CUNA Regulatory Comment Call
August 29, 2005
FDIC COVERAGE OF STORED VALUE CARDS
EXECUTIVE SUMMARY
The Federal Deposit Insurance Corporation (FDIC) is issuing a Notice of Proposed Rulemaking (Second Proposed Rule) after reviewing comments it received from its First Proposed Rule on the insurance coverage of funds subject to the transfer or withdrawal through the use of stored value cards and other nontraditional access mechanisms. This Second Proposed Rule would add a new subsection to the existing rules and would extend the FDIC’s rules regarding ownership of deposits to funds underlying nontraditional access mechanisms as well as provide guidance to the public about the insurance coverage of these funds.
Although the FDIC proposal only prescribes the legal rules for banks and bank insurance coverage, it may have an indirect impact on credit unions because they can offer stored value cards and payroll cards as well and NCUA often seeks to maintain parity between its insurance rules and those of the FDIC.
- The FDIC is proposing to recognize the term "deposit" to include funds that are subject to transfer or withdrawal solely through the use of nontraditional access mechanisms to the extent that the mechanisms provide access to funds that are received and held by an insured depository institution for payment to others.
- Funds that are placed at a bank by one party for transfer or withdrawal by other parties, such as payroll cards, would be insured to the party that places the funds at the bank (i.e. employer). However, if the bank’s account records reflect that the first party is not the owner of the funds and either the first party or the bank maintains records reflecting the identities of the persons holding the access mechanisms and the amount payable to each person, then the funds would be insurable to the persons holding the access mechanisms.
- The FDIC is requesting comments on whether the rule mandate that banks specifically disclose when "pass-through" coverage is available or when the bank has a good faith belief that the requirements for "pass-through" coverage has been satisfied.
- Please submit your comments to CUNA by October 24, 2005. Comments are due to the FDIC by November 7, 2005.
Please feel free to fax your responses to CUNA at 202-638-7052; or e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Mary or Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of the FDIC Second Proposed Rule.
BACKGROUND
In its First Proposed Rule, the FDIC proposed to clarify that the meaning of the term "deposit" as that term relates to the funds at insured banks that underlie stored value cards. The funds would be "deposits" unless (1) the bank itself has issued the cards against a pooled "reserve account" representing multiple cardholders; and (2) the bank maintains no supplemental records or sub-accounts reflecting the amount owed to each cardholder.
The FDIC identified four types of stored value cards in its General Counsel’s Opinion No. 8 (GC8) and followed this opinion in its First Proposed Rule when determining whether the funds underlying each of those cards qualify as "deposits". The "Bank Primary-Reserve System", in which the bank keeps a pooled "reserve account" for all cardholders was not considered a "deposit" while a "Bank Primary-Customer Account System", in which an individual account is maintained for each cardholder is.
The secondary systems ("Bank Secondary-Advance System" and "Bank Secondary Pre-Acquisition System") would not be considered "deposits" to the consumer. The Bank Secondary-Advance System is when the bank acts as an intermediary in collecting funds from cardholders in exchange for store value cards issued by a third party or sponsoring company. The funds are held by the bank for a short period of time and then forwarded to a third party. When the cardholder uses the stored value card, the third party (not the bank) sends the appropriate amount of money to the merchant. The funds collected by the bank are "deposits" belonging to the third party only for the brief period before the funds are forwarded to the third party. In the Bank Secondary Pre-Acquisition System, the bank purchases cards from a third party then sells the cards to cardholders. When a cardholder uses the stored value card, the third party, not the bank, sends the funds to the merchant. The funds that are collected by the bank when selling the cards are not deposits because the bank is not assuming a responsibility to return or disburse the funds.
Since the issues that exist with respect to the funds underlying stored value cards also exist with respect to the funds underlying other nontraditional access mechanisms, the FDIC is replacing the First Proposed Rule, which deals with only funds underlying stored value cards, with a Second Proposed Rule, which addresses funds underlying all types of nontraditional access mechanisms.
DISCUSSION
After reviewing comments it received from its First Proposed Rule, the FDIC is proposing to extend its rules regarding ownership of deposits to funds underlying nontraditional access mechanisms, including cards, codes, computers or other electronic means. This is a different approach than that taken in the First Proposed rule.
The FDIC is now proposing to recognize the term "deposit" to include:
funds subject to transfer or withdrawal solely through the use of nontraditional access mechanisms, including cards, codes, computers, or other electronic means, to the extent that such mechanisms provide access to funds received and held by an insured depository institution for payment to others.
In determining who owns the funds, the general disclosure rules would apply, which state that the deposited funds are owned in the manner indicated on the account records. If the stored access card does not provide access to funds at a bank, like a subway farecard, the FDIC’s regulations would not apply.
Additionally, in situations in which funds are put in a bank by one party for transfer or withdrawal by the same party through an access mechanism, the funds would be insured to the party, not the party holding the access mechanism. An example of this type of situation is funds transferable by a customer through the Internet, such as PayPal.
The FDIC would also address cases in which one party places funds at a bank for transfer or withdrawal by other parties, such as the case with payroll cards. The funds would be insured to the party that places the funds at the bank (i.e. employer). However, if the following conditions were met, then the funds would be insurable to the persons holding the access mechanisms:
- The account records of the bank reflect the fact that the first party is not the owner of the funds; and
- Either the first party or the bank (or its agent) maintains records reflecting the identities of the persons holding the access mechanisms and the amount payable to each person.
In the current rules, if the party that places funds at a bank is not the actual owner of the funds but an agent or custodian, then certain disclosure requirements must be satisfied for the insurance coverage to "pass through" the agent to the actual owner. Under this Second Proposed Ruling, the involvement of a third party processor for a bank would not preclude pass through insurance coverage. Pass through coverage to the holders of the stored value cards or other access mechanisms would be available if the bank itself or a third party processor on behalf of the bank maintains records reflecting the identities of the cardholders and the amount payable to each cardholder. If the third party processor maintains the records, the bank’s own records should reflect the fact that the funds are owned by the cardholders.
The Second Proposed Rule does not address a secondary system of stored value cards, which is different then the First Proposal. The secondary system is when stored value cards or other nontraditional access mechanisms are sold or issued directly by the bank and the bank does not maintain records reflecting the identities of the purchasers. The FDIC is unsure that this scenario currently exists.
Neither the First nor Second Proposed Rule mandate that stored value cards disclose whether the underlying funds are insured by the FDIC. However, the FDIC discusses the issue and states that the additional burden mandatory disclosures would impose may be outweighed by the consumers’ need for accurate information. Therefore, it is seeking comment on the issue of disclosures.
QUESTIONS REGARDING THE PROPOSAL
- Do credit unions currently provide a secondary system of stored value cards or other access mechanisms in which it collects funds from cardholders and either forwards the funds to a sponsoring company or retains the funds as reimbursement for funds previously paid but does not hold the funds for the cardholders? Do you believe the FDIC should include this type of system in its rule?
- To what extent do you believe funds in the secondary system should be classified as “deposits”?
- Do you believe the proposed treatment of payroll cards appropriately insures the underlying funds? Please explain.
- Should the FDIC adopt any specific disclosure requirements on the insurability of stored value cards?
- Would requiring a specific disclosure when “pass-through” coverage is available or when the bank has a good faith belief that the requirements for “pass-though” coverage has been satisfied be necessary or burdensome? Please explain.
- The FDIC is considering printing the following disclosure on the access card for “pass-through” coverage: “Funds available through this card are individually insured by the FDIC to the cardholder” Would such a disclosure adequately address consumer confusion about the insurability of funds? Please explain
- Are there ways to prevent misleading disclosures for insurability of funds when “pass-though” coverage is not available?
- Should the disclosure be brief and printed on the back of the access card, or should a more substantive disclosure be provided at the same time the card is issued?
- Do you have any additional comments on issues not raised in this Comment Call?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
