Welfare Card Restrictions Redux

An update on the status of implementing restrictions on where and how EBT payment cards used for the federal/state TANF program, known colloquially as welfare, has been posted at the EFTA's eGovernment Payments Council website, www.electronicbenefitstransfer.org, You can access the information there or by clicking this link.

CFPB Update

The 112^th Congress may be winding down, but the Consumer Financial Protection Bureau (CFPB) keeps chugging. Before Congress scurried off home for electioneering in September, CFPB Director Richard Cordray paid a visit to both the Senate Banking Committee and House Financial Services Committee for a biannual update on the Bureau’s activities. House Financial Services Committee Chairman Spencer Bachus (R-AL) even quipped that Director Cordray “made some news” during his appearance on September 20. Yes, it’s news when an Administration official appears before Congress and says something of interest.

The Consumer Financial Protection Bureau is poised to
issue two important proposed rules on overdraft
protection and prepaid cards.

What did Cordray say of interest? At issue is the 2009 CARD Act’s “ability to pay” rule. The Federal Reserve Board had responsibility for the implementing this provision of the CARD Act (the CFPB had not existed at this time). The Board created a uniform standard requiring all consumers to demonstrate “an independent ability to repay.” The Board’s rule took effect October 1, 2011 and almost immediately Congress began asking questions on the rule’s impact on stay-at-home spouses and their ability to obtain credit. Dodd-Frank gave the CFPB rule-making authority over Regulation Z (Truth in Lending). At another House Financial Services Committee hearing during the summer, Gail Hillebrand of the CFPB did not appear very sympathetic to opening up the rule again. But Cordray believe enough evidence had been produced to warrant a new rule that would disadvantage stay-at-home spouses who may ample “household income” to secure credit. CFPB will likely issue the revised rule for public comment later this year or early 2013.

Senate and House leaders also expressed concerns with CFPB’s final rule on international remittance transfers (Sec. 1073 of Dodd-Frank). Several House members wrote Cordray in August asking for a delay in the effective date (February 2013) while the CFPB studies its impact on consumers. The CFPB’s rule on international remittance transfers required several disclosures to be made to consumers including exchange rates and fees charged by other entities and taxes to be charged by foreign governments. The only relief CFPB has given to exempt those financial institutions providing less than 100 remittances annually from the new disclosure rules. I do not expect this will be the last we hear of this issue. How far will consumer choice be limited as institutions exit the business because compliance requirements are not financially viable? Stay tuned.

Looking ahead to 2013, the CFPB is poised to issue two important proposed rules on overdraft protection and prepaid cards. EFTA has provided comment to the Bureau on both subjects in 2012 as part of an Advanced Notice of Proposed Rule-Making. Gov. Mitt Romney also called out the Bureau for slow progress on issuing rules on qualified mortgages. Expect some busy beavers in the hallways and offices of the CFPB in the weeks and months ahead.

Choppy Waters Ahead for Interchange

October 1 marked the one-year anniversary of the Durbin Amendment’s limitation on the amount large financial institutions ($10 billion or greater in assets) can collect in interchange (24 cents) for debit card transactions. Government agencies and industry typically wait several years for an important regulation to sort itself out in the marketplace. But, there’s nothing typical about the Durbin Amendment and one really needs a scorecard to understand who’s on first and what’s on second.

This week, retailers and merchants argued in DC federal court that the Federal Reserve Board’s final rule implementing the Durbin Amendment completely missed Congressional intent. The Durbin Amendment instructed the FRB to set debit interchange rates at par with the cost of clearing an electronic check and that it be “reasonable and proportional” to cost of processing the transaction. The FRB initially proposed to the set the rate at seven cents. But, after a public comment period, the Board settled on 21 cents with an ad valorem and fraud adjustment (effectively 24 cents). Thus, the merchants and retailers want the Board to start anew. In the past, courts have been reluctant to take this type of action under the Administrative Procedures Act. It is difficult to predict when the court will issue a ruling. And, expect the losing party to appeal.

Meantime, in New York, retailers and merchants are throwing cold water on a $7.5 billion proposed settlement with Visa and MasterCard on credit card interchange. The proposed settlement was agreed to in July and must be blessed by a judge before taking effect. Even Senator Durbin took the Senate Floor to suggest the proposed settlement was a grand give-away to the Visa, MasterCard and the banks. The proposed settlement would allow merchants to “surcharge” customers using credit cards as well as temporarily reducing interchange rates. Durbin, the American Bankers Association and the Retail Industry Leaders Association all traded letters to excoriate one another. It’s getting both nasty and personal.

Back in Washington, retailers are boasting in the press that Congress is ready to take on credit card interchange reform. The financial services community isn’t so sure given the bruising battle over the original Durbin Amendment in 2010 and the effort to repeal it in 2011 (unsuccessful obviously). Will Congress ever touch credit card interchange? Check back with me after the November elections.

As long as Dick Durbin remains a US Senator and as long as debit and credit card interchange rates remain above zero, the financial services industry needs to be vigilant on Capitol Hill and the media about the value of  electronic funds transfer (safe, secure and fast). And, EFT networks require investments to maintain and grow. 

Examining Social Security's Electronic Payment Program

The Subcommittee on Social Security of the House Ways and Means Committee scheduled a hearing on Wednesday, Sept. 12 to take a look at the impact on Social Security payees of direct deposit of benefits. Among the topics on the table were exemptions from the mandatory electronic payment requirement and the fraud experience following the electronic payment mandate. The scheduled witness list was short and included Margot Saunders of the National Consumer Law Center and representatives of the Social Security Administration.

Before we look into the issues before the Subcommittee, a little history is in order. In 1996 Congress passed the Debt Collection Improvement Act. The DCIA required all federal payments, including Social Security benefits, to be made through electronic funds transfer (EFT) beginning in January 1999.  The law gave broad authority to the Treasury Dept. to grant so-called hardship waivers that would allow Social Security payees to continue receiving checks rather than electronic payments. That ultimately proved the law’s undoing.

To implement the law, Treasury  launched a program dubbed “EFT99.” The goal of the program was to meet the mandate of the DCIA to convert Social Security and other benefit programs to electronic payment by 1999. To do this Treasury contracted with a number of financial institutions to issue EFT99 debit cards that Social Security payees without a deposit account could obtain at a participating financial institution in order to access their benefits.

But perhaps EFT99 was a little too far in front of the electronic payment tsunami we’ve seen over the last decade. In 1999, shortly before the deadline for converting to electronic payments, Congress bowed to pressure on the mandatory nature of the program. As a result Treasury then instituted a program of self-certifying exemptions from the electronic payment requirement.  In effect, the “mandatory” program became an opt-in, rather than an opt-out, program. Banks that had expressed an interest in participating in EFT99 folded their cards and left the table. The opt-in program left them no way to evaluate the risk or the rewards of participating in the government’s program.  Social Security beneficiaries who wanted to participate had limited access to banks that would issue the EFT99 cards. The program foundered, despite Treasury’s game attempts to save it through advertising and outreach to payees.

In 2001 the Government Accountability Office flatly observed that no amount of effort could make the program effective. Treasury pulled the plug.

I bring up EFT99 as a cautionary tale of what happens when legislators or regulators bend to the will of parochial interests at the expense of the public at large. In 2005 Treasury attempted a reset of electronic payment of social security with the launch of the “Direct Express” campaign targeted once again at Social Security payees to emphasize the benefits of electronic payment.  In 2008 Treasury launched the Direct Express® Debit MasterCard. Following the successful example of state electronic benefits transfer projects, Treasury contracted with one bank to handle the program. However, issuers of private label prepaid cards can participate in the program, as long as those card programs meet Treasury’s standards.

Direct Express is a reloadable, debit card that allows payees to receive their Social Security allotments on an electronic card, even if they don’t have a bank account.  Payees can use the card wherever its brand is accepted. They can also get cash at ATMs or by requesting cash back when they make a purchase with the card. 

After 16 years of trying, the Direct Express card program has allowed the federal government to finally reduce the government’s cost of check processing, estimated to be $125 million, according to Saunders’ written testimony. But success always has its skeptics.  Critics have blasted the program for its hard-nose approach to minimizing the remaining number of check payments, for allowing debit card providers other than the contracted bank into the program, and for allegations of fraud and theft of payees’ identities.

In her prepared testimony Saunders generally praised the Go Direct program for its “laudable goal of saving money, saving trees and improving the security of the delivery of federal benefits.” However, she testified that the program needs “an articulated waiver procedure” for those payees for whom electronic payment won’t work. This could be because of a disability or geography. In fact, previous posts to this column have explained the hardships that the Department of Health and Human Services’ new restrictions on TANF EBT transactions might cause in some geographic areas.

When Treasury’s final regulations become effective next year only payees 92 years old and older and those who live in areas where electronic payment infrastructure is not convenient will be allowed to continue receiving paper checks. I don’t have any problem with those parameters. Frankly, I think there are a lot of people who are 70 years short of their ninety-second birthday who should probably think twice about having a debit card. But Saunders raises another interesting issue: the cumbersome, bureaucratic procedures for requesting a waiver.

Her testimony outlined the waiver process: Call and have a chat with a customer service rep. Then articulate exactly why you need a waiver. Then, once in hand, fill out the form. Take the completed form and find a notary to stamp it. Then mail it off to the Social Security Administration. Then wait. 

It’s not beyond possibility that a ninety-something year-old payee might get a waiver out of this world before she gets a waiver out of the Direct Express program.

There is a line between an efficient program and a bureaucratic one. And that line isn’t real fine. In fact, it’s pretty easy to see. I could never support any changes to the Direct Express program that results in another EFT99 opt-in fiasco. But Direct Express is hardly the camel’s nose under the tent flap. And it is nothing like EFT99. It is a well-conceived, well executed card program. Having a reasonable, well-articulated exception policy and an efficient adjudication process for waiver requests seems reasonable, provided it does not impact the objectives or ROI of the program.  

If the waiver process somehow starts reminding observers of EFT99, Treasury can always tighten ratchet down on requirements. It is Social Security and the churn in the program is not unsubstantial.

That’s my take. What’s yours?

The Boys are Back in Town

After a five week recess, two party conventions and a nasty Gulf hurricane, Congress is back in session on September 10. How long will they stick around? What can they do before taking off to campaign back home? [Quick fact: The boys may be back in town, but women currently constitute 17% of the 112^th Congress. Apologies to Thin Lizzy.]

At most, Congress will be in session three weeks with a scheduled adjournment date of October 5. The only “must do” agenda item is to pass a measure to fund the government when the new fiscal year begins October 1. At this writing, no individual appropriations bills have been sent to the President’s desk for signature into law. No one is even sure if a lame duck Congress can agree on 2013 spending levels. The budget can could be kicked into early 2013 and a new Congress. It’s happened before in recent years. The only positive news here is that the House and Senate agreed to the temporary funding measure back in July.

When we last saw the Senate in session, no agreement could be reached to move forward on comprehensive cyber-security legislation. News reports popped up periodically in August that some Senators believed a deal could be reached in September. Count me in the doubtful column. We do know, however, the Obama Administration is actively considering either a revised Homeland Security Presidential Directive 7 or an entirely new executive order on cyber-security. PaymenTrends will keep close tabs on all things cyber. We should also bear in mind that Congress may be in and out of session with a blink of an eye, but federal agencies such as the Consumer Financial Protection Bureau remain open for business. CFPB is currently digesting public comments on overdraft protection and prepaid cards (just to name two).

I do want to give a “shout out” to one piece of legislation that has passed the House of Representatives 371-0 and that has more than 60 Senate cosponsors. This legislation (H.R. 4367/S. 3204) would eliminate the requirement that an ATM need a physical placard fee notice to accompany the on-screen fee notice to a consumer. This is one issue where Republicans and Democrats have united behind common-sense legislation to eliminate a burdensome and unnecessary regulation. The Senate needs to act on S. 3204 before leaving for home in October.

EFTA’s Legislative & Regulatory Council will be tackling all these issues (CFPB, ATM signage, overdraft protection, cyber-security) this September 27 in Washington DC. Speakers include Stuart Pratt, President & CEO of the Consumer Data Industry Association, Nicole Muryn, director of regulatory and legislative affairs for BITS and Catherine Galicia, counsel to Chairman Tim Johnson of the Senate Banking Committee.

Federal Reserve Final Rule on Durbin Amendment (Reg II) Fraud-Adjustment

Last week, the Federal Reserve Board (Board) published the final rule on fraud-prevention cost adjustments allowed under Regulation II (the Durbin Amendment). As you may recall, the Board’s Durbin Amendment final rule issued last July allowed for a provisional, one cent fraud-prevention adjustment in addition to the 21 cent and ad valorem rates. The Board asked for additional information and comments on fraud-prevention standards in the marketplace and suggested it may increase the adjustment depending on the data received.

The Board’s final rule that takes effect October 1, did not change the one cent fraud-prevention adjustment standard. The final rule requires an issuer to develop policies and procedures reasonably designed to detect fraud in order to receive the fraud-prevention adjustment. Required elements of these policies and procedures should include:

• Identify and prevent fraudulent electronic debit transactions

• Monitor the incidence of, reimbursements received for, and losses incurred from fraudulent electronic debit transactions

• Respond appropriately to suspicious electronic debit transactions so as to limit the fraud losses that may occur and prevent the occurrence of future fraudulent electronic debit transactions

• Secure debit card and cardholder data

Issuers must inform its payment card networks annually of its fraud-prevention compliance program in order to receive the one cent adjustment under Reg II.

I will provide additional thoughts on the Board’s final rule during the next Legislative & Regulatory call on Wednesday, August 8 at 2 p.m. EDT.

GAO Weighs in on Congressional Effort to Block Use of Welfare in "Sin" Locations

As followers of PaymentTrends and its sister blog, The Wall, on the website of the eGovernment Payments Council know, EFTA and eGPC have been very active in working with states, transaction processors, the Department of Health and Human Services and the Government Accountability Office on the issue of restricting access and use of TANF, commonly called welfare, payments at businesses inconsistent with the mission of the TANF program.

In its Middle Class Tax Relief and Jobs Creation Act earlier this year, Congress restricted the use of TANF payments, prohibiting their access or use in liquor stores, casinos or adult-entertainment establishments. The GAO launched a study back in December 2011 of the issue. Recently the Office released the results of its study. You can find those results and corresponding analysis over on our sister blog, The Wall, part of the eGPC's website www.electronicbenefitstransfer.org.