Testimony before the Committee
on Banking and Financial Services regarding
The impact of Treasury's Proposed Regulation under the "EFT
99" Provisions of the Debt Collection Improvement Act of 1996
On the Poor, the Elderly and the "Unbanked"
September 25, 1997
Presented by Margot Saunders, Managing Attorney, National Consumer
Law Center, with assistance from Barbara Leyser, EBT Consultant, also on behalf
of the Consumer Federation of America, National Community Reinvestment Coalition,
and Organization For A New Equality
Mr. Chairman and Members of the Committee, the National Consumer
Law Center(1) thanks you for inviting us to testify
today regarding the implications of EFT 99 to the unbanked recipients of federal
payments. We offer our testimony here today on behalf of our low income clients,
as well as the Consumer Federation of America,(3)
the National Community Reinvestment Coalition,(4)
and the Organization for A New Equality.(5) This
is an issue in which we are all vitally interested. Treasury has proposed some
good rules on the waiver provisions as well as the potential structure for the
design of the account provided to the unbanked by Treasury. However, there is
a significant possibility for a negative impact on low income elderly and disabled
people throughout the U.S. which will result unless Treasury makes some changes
to the implementing regulations of this new law.
Given the thoughtful and comprehensive nature of the questions posed to witnesses
in this Committee hearing, we will provide most of the information in the form
of answers to those questions. However, there are four crucial points we wish
to emphasize on behalf of our low income clients:
The goal of bringing the unbanked into the financial mainstream will not
be achieved by these regulations. Treasury has chosen to establish a system
which will push many unbanked recipients of federal payments into the arms
of the unregulated, unsupervised wing of the financial services industry:
the check cashers, the finance companies and other fringe bankers. This is
potentially very harmful for the residents of low income communities. Treasury
has chosen to do this by refusing to regulate the "voluntary" accounts
established by recipients despite the strong encouragement by Treasury
to the unbanked to establish these accounts so that their benefits may
be delivered by direct deposit.
No waivers are allowed for persons with mental disabilities, literacy problems
and language barriers. Treasury's proposal to disallow waivers for persons
on the basis of mental disabilities, literacy problems, and language barriers
will create serious problems for many federal recipients.
Critical questions of cost and real access to banking services are still
undetermined. The design of the account provided to the unbanked by Treasury
is completely undetermined at this point; yet the attributes of the account,
the cost to recipients, and the extent to which the banks providing the account
will expand their presence in the low income community are all crucial issues
which still must be addressed.
There are protections against attachment and garnishment. Despite the clear
protections in federal law against attachment and garnishment of Social Security,
Supplemental Security Income (SSI) and Veterans' Benefits, numerous consumers
do not use banks because they are afraid their limited funds will be taken
by judgment creditors. Providing crystal clear prohibitions against attachment
of funds in EFT accounts would bring many consumers back into the financial
mainstream. Treasury's proposed regulations do not address this issue.
Answers to Chairman Leach's Questions
Question:
1. Does NCLC support the goal of "EFT 99" and EBT? Are the objectives
of the new law a net plus or minus for consumers, particularly low income or
other individuals who may be unbanked today? What are the drawbacks and how
successfully do the proposed regulations deal with those problems?
Answer:
On behalf of our clients, and the other organizations who have signed this testimony,
we all support the basic goals of EFT 99 to bring low income people into the
financial mainstream, and to make the receipt of their federal payments more
secure. As Secretary Rubin has noted, this is a tremendous opportunity. However,
the opportunity to bring more Americans into the banking system will be squandered
if Treasury proceeds with the regulations as currently proposed.
Further, these goals are not so important that they should be strived for at
considerable costs to recipients. There are two forms in which the costs to
recipients could be manifested:
The out of pocket expense to the recipient from accessing their federal
money. This would include monthly account fees, ATM (Automated Teller Machine)
usage fees, POS (Point of Sale) usage fees (although these are currently rare
in the marketplace, there is nothing prohibiting their imposition), foreign
ATM fees (surcharges), and fees imposed to determine the remaining balance
on the debit card, information about their account, replacement cards, and
other costs associated with electronic transfers.
Treasury has effectively and appropriately addressed this concern by allowing
any unbanked recipients to claim a waiver from the requirements of EFT 99 if
the requirements impose a financial hardship.(6)
The costs of the ancillary services sold to the recipients by fringe bankers
with whom the recipients have established an EFT account.
Treasury has left the door wide open for abuses in this area, by not setting
any limits on the voluntary accounts. At the same time, Treasury is announcing
plans to join with the other affected federal agencies and the financial services
industry to conduct a massive public education campaign to encourage unbanked
recipients to sign up on their own for accounts through which to receive their
federal payments.
The dangers posed by voluntary accounts established through fringe bankers.
We are concerned that recipients will be pressured by the public information
campaign to be waged by Treasury and the Social Security Administration to establish
expensive and dangerous electronic accounts through which they must
receive their federal payments. In other words, recipients will establish accounts
through check cashers and finance companies which meet the minimal requirements
set out by Treasury,(7) yet which leave the recipients
open to serious abuses from these unregulated providers.(8)
We know that check cashers will seek ways to maintain and expand their market,
as will finance companies and other alternative financial providers. We have
already heard of one check casher in Chicago who has established accounts for
recipients through a bank. The recipients receive a paper check for their federal
funds at the check cashers' place of business from which the bank has already
deducted $1.90. To cash the check drawn on the check casher's own account, the
recipients must then pay another $7.90. The total cost for this service - $9.00.
It is not reasonable to assume that all unbanked recipients of federal
payments use check cashers to cash their federal checks. It is much more likely
that the majority of these unbanked use one of the following no cost
alternatives:
cash their check at a bank at which they do not have an account;
cash their check at a grocery store or other neighborhood store;
deposit their check in a relative's account;
have a relative cash their check for them.
In fact, a recent Treasury survey on the characteristics of Federal Benefit
Check Recipients,(9) found that 58% of federal
benefit recipients without a bank account nonetheless have their federal checks
cashed at a bank, 25% use a grocery store or other retailer for check cashing
purposes, and a mere 8% of unbanked federal recipients regularly used check
cashing outlets. (10)
By deciding not regulate the voluntary accounts, Treasury has decided to allow
providers of financial services other than regulated depository institutions
to be conduits of federal benefits. This result will be terrible for low income
recipients of federal payments and their communities. If alternative providers
of financial services are permitted to be conduits of federal payments, that
would constitute the federal government's blessing of grossly abusive practices
against low-income and elderly people. Moreover, it would actually force the
unbanked into relationships with these unregulated financial providers that
to date they have generally been able to avoid. As the Treasury's own study
indicates, the overwhelming majority of the unbanked federal recipients cash
their federal checks at banks or stores,(11)
generally --if not always -- without any fees being paid to access their federal
money whatsoever.
Treasury has stated that to regulate these voluntary accounts would "place
Treasury in the position of determining the reasonableness of prices charged
by thousands of financial institutions, for a wide variety of account services,
to individuals who have account relationships at institutions they have chosen
voluntarily."(12) This neat economic argument
in favor of marketplace dynamics does indeed sound persuasive. However, it avoids
the real issue. Consumer representatives have never asked that Treasury examine
all the prices charged to determine reasonableness, only that it clarify that
the standard of reasonableness set out in the statute actually applies to the
voluntary accounts.
Representatives of the low income people who will be most effected by the EFT
requirements have consistently and specifically only asked Treasury to regulate
the type of institution who should be permitted to be conduits of federal funds.
(See attached letter to Secretary Rubin from 21 advocacy organizations collectively
representing low-income people, the elderly, the disabled, minorities and other
consumers affected by EFT 99). It is our united position that only financial
institutions -- banks, credit unions and savings associations -- should be permitted
to be conduits for federal moneys. This would mean that partnering between a
check casher and a bank would not be permitted. Instead Treasury's regulation
prohibit federal payments deposited by Treasury into recipients' accounts at
financial institutions that are effectively accessible only through fringe bankers.
The recipient should always be able to access the federal payment in the
neighborhood through ATMs and POS devices made available by financial institutions.
This interpretation is required by the federal law mandating these regulations.
Section 3332(i)(2) provides:
Regulations under this subsection shall ensure that individuals required under
subsection (g) to have an account at a financial institution because of the
application of subsection (f)(1)--
(A) will have access to such an account at a reasonable cost; and
(B) are given the same consumer protections with respect to the account as
other account holders at the same financial institution.
The law does not differentiate between voluntary accounts and those established
by Treasury. The law specifically requires that these protections apply to everyone.
Treasury's allowance of alternative financial providers as conduits for the
federal payments will be the U.S. imprimatur on the unregulated activities of
these alternative providers. The government will be saying, in effect, that
the federally insured and regulated banking system is only for those who can
afford it. The poor would be required by the government to use alternative,
unregulated providers with none of the benefits and protections furnished to
consumers in the financial mainstream. Such a result should not be the consequence
of this legislation.
Consumer and community advocates fear the use of alternative financial providers
as conduits largely because of the other services that will undoubtedly
be sold to the recipients. If recipients must go through the doors of the fringe
bankers at least one time each month, it is very likely that they will fall
prey to the expensive -- and unregulated -- other financial products of these
fringe bankers, such as check cashing,(13) payday
loans,(14) high cost home equity loans, even
rent-to-own transactions. While recipients may always be able to opt for these
services if they care to, they should not be required to go through the doors
of these alternative providers every single month in order to obtain their federal
entitlement.
Question:
2. In the year since the "EFT 99" legislation became law, what discussion
have you had with Treasury officials and how have your views been incorporated
in the proposed regulations? Which of your concerns have not been addressed?
Answer:
We have had a number of discussions with Treasury officials, in public as well
as private meetings, and we very much appreciate the time that Treasury has
taken with us. Many of our concerns have been addressed by Treasury. To name
some of those which seem to have been specifically addressed in these regulations:
We were very concerned that the language in the law which permitted a recipient
to name an "authorized payment agent" for the purpose of receiving
the recipient's federal funds would allow fringe bankers access to the federal
funds. We argued that the term in the statute should be read to incorporate
only the concepts of "representative payees" or other fiduciaries
recognized by federal and state law as those providing assistance to recipients.
Treasury has agreed with this limitation in its proposed definition of authorized
payment agents. However, our concern regarding potential access to these funds
by fringe bankers is still very real, as Treasury has allowed them to partner
with financial institutions for the delivery of federal funds in the voluntary
accounts, and may yet allow these partnerships even in the accounts to be
established by Treasury.
We were concerned that liberal waivers be allowed. Treasury has addressed
these, with a few exceptions regarding waivers for persons with mental disabilities,
literacy and English fluency problems. This issue is detailed below in response
to Question 5.
We are concerned that the attributes and the costs of the accounts established
by Treasury be open for public comment. Treasury has indicated that it will
allow some comment on their proposed parameters of these accounts before they
allow competitive bidding.
In addition to the concerns which have been partially addressed, as described
above, Treasury has not addressed our stated concerns in the following area:
Treasury has failed to provide any protections from attachment or garnishment
in EFT accounts. This remains a very serious concern for many low income federal
recipients. (See discussion in response to Question 4.)
Question:
3. What type of institutional and network infrastructure is necessary to provide
"unbanked" recipients with low cost access to EBT? What is an appropriate
role for financial institutions and other money services businesses?
Answer:
We have not said that banks should be required to provide accounts to
the unbanked. We have not said that banks should be required to subsidize
the accounts of low income people. What we have said is that it should
not cost low income recipients money to receive their federal funds. If affordable
accounts cannot be designed that meet the needs of the unbanked, then either
Treasury should use some of the substantial savings to be experienced by the
Government from EFT 99 to subsidize these accounts or low income recipients
should be exempted from the requirement of electronic transfer. We do not disapprove
of the approach that Treasury has taken to this issue at this juncture. Treasury
is waiting to see what the market will develop, and how low income recipients
will respond. We are very concerned, however, that Treasury might drive many
recipients into voluntary, yet unaffordable accounts. Recipients might be led
to believe that unless they sign up for the only accounts that are made available
to them -- which might be only those provided through the local check casher
or finance company -- they will lose their federal benefits. The public information
campaign which is planned to start imminently should be carefully designed to
avoid this result.
Regarding the appropriate role that other money services businesses should have
in the delivery system for federal payments, the answer is only as retail outlets
at which POS devices or ATMs are placed. For once, let us learn from experience.
The experience in the low-income communities around the nation is that fringe
bankers have developed sophisticated and ingenious techniques for taking money
from the poor. Fringe bankers--check cashers,(15)
finance companies, and others--should not be provided a government boost to
their business by serving as contractors with financial institutions for the
delivery of federal payments. Commercial banks, savings banks, and credit unions
should be the only designees for receipt of electronic transfers of federal
payments.
"Fringe banking" is an entire industry devoted to doing business in
the low-income community, which has proliferated largely as a result of the
deregulation of interest rates and loan terms in many states since the 1980's.
Lawyers who represent poor people can document--in almost every state--high
cost lending, both illegal under state usury laws, as well as legal under a
deregulated environment. Many of these providers constantly push the envelope
in terms of the legality of their practices--they keep charging the exorbitant
fees until made to stop. All too often, the abusive practices are not technically
illegal, but exceed the bounds of common decency.(16)
Establishing any one of the purveyors of this high cost credit as the conduit
of federal payments sanctions and stimulates these types of transactions. The
federal government should be in the business of discouraging high cost lending,
not providing the means to facilitate it.
Justifications for Fringe Bankers - Not Sufficient. Some Treasury staff have
said that check cashers and money transmitters should be considered for three
reasons: 1) they seem to be the financial providers of choice to many of the
unbanked; 2) they may offer services (such as electronic payment of bills) to
many low income people that may not otherwise be accessible; and 3) they have
a wide array of outlets in the community already which should be deployed to
provide residents more access. Even if these statements were true -- although
Treasury's own research calls them into serious doubt -- they are nevertheless
not sufficient justification for making the fringe bankers "authorized
agents" for the receipt of federal funds.
There are several reasons that some low income people choose to use check cashers
rather than banks. Very often, low income people cannot afford to use banks:
they cannot afford the fees or minimum balances required for accounts. Presumably
the proper design of Direct Deposit Too(17)
accounts will remedy the financial aspect of this issue. However, many low income
people do not use banks even when affordable accounts are offered because of
privacy concerns, fears of having their funds attached by creditors, or just
because banks are not as comfortable to them as the local check casher or retailer
who provides free or low cost check cashing services to its customers. Reassurances
of privacy and of the anti-attachment prohibitions for Social Security funds
should address the first two aspects of this concern. The last aspect - the
level of comfort - can be addressed by simply allowing check cashers to continue
providing their services in the community as they do currently.
We do not propose that fringe bankers be prohibited from providing any access
to federal money, just not the sole access for any federal recipient.
Nothing requires that check cashers could not establish ATM or POS devices on
their premises and sell recipients all of the products and services that are
now currently offered. The key distinctions between this and allowing alternative
financial providers to be contractors with financial institutions for the delivery
of federal electronic payments are:
1) If recipients can only receive their federal payments through "financial
institutions" as currently defined by Treasury, they will be pulled into
the mainstream banking system, and thus provided savings' opportunities as well
as alternative (and less expensive) sources for credit.
2) Recipients who must have a bank account, but who nevertheless choose to access
their money through a check cashier or a money transmitter, will still have
the choice every month of where to obtain their funds-- they would not have
to go to the check cashers to receive their federal payments.
3) The banks receiving the federal payments will have a greater source of funds
as a basis for community reinvestment back into the low income community, whereas
the check cashier has no such obligation.
Question:
4. What are the most compelling reasons and the most successful methods for
persuading federal beneficiaries to establish their own bank accounts and participate
in direct deposit before January 1, 1999? To what extent are federal agencies,
financial institutions, and other organizations making that case to the unbanked?
Answer:
We have heard one overwhelming concern from low income recipients of federal
payments, and their legal services attorneys: The reason that many low income
recipients do not have bank accounts is their fear of losing their limited funds
to judgment creditors. Low income elderly and disabled people are particularly
vulnerable because of their inability to pay all of their doctor or hospital
bills. They deliberately avoid keeping their money in bank accounts to ensure
that the bank does not allow their funds to be attached by creditors.
Treasury could go a considerable distance in convincing many recipients of federal
payments to feel comfortable in doing business with a bank, if they would assure
recipients that their funds would be safe from the claims of creditors.
Although many federal payments are protected by law from attachment and the
claims of judgment creditors, banks routinely fail to abide by these restrictions.
The provision on Social Security is typical of these protections:
(a) The right of any person to any future payment under this subchapter shall
not be transferable or assignable, at law or in equity, and none of the moneys
paid or payable or rights existing under this subchapter shall be subject to
execution, levy, attachment, garnishment, or other legal process, or to the
operation of any bankruptcy or insolvency law.(18)
There are similar provisions in the governing statutes for SSI benefits(19)
and Veteran's benefits.(20) However, the only
remedy available for a recipient whose funds have been wrongly attached is to
file a lawsuit against the financial institution. That does little good for
the recipient who is living month to month and in dire need of the funds that
were wrongly attached. As a result, cautious recipients simply do not allow
their funds to be kept in a bank account.
We have notified Treasury of our concerns in this regard and requested that
they issue a regulation that flatly prohibits the attachment or garnishment
of any funds in an account into which the covered federal funds have been deposited.
However, the proposed regulations are completely silent on this point.
Question:
5. By law, the Treasury Department is authorized to grant waivers of the EFT
requirements under certain circumstances. What is your position on the waiver
criteria proposed in the regulations?
Answer:
The scheme proposed by Treasury of using one of four separate standards or tests
to determine whether a waiver should be granted to permit the continued receipt
of payment by check rather than EFT is good, in so far as it goes. However,
Treasury has defined the hardship standard much too narrowly in terms of its
enumerated barriers and, without further alterations, many recipients of direct
federal benefits may be forced into a situation that requires them to surrender
a level of independence they otherwise had in the check based environment.
Specifically, Treasury ignores the legislative history on the hardship exemption
in the Act by excluding from the enumeration of qualifying barriers:
mental,
educational, or
language problems
Under the proposed regulations, none of these conditions would be just cause
for the granting of a waiver from the EFT requirement. Only physical handicap,
geographic barrier, or financial hardship for the unbanked, would qualify as
a hardship criteria. The rationale offered by Treasury for this decision in
the preamble to the proposed regulations evidences a lack of true understanding
or compassion for the populations that would be affected.
Mental Disability. Treasury simply states that waivers would not be required
for persons with a mental disability because those who have a mental disability
that makes them incapable of managing their own funds have a representative
payee appointed for them by the applicable program agency and such payee would
presumably be able to handle an EFT payment arrangement unless he/she individually
met one of the other exemption criteria. There are several very important considerations
that Treasury leaves out of its overly simplistic justification. First, there
are a very large number of recipients with mental impairments who are quite
capable of managing their own funds in a check based system and who, absent
a transition to an electronic delivery system, could function independently
without the need of turning their finances over to a representative payee. Some
of these recipients may simply be unable to remember a PIN; others may have
a limited ability to think conceptually and, while they can count out money
to make purchases or even write checks to pay bills, cannot deal with abstract
benefits they cannot see and feel. It is simply unconscionable to say that,
because the government wants to save some money, such individuals should now
have to put someone else in charge of their funds and give up that level of
control over their own lives.
The second consideration that Treasury ignores is that there is already a great
difficulty in finding persons or entities willing to serve as representative
payees for those government benefit recipients who are truly incapable of managing
their own funds. SSA officials over the years have acknowledged this problem
and there has been a concerted effort to identify entities willing to serve
in this capacity. In some parts of the country there is a thriving business
of individuals and agencies that sell their services to be a representative
payee to persons who can not otherwise find someone. By forcing even more people
into a situation where they will have to have a representative payee in order
to receive their government benefits, Treasury will in effect be supporting
the growth of this industry that takes money out of the pockets of some of our
neediest citizens without any tangible benefit to the program recipients.
A final consideration ignored by Treasury's justification for its position is
the possible risk of loss of benefits to recipients if they are forced into
a representative payee situation, especially in those cases where the representative
is someone with whom the recipient does not otherwise have a relationship, such
as the pay for service arrangements discussed above. While Congress has made
clear that recipients of direct federal payments in an EFT environment are fully
covered under the Reg E protections, the Reg E limitations on consumer liability
for loses that are associated with the use of a valid care and PIN do not apply
if those benefits are accessed by a representative payee who misappropriates
the funds for his/her own use. Thus, there would be no protection for recipients
who felt compelled to pay some stranger to serve as their representative payee
so that they could get their government benefits only to find that such person
wiped out their accounts and moved on.
Limited Literacy Skills and English Fluency. Treasury's proposed rule also does
not envision permitting a hardship waiver on the basis of educational level,
limited literacy skills, or lack of fluency in English. Here Treasury argues
first that these factors do not pose any barriers unique to an EFT delivery
mechanism as opposed to a check system. Such an assertion is again simply untrue.
Many persons who fall within one of these categories can in fact operate in
a paper based environment sometimes alone and sometimes with the help of friends
and family, even if they cannot read or write or are not fluent in English.
It does not take an ability to read or write to sign a check with an "X"
or an ability to read English to sign your name on the back of a check. It does
on the other hand require an ability to read English or one of the other limited
languages that may be available on a POS or ATM screen to negotiate an electronic
debit of funds, and it is those who are not literate and/or fluent in English
that are most likely to end up with an electronic debit only account because
they will not otherwise have a relationship with a bank and therefore will not
even be able to avail themselves of teller assistance when they cannot negotiate
the ATM.
Treasury's next argument is that whatever problems EFT may pose for these segments
of the population are merely a "short-lived" "transitional hurdle"
that it asserts will be overcome by targeted educational programs. Since, to
the best of our knowledge, Treasury has no plans to offer any in-person training
on how to use debit card technology or on how to shop around for low cost bank
accounts that will permit direct deposit it is unclear how they plan to "educate"
this population to get them through the transition. The printed materials they
appear to be relying on most heavily for their educational campaign will be
of little use to those who cannot read the materials, nor is there any indication
that they will be made available in anything other than a very limited number
of languages. Public service announcements, the other major vehicle Treasury
plans to employ, are unlikely to provide much in the way of substantive information.
It is certainly unrealistic for Treasury to count on already over-extended and
under-funded community based organizations to take on the role of educating
and training those among the 10 million unbanked recipients of direct federal
benefits who are out there who will need such assistance because of their educational
or language problems.
Finally, it is not enough to note, as Treasury does in the preamble to the proposed
regulations, that in some areas ATMs and POS terminals offer language options
other than English as this does nothing to answer the question of whether on-screen
messages in the appropriate language are in fact available to those who need
them where and when they need them. The obvious answer to this question is no
if your primary language is something other than Spanish or English and that
is not something that the onset of EFT '99 is likely to change.
In light of all of the above, there is simply no justification for excluding
these populations from the ability to seek a hardship waiver on the grounds
that an EFT system will impose a burden upon them that could be avoided if they
could elect check receipt as an option.
Question:
6. What risks to consumers may be associated with use of a federal electronic
benefit card? What steps should be taken to ameliorate these problems?
Answer:
There are a number of concerns, as well as steps that can be taken to address
these:
POS fee structure. POS fees must be limited or prohibited altogether.
Several states have implemented, or are contemplating, EBT projects in which
retailers are permitted to charge as much as $1 per POS cash back or cash
withdrawal transaction. This POS transaction charge is more than four times
the average per transaction cost merchants incur for processing a transaction.
Thus, merchants have in effect been authorized to make a profit at the expense
of recipients who have to use their equipment.
Transaction Limitations. Any restrictions on the number or type of transactions
or dollar amounts of transactions must be reasonable. Actual experience with
EBT has shown that, after becoming familiar and comfortable with the new system,
the average recipient tends to make between three and four ATM withdrawals
per month. Many recipients will need to draw down the bulk of their cash benefits
at one time to pay their monthly bills. Accordingly, no restrictions should
be placed on transactions unless experience shows that recipients are using
the transaction capabilities in a way that makes the cost prohibitively expensive.
In addition, if such restrictions are imposed, recipients should be allowed
unlimited free transactions for the initial months of their participation
so that they can gain confidence that they have ready access to their benefits
in an EFT environment. Currently some ATMs only allow withdrawals in $10 or
$20 increments. Recipients obviously need access to their change, because
their benefits are generally not in these neat denominations. They should
not have to wait for the next transfer of funds to access their own money.
PIN Selection. Recipients feel very strongly about the importance of permitting
self-selection of the PIN. In pilots where the PINs have been assigned, there
have been complaints that recipients can't remember the PIN or that they write
it down on the card.
Card Replacement. It is critical that any electronic delivery system have
established procedures for promptly responding to recipient requests for a
replacement of either the plastic debit card or the PIN. The need to get a
replacement card or PIN could arise for any number of reasons, including the
loss of the card, damage to the card or the magnetic strip on the card, failure
to remember the assigned PIN, or recipient concern that the card and/or PIN
has been compromised. Use of the card and PIN may be the only way that recipients
can access the benefits they need to pay their bills and provide for the bare
necessities. Accordingly, a simple procedure for requesting and promptly obtaining
a replacement card and/or PIN not only must be in place but a clear explanation
of the steps a recipient must take to initiate this process must be included
in both the oral and written information provided to EFTT recipients.
Security. The isolated location of ATMs that are appendages to the outside
of buildings or inside the vestibule of banks, especially in high crime areas,
makes one an easy target for muggers. Efforts must be made to deploy unmanned
terminals inside stores (including some, such as convenience stores, that
have extended hours) and malls, or in other well lit, heavy traffic areas.
Backup Systems. There must be a way of making sure there are backup systems
for handling computer glitches and system breakdowns.
Question:
7. What is your view of the use of a single card for both federal and sate benefits
and how would you assess the success of recent federal-state pilot programs
testing that concept?
Answer:
Their possible advantages to the government and the recipients of combining
all government benefits to which a household may be entitled on a single debit
card are fairly self-evident, for example, convenience, and the need to remember
only one PIN. However, there are some potential concerns with such an approach
that need to be addressed. The first concern is that combining all benefits
on one card increases the amount of the loss a recipient could suffer if the
account is fraudulently accessed or the recipient is coerced into making a forced
transaction. Moreover, confusion and a possible loss of rights may result due
to the different procedures that must be followed for reporting such problems
depending on the types of benefits combined on the single card. Federal benefits
are covered by the protections of the Electronic Funds Transfer Act; state administered
benefits are not.
A second, related, concern is that such a system could enable other household
members to access benefits that are intended for the exclusive needs of a single
household member. For example, there are households that contain members who
currently receive some benefits that are for the entire household's use and
other benefits that are restricted to particular members of the household. One
example of this situation would be a multi-generational family in which the
grandmother receives social security benefits and the entire family qualifies
for food stamp benefits as a single food stamp assistance unit. In such instances,
we believe that the household head (the grandmother in this example) should
be given various options, either one card issued to her with all the household
benefits on it, one card issued to her with all the benefits accessible from
it and a second card issued to her adult child that permits access to the food
stamp benefits only, or one card to her for the social security benefits and
a second card to the adult child for the food stamp benefits.
The final concern in this area relates to the issue of transaction limits. The
more cash benefit programs that are combined on a single card, the more egregious
the imposition of restrictive transaction limits becomes.
With respect to your question about the "recent federal-state pilot program"
testing the concept of combining federal and state benefits on a single card,
there is no data yet available on the impact of this approach. Alabama first
made this option available to recipients when it began piloting EBT in April
of this year, with Missouri following in June and Georgia in July. As these
states bring their state EBT projects up, recipients in the affected areas are
advised that if they are also receiving their direct federal benefits by check
they can choose to have those benefits combined into their EBT account. Our
information is that to date only a very small number of recipients of both federal
and state benefits have actually chosen this option and we have no information
on the experiences of those who have. Why the numbers are so small is another
open question at this time. We do not know whether it is due to poor outreach
concerning this option, whether it is because EBT is still so new in these areas
that recipients are not ready yet to experiment with adding additional benefits,
whether it is because of the costs associated with receiving their direct federal
benefits in this manner, or because of limitations on where they would be able
to actually access their federal benefits to pay their bills, or some combination
of these and other factors.
Conclusion.
Treasury's stated goal of bringing "into the mainstream of the financial
system those millions of Americans who receive Federal payments and who currently
do not use the financial services to receive funds, make payments, save, borrow
or invest" will not be achieved unless substantial changes are made to
the proposed regulations. We hope this Committee will exert its influence and
convince Treasury to address these concerns appropriately.
Appendix A
Letter to Secretary Rubin
June 18, 1997
Secretary Robert E. Rubin
Department of the Treasury
15th and Pennsylvania Avenue
Washington, D.C. 20220
Dear Secretary Rubin:
The undersigned advocacy organizations collectively represent low-income people,
the elderly, the disabled, minorities and other consumers who will be significantly
affected by the implementation of EFT 99. This joint letter is to urge you to
use the statutory requirement for electronic transfer of federal payments to
improve the lives of America's most vulnerable citizens by bringing them into
the banking system. You have the opportunity through the appropriate implementation
of P.L. 104-134 to make a significant difference. The wrong decision
by Treasury at this juncture may ease the transition to an electronic payment
system for the U.S. Government, but it will do so at the cost of its citizens.
If done right, Mr. Secretary, EFT 99 will significantly foster the relationship
between the unbanked federal recipients and the regulated, insured mainstream
banking system. As you have recognized, bolstering banking relationships facilitates
savings efforts, and increases the opportunities for other financial transactions
between consumers and banks. The banks benefit from the new business. Consumers
benefit from the lower cost and less abusive terms banks provide as compared
to the unregulated alternative financial providers.
There are a number of specific decisions we urge Treasury to make in implementing
rules for EFT 99:
Only federally regulated and insured, depository institutions should
be permitted to be the conduits for federal payments. This would
not mean that recipients could not access their funds through an
ATM or POS device at an alternative financial provider such as a money transmitter
or a finance company -- just that they would never be required to
go to that alternative provider to access their money. Nor would it prevent
recipients from transferring the funds on their own to a non-insured mutual
funds account.
Recipients who do not voluntarily participate in the electronic
transfer program must be provided individual accounts at insured,
depository institutions, which are affordable, reasonably accessible, include
basic consumer protections and provide access to essential banking services.
These accounts must provide least-cost access to their federal entitlement;
encourage savings; and foster financial relationships between the unbanked
federal recipients and the mainstream financial institutions. When selecting
institutions to provide these services, Treasury should give weight to the
geographic coverage that the competing institutions offer.
Treasury's use of "authorized agents" as alternative conduits
of federal payments should be limited to those individuals and entities who
have a fiduciary duty to the recipient. The words "other authorized
agents" in the new law are only intended to apply to the types of recognized
surrogates that are currently used as intermediaries for the receipt of benefits
through the various federal programs, when the actual recipient cannot, for
some reason, be the original designee of the federal payment. The consistent
aspect among all of the types of intermediaries currently recognized in federal
law is the fiduciary duty that is owed to the recipient. Treasury should
not deviate from this important principle by allowing agents to be conduits
of federal payments who do not have a fiduciary duty to the recipients.
Fringe bankers, such as check cashers, finance companies, and others doing
business in low and moderate income communities have succeeded because of the
vacuum created by the absence of banks from these communities. These fringe
bankers do not reinvest their substantial profits back into the communities.
The residents of these communities gain little benefit other than the specific
service provided by the fringe bankers. If Treasury allows this non-regulated
industry -- which continues without obligations to the community -- to operate
as either "authorized agents, " or subcontractors with banks for the
purpose of receiving federal payments, the financial problems in the communities
will not only continue to be ignored, but they would be exacerbated.
Treasury's use of alternative financial providers as conduits for the federal
payments will be the U.S. imprimatur on the unregulated activities of these
alternative providers. The government will be saying, in effect, that the federally
insured and regulated banking system is only for those who can afford it. The
poor would be required by the government to use alternative, unregulated
providers with none of the benefits and protections furnished to consumers in
the financial mainstream. Such a result should not be the consequence of this
legislation.
We urge you to exercise your authority to ensure the proper resolution of these
issues. We would like to meet with you at the earliest possible date to discuss
our concerns in more detail. Thank you for your attention.
Sincerely,
ACORN
AFL-CIO
American Association for Retired Persons
American Federation of State, County and Municipal Employees
Center for Community Change
Consumer Action
Consumer Federation of America
Greenlining Institute
International Brotherhood of Teamsters
Jesuit Conference USA, National Office of Jesuit Social Ministries
National Alliance to End Homelessness
National Community Reinvestment Coalition
National Consumer Law Center
National Peoples' Action
NETWORK: A Catholic Social Justice Lobby
Organization for A New Equality
Surface Transportation Policy Project
21st Century Group
Woodstock Institute
United Auto Workers U.S. PIRG
Appendix B
Examples of Fringe Banking Charges
Establishing formal relationships between the recipient of federal funds and
fringe bankers, which are not easily discarded, is a dangerous support for the
activities of these fringe bankers. Limits on the fees and the terms charged
by the fringe bankers for the transfer of funds will not adequately protect
consumers. Even now, some fringe bankers provide free check cashing as a means
of enticing customers into their stores. Even rent-to-own dealers are recognizing
that check cashing provides a captive audience for its overpriced services.(21)
The free check cashing is simply a loss leader for the overwhelmingly profitable
rent to own transactions that follow. The rental of the living room suite or
a TV at a rental purchase store is likely to cost the consumer an equivalent
interest rate of well over 100%.(22) One federal
appellate court recently found "the public interest overwhelmingly favors
enjoining these contracts."(23) Unfortunately
for consumers, in most of the other 49 states equivalent judicial decisions
are not immediately likely. Is this a relationship that the federal government
should be fostering by allowing this type of financial services provider to
be a conduit for federal payments?
"Check cashing fees range from 1% of the check to a very high 21% of
the face amount of the check."(24) There
are only a handful of states that regulate the rates imposed by check cashers.
Allowable regulated fees are as high as 10% on personal checks (Georgia).
However, even in the few states where there are limits on check cashier's
fees, these restrictions are routinely ignored. In a study by the New Jersey
Public Advocate's Office on check cashing charges, 652 customers were surveyed.
49% of these customers were found to have been charged more than the maximum
legal rate--on average 44% over the legal rate.(25)
The check cashers' fees are not just exorbitant on small checks. Consider
one case in which $1,100 was charged on a lump sum Social Security check for
$11,000. The check cashier had deceptively told the recipient that cashing
the check would have been more expensive at a bank.(26)
In South Carolina, where until recently small loan rates were completely
deregulated, 100% was a typical posted interest rate charged for small loans.
Now, with some statutory limits, 56%-60% is a typical charge for loans between
$300 and $400. Higher rates, even for costlier loans, are not uncommon. For
example, 85% on a $1000 loan with a 1 year term was recently made to one low-income
consumer.
Check cashers are also making big bucks on people who have checking accounts.
"PayDay" Loans are the newest scheme. Lower income wage earners,
military personnel and welfare recipients are all typical customers.(27)
According to the Virginia Attorney General the following describes a typical
loan transaction:
Consumer customer visits Payday, completes application and writes a present
or post-dated check to Payday for $100. Payday provides customer with $83 in
cash that day and agrees to hold customer's check until an agreed upon future
date, generally corresponding with the consumer customer's payday. On the agreed
upon future date, Payday deposits and presents the consumer's check for payment.
During this process the consumer customer's check typically is held for a period
of between five to fifteen days." The effective annual percentage rate
actually charged on these PayDay loans ranges from 498% to 1,495% if the check
is held for only five days.
In Illinois, finance companies have also abused the deregulation of small
loan interest rates. In one case(28)consumers
were charged between 283% and 557% on loans in the range of $1000. Lender's
employees typically met customers as they left their places of employment;
threats of violence were implicit throughout the dealings.(29)
Some may argue that these examples are extreme, and not characteristic of the
fringe banking industry. We, who work with lawyers representing low-income consumers
on a daily basis, attest that these few examples are not isolated incidents.
How many examples would it take to prove a pattern of abusive behavior by too
many fringe-bankers throughout the United States?
Others may argue that there is nothing inherently wrong with these charges,
as everyone has choices and the consumers of these fringe bankers are simply
inappropriately exercising their freedom of choice. That may or may not be.
But the issue here is not whether to allow these industries to continue to thrive,
but whether the federal government should place its imprimatur on these activities
by establishing those responsible as the conduit for the access to the federal
payments by many low-income consumers.
______________________________
1. The National Consumer Law Center is a nonprofit organization
specializing in consumer credit issues on behalf of low-income people. We work
with thousands of legal services, government and privates attorneys around the
country, representing low-income and elderly individuals, who request our assistance
with the analysis of credit transactions to determine appropriate claims and
defenses their clients might have.(2)
2. The National Consumer Law Center, Inc. (NCLC) is a nonprofit
Massachusetts corporation founded in 1969 at Boston College School of Law and
dedicated to the interests of low-income consumers. NCLC provides legal and
technical consulting and assistance on consumer law issues to legal services,
government and private attorneys across the country. Cost of Credit
(NCLC 1995), Truth in Lending (NCLC 1996) and Unfair and Deceptive
Acts and Practices (NCLC 1991), three of twelve practice treatises published
and annually supplemented by NCLC, and our newsletter, NCLC Reports Consumer
Credit & Usury Ed., describe the law currently applicable to all types
of consumer loan transactions. - -- --
3. The Consumer Federation of America is a nonprofit association
of some 250 pro-consumer groups, with a combined membership of 50 million people.
CFA was founded in 1968 to advance consumers' interests through advocacy and
education.
4. The National Community Reinvestment Coalition (NCRC)
is the nation's largest CRA (Community Reinvestment Act) membership organization.
The goal of NCRC is to increase fair and equal access to credit, capital and
banking services. NCRC, representing over 615 national, regional and local community
organizations seeks to support and provide tools to build community and individual
net worth.
5. The Organization for a New Equality (O.N.E.) is a multi-racial
organization whose top priority is expanding economic opportunity to people
who have historically been excluded from the economic mainstream. Established
in 1985 by the Reverend Dr. Charles R. Stith as a non-profit organization, O.N.E.
is working to develop and implement new economic strategies to promote equal
opportunity and encourage change.
7. These minimal requirements are only 1) that the funds
must be deposited into a financial institution 2) in the name of the recipient.
There is no requirement that the recipient actually be able to withdraw the
federal funds directly from the financial institution.
8. For additional information about the current practices
of check cashers and pay day lenders, see Consumer Federation of America,
The High Cost of "Banking" at the Corner Check Casher: Check Cashing
Outlet Fees and Pay Day Loans. August, 1997.
9. Department of the Treasury Financial Management Service,
Mandatory EFT Demographic Study, Executive Summary, April 22, 1997.
13. According to a recent study of fringe banking in Milwaukee:
"Customers pay far more for services provided by a check cashing business
than they pay for the same services at a conventional bank. Fees for cashing
payroll checks nationwide generally range between one percent and three percent
of the face value of the check. For personal checks the range was generally
between 1.7 percent and 20 percent, averaging around 8 percent. In some instances,
however, fees and interest rates have been reported as high as 2000 percent.
A study by the New York Office of the Public Advocate found that a check cashing
customer with an annual income of $17,000 will pay almost $250 a year at a check
cashing business for services that would cost $60 at a bank. The Federal Reserve
Bank of Kansas City reported that a family with a $24,000 annual income using
a check cashing business will spend almost $400 in fees for services that would
cost under $110 at a bank." (Citations omitted). Squires and O'Connor,
Fringe Banking in Milwaukee: The Rise of Check Cashing Businesses and the
Emergence of Two-Tiered Banking System. (1997) at 5,6.
14. Payday loans are generally provided by check cashers
who agree to cash a post-dated personal check with the understanding that it
will not be deposited until the customer's next payday. "Customers can
receive $50 for a check written in the amount of $60 and dated 14 days after
the cash is provided. ... The effective annual interest rate for this loan is
1,092 percent." Ibid, at 11, 12.
15. Very Limited Regulation on Check Cashers. Check cashers
are NOT the appropriate alternative to banks to provide access to federal payments
for the "unbanked." In only fourteen states are there even limits
on the amounts that check cashers can charge to cash government checks. Examples
of caps on check cashing fees in the few states that have limits are:
California: 3 to 3.5% for government and payroll checks, depending upon identification.
Connecticut: 1% for state welfare checks, 2% for others.
Delaware: 2% or $4, whichever is larger, for all checks.
Florida: 5% with ID or 6% without, or $5 whichever is greater for personal
checks and money orders; 3% with ID, 4% without or $5 for state benefits or
Social Security checks, whichever is greater.
Georgia: The larger of $5 or 3% for welfare checks, 5% for payroll checks,
and 10% for personal checks.
Illinois: 1.4% to 1.85% plus an additional 90-cent-per-check charge.
Indiana: $5.00 or 10% of the face amount of the check, whichever is greater.
Minnesota: 2.5% of welfare checks over $500 (5% for the first check), 3% of
other government and payroll checks (6% for the first check); no limit on personal
checks (but rates must be filed and "reasonable").
New Jersey: 1% on New Jersey checks, 1.5% on others, or $.50, whichever is
larger.
New York: 1.1% of the face amount or $.60, whichever is larger.
North Carolina: 3% or $5 whichever is greater for government checks; 10% or
$5 whichever is greater for personal checks; 10% or $5 whichever is greater
for all other checks. (Eff. 10/1/97)
Ohio: 3% on government checks.
Rhode Island: The larger of $5 or 3% for welfare checks, 5% for payroll checks.
Tennessee: 3% or $2 whichever is greater for state public assistance or federal
social security checks, 10% or $5 whichever is greater of personal checks or
money orders. (Eff. 10/1/97).
While some of these fee ceilings may themselves seem high, in the rest of the
36 states, there are no limits whatsoever on these fringe bankers.
16. The legal standard applicable to judge these transactions
thus becomes one of "unconscionability." Unconscionability generally
refers to a transaction "which is so one sided that only one under delusion
would make it and only one unfair and dishonest would accept it." See,
Cobb v. Monarch Finance Company, 913 F.Supp 1164, 1179 (N.D.Ill. 1995).
17. Treasury's use of "default" banks to receive
all the direct deposits for all non-exempt recipients who fail to designate
a financial institution will provide a significant opportunity for Treasury
to ensure that there are adequate ATMs and POS devices throughout the low income
community accessible at little or no cost to these Direct Deposit recipients.
21. See Rental Dealer News (August 1993), at 11-12.
22. A recent 8th Circuit case found that the 46%-746% interest
rates charged by rent to own dealers was ample justification for a permanent
injunction against dealers operating in the state of Minnesota in standard modes.
Fogie v. THORN Americas, Inc. 95 F.3d 645, 653 (8th Cir. 1996).
25. John P. Caskey, Fringe Banking: Check-Cashing Outlets,
Pawnshops, and the Poor (Russell Sage Foundation 1994).
26. In Re Wernly, 91 B.R. 702 (Bankr. E.D. Pa.
1988).
27. This quote is from the complaint filed by the Virginia
Attorney General in the case of Commonwealth of Virginia, ex rel. Mary Sue
Terry, Attorney General v. Bar D Financial Services, Inc. (d/b/a Payday).
28. Brown and Cooper v. C.I.L. Inc., January 28,
1996, 1996 U.S. Dist. LEXIS 4917.
29. For an example of a case in which a court found that
a series of transactions may have been "unconscionable," or "not
inconsistent with an absence of meaningful choice," see, Cobb v. Monarch
Finance Company, 913 F.Supp 1164, 1179 (N.D.Ill. 1995). In this case, the
consumer entered into a total of ten separate loans from three finance companies:
(1) four loans, each with a principle of $690, and annual percentage rate (APR)
of 101%; (2) five loans, each with a principle of $700, an APR of 96.43%; and
(3) one in the amount of $500, an APR of 57.22%. All loans created a similar
payment mechanism. A bank account was created on behalf of the consumer, to
which an allotted portion of her paycheck was electronically and directly deposited.
The allotment was then immediately transferred from the consumer's account to
the finance company account.
