Update: FMS Permits Federal Payments to Prepaid Cards Meeting Certain Requirements
January 21, 2011 (Effective Date)
On December 22nd, 2010, FMS issued an interim rule at 31 CFR Part 210 that permits federal payments to prepaid cards if certain FMS requirements are met by the provider. To be eligible to receive federal payments, a prepaid card provider must meet the following requirements:
31 CFR Part 210 generally requires that a federal direct deposit payment be delivered to a deposit account at a financial institution. For all federal government payments other than vendor payments, the account at the financial institution must be in the name of the recipient, unless certain limited exceptions apply. The purpose of this requirement is to ensure that the payment reaches the intended recipient by delivery to a deposit account that the recipient owns and has unfettered access, so that the payment is not diverted to a creditor or another third party before it reaches the recipient and comes under the recipient's control.
The "in the name of the recipient" requirement has the effect of prohibiting payments to pooled accounts where the recipient's ownership interest is reflected in sub-account records. Because prepaid card programs are set up using this kind of structure, the delivery of non-vendor federal payments to these types of cards was previously prohibited. FMS believed the “in the name of the recipient” requirement may be impeding the use of prepaid card programs that may be beneficial to the unbanked and underbanked populations currently receiving their federal government payments by check. As a result, FMS is creating an exception to the “in the name of the recipient” requirement in order to allow the delivery of federal payments to accounts accessed by prepaid and stored value cards, provided that the card bears the cardholder's name and meets certain conditions that provide consumer protections.
To be eligible to receive federal payments, a prepaid card provider must meet the following requirements:
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. This requirement ensures that cardholders receive important consumer protections, while allowing prepaid card issuers to provide account history and balance information as an alternative to sending periodic paper statements.
FMS considered developing a separate framework of requirements based on Regulation E to apply to prepaid cards accepting federal payments, but believe it would be detrimental to introduce a separate and unique framework of consumer. The card industry is already familiar with the payroll card requirements of Regulation E, and they represent an established and widely understood standard. A number of prepaid cards already provide most of the payroll card protections to cardholders. FMS expects that some prepaid card providers will choose to modify the terms and conditions of their card accounts to include all of the payroll card protections to cardholders, so that their cards will be eligible to receive federal payments.
It should be noted that Regulation E provides an exception to the statement requirements for payroll cards. Generally, statements do not need to be sent if the issuer makes the consumer's account balance available by phone and also makes available an electronic history of the consumer's account transaction activity covering 60 days, as well as a written transaction history covering 60 days upon the consumer's request. This exception may alleviate, to some extent, a processing burden for prepaid card providers seeking to accept federal government payments on their card product(s).
While FMS is not determining a fee structure or a range of acceptable fees, it is FMS' expectation that card fees be transparent to the recipient, adequately disclosed, and reasonable by industry standards. It should also be noted that Regulation E requires that fees be disclosed in a clear and readily understandable manner.
FMS is prohibiting prepaid cards from having an attached line of credit if the credit agreement allows for automatic repayment of a loan from a card account triggered by the delivery of the federal payment into the account. FMS' intention is that this restriction prevent arrangements in which a bank or creditor "advances" funds to a cardholder's account, and then repays itself for the advance and any related fees by taking some or all of the cardholder's next deposit. However, this restriction does not prevent the provision of credit to consumers who receive federal payments via an eligible prepaid card product.
The prepaid card interim rule states that no person or entity may issue a prepaid card that accepts federal payments in violation of the rule's requirements, and that any financial institution that holds an account for a prepaid card issuer where federal payments are received is responsible for ensuring the requirements are met. If FMS becomes aware that federal payments are being deposited to prepaid cards that do not meet these requirements, they will review the situation and take appropriate action. FMS may, for example, contact both the card issuer and the financial institution holding the issuer's account, review the terms and conditions of the card account, and refer any violations of the rule's requirements to the appropriate regulatory bodies, including the primary regulator of the financial institution maintaining the card account for the prepaid card provider.
A copy of the Prepaid Card Interim rule is available at http://www.fms.treas.gov/ach. This is an interim rule with request for comment from the public. Comments are due to FMS by February 22nd, 2011.