On behalf of the American Association of Retired Persons (AARP), thank you for this opportunity to present our views regarding the impending implementation of mandatory receipt of federal payments via "electronic funds transfer" (EFT). My name is Marcelyn Creque and I am the Regional Volunteer Director for AARP's Midwest Region.
AARP played an active role in the debate regarding mandatory conversion of federal benefits to EFT prior to enactment of the Debt Collection 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.
The conversion to EFT is of particular interest to AARP because older persons make up a significant proportion of those affected by it. The Treasury Department estimates over 10 million recipients of federal payments are "unbanked", i.e., they do not have bank accounts. Some 80% of these persons are recipients of Social Security, veterans benefits or other federal retirement pensions or payments. The latest (1995) Survey of Consumer Finances (SCF) released by the Federal Reserve indicates that 9.1 percent of families headed by persons age 60 and older, some 2.5 million families, had neither a checking nor a savings account. They make up 20.5 percent of the families without checking or savings accounts.
The lack of a checking account is particularly difficult for families receiving government benefit payments. They frequently must resort to more expensive check cashing services to obtain cash for living expenses. The SCF reports that 21.4 percent of families headed by persons age 60 and older, some 3.2 million families, do not have checking accounts. These figures are higher for families headed by persons age 50 and older. One third (33.2 percent) of these families, some 4.9 million families, do not have checking accounts.
Further, the incidence of older families (age 60 and older) without checking accounts is heavily concentrated among those with incomes below $10,000 and those headed by older women and minorities. Twenty-eight percent of families age 60 and older with incomes below $ 1 0,000 did not have checking accounts. This compares to 8 percent for families age 60 and older with incomes between $ 1 0,000 and $24,999. The percentage of female-headed families age 60 and older without checking accounts was double that of older families headed by men (16 percent versus 8 percent). Finally, some 38 percent of families headed by an African American age 60 and older and 35 percent of families headed by Hispanics age 60 and older were without checking accounts. This compares to only 7 percent of families headed by white persons age 60 and older.
The SCF also notes that certain occupational/work status categories correlate with a high incidence of unbanked families. For example, about 14 percent of retirees were without transaction accounts of any kind. Families without bank accounts also tend to have lower educational and literacy levels. An analysis of the 1985 Survey of Income and Program Participation (SIPP) by the U.S. General Accounting Office (GAO) concluded that 57 percent of nondepositor family heads had 9 to 12 years of education and 24 percent had 8 years or less. In his analysis of the 1989 SCF, John P. Caskey, author of Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor, found that households with deposit accounts (either checking or savings) averaged 12.6 years of education compared to only 9.9 years for households without deposit accounts. Literacy and familiarity with banking technology will become critical factors as large numbers of persons are required to use Automatic Teller Machines and Point Of Service terminals for the first time to access vital government benefits. Data from the SCF indicate that among those aged 65-74 without checking accounts, difficulties in managing and balancing an account were among the chief reasons given for not having one.
The switch to EFT will also impact those with deposit accounts who currently receive government-issued checks. According to the Social Security Administration, as of March 31, 1997, 67.3 percent of Social Security recipients and 31.8 percent of SSI recipients received their benefits through direct deposit. Social Security recipients receiving their benefits by check were heavily clustered in New York, Pennsylvania, Texas, and California. Florida, North Carolina, Ohio and Illinois also had significant numbers of Social Security recipients receiving their benefits by check.
Given the particular vulnerability of so many of the unbanked, it is critical that implementing regulations be carefully crafted to include consumer protections. AARP has encouraged the Treasury Department to take the following actions:
It is critical. to define the term "authorized payment agent" in a way that provides fiduciary accountability and assures consumers that their funds are both safe and accessible. In many rural and low-income communities, the absence of banks forces consumers to use alternative check-cashing outlets or other options that may charge up to 25 percent or more of the check's face value. These operations are also sometimes located in unsafe areas, jeopardizing the personal safety of those who use them. If the term is not carefully defined, facilities such as these check- cashing outlets may qualify to participate in EFT, but without adequate restrictions to protect consumer funds or discourage potentially fraudulent practices. Merely establishing a federal insurance requirement for these agents, as has been suggested by some, is not sufficient to protect vulnerable federal beneficiaries from abuse. Nor would an insurance requirement guarantee that such agents fulfill their fiduciary responsibility to protect consumer funds to which they have access.
Without a clearer definition, nursing homes, assisted living facilities, or other institutions that have a financial interest in the recipient of the federal payment may also qualify as a recipient's payment agent. What is to prevent these institutions from charging high service or management fees or denying/limiting ready access to funds? Who will oversee the institution to ensure that these funds will be properly managed and protected? The potential for fraud or abuse of these funds is considerable and is compounded if the recipient is unsophisticated or physically or mentally unable to protect his or her interests.
Moreover, in the absence of implementing rules, some may suggest that an "authorized payment agent" is not subject to the consumer protections provided under new subsection (I)(2)(A) and (B) of the Act, which states that individuals required to have accounts at financial institutions "will have access to these accounts at reasonable cost, and with the same consumer protections with respect to other account holders at the same financial institution." Even if these consumer protection provisions were imposed on all agents receiving federal EFTs, presumably these same protections would not be extended to other transactions made at these non-financial institutions. Those required to have their federal payments deposited with these "authorized payment agents" would likely still use undesirable check-cashing services that, as mentioned above, may be extremely expensive, prone to entice clients into usurious financial contracts, and compromise personal safety.
Consequently, AARP strongly believes that a separate rulemaking to define @4 authorized payment agent," along with public hearings across the country (including rural areas, inner city communities, and other diverse areas) would offer a better means of ascertaining which services and consumer protection concerns are most essential.
In the alternative, if a separate rulemaking is not conducted (or until final rules are promulgated), AARP urges Treasury to limit the authorized payment agents to federally-regulated financial entities. If the agents are not limited in this way, it is critical that these agents be carefully and comprehensively defined, with considerable consumer protection provisions in place before any payments may be accepted by them.
Banks and other financial institutions cite as a major concern the cost of EFT systems implementation. Significant among those costs will be the installation of additional ATM terminals to handle the additional customers who will be required to receive their benefits via EFT. Special problems are anticipated in low-income communities that are currently under served or unserved by bank branches or ATM machines. In addition, many terminals may have to be modified to permit access to disabled, non-English speaking or illiterate recipients. Further, the installation of crime prevention measures at ATMs such as lighting, surveillance cameras, and "panic buttons" will be an additional expense.
In its report, From Paper to Plastic: The Electronic Benefit Revolution, the Financial Management Service (FMS) of the U.S. Treasury Department indicates that financial institutions have the main responsibility for new terminal installations and efforts to insure the safety of customers. While AARP recognizes that some investment will be necessary to adapt services to the unbanked population, we are concerned that these costs not simply be passed on to new customers who will be required to use EFT under Treasury regulations. As noted previously, many of these persons would be hard put to manage any additional charges.
Banking is becoming increasingly expensive for consumers as financial institutions charge for services previously offered free of charge, and raise fees for such core banking needs as writing a check, using an ATM machine, or making balance inquiries. Increasing costs are an important reason why IO million recipients of federal checks do not have bank accounts -- they cannot afford them. High minimum account balance requirements, now common at banks, are unacceptable for those who must use all available funds for basic needs such as food, shelter, and utilities.
According to estimates from Treasury, the 340 million federal payments that must be made by electronic transfer by January 1, 1999, comprise some $240 billion dollars annually. Financial institutions will profit through the "float" created by this tremendous influx of money. Therefore, far from being a burden, mandatory EFT represents a significant windfall for these institutions. It will also be much less expensive for financial institutions to process and manage paperless deposits. Given these advantages, financial institutions should not be allowed to assess unreasonable costs or fees for receiving federal EFTs.
According to the National Automated Clearing Housing Association (NACHA), the cost savings to the banking industry alone flowing from the requirement for federal EFT payments will be sizable. Financial institutions will save between $.75 and $1.25 per transaction for each payment converted from a deposit made with a teller to direct deposit. Annual cost savings to the banking industry under mandatory EFT are estimated by NACHA to be in the area of $350 million to $500 million.
AARP is concerned that without strong direction from FMS, preparations for full implementation of EFT will be inadequate to handle the additional new recipients entering the system for the first time.
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 could hardly be viewed as burdensome. A basic bank account should have the following elements:
There is also a need to adequately monitor and address current and potential direct deposit problems resulting from the new requirements. While Treasury and the financial services industry tout direct deposit as a virtually trouble-free payment mechanism, AARP is concerned that these observations may be overly optimistic and may not take into consideration all of the problems that consumers are currently experiencing or that the system is likely to experience with the addition of many new participants.
An informal survey of AARP's membership conducted through the AARP Bulletin in 1993 revealed a significant number of Social Security recipients who signed up for direct deposit but did not have their funds deposited in the proper accounts. Many others experienced delays in receiving their funds, particularly when they switched banks or their bank changed hands. None of the respondents in the survey reported having their direct deposit problems resolved within a day or two. Rather, they frequently reported that it took several months before they gained access to their funds. Such a delay can have a serious impact on those who rely on the monthly payment to cover basic necessities such as rent and food. Moreover, consumers being pushed into direct deposit are the least educated and least able to deal with the banking industry's error resolution system.
Consequently, 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. Given the sheer number of recipients who could be adversely affected by these provisions, it is essential that the waiver provisions be widely publicized and have broad application.
Waiver notices must inform recipients of the name, address, and telephone number of a contact at the federal office from whom they must seek a hardship waiver. Also, the notice must communicate clearly the circumstances that give rise to such a waiver. Waivers should not be reserved only for the most extreme cases but should apply to anyone who truly will suffer a hardship according to their individual situation and condition. This means that the standard must be flexible, as a situation that is hardship for one person may be relatively insignificant for another.
Most consumers are unaware of the Electronic Funds Transfer Act (EFTA) or Regulation E, which implements it. While EFTA and Regulation E provide important consumer protections (such as a $50 liability limit on the use of a stolen credit card), their provisions are not well known by consumers and the notice requirements are complicated. For example, many low-income families do not have telephones, yet a bank may select use of a special telephone line to allow customers to learn if a deposit was made. Also a financial institution may fulfill its error resolution obligation under EFTA by simply informing the recipient that its investigation indicates the error was not caused by the bank and that the recipient should get in touch with the appropriate agency. AARP is concerned that this will result in recipients being shifted back and forth between the bank and the local Social Security office. We believe significant attention must be given to the probability that many of those using direct deposit or a financial institution for the first time will experience difficulties. The Federal Reserve and Treasury should assess existing problems and develop procedures for monitoring and resolving consumer complaints that are likely to result from increased participation under the proposed rule. Information gathered should provide the basis for developing public education messages targeted to specific recipients.
Each federal payment recipient must be notified repeatedly -- well before January 1, 1999 -- 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.
Although electronic funds transfers may offer significant benefits for consumers and the federal
government (efficiency, cost savings, and reduced risk of theft of federal payments), fundamental
consumer protection provisions must be in place well before January 1, 1999. This is
particularly important for those recipients of federal payments who do not have a current
relationship with a bank. Federal payments may be the primary or sole source of income for
these "unbanked" consumers. Therefore, Congress and the relevant federal agencies must ensure
that these individuals are protected from unfair, deceptive, or abusive practices, as well as from
unreasonable hardship. AARP stands ready to work with you in this critical endeavor.
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