaid cards by third parties, such as program managers or retailers, would result in the pool of funds underlying such prepaid cards being classified as “brokered deposits” instead of “core deposits.” If the FDIC deter- mines they are brokered deposits, then there are significant implica- tions for issuing banks, including higher deposit insurance assess- ments, requirements to separately report brokered deposits on call reports and the negative stigma faced by banks with a large volume of brokered deposits that are often perceived as safety and soundness concerns by prudential financial regulators regardless of whether or not the bank is well-capitalized.
The more you know, the safer your money.
“While the FDIC positioned the gui- dance as merely a summary of ex- isting precedent, it was completely unexpected for much of the pay- ments industry,” Fauss says. “In fact, the NBPCA has learned that multiple prepaid card issuers were contacted by the FDIC following the issuance of the guidance, and the FDIC recommended that they review the guidance and reevaluate whether their prepaid card programs should be treated as brokered deposits in light of the guidance.” Those calls would not have been necessary if the FDIC’s view on the treatment
of prepaid card loads as brokered
deposits was widely understood by the industry prior to the release of the guidance, Fauss adds.
The term “deposit broker” is defined broadly as “any person en- gaged in the business of placing deposits, or facilitating the place- ment of deposits of third parties with insured depository institutions or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties.” In addition, a third party may qualify as a deposit broker even
if it receives no fees or other direct compensation from the deposit.
If a deposit is accepted through
a “deposit broker,” the deposit is considered a “brokered deposit.”
While the definition of a “deposit broker” is broad, the Federal Deposit Insurance Act and its implementing regulations contain at least 10 exceptions to the definition to avoid a situation where all bank deposits would
be considered brokered deposits. The most common exception historically relied upon by prepaid issuers is the “primary purpose” exception, which says that “an agent or nominee whose primary purpose is not the placement of funds with depository institutions” is not considered a deposit broker. While the determination of whether the “primary purpose” exception applies must be made on a case- by-case basis according to the specific facts of a particular case, the FAQs for the first time ex- pressly state that the “primary
We share the IRS’s perspective that stopping identity theft tax refund fraud isn’t the industry’s problem or the IRS’s problem to solve alone, but it is our collective problem to solve by working closely together.
—Brad Fauss, NBPCA
purpose” exception rarely applies to prepaid cards sold by any party other than directly by the issuing bank to its own customers.
“The FDIC advised that the FAQs are intended to be a living docu- ment, which will be updated over time,” Fauss explains. “As a result, the NBPCA will continue its educa- tion and outreach to the FDIC to explain the policy reasons why
we believe prepaid card deposits should be treated differently than the prototypical example
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