2:00 p.m., Thursday, May 22, 1997
There are numerous issues which will effect the unbanked recipients of federal benefits. One is the extent to which Treasury forces the 'unbanked" to use accounts which cost them too much money to access. Another, just as important issue is which kind of institution - regulated and insured or unregulated - Treasury authorizes to be the providers of the federal payments to federal payees. This issue is important, not only because of the fees which would be charged by the alternative financial providers, but because of all of the other services that these providers would market to the poor. A third issue is how Treasury defines the "hardship" exemption under the statute. If defined appropriately, those federal recipients who cannot find appropriately priced accounts would be allowed to continue receiving paper checks. (Criteria included in the hardship standard should also include reasonable and safe access and consideration of disabilities).
The crux of the problem here is that Treasury says that the banks don't want the accounts of the "unbanked" and that the only way to convince the banks to provide these services is to allow them to charge fees for the services. In fact, it is too early to know the answer. Treasury does not know how much it will cost to provide these accounts. Treasury does not know how much benefit the banks may derive from providing these accounts - in terms of float on the funds in the accounts, and sale of other banking services to these new customers. There is considerable confusion over the reasons why there are so many people outside the banking system in the U.S.' Rather than guessing, more information should be gathered before drastic and expensive changes in the delivery system for federal payments are made.
While banks are publicly hesitating to embrace the unbanked as a new source of customers, other financial providers - such as check cashiers and finance companies - are chafing at the bit to be allowed to dispense these services. However, low income advocates are united in their belief that allowing alternative financial providers to be the conduits for federal payments will be expensive and harmful to federal recipients and low income communities It is the task of Treasury, and of Congress, to figure out how to deliver federal benefits to the unbanked in the United States so as to improve the lives of the recipients, not make them harder.
Treasury has estimated that it will save approximately one hundred million dollars per year by the electronic deposit of all federal funds? Most of these savings will flow from the direct deposit of federal payments into existing bank accounts. EFT-99 (as Treasury has dubbed the requirements of P.S. 104-134) offers significant opportunities to bring low income people into the mainstream banking system. Low income advocates welcome this chance to facilitate the relationship between the poor and the banks. Savings efforts would be fostered and loan terms improved. Credit provided by banks is generally on much more reasonable terms than that provided by alternative financial providers - fringe bankers. However, these new relationships between banks and low income federal recipients should not cost too much; nor should they be cause of further problems in the low income community. Treasury should use some of the initial savings realized from the electronic deposits to encourage and pay for the initial establishment of truly low cost accounts for the "unbanked."
The balance of this testimony will be in four parts:
Further, because of the interest income that banks can make on the federal payment held in the accounts, it would make business sense for institutions to encourage more withdrawals during the month, rather than fewer - thus rewarding recipients for leaving some funds in ' the account (and encouraging recipients in their savings! efforts). Also, it is likely that the unbanked will recognize the safety and convenience of leaving funds in the accounts, for gradual withdrawal as need arises during the month. So, it is not unreasonable to imagine a scenario in which the following, seemingly reasonable, incremental fees would be charged to a federal recipient in one of these accounts:'
Monthly service charge by the assigned bank.................................$3.50
Charge from the assigned bank for accessing benefits ($1.00 x 3).....3.00
Surcharge fee for use of another banks ATM ($1.50 x 2).................3.00
POS fees ($1.50 x 3)......................................................................4.50
TOTAL monthly expenditure accessing federal payments...............$14.00
Now, consider the burden this amount imposes on an elderly or disabled individual subsisting entirely on Supplemental Security Income (SSI). Currently the federal payment to an SSI recipient living alone is $484 a month. This means that this low income federal recipient would spend 2.9% of their income every month just accessing the federal payment to which they are by law entitled. The burden could easily be more, as the incremental fees used in this example are each fairly low.
Some may say that these charges are not excessive when compared to the amounts that many of the unbanked currently pay to have their federal payments cashed. Indeed if the unbanked recipient is now using a check cashier on a regular basis, it is likely that a single transaction of cashing the federal check would be in excess of these $14 monthly fees. And, it must be recognized that the individual who uses the ATM card to withdraw funds in increments during the month enjoys additional safety and convenience features that are not available when a check cashier is used. However, it is not reasonable to assume that all unbanked recipients of federal payments use check cashiers to cash their federal checks. It is much more likely that the majority of these unbanked use one of the following, no cost alternatives:
The impact of the combination of numerous fees imposed to access electronically deposited . federal payments on low income recipients will be equivalent to a reduction of their federal entitlement. Those in poverty will suffer. This potential financial burden on America's poorest, underscores the importance of Congress and Treasury' ensuring that the actual fees charged - if any are appropriate and truly necessary.
Alternative providers of financial services could be the conduits in two ways: 1) The term "authorized agent"10 in the statute could be interpreted to allow an alternative financial provider to be designated the recipient of federal payments instead of a financial institution (defined by Treasury to be limited to be a bank, savings institution or credit union)"; or 2) Treasury could permit financial institutions to contract with alternative providers as its delivery mechanism for EFT payments to the otherwise "unbanked."
Fringe bankers, such as check cashiers, finance companies, and others, do business in the low income community because of the large profits that they can make. Expensive services, extraordinarily high fees, and abusive transaction terms are standard business practices for these alternative providers. They have succeeded because of the vacuum created by the absence of banks from these communities. These fringe bankers make no reinvestment of their substantial profits back into the communities. They charge as much for financial services as the regulatory structure - or lack of regulation - allows. And the low income residents of the community gain Rule benefit other than the specific service provided from their presence. If this non-regulated industry which continues without CRA obligations - is allowed to be the conduits of federal payments, the financial problems in the low income communities will not only continue to be ignored, they will be exacerbated.
Low income 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," payday loans,' 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,
Check cashiers are NOT the appropriate alternative to banks to provide access to federal payments for the 'unbanked." In only eleven states, plus the District of Columbia, are there even limits on the amounts that check cashiers 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.
D.C.: 1% or 50 cents 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.
Ohio: 3% on government checks.
Rhode Island: The larger of $5 or 3% for welfare checks, 5% for payroll checks.
While some of these fee ceilings may themselves seem high, in the rest of the 3 8 states, there are no limits whatsoever on these fringe bankers.
For once, let us learn from experience. The experiences 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 cashiers, finance companies, and others-should not be provided a government boost to their business by serving either as "other authorized agents, or contractors with financial institutions for the delivery of federal payments. Commercial banks, savings banks, credit unions, and possibly the U.S. Post Office, 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. 14 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 means to facilitate it.
Substantive limitations on fees and terms governing the contracts between the recipients of federal payments and the authorized agents would NOT provide sufficient protections from the problems that would be created by allowing fringe bankers to be authorized agents. The federal payment would simply ensure that the recipient becomes a captive customer of that fringe banker, without even the present opportunities to go elsewhere if treated unfairly. Fringe bankers, generally speaking, should not be supported by the federal government. Appendix A provides examples of some of the abusive charges made by fringe bankers.
Justifications for Fringe Bankers - Not Sufficient. Some Treasury staff have said that check cashiers 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 are true, they are nevertheless not sufficient justification for making the fringe bankers "authorized agents' for the receipt of federal funds.
There are several reasons that low income people often choose to use check cashiers 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" 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 cashier. 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 cashiers to continue providing their services in the community as they do currently.
We do not propose that fringe bankers be prohibiting from providing any access to federal money, just not the sole access for any federal recipient. Nothing requires that check cashiers could not establish banks' 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 "authorized agents" or contractors with financial institutions for the delivery of federal electronic payments are:
Access should not be the criteria to allow alternative financial providers to be the conduits of federal payments. Social service agencies in the community can quite easily facilitate access. The agencies can help recipients initially establish accounts with various banks that have electronic equipment or branches in the community. The social service workers can help recipients determine which accounts best serve their individual needs by interpreting the features and the costs of the available choices. Further, the workers can help recipients learn about accessing funds electronically by conducting trainings, providing reading materials on the new law and its requirements, and helping recipients master the use of personal identification numbers (PINs), ATMs and PO S devices. Finally, the social service agencies can help recipients use banks' customer assistance telephone fines to answer questions about withdrawals, charges, and other issues.
The Use of Default Banks Provides Treasury With Tremendous Leverage To Expand Services in Low Income Communities. What happens to all the payments to federal recipients who fail to tell their federal payer into which bank their deposits should be placed? It is unlikely that paper checks will still be sent. Instead, the funds will be transferred electronically to some bank. The recipients will then have to obtain their funds from that bank, either electronically or through a teller. Treasury will have the choice of using either a federal Electronic Benefits Transfer system - one bank nationwide, with minimal services, and minimal access - or a series of default banks in each state.
If Treasury chooses to go the route of using default banks, the leverage available is immense. Consider the potential amount of money involved in just one state, that would flow through the default bank, that is not now being deposited in that bank. On a state by state basis, the monthly deposits will be increased by hundreds of millions of dollars." The float on this money, even if it is all withdrawn within a few days of deposit by the Treasury, will be substantial. It therefore seems reasonable to assume that many banks will recognize the profitable potential of being a default bank for all of the unbanked recipients in the state, and that there will be competition for this opportunity on a national, state, or local level.
Treasury can use the leverage provided by the competition between financial institutions to be the default bank to ensure that additional ATM and POS devices are available at reasonable access points throughout the low income communities. Treasury can also use the combination of these many relatively small accounts to provide economies of scale. In this way, the combination of many accounts should keep the monthly and transaction fees to a minimum, while still providing the financial institution with a healthy profit for engaging in this new business. Additionally, the default banks will have a ready source of new customers to whom to market all of their other products and services.
If consumer advocates are overly pessimistic, we will be thrilled to find ourselves wrong. However, if we are correct, then it will fall back to the federal government either (1) to reduce its expectations for the pervasive use of electronic transfers (because too many of the unbanked will remain unbanked, and thus not have electronic transfers realistically available to them); (2) to provide some incentives to banks for providing these electronic transfer services to the unbanked; or (3) to compromise the standards of the accounts to be furnished to the unbanked, and require this population to be serviced in a manner which does not adequately protect them from abuses. Option 3 should be avoided at all costs, as whether or not one believes that it is the government's responsibility to protect the neediest of its citizens from Harm, everyone should agree that it is NOT in the government's purview to advance that Harm upon the neediest of its citizens. Requiring the unbanked to use fringe bankers to access their federal payments, or requiring them to use accounts at financial institutions which do not include certain minimum standards would create new opportunities for the neediest segment of the federal payee population to be harmed. This is an unacceptable choice.
Essential protections for electronic transfers include a myriad of considerations. We propose that the minimum attributes of a required electronic account for the receipt of federal payments meet these criteria. Any federal payee who cannot find an account at an insured, depository institution should be considered to have a hardship under the statute, such that their federal payment would continue to be made by paper check." After all, although as a policy matter we can all agree that receipt of payments electronically is generally better for all concerned, that will not apply to each individual. This is the basic rationale behind the statue's exception to the requirement for electronic transfers in cases of hardship. When high costs, excessive risks and difficulties in accessing the payment are involved for a particular individual the electronic option may be far worse than the paper system.
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.
Unless Treasury is prepared to monitor compliance, merely -requiring system compliance with
the Americans with Disabilities Act is not sufficient. Leaving it up to the aggrieved individual to
somehow find a way to manage while independently pursuing an ADA claim is an unreasonable
expectation for government benefit recipients who are both poor and disabled.
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