FDIC Guidance on Brokered Deposits Does Little to Ease Prepaid Industry Concerns
The latest FDIC guidance on brokered deposits, released on June 30, has done little to alleviate industry concerns about the treatment of prepaid card loads as brokered deposits.
The FDIC’s revised frequently asked questions about identifying, accepting and reporting brokered deposits continue to treat the majority of prepaid accounts as being under the brokered deposit umbrella, a classification that can increase the deposit insurance costs to a bank that operates prepaid programs, among other impacts. Historically, the prepaid industry has relied on 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. In its first revised FAQs released in December 2014 (see sidebar), the FDIC noted that the primary purpose exception applies only infrequently and typically requires a specific request for a determination by the FDIC. The latest FAQs conclude that government benefits cards could fall under the primary purpose exception to the definition of brokered deposits if the government agency disbursing benefits via prepaid cards:
- Is mandated by law to disburse the funds to the beneficiaries;
- Is the sole source of funding for the deposit accounts; and
- Does not receive fees from the insured depository institution, other than those fees necessary to help cover the agency’s administrative costs.
But prepaid industry leaders fear the agency hasn’t gone far enough to classify additional types of prepaid products as either not brokered or falling under the primary purpose exception.
|Brokered Deposit Guidance Timeline
By regulatory definition, a “brokered deposit” is any deposit obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker. In a 2011 study, the FDIC characterized core deposits as “historically stable, less costly deposits obtained from local customers that maintain a relationship with the institution, while brokered deposits are considered volatile, interest rate sensitive deposits from customers in search of yield.”
December 2014: FDIC issues Guidance on Identifying, Accepting, and Reporting Brokered Deposits Frequently Asked Questions. The prepaid industry, which has long relied on the primary purpose exception to classify prepaid deposits as core deposits, no longer may claim the exception, according to the agency.
January 2015: FDIC advises banks to contact examiners on brokered deposits. For prepaid issuers, specifically, the FDIC recognizes that a bank may require time for careful review and consultation with FDIC staff to determine whether a prepaid card-related deposit is brokered, according to the American Bankers Association, which met with the agency.
November 2015: FDIC issues revised brokered deposit FAQs, soliciting public opinion on a proposed update to its series of FAQs. The revised guidance has a 45-day comment period. See highlights of the FDIC’s updates from its previous FAQs.
December 2015: Industry groups voice concerns over FDIC brokered deposit FAQs. The FDIC receives only nine comment letters, mostly from industry groups expressing concern about the implications of its guidance, particularly as it relates to prepaid deposits.
June 2016: FDIC updates FAQs on Identifying, Accepting and Reporting Brokered Deposits, including adding government benefits cards to the primary purpose exception if certain conditions are met.
“While we are encouraged with the positive improvement in the FDIC’s treatment of government benefit cards, we are generally disappointed that the FDIC has chosen to ignore the policy underpinnings of the brokered deposit statute in refusing to make many of the other changes suggested by the Network Branded Prepaid Card Association in its detailed comment letter and white paper delivered to the agency late last year,” says Brad Fauss, president and CEO of the trade group. “The FDIC’s differential treatment of prepaid cards compared to other financial products defies common sense and logic.”
Other industry groups also have voiced concerns about the how the FDIC classifies prepaid. In a joint comment letter earlier this year, the Clearing House, American Bankers Association, Financial Services Roundtable, Independent Community Bankers of America and Institute of International Bankers note that the expansive scope of the FDIC’s definition of what constitutes facilitating the placement of deposits likely will result in core deposits being classified as brokered in an overly broad manner.
“The classification of deposits resulting from direct deposits and prepaid payroll cards as brokered may have a particularly negative impact on the unbanked and underbanked, as banks may be disincentivized from offering those products as a result of such classification,” the groups wrote. “This result would further disintermediate the unbanked and underbanked from relationships with depository institutions, thereby limiting their ability to meet their economic needs safely and securely within the mainstream banking system.”
Still, there was at least a speck of hope in the FDIC guidance, according to David Luigs, a partner from Debevoise & Plimpton, who specializes in banking and consumer finance issues. “We are encouraged that the FDIC recognized in the context of government benefit cards that prepaid cards have a primary purpose of facilitating certain types of payments, not brokering deposits, but we would hope that over time the FDIC would recognize that this same rationale also applies to other prepaid cards,” he says.
- Viewpoint: FDIC’s Brokered Deposits FAQs – Implications Range from Limited to Significant for Prepaid Issuers: It All Depends
- FDIC: Frequently Asked Questions on Identifying, Accepting and Reporting Brokered Deposits
- Navigating the Regulatory Waters