Compliance Blog

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

On March 21, 2016, the federal banking agencies, FinCEN, and NCUA issued interagency guidance on applying customer identification program (CIP) requirements to certain prepaid cards issued by banks, savings associations, or credit unions. In general, the guidance states that financial institutions should apply CIP to general purpose prepaid cards that provide a cardholder with the ability to reload funds or access to credit or overdraft features.

The agencies believe that the issuance of these types of prepaid cards establishes a formal banking relationship that is equivalent to opening an account for purposes of the CIP rule. For prepaid cards that require the purchaser to contact the issuing bank or credit union in order to active these types of features, the agencies believe that an account is not established until a reload, credit, or overdraft feature is activated by cardholder registration.

For purposes of complying with the CIP rule, the guidance states that banks and credit unions should treat the cardholder as the bank or credit union's customer even if the cardholder is not the named account holder. This is typically the case when the prepaid program is run by a third-party intermediary who uses a pooled account to fund the prepaid cards. Therefore, the fact that the funds are held in a pooled account should not affect the status of the cardholder as the bank customer, assuming the cardholder has established an account with the bank [or credit union] by activating the reloadable functionalities of the card.

The guidance also discusses how the CIP rule applies to specific prepaid card programs such as payroll, government benefit cards, and health benefit cards. For payroll cards, the guidance states that the bank or credit union should treat the employer as its customer and does not need to apply its CIP to each employee unless the card allows the employee to access credit through the card or reload the payroll card from sources other than the employer. In these cases, the bank or credit union would be required to treat the employee as its customer and apply its CIP to the employee.

For government benefit cards, the guidance reminds banks and credit unions that government agencies are not typically considered customers for CIP purposes and therefore the institution is not normally required to apply its CIP to government benefit cards. That being said, if the card program allows the cardholder-beneficiary to load non-government funds onto the card or provides access to credit, then a customer relationship is established and the institution must perform its CIP on the cardholder-beneficiary.

For health benefit cards, the guidance discusses CIP requirements for health savings accounts, flexible spending arrangements, and health reimbursement arrangements. Since employees typically establish health savings accounts, the guidance states that the bank or credit union should treat the employee establishing the account as the institution's customer for CIP purposes. On the other hand, for flexible spending arrangements and health reimbursement arrangements, the guidance states that banks or credit unions should treat employer as the institution's customer since no person other than the employer establishes these types of accounts.

Finally, the guidance notes that for banks or credit unions that work with third-party program managers that design, manage, and operate prepaid card programs, the institutions should have well-constructed, enforceable contracts with third-party program managers that clearly outline CIP obligations and ensure the bank or credit union has access to all CIP information collected by the third-party program manager.

Ultimately, it is unclear whether this guidance will be particularly useful to credit unions since credit unions may not typically provide services to nonmembers. For credit unions operating prepaid programs, these types of services are usually offered to members whose identities have already been verified at the time the member opened his or her initial share account. That being said, the guidance may be useful to credit unions that offer payroll cards to employees of their business members or for credit unions that may want to administer government benefit programs for state or local governments.

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Programming Note: This is just a reminder that NAFCU will be closing at 12:00pm today in celebration of the holiday weekend. We wish a happy holiday to those of you and your families who may celebrate the holiday. Personally, I'm looking forward to the discounted candy sales on Monday.