Last month, I wrote about a big move by the Treasury Department to make all payments from the U.S. government electronically. In the announcement, Office of Management and Budget Director Peter Orszag called the change a "win-win for the American public." Now, we're hearing from others with a different opinion.
Consumer rights groups, including the Consumer Federation of America and Consumers Union, have stepped forward to say that the real winner here could be banks and payday lenders.
The issue at stake is that, while the Social Security Administration says that 83% of all Social Security and SSI beneficiaries receive their benefits by direct deposit, the elimination of paper checks may be forcing the rest into a situation that could put them at risk for expensive payday loans and high fees.
If you don't have a bank account -- and about four million Social Security recipients fall into this category -- your options are limited under the new paperless plan.
Many people have their checks deposited into a master account that's controlled by a storefront -- you have to go there to get your money across the counter, says Jean Ann Fox, Director of Financial Services for the Consumer Federation of America. "It goes into a pooled account, that you can only access by going to a check casher who sold you the direct deposit service. They print out a paper check, give that to you, and then charge you a fee for producing the check and a fee for cashing it. You're essentially getting direct deposit, but you don't have control of the account -- it isn't owned by you."
Others, Fox says, have their benefits deposited on a pre-paid card issued by a bank or other financial institution. "Those come with steep fees, some have overdraft provisions, some have high cost loan products, and the cost of those things is deducted before you get access to that money."
On June 17, the Treasury published a notice in the Federal Register seeking comment on the proposed rules, and the comment period is currently still open. The Department is seeking input from consumer groups and others. Fox says CFA submitted comments last week, suggesting that instead of allowing a third party to skim off payments and fees, exempt money should go into an account that is owned and controlled by the recipient. If the Treasury is going to authorize direct deposit to pre-paid cards, CFA wants a stronger set of protections to apply.
In a statement, Treasury Fiscal Assistant Secretary Dick Gregg says that the Treasury is "working to implement strong consumer protections against abusive or deceptive practices, including, for the first time, providing seniors, veterans, federal retirees and others with protection from creditors and debt collectors seeking to garnish their benefits. For benefit recipients without bank accounts, Treasury has made available the Direct Express debit card which provides a low-cost, consumer-friendly alternative to payday lenders or other institutions that charge extremely high fees and interest rates."
The Direct Express card does seem to be the solution, at least for the time being. The card can be used to make purchases at any location that accepts MasterCard, and to get cash at an ATM. There aren't any sign up or monthly fees, but after one ATM withdrawal per deposit, users are charged $0.90 for each additional. There are a few other fees as well -- $0.75 a month if you want a paper statement, $0.50 for bill pay, $1.50 for a funds transfer -- but by and large, many people can use the card free of charge. You also can't overdraw the account, so you can't be charged an overdraft fee, and there are no loan products attached to the card, says Fox.
A spokesperson from the Treasury says that the Direct Express card has had over one million voluntary enrollments since June 2008.
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