Bank Regulator Reminds Banks: Pay Attention To Risks Associated With Prepaid Products

On June 29, 2011, the Office of the Comptroller of the Currency (OCC) issued a bulletin to national banks focusing on their obligation to assess and manage the risks associated with what the OCC calls prepaid access programs. The OCC defines "prepaid access" as a wide range of devices that provide consumers with access to money electronically, including general purpose reloadable cards, payroll cards, government benefit cards, retail gift cards, mobile phones, and Internet sites. The Bulletin states that it applies to any other electronic devices or vehicles that are in use or may be developed in the future. Because the other federal banking agencies have not issued similar guidance, the Bulletin imposes expectations on national banks that are not imposed on other banks, although the guidance will also apply to federal savings banks as of July 21, 2011. While prepaid access devices are attractive to banks because they can be marketed to a broad range of persons that are not usually bank customers, the OCC is concerned that they can also increase a national bank's risks if not implemented appropriately. Thus, the Bulletin reminds national banks that offer prepaid access devices to consumers that they should have a comprehensive risk management program that identify, measure, monitor, and control the risks related to those products. The program also should clearly assess how prepaid access devices fit within its overall business strategy and risk appetite. Additional components of such a program include: Policies and procedures to govern the program, including a due diligence process for selecting third-party service providers; Policies and procedures to ensure that disclosures to consumers about pricing, fees, transaction limits, and other program requirements and restrictions are clearly outlined; Robust audit and compliance functions; and Parameters for reporting to the bank's board of directors. For example, the Bulletin reminds banks that their arrangements with third-party service providers that often market these products should be governed by a well-constructed, enforceable service contract that clearly defines the rights and obligations of each party, as required by the OCC's policies on use of third party service providers. The Bulletin also states that national banks should ensure that the audit and compliance functions provide for sufficient consumer protection transaction testing (i.e. fees and disclosures), and BSA/AML and OFAC compliance. The program should also include procedures to evaluate any proposed changes or additions to the product prior to implementation. The Bulletin finally outlines the duties of the national bank's board of directors with respect to these programs, including receipt of periodic reports from bank management that allow the board to determine whether the prepaid access program is operating within established risk limits. While the OCC is the only agency issuing such guidance to date, the guidance in the Bulletin is very broad and essentially is covered by more generic agency guidance such as the guidance for third party service providers. See Financial Institution Letter 44-2008, Guidance for Managing Third Party Risk (June 6, 2008). Thus, while the issuance continues to show agency concern over prepaid access generally, it does not really break new ground in the area. However, with the CFPB scheduled to take over responsibilities for this area this week, stay tuned for more substantive developments in the near future. – Beth DeSimone and Jeremy Hochberg

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