[Federal Register Volume 64, Number 5 (Friday, January 8, 1999)]
[Proposed Rules]
[Pages 1149-1152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-354]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Chapter II
RIN 1505-AA74
Possible Regulation Regarding Access to Accounts at Financial
Institutions Through Payment Service Providers
AGENCY: Fiscal Service, Treasury.
ACTION: Advance Notice of Proposed Rulemaking (ANPRM).
-----------------------------------------------------------------------
SUMMARY: The Debt Collection Improvement Act of 1996 (the ``Act'')
requires that, subject to waiver, all federal payments (other than tax
payments) made after January 1, 1999 shall be made by electronic funds
transfer (``EFT''). It also mandates that the Secretary of the Treasury
(``Treasury'') ensure that individuals required by the Act to receive
their payments electronically have an account at a financial
institution, with access to such an account at a reasonable cost and
with the same consumer protections with respect to the account as other
account holders at the same institution. Treasury has issued a rule
implementing the Act. Treasury is also designing an electronic transfer
account (``ETA SM'') for which any individual who receives a
federal benefit, wage, salary, or retirement payment shall be eligible,
and that may be offered by any federally-insured financial institution
that enters into an ETA SM Financial Agency Agreement with
Treasury; Treasury has asked for public comment on the proposed ETA
SM.
Separately, certain financial institutions have entered into
arrangements with nondepository payment service providers, such as
check cashers, currency dealers and exchangers, and money transmitters,
whereby recipients of electronic federal payments deposited into a non-
ETA SM account at the financial institution may gain access
to these payments through payment service providers. These service
providers are not themselves eligible to maintain deposit accounts or
to receive electronic deposits directly from the government. Treasury
is seeking comment on whether it should propose regulations regarding
these arrangements, and if so, what the content of such regulations
should be.
DATES: Written comments are encouraged and must be received on or
before April 8, 1999.
ADDRESSES: Comments should be mailed to the Office of the Fiscal
Assistant Secretary, U.S. Department of the Treasury, Room 2112, 1500
Pennsylvania Avenue, N.W., Washington, D.C. 20220. Comments received on
this ANPRM will be available for public inspection and copying at the
Department of the Treasury Library, Room 5030, 1500 Pennsylvania
Avenue, N.W., Washington, D.C. 20220. To make an appointment to inspect
comments, please call (202) 622-0990.
FOR FURTHER INFORMATION CONTACT: Roger Bezdek, Senior Advisor for
Fiscal Management, Office of the Fiscal Assistant Secretary, at (202)
622-1807; or Gary Sutton, Senior Counsel, Office of the General
Counsel, at (202) 622-0480.
SUPPLEMENTARY INFORMATION:
I. Background
Section 31001(x) of the Act requires that all federal payments
1 made after January 1, 1999 be made by EFT, unless Treasury
grants a waiver. The Act further mandates that Treasury ensure that all
individuals required by the Act to receive their payments
electronically have an account at a financial institution, with access
to such an account at a reasonable cost and with the same consumer
protections with respect to the account as other account holders at the
same institution. Treasury's final rule implementing this mandate, 31
CFR Part 208 (``Part 208''), provides that any individual who receives
a federal benefit, wage, salary, or retirement payment shall be
eligible to open an ETA SM, and that the ETA SM
may be offered by any federally-insured financial institution that
enters into an ETA SM Financial Agency Agreement with
Treasury.2
---------------------------------------------------------------------------
\1\ The Act defines ``federal payments'' to include federal
wage, salary, retirement, and benefit payments and vendor and
expense reimbursement payments. Payments under the Internal Revenue
Code of 1986 are excluded. 31 U.S.C. Sec. 3332(j)(3) (Supp. 1998)
\2\ 63 FR 51490 (Sept. 25, 1998). Part 208 generally defines
``financial institution'' as any ``insured bank,'' ``mutual savings
bank,'' ``savings bank,'' or ``savings association,'' as each term
is defined in section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813), any ``insured credit union'' as defined in section 101
of the Federal Credit Union Act (12 U.S.C. 1752), or any agency or
branch of a foreign bank as defined in section 1(b) of the
International Banking Act, as amended (12 U.S.C. 3101). 31 CFR
Sec. 208.2(k).
---------------------------------------------------------------------------
At this time, more than two-thirds of federal payment recipients
receive their payments electronically, primarily by Direct
Deposit.3 However, there are millions of recipients of
federal payments that do not have an account at a financial institution
and are therefore not positioned to receive their payments by Direct
Deposit. Treasury is designing the ETA SM primarily to
afford these recipients a safe, reliable, and economical means of
accessing their federal electronic payments in compliance with the
requirements of the Act. Treasury recently published a notice and
request for comment regarding the proposed ETA SM (``ETA
SM Notice'').4 As is more fully described in the
ETA SM Notice, the proposed ETA SM will:
---------------------------------------------------------------------------
\3\ Direct Deposit is the EFT payment mechanism by which federal
payments are sent through the Automated Clearing House (ACH) system
to an account at a financial institution established by the
recipient. 31 CFR Part 210.
\4\ 63 FR 64820 (Nov. 23, 1998).
---------------------------------------------------------------------------
Be an individually owned account at a federally-insured
financial institution,
Be available to any individual who receives a federal
benefit, wage, salary, or retirement Payment, regardless of whether the
individual already has an account at a financial institution,
Accept only federal electronic payments,
[[Page 1150]]
Permit a minimum of four withdrawals per month, included
in the monthly fee, at the financial institution's offices and/or
proprietary automated teller machines (``ATMs''), at the financial
institution's option,
Be subject to a maximum fee of $3.00 per month, and
Provide the same consumer protections that are available
to other account holders at the financial institution.
Financial institutions will be prohibited by Treasury's Financial
Agency Agreement from entering into arrangements with nondepository
payment service providers to provide access to ETAs SM. The
ETA SM Notice also requests comment on three other features
that are not currently part of the proposed ETA SM, to
determine whether any or all should be added to the ETA SM
at the option of the financial institution and at additional cost, if
any, to the account holder: payment of interest on balances, allowing
deposits of other electronic funds, and allowing ACH debit capability.
II. Payment Service Providers
The vast majority of financial institutions already offer Direct
Deposit directly to federal payment recipients. Moreover, it is
anticipated that many financial institutions will offer ETAs
SM to recipients. In addition, however, in anticipation of
the Act's EFT requirement, a number of financial institutions are
offering or planning to offer Direct Deposit services that involve
prearranged linkages with nondepository providers of financial services
such as check cashers, currency dealers and exchangers, and money
transmitters (``payment service providers'').5 Payment
service providers comprise a number of diverse businesses that vary
greatly in size; they include large, publicly held companies that are
in the business of providing money transfers, money orders, and related
payment services on a nationwide basis, as well as small businesses
that operate from a single location. Many of these businesses offer
check cashing in conjunction with other financial products, such as
``payday loans.'' 6 Moreover, many such businesses may offer
other nonfinancial products and services to the same customers (e.g.,
as a convenience or grocery store or liquor store). However, a common
element that these payment service providers share is that they are not
subject to comprehensive federal regulation,7 and are
generally subject only to limited regulation, if any, at the state
level.
---------------------------------------------------------------------------
\5\ Subject to limited exceptions, Part 208 requires that
electronic Federal payments must be deposited into a financial
institution account ``in the name of the recipient.'' The exceptions
to this requirement are limited to payments to an ``authorized
payment agent,'' which includes a representative payee or fiduciary
under the regulations of the agency making the payment, or to an
investment account established through a broker-dealer or investment
company registered with the Securities and Exchange Commission. 31
CFR Sec. 208.6. These types of entities are therefore not considered
``payment service providers'' in the context of this ANPRM.
\6\ See ``The Growth of Legal Loan Sharking: A Report on the
Payday Loan Industry,'' Consumer Federation of America, November
1998.
\7\ Although not directly relevant to this ANPRM, Treasury's
Financial Crimes Enforcement Network (FinCEN), in connection with
its anti-money laundering program, has proposed regulations under
the Bank Secrecy Act (``BSA'') requiring that ``money services
businesses,'' a category that includes, among others, check cashers,
currency dealers and exchangers, and money transmitters, register
with FinCEN (as mandated by the BSA), and that certain of these
businesses file reports of suspicious activities. 62 FR 27890, 27900
(May 21, 1997).
---------------------------------------------------------------------------
These arrangements between financial institutions and payment
service providers typically involve the establishment of an account in
the name of the recipient at a financial institution into which the
recipient's payment is deposited, followed by the transfer of the
payment to a commingled account in the name of the payment service
provider, and in which the recipient's interest may not be fully
covered, if at all, by federal deposit insurance. The recipient then
accesses the payment at an outlet of the payment service provider,
where the recipient is given either cash or a check. Typically the
recipient is charged an enrollment fee and a monthly fee for the
service, and, if applicable, a check cashing fee. Although these
arrangements vary considerably with respect to access to payments, fees
charged, applicability of federal deposit insurance, and disclosures,
customers of these services usually must access their payments through
the payment service provider rather than directly through the
depository institution that receives the Direct Deposit, must withdraw
the entire amount of the federal payment rather than a portion thereof,
and often must pay significant fees.
The following are descriptions of some arrangements between payment
service providers and financial institutions, either in existence or
under development, of which Treasury is aware:
In one arrangement, the federal payments of recipients who
enroll in the program are initially deposited into a federally insured
account of the recipient at the participating financial institution.
These payments are immediately transferred to a trust account at the
financial institution that contains the federal payments of all
recipients who enrolled at a particular check casher. A recipient's
only means of accessing his funds is by obtaining a check at the check
casher where the recipient enrolled, in the full amount of the federal
payment. The recipient may then cash the check at the check casher or
elsewhere. An enrollee may obtain a monthly statement at the check
casher or by mail, at his option. The cost for the program is $1.60 per
federal payment, plus a check cashing fee.
A second arrangement establishes a federally insured
account at a financial institution affiliated with the service provider
for each recipient enrolled in the program. After the financial
institution receives a federal payment and credits it to the
recipient's account, the amount is immediately transferred to a pooled
account at an unaffiliated financial institution in the name of the
payment service provider, in which each recipient's interest is not
federally insured. Recipients in the program may withdraw the amount of
the federal payment (in full or in part) and check the available
balance at any office of the payment service provider, as well as at
any ATM included in a participating network. The charges for the
program include a $4.00 enrollment fee, a $5.50 monthly maintenance
fee, and a $1.00 fee for each withdrawal or balance inquiry.
In a program being developed, a recipient could enroll at
any check casher that is a member of a national trade association. The
participating financial institution would establish a federally insured
account subject to Regulation E 8 to receive each enrollee's
federal EFT payment. The recipient could withdraw the amount of the
federal payment (in full or in part) from his account at any
participating check casher through a point-of-sale device, or at any
ATM of the financial institution or of any participating network, but
not at the financial institution's offices. The fees for the program
would be determined by each check casher.
---------------------------------------------------------------------------
\8\ 12 CFR Part 205.
---------------------------------------------------------------------------
A number of concerns have been articulated regarding financial
institutions entering into these kinds of arrangements with payment
service providers, with respect to delivery of federal payments. The
concerns include that these arrangements could result in recipients
being charged excessive fees for accessing their electronic federal
payments; that by participating in such arrangements, the recipients
may lose the benefit of certain consumer
[[Page 1151]]
protections, such as federal deposit insurance, that they would
otherwise have as an account holder at the financial institution; and
that recipients may not be adequately informed of the fees they may
incur or the protections they may forego by entering into these
arrangements. Some have pointed out that many payment service providers
offer other products, such as short term, high rate advances known as
``payday loans,'' to their customers, that may subject them to
substantial payments, fees, or other risks. Some have argued that, if
the amount of the federal payment is immediately transferred out of the
recipient's financial institution account into a payment service
provider account, and the recipient cannot withdraw less than the
entire amount of the federal payment from the account or maintain the
account separately from the relationship with the service provider,
then the recipient in fact may not have an ``account'' at a financial
institution in any meaningful sense. Others have argued that, if the
recipient cannot access his federal payment directly at the financial
institution but may do so only at an outlet of the payment service
provider, the recipient may not have ``access'' to an account at a
financial institution. In addition, the arrangements in which the
payment service provider prints its own check for the recipient are
contrary to the goal of replacing paper checks with electronic
payments. However, others have noted that payment service provider
arrangements provide access to funds for recipients residing in areas
underserved by banks and other financial institutions, including low
and moderate income and rural areas.
As Treasury announced in the ETASM Notice,9 a
financial institution that offers the ETASM may not enter
into arrangements whereby a recipient of an electronic federal payment
may access an ETASM through a payment service provider. In
addition, Treasury has urged the federal bank regulatory agencies to
take steps to ensure that the institutions they regulate take
responsibility for full and fair disclosure of all fees charged by the
parties involved in arrangements whereby recipients access federal EFT
payments deposited in non-ETASM accounts through payment
service providers, as well as the legal relationships involved and the
applicability of federal deposit insurance. Moreover, Treasury
continues to explore ways to facilitate access to federal EFT payments
in areas underserved by financial institutions; these include working
with other public entities to expand ATM access in these areas.
---------------------------------------------------------------------------
\9\ 63 FR 64820, 64823 (Nov. 23, 1998).
---------------------------------------------------------------------------
However, some commenters have urged Treasury to go further, and
also to regulate arrangements between financial institutions and
payment service providers whereby a recipient of an electronic federal
payment accesses a non-ETASM account at such a financial
institution through a payment service provider, such as those described
above. Treasury did not regulate these arrangements when it adopted
Part 208, but noted in its adopting release that it would monitor their
development.10
---------------------------------------------------------------------------
\10\ 63 FR 51490, 51498 (Sept. 25, 1998).
---------------------------------------------------------------------------
In light of the concerns regarding these arrangements described
above, Treasury is considering whether rulemaking is necessary or
appropriate with respect to such arrangements, and if so, what the
content of such regulations should be. In considering these questions,
Treasury is endeavoring to ensure that federal payment recipients have
access to their funds at a reasonable cost and with the same consumer
protections as other account holders at the same financial institution,
to increase use of EFT for federal payments in order to reduce cost to
the federal government, and to increase participation by federal
payment recipients in the country's financial system.
III. Issues for Comment
Treasury is seeking comment on the following questions:
Should Treasury regulate or prohibit arrangements between
financial institutions and payment service providers in which
electronic federal payments are deposited into a recipient's non-
ETASM account at a financial institution but made available
to the recipient through a payment service provider?
Do such arrangements deny the recipient either: (a) an
account at a financial institution, (b) access to such account, (c)
access at a reasonable cost, or (d) the same consumer protections with
respect to the account as other account holders at the same
institution?
Should all payment service providers be subject to
regulation, or only a particular subset, and if only a subset, what is
the basis for such distinction?
Commenters are asked to cite specific evidence supporting their
position, e.g., data showing that the fees charged recipients by
payment service provider arrangements (either generally or with
reference to specific types of payment service providers or specific
recipients) are or are not reasonable; that specific consumer
protections, such as federal deposit insurance or Regulation E
coverage, are given or denied to such persons; or the extent to which
the recipient may or may not have either an account at a financial
institution, or access to such account, under such arrangements.
Treasury is also seeking comment with regard to the nature of any
regulation that may be appropriate for payment service provider
arrangements. As noted above, a range of suggestions have been made as
options for Treasury to consider; these generally fall into two broad
categories. Under one category, Treasury would generally prohibit
arrangements between financial institutions and payment service
providers whereby electronic federal payments received at such
institution are accessed by the recipient through a payment service
provider. For example, some have urged that Treasury could require all
financial institutions that receive federal Direct Deposit payments for
account holders to become Treasury Financial Agents and prohibit these
kinds of arrangements with payment service providers in their Financial
Agency Agreements. Alternatively, it has been suggested that, under
certain circumstances, Treasury could adopt regulations that would
prohibit financial institutions that receive Direct Deposit from
entering into these kinds of arrangements with payment service
providers.
Under the second broad category noted above, Treasury could
promulgate rules to delineate further the requirements relating to
financial institution accounts required by the Act for receipt of
federal electronic payments. Treasury might approach this by
establishing minimum requirements for the receipt of electronic federal
payments by defining in a regulation terms such as ``account,''
``access,'' ``reasonable cost,'' and ``consumer protection,'' in the
context of the Act. For example, Treasury might determine that, for
purposes of the Act, an ``account'' must have certain core attributes,
which could include the ability of the account holder, at the account
holder's option, to maintain the account and to retain a federal
payment in the account, notwithstanding any arrangement with any third
party, and to withdraw less than the entire amount of a federal payment
made to the account. Similarly, Treasury might determine that, in order
to have ``access'' to an account, for purposes of the Act, a recipient
must be able to access the account at an office or ATM of the financial
institution, notwithstanding any access that may
[[Page 1152]]
exist through a payment service provider. In addition, it is suggested
that Treasury could use its rulemaking authority to determine a
``reasonable cost'' for a financial institution account, considering a
variety of factors and circumstances. Finally, Treasury could determine
that, to satisfy the ``consumer protection'' requirement of the Act, a
financial institution must at least provide its recipients with federal
deposit insurance (in the cases where the institution is federally
insured) and the benefits of Regulation E.
Other options have also been suggested; these include the
imposition by Treasury of enhanced disclosure obligations by financial
institutions regarding the products being offered,11 and the
enactment of additional state or federal legislation regulating some or
all payment service providers. Alternatively, some have suggested that,
rather than focusing on the attributes of the financial institution
account, regulations should be directed at ensuring that the aggregate
fees that may be charged recipients of federal EFT payments are
``reasonable.''
---------------------------------------------------------------------------
\11\ As noted above, Treasury has already urged the federal bank
regulators to endeavor to ensure that the banks they regulate take
responsibility for full and fair disclosure of all fees charged by
all the parties involved in these kinds of arrangements, the legal
relationships involved, and the applicability of federal deposit
insurance. Some have suggested that Treasury could amplify this
request by adopting a regulation requiring such disclosure.
---------------------------------------------------------------------------
Treasury invites comments on all the above options and suggestions
as to how Treasury might implement them, as well as suggestions as to
any other type of measure that the commenters believe would be
appropriate for these arrangements, including any factual and legal
bases therefor. Treasury also requests that any comments address the
following issues: Should a suggested regulation be directed at all
payment service providers, or limited to a particular subset, and if
limited, what is the basis for making such a distinction? What effect
would any such regulation have on the Direct Deposit program generally?
How could such regulation be limited so as not to disrupt the many
types of standard account arrangements, such as preauthorized debits,
that are in wide use and do not give rise to the possible abuses that
are the focus of this ANPRM? Would the prohibition or regulation of
payment service provider arrangements limit or expand the ability of
federal payment recipients to access their funds, if such measure would
significantly impede or preclude the functioning of such arrangement?
How would such regulation further Treasury's objectives, including
helping federal payment recipients access federally insured depository
institutions, reducing government costs, and improving the payment
system?
It has been determined that this ANPRM does not constitute a
``significant regulatory action'' for purposes of E.O. 12866. Treasury
specifically requests comments on the costs and benefits of the
regulatory approaches discussed in this document, and the economic
impact such approaches may have on small businesses.
Comments received in response to this ANPRM will be reviewed and
considered by Treasury in preparation for possible further action in
connection with the issues discussed herein.
This ANPRM is issued under the authority of 31 U.S.C. 321 and 3332.
Dated: January 4, 1999.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 99-354 Filed 1-7-99; 8:45 am]
BILLING CODE 4810-25-P
