TESTIMONY OF

MARCELYN CREQUE,

REGIONAL VOLUNTEER DIRECTOR

MIDWEST REGION

Regarding

Proposed Regulations to Implement the Electronic Funds Transfer Provisions of the Debt Collection Improvement Act of 1996

Before the

United States House of Representatives

Committee on Banking and Financial Services

September 25, 1997

Washington, D.C.

On behalf of the American Association of Retired Persons (AARP), thank you for this opportunity to present our views regarding the U.S. Department of Treasury's proposed regulations to implement mandatory receipt of federal payments via "electronic funds transfer" (EFT) under the Debt Collection Improvement Act of 1996. My name is Marcelyn Creque and I am the Regional Volunteer Director for AARP's Midwest Region.

I. Introduction

AARP played an active role in the debate regarding mandatory conversion of federal benefits to EFT prior to enactment of the Debt Collection Improvement Act (the Act) of 1996. While we recognized the value of EFT as a consumer choice that could enhance banking convenience, the Association did not favor mandating EFT on all recipients of federal payments because it could impose undue hardships on many. We were pleased that Congress included a hardship exemption and other provisions in the Act to accommodate such cases.

Since enactment of the law, the Association has participated in numerous stakeholder meetings and informational briefings sponsored by Treasury, as well as in Congressional hearings. The Association intends to participate in the public hearings on the proposed regulations and submit written comments on the proposed rules.

AARP is pleased to see that self-certifying waivers for physical disability, geographic barriers, and financial hardship have been incorporated into the proposed rule. We also support provisions that defer implementation of EFT for those without bank accounts beyond the January 1, 1999 deadline. These provisions and subsequent comments by Undersecretary Hawke signal the Department’s growing recognition of the "real life" needs of federal benefit recipients and the enormity of Treasury’s task in implementing the transition to a paperless payment system. However, we still have many questions about the proposed rule and the federal government’s ability to implement this policy without causing hardship to many benefit recipients. AARP is particularly concerned about the adequacy of arrangements to:

• assist Social Security and SSI beneficiaries who currently receive their benefits by check to sign up for direct deposit or obtain waivers;
• protect recipients from paying excessive fees and charges to obtain their benefits -- especially in cases where depository institutions might subcontract with non-financial institutions such as check cashing outlets to provide the new ETA accounts; and
• inform and educate the public regarding the requirements and workings of the new program.

II. Who Is Affected by EFT?

Direct deposit offers a delivery mechanism that is safe, convenient, and reliable. It eliminates worries about checks being misplaced or stolen out of mailboxes. If a person is ill or unable to get to the bank for any other reason, direct deposit assures that the money will be safely deposited and available for use by the recipient. Currently, 67 percent of Social Security recipients and 31.4 percent of Supplemental Security Income (SSI) recipients use direct deposit.

The conversion to mandatory EFT is of particular interest to AARP because older persons make up a significant proportion of those affected by it. Most immediately affected will be those with deposit accounts who currently receive their benefits by check. Social Security beneficiaries represent 70% of federal benefit check recipients. SSI check recipients are the next largest segment (20%) and one-third of these recipients are older persons. Altogether, some 20 million Social Security and SSI recipients receive payments by check. Some 6.5 million of these recipients do not have bank accounts. Social Security recipients receiving their benefits by check are heavily clustered in New York, Pennsylvania, Texas, and California. Florida, North Carolina, Ohio and Illinois also have significant numbers of Social Security recipients receiving their benefits by check.

III. Obstacles to Implementation of Mandatory EFT

A report prepared for Treasury by Booz-Allen & Hamilton Shugoll indicates that most recipients who receive their benefits by check are aware of the advantages of direct deposit. The reasons why recipients may prefer to obtain their benefits by check are varied and depend on individual circumstances. According to the Treasury report, the major concerns of recipients about direct deposit include uncertainty regarding when a payment will arrive, problems accessing money if an account is frozen or under dispute (such as in the case of a divorce), and the potential difficulty of resolving a problem if the payment does not arrive on schedule. Many older benefit recipients like seeing a tangible payment that they can touch and count for themselves. Also, some beneficiaries do not see an advantage to direct deposit because they need to go to the bank to obtain cash anyway. Others who do not feel compelled to go to the bank dislike the idea that they would need to write additional checks to obtain cash.

Many older households do not use direct deposit because they do not have a bank account. This is especially true for older households with incomes under $10,000 and minority and female-headed older households. Eleven percent of all Social Security and 58% of all SSI recipients are without bank accounts.

It is important to note that a plurality of all federal benefit recipients in the Treasury study object to mandatory EFT. According to the study, 47 percent of recipients object to mandatory EFT compared to 28 percent who support it. These negative views are likely to hamper attempts to increase direct deposit participation among those recipients currently receiving checks.

Given the particular vulnerability of the unbanked and banked consumers on limited and fixed incomes, it is critical that implementing regulations be carefully crafted to include consumer protections. In various meetings and written comments, AARP has encouraged the Treasury Department to take the following actions:

• Ensure the availability of hardship waivers, especially where current service needs are not met;
• Limit the use of "transaction" and "account" fees related to EFT;
• Require financial institutions to offer minimal banking accounts with specific consumer protections such as Regulation E;
• Provide adequate public education and notice about the impending change; and
• Define "Authorized Payment Agent" and "financial institution," preferably in a separate rulemaking.

IV. Key Features to Note in the Proposal Rules

While AARP is pleased with the general tone of Treasury’s proposal, we remain concerned about a number of issues. First, federal payment recipients have no protections against unrestrained hikes in banking service fees. Many seniors depend on these payments for most, if not all, of their income. The absence of protections increases the likelihood that unbanked individuals will opt not to open accounts and many banked recipients may close existing accounts to seek hardship waivers. The effect would be to reduce, rather than increase the accessibility of the banking system.

It is unclear how the default accounts -- Electronic Transfer Accounts– for the unbanked will make banking affordable. In fact, mandatory EFT may force many unbanked individuals to pay fees that they currently are not required to pay. For example, 30% of unbanked recipients regularly cash their checks for free at groceries and supermarkets. And they avoid additional transaction costs by using cash whenever possible. According to the Treasury study, the major reason for federal benefit recipients not having a bank account is that they believe they do not have enough money to justify an account (47 percent of poll respondents). Less frequently cited reasons include: no need for an account (21 percent), fees are too high (6 percent), and problems managing an account (3 percent). However, 58 percent of the unbanked recipients cash their checks at a financial institution. This indicates that a formal relationship with a financial institution may be possible if appropriate products are offered to the unbanked.

As noted previously, individual circumstances rather than a lack of awareness often determine whether a benefit recipient will choose to use direct deposit. The proposed rule attempts to address individual circumstances by incorporating waivers and electronic transfer accounts (ETAs). While these measures represent important first steps, some critical elements are missing. For instance, the proposed regulation does not specify the procedures that recipients currently receiving checks must use for filing waivers. AARP is particularly concerned about the ability of the Social Security Administration to handle the millions of requests for waivers, ETAs and direct deposit that must be processed in the next 27 months by recipients. In this brief time span, SSA will be required to process two-thirds the number of applications for direct deposit handled in the last 21 years! It is our understanding that SSA may apply an administrative waiver to current benefit recipients receiving checks in order to prevent its local offices and phone system from being overwhelmed. AARP believes such an administrative waiver may be necessary.

Despite the cost savings and decreased risk of theft that may result from electronic funds transfers, a considerable number of federal benefit recipients will still endure a hardship if required to receive their payments this way. Besides those in isolated locations or those with impaired mobility or a diminished capacity to understand EFTs, others affected include those confused by debit cards or other electronic technology and those fearful or mistrustful of financial institutions. While Treasury recognizes hardship based on "physical disability" along with geographic hardship and financial hardship, Treasury specifically denies hardship waivers based on mental disability or literacy. We will strongly urge Treasury to reverse this decision. Given the vulnerability of recipients who could be adversely affected by these provisions, it is essential that the hardship waiver provisions have broad application and be widely publicized.

The structure of the ETAs is critical in determining how effective these accounts will be in increasing participation in the banking system. AARP agrees with Treasury’s decision to seek separate comments on how these accounts should be structured. The Association does not believe that low-income recipients who cannot afford checking accounts because of fees or balance requirements should be forced to use expensive check cashing services. To address the needs of persons currently without bank accounts, banks should be required to offer basic bank accounts which represent a modest cost to financial institutions. Given the financial windfall institutions will receive from the "float" on EFT deposits, such costs should not be viewed as burdensome. The proposed ETA should resemble a no-frills banking account, with features such as the following:

• Available to individuals with $750 or less on deposit during each monthly period;

• An account maintenance fee no greater than cost plus ten percent profit, with Federal Reserve oversight;

• Minimum initial deposit requirement of no more than $25;

• Minimum balance requirement of $1;

• Ten free withdrawals permitted each month; and

• A monthly statement or passbook detailing account activity.

The proposed regulations give the recipient the option to decide whether federal and state benefits are placed on one card. However, in order to implement this policy, Treasury must negotiate individual agreements with the states that have Electronic Benefit Transfer (EBT). The most important factor from a consumer viewpoint is making sure that recipients understand that their federal benefits are covered by Regulation E, but their state benefits are not. Consumers need to be aware of the differences in coverage prior to making the decision to place their federal and state benefits on one card.

AARP is pleased that the ETA designation does not have the effect of labeling or stigmatizing the account holders as persons who cannot afford to be a part of the mainstream banking system. It was not the intent of Congress to segment federal payment recipients. EBT generically refers to state-administered public assistance benefit accounts that are accessed via debit cards and are explicitly denied Regulation E protections by law. Mandatory EFT, according to Treasury, will have full Regulation E protection. Finally, it is essential that institutions offering ETA accounts be required to incorporate mainstream bank account privileges, such as making personal deposits to the account and writing checks.

Three other issues warrant some mention. They are: defining the term "authorized payment agent"; the adequacy of proposed public hearings; and structuring an effective public education and outreach campaign on EFT. Regarding the first, the proposed rules defer the question of defining "authorized payment agent" to the federal agency that has responsibility to administer the program. Where loopholes currently exist, regulatory silence under the mandate has the effect of giving an institution complete control over the recipient’s payments. For example, nothing would seem to prevent a nursing home or care facility from becoming a financial institution despite its obvious interest in the recipient’s assets. Similarly, who would be responsible for maintaining controls on fees for any services the institution chose to impose? Would the rules for such designations be consistent or equitable across federal agencies?

Second, AARP strongly supports public hearings on the proposed rule, but believes that the three proposed by Treasury do not provide for adequate representation of the country’s regions and recipient populations. Hearing sites should include rural areas, inner city communities, and diverse ethnic and socio-economic populations.

Third, the Association has urged the Treasury and other federal agencies to provide adequate advance public education and outreach about the impending conversion to EFT. The proposed regulations lack provisions for assisting those recipients without bank accounts to understand their options. A number of financial institutions now offer free or low cost accounts that could provide less costly alternatives to check cashing services currently used by many recipients. However, there is no organized network in place to provide information to the unbanked and help link unbanked benefit recipients with these services. Treasury’s proposed public information campaign must be supplemented by such community efforts if EFT is to be a catalyst for increasing access of low-income households to financial services and the mainstream economy.

AARP continues to urge that each federal payment recipient be notified repeatedly -- well before the January 1, 1999 and January 1, 2000 deadlines -- in mailings containing benefit payments (and other appropriate forms of communication) that future payments will be made by electronic funds transfer. The notice must explain in plain, simple-to-understand language, including a Spanish translation, what electronic funds transfer and related terminology means, since many recipients will be unfamiliar with the terms.

V. Conclusion

Although electronic funds transfers offer significant benefits for consumers and the federal government, consumer protections need to be in place well before the January 1, 1999 and 2000 deadlines. This is particularly important for the unbanked. AARP stands ready to work with you in this critical endeavor.

In compliance with House Rule XI, clause 2(g) regarding information of public witnesses, attached is AARP's statement disclosing federal grants and contracts by source and amount received in the current and preceding two years.