The Community Reinvestment Act (“CRA”) was enacted to encourage banks and thrifts to help meet the credit needs of their communities, particularly low- and moderate-income (“LMI”) persons and geographies within their communities. Under the CRA, the federal banking agencies evaluate large, full-service institutions under three tests: a lending test, an investment test, and a services test. (Smaller and limited-purpose institutions may be evaluated under different standards.) Offering prepaid payroll cards, or possibly other types of reloadable prepaid cards, such as general purpose reloadable cards or government disbursement cards, might have a positive impact on a bank’s service test component. This, in turn, could have a positive impact on an institution’s CRA rating.
Federal banking agencies are required to take into consideration an institution’s CRA rating in the review of an application by the institution for approval of a merger or acquisition. Also, an institution’s CRA rating can determine whether a particular new investment or activity will be eligible for an expedited regulatory review process instead of the longer standard process. Hence, CRA ratings matter. The CRA service test evaluates an institution’s record of helping to meet the credit needs of the communities surrounding its home office, branches, and deposit-taking ATMs, as well as the surrounding geographies in which the institution has originated or purchased a substantial portion of its loans (or possibly a state-wide area that includes one of these areas). These areas are called an institution’s “assessment area.” Under the service test, federal banking agencies analyze (1) the availability and effectiveness of an institution’s systems for delivering retail banking services and (2) the extent and innovativeness of its community development services.
The first part of this test includes a look at the availability and effectiveness of alternative systems for delivering retail banking services in LMI geographies and to LMI individuals in the institution’s assessment area. An example of an alternative system for delivering retail banking services is an ATM, whether it is owned by an institution or the institution has arranged for its cardholders to be able to use the ATM through an agreement with others. There is nothing in the CRA regulations or banking agency interpretations that discusses whether prepaid cards might be viewed as an alternative system for delivering retail banking services, but banks and thrifts might consider discussing the matter with the federal banking agency that is their primary regulator. After all, the sale of a general purpose reloadable prepaid card in a retail environment, particularly if it is coupled with access to a reload network, would seem to be a highly effective alternative system for delivering access to the banking system.
The second part of the services test looks at an institution’s “community development services.” This is a term of art that is defined in the CRA regulations. It can be complicated. However, in 2004, the Office of the Comptroller of the Currency (“OCC”) published an article about prepaid cards in which it explained that “[w]hen technology advances result in retail banking services that reduce the cost of, or otherwise improve access to, financial services for low or moderate-income persons, they may be considered [community development] services.” (Services and Technology: CRA Considerations, OCC Community Developments Online, Fall 2004; the OCC repeated this statement in a 2005 article regarding prepaid payroll cards.)
The OCC went on to explain that prepaid payroll cards might qualify for CRA credit, noting that “[t]o the extent that such cards are free or low-cost and improve access to financial services for low- or moderate-income persons, they would qualify as [community development] services.” Although the OCC did not touch on whether other types of prepaid products, such as government disbursement prepaid cards, would qualify for CRA credit, if these products meet the standard articulated by the OCC, they may also be eligible for positive consideration under the CRA.
Nearly ten years after the OCC first raised the possibility of financial institutions’ receiving CRA credit under the services test for prepaid payroll cards, the value of prepaid cards as a way to bring the underbanked and unbanked into the formal banking system has been well established. Moreover, the cost of prepaid cards has declined, while the availability and utility of these products has increased. Prepaid payroll cards and general-purpose reloadable prepaid cards are now widely recognized as an important alternative to traditional deposit products, and they are serving an important need in LMI geographies and for LMI persons.
All of this suggests that CRA credit under the services test would seem appropriate. However, because only the federal banking regulators have the authority to determine whether any particular institution will receive CRA credit for its prepaid card activities, institutions interested in seeking credit under the CRA for their prepaid card activities should talk to their regulator and should be prepared to demonstrate how their prepaid cards promote access to financial services for LMI individuals in their assessment area.