BILL ANALYSIS Ó SENATE HUMAN SERVICES COMMITTEE Senator Leland Y. Yee, Chair BILL NO: AB 1280 A AUTHOR: John A. Pérez B VERSION: February 22, 2013 HEARING DATE: June 11, 2013 1 FISCAL: Yes 2 8 CONSULTANT: Mareva Brown 0 SUBJECT Public assistance payments and unemployment compensation benefits: electronic fund transfer: qualifying accounts SUMMARY This bill would authorize a recipient of public assistance payments to authorize payment to be directly deposited by electronic fund transfer to a qualifying account, as defined, at a financial institution of his or her choice. The bill would require qualifying accounts to meet specified requirements, and would require that if a recipient of unemployment benefits elects to receive payments by direct deposit, the payments only be deposited to a qualifying account, as defined. ABSTRACT Existing law: 1) Establishes legislative intent that it is considered to the public good and the general welfare of the citizens of California to set aside funds to be Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageB used for a system of unemployment insurance to provide benefits for persons who are unemployed through no fault of their own, as specified. (UIC 100 et seq.) 2) Defines the circumstances under which a California resident may be eligible for unemployment insurance benefits. (UIC 1253 et seq.) 3) Requires the Employment Development Department (EDD) to pay unemployment compensation benefits through public employment offices or such other agency as may be prescribed by authorized regulations of the director. (UIC 1339 (a)) 4) Establishes in federal statute the Electronic Fund Transfer Act, which declares that the use of electronic systems to transfer funds provide the potential for substantial benefits to consumers and provides a basic framework establishing the rights, liabilities and responsibilities of participants in an EFT transfer. (15 USC § 1693 et seq). 5) Establishes in California statute the Electronic Benefits Transfer Act to disburse public assistance benefits through electronically issued means, such as automated teller machines, point-of-sale devices or other devices that accept electronic benefits transfer transactions. (WIC 10072 et seq.) 6) States legislative intent that the goals of electronic benefits transfer are to reduce the cost of delivering benefits to recipients, to ensure that all systems within California are compatible, and to afford public social services recipients the opportunity to better and more securely manage their financial affairs. (WIC 10065 (b)) 7) Defines "benefits" to mean financial and food assistance provided to, or on behalf of, those Californians who, because of their economic circumstances or social condition, are in need, as specified. (WIC 10066 (b)) 8) Establishes the responsibility of the state Department of Social Services (DSS) to maintain STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageC uniform public social service programs, administered by the counties, and to administer the payment of grants for all aid programs. (WIC 11050) 9) Requires DSS to cooperate with county treasurers and private financial service providers, including depository institutions, licensed check sellers, data processing service vendors and retail merchants in developing and implementing an electronically based system for delivering public assistance payments to those recipients who do not have individual deposit accounts with financial institutions. (WIC 11006.2 (b)) 10) Permits a recipient of public assistance payments to authorize direct deposit by electronic fund transfer into the recipient's account at the financial institution of his or her choice under a program for direct deposit by electronic transfer established by the county treasurer. The direct deposit shall satisfy DSS's obligation for the payment. (WIC 11006.2 (c)(1)) 11) Requires each county treasurer to make an agreement by December 1, 2001, with one or more financial institutions, as specified, and to establish a program for the direct deposit by electronic fund transfer to any person entitled to the receipt of public assistance benefits who authorizes direct deposit. (WIC11006.2 (c)(2)) This bill: 1) Requires that if a recipient of unemployment compensation benefit payments elects to receive the payments by direct deposit to an account of the recipient's choice, that the payments may only be deposited into an account that meets the requirements of a qualifying account for deposit of public assistance payments, as specified in WIC 11006.2. 2) Requires that a person or entity that issues a prepaid card or maintains or manages a prepaid card account shall not accept or facilitate direct deposit of unemployment compensation benefits to a prepaid card that is ineligible under this section. STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageD 3) Deletes the requirement that DSS cooperate with county treasurers and private financial service providers, including depository institutions, licensed check sellers, data processing service vendors and retail merchants, in order to develop and implement an electronically based system for delivering public assistance payments to recipients who do not have individual deposit accounts with financial institutions. 4) Adds the requirement to existing statute that a direct EFT deposit into an account be made only into a qualifying account. 5) Defines qualifying account as one of the following: a. A demand deposit or savings account at an insured financial institution in the name of the person entitled to receipt of public assistance payments. b. A prepaid card account that meets all of the following: (i) The account is held at an insured financial institution. (ii) The account is set up to meet the requirements for pass through deposit or share insurance so that the funds accessible through the account are insured for the benefit of the person entitled to the receipt of public assistance payments by the Federal Deposit Insurance Corporation in accordance with Part 330 of Title 12 of the Code of Federal Regulations, or the National Credit Union Share Insurance Fund in accordance with Part 745 of Title 12 of the Code of Federal Regulations. (iii) The account is not attached to any credit or overdraft feature that is automatically repaid from the account after delivery of the payment. (iv) The issuer of the card complies with all of STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageE the requirements, and provides the holder of the card with all of the consumer protections, that apply to a payroll card account under the rules implementing the federal Electronic Fund Transfer Act (EFTA) or other rules subsequently adopted under the EFTA that apply to prepaid card accounts. 6) Requires that a person or entity that issues a prepaid card or maintains or manages a prepaid card account that does not comply with the definition of a qualifying account shall not accept or facilitate the direct deposit of public assistance payments to the prepaid card account. 7) Establishes the following definitions in statute: a. "Financial institution" means a state or national bank, a state or federal savings and loan association, a mutual savings bank, or a state or federal credit union. b. "Issuer" means a person or entity that issues a prepaid card. c. "Payroll card account" shall have the same meaning as that term is defined in the regulations implementing the federal Electronic Fund Transfer Act. d. "Prepaid card" or "prepaid card account" means either of the following: i. A card, code, or other means of access to funds of a recipient that is usable at multiple, unaffiliated merchants for goods or services, or usable at automated teller machines. ii. The same as those terms or related terms are defined in the regulations adopted under the federal Electronic Fund Transfer Act regarding general use reloadable cards. STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageF FISCAL IMPACT An Assembly Appropriations Committee analysis noted that costs associated with this legislation should be minor and absorbable within existing resources. BACKGROUND AND DISCUSSION Purpose of the bill The author states that AB 1280 would require the consumer protection standards used by the federal government for their public benefit programs to be applied to the state's cash assistance benefits that are delivered on electronic payment prepaid cards. The bill would create these consumer protection standards by requiring deposit insurance, providing protection from theft and unauthorized charges and prohibiting overdraft fees and other credit-related features to be applied to the benefits delivered on electronic payment prepaid cards. Public and unemployment benefits Congress and the California Legislature have variously declared the importance of preserving a family's ability to raise and nurture children in a supportive environment and the intent of public benefits to provide support to allow families the opportunity to support families while providing an opportunity to pursue self-sufficiency through work or education. The California Work Opportunity and Responsibility to Kids (CalWORKs) program provides a monthly benefit and employment-related services with the goal of moving children out of poverty and helping families meet basic needs. As of January 2013, more than 500,000 families, including more than one million children, were aided by the CalWORKs benefit. Nearly half of the children on CalWORKs are under age six. The average monthly cash grant for a family of three (one parent and two children) on CalWORKs is $465, according to DSS data. Recent changes to state law limit eligibility for the CalWORKs program to 24 months, although benefits to families may be extended if families meet federal work participation requirements and benefits STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageG solely for children may be extended beyond that date if the family continues to meet income eligibility. Unemployment insurance benefits may be provided to a California wage earner who becomes unemployed through no fault of their own as long as they are physically able to work and are actively seeking work, as well as meeting other criteria. Benefits are effective for one year, and can range from $40 to $450 per week based on prior quarterly earnings. While CalWORKs and Unemployment Benefits are provided as cash aid to allow beneficiaries to pay rent, utilities and other expenses, others benefits, such as CalFresh, can be used only for specific purposes such as to purchase food. Electronic Fund Transfers The federal Electronic Fund Transfer Act (EFTA) was established in 1978 to protect individual consumers who are engaging in fund transfers. It establishes the rights, liabilities, and responsibilities of financial institutions that offer such services and of the customers who use them. (15 USC 1693 et seq.) In 2010, the federal Department of the Treasury mandated that federal benefit payments such as social security, veterans benefits and others be delivered through an electronic transfer. Electronic Benefit Transfer (EBT) cards Food benefits for CalFresh recipients are distributed through an EBT system, which allows recipients to access funds at point-of-sale terminals, automated teller machines (ATMs) and other electronic fund transfer devices. EBT cards look similar to ATM debit cards, and are swiped through the same machines using magnetic strips to transfer information. While the EBT system was designed in California to deliver CalFresh benefits, all of California's 58 counties also STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageH deliver either CalWORKs or General Assistance benefits, or both, through the EBT cards. According to DSS, in May 2012 there were nearly 22.5 million EBT transactions to purchase food through the CalFresh program and nearly 3 million cash purchase or withdrawals at point-of-sale or ATM machines through the cash benefit programs, CalWORKs and General Assistance. The vast majority of participants receive CalWORKs benefits via their EBT cards - about 97 percent in LA County. Virtually all of the rest are issued through direct deposit. A very small number are issued by check. An EBT card cannot be used to pay bills online or to make online purchases. Unemployment Insurance Debit Cards EDD began paying Unemployment Insurance (UI) benefits through the EDD Debit Card in July 2011 to eliminate payment delays due to mailed checks and check cashing fees for people without personal bank accounts. The debit card, issued by Bank of America, permits users to swipe their card to make point-of-sale debit purchases or to use the credit function to the extent that funds are available in the account. Beneficiaries can receive cash back from point-of-sale purchases at grocery stores, drug stores and at U.S. Post Office locations. Withdrawals at non-Bank of America ATMs may be subject to fees. Users can have funds directly deposited into another banking institution from Bank of America.<1> Prepaid Debit Cards According to a July 2011 report to Congress on "Government-Administered General-Use Prepaid Cards by the Board of Governors of the Federal Reserve System," these cards are used by state and federal governments to replace the time-consuming and less-precise method of distributing funds by check or voucher through the mail or in person. In ------------------------- <1> http://www.edd.ca.gov/about_edd/The_EDD_Debit_Card.htm STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageI most instances, these prepaid cards are used when funds are not or cannot be deposited directly into beneficiary accounts at financial institutions. The cards can be used to provide payments such as Social Security benefits, veterans' benefits, disability benefits, pensions, unemployment benefits, worker's compensation, emergency disaster relief, and child support disbursements. Examples of federal, state, and local government-funded programs that use general-use prepaid cards include Social Security; Temporary Assistance for Needy Families (TANF); Women, Infants, and Children (WIC); state unemployment; and court-ordered payments.<2> However, the prepaid, reloadable cards have been the subject of controversy for several years over some cards' charging of excessive fees. Card users have complained that a lack of protection for theft recovery have meant that stolen funds are unrecoverable, according to news articles.<3> Amid many stories of consumers who were charged repeated fees for making inquiries of irregularities in their accounts, a 2009 New York Times article described one consumer's ordeal in this way: Mr. Saxton said that when he punched the wrong code into an A.T.M., the bank charged him $2.95 for a declined A.T.M. transaction. When he called to complain, he said, they charged him an additional $1.95. When someone got hold of his card number and racked up several hundred dollars in shortage fees, (the financial institution) covered the fees with Mr. Saxton's tax return, which was directly deposited onto ----------------- <2> http://www.federalreserve.gov/publications/other-reports/fil es/government-prepaid-report-201107.pdf <3> http://redtape.nbcnews.com/_news/2013/05/15/18255097-surpris e-prepaid-debit-cards-actually-a-good-deal-for-consumers?lit e STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageJ the card, he said. <4> In 2012, the Federal Reserve Board issued a request for comment on its proposed change to "Regulation E," which governs Electronic Fund Transfers. The rulemaking, as well as annual reports to Congress, were required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which among many other protections, require regulation of general purpose reloadable prepaid cards. In its comments on the proposed rules, the Bureau of Consumer Protection of the Federal Trade Commission (FTC), argued that additional consumer protections were necessary for general purpose reloadable (GPR) prepaid cards. Currently, a variety of different payment card options exist including credit cards, traditional debit cards, electronic benefits transfers (EBTs), payroll cards and gift cards that have some form of federal protections regarding costs and terms. Although GPR cards are expanding in usage, consumers who use these cards do not have similar protections, and they may not realize that these protections are lacking. In the discussion below, FTC staff focuses in particular on four protections that have applied to other payment cards: 1) Limits on liability for fraud and unauthorized use; 2) Disclosure requirements for card fees and expiration dates; 3) Error resolution procedures; and 4) Authorization standards for recurrent payments. The FTC, in its role as the nation's consumer protection agency, noted in its comments that it has brought many law enforcement actions against those who injure consumers by ------------------------- <4> http://www.nytimes.com/2009/10/06/your-money/06prepay.html?p agewanted=all&_r=1& STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageK engaging in practices that anticompetitive, deceptive or unfair to consumers. Specifically, it said its regulators have brought a number of actions against defendants engaging in unfair or deceptive practices involve the sale of prepaid cards, including some cases alleging that companies used plans that violated federal law through unauthorized recurrent debiting of bank accounts. The Dodd-Frank Act assigned the FTC new enforcement authority for payment cards. Of particular concern to consumer advocates is those cards that offer an attached line of credit or loan feature that would cause automatic repayment from the card account. In its comments to the federal government on the proposed new rules for prepaid cards, the National Consumer Law Center cited a number of specific cases in which lenders used deceptive or unfair banking practices to charge low-income customers high or recurring fees and specifically mentioned the need for restrictions on overdraft fees, deposit insurance and credit features. Prepaid credit features will undo the elimination of rent-a-bank payday lending that was laboriously achieved a decade ago and be much more difficult to control if left to spread. Prepaid credit features are already being used to circumvent the law but it is early enough to nip this trend in the bud. <5> Related legislation AB 2035 (Bradford), Chapter 319, Statutes of 2012, protects recipients against the loss of EBT benefits that are stolen electronically. AB 756 (Mitchell), 2011, would have prohibited fees or surcharges for EBT cash withdrawal at ATMs, POS machines or similar cash withdrawal devices. ------------------------- <5> http://www.ftc.gov/os/2012/07/120730cfpbstaffcomment.pdf STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageL AB 1542 (Ducheny), Chapter 270, Statutes of 1997, implemented federal welfare reform and conformed to federal law in establishing the electronic benefits transfer system to deliver CalWORKs and CalFresh (then Food Stamps) benefits. COMMENTS This bill provides protections for beneficiaries who use prepaid debit cards similar to those protections enacted in federal statute. While there have been some improvements in lenders' use of fees and other harmful consumer practices with prepaid cards, the author argues that continued concern indicates a need to establish protections in this state for recipients of public benefits. In order to clarify concerns that current language could be interpreted to require counties to certify the validity of qualified accounts and to clarify that this language conforms with federal rules, the author requests and staff recommends the following amendments: 1339.1. (a) Notwithstanding any other provisions of this part, ifa recipient ofunemployment compensation benefit paymentselects to receive the payments by direct depositare directly deposited to an account of the recipient's choice, as authorized under the federal Electronic Fund Transfer Act (15 U.S.C. Sec. 1693 et seq.), the payments may only be deposited to an account that meets the requirements of a qualifying account for deposit of public assistance payments as set forth in Section 11006.2 of the Welfare and Institutions Code. (b) A person or entity that issues a prepaid card or maintains or manages a prepaid card account shall not accept or facilitate direct deposit of unemployment compensation benefits to a prepaid card account that is ineligible under this section. (c) The department has no obligation to determine whether an account at the financial institution of the recipient's STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageM choice is a qualifying account, as described in subdivision (a). For purposes of this section, the department shall not be held liable for authorizing a direct deposit of unemployment compensation benefit payments into a prepaid card account designated by the recipient that does not comply with paragraph (3) of subdivision (b) of Section 11006.2 of the Welfare and Institutions Code. 11006.2. (b) (2) Each county treasurer shall make an agreement with one or more financial institutions participating in the Automated Clearing House pursuant to the local rules, and shall, by December 1, 2001, establish a program for the direct deposit by electronic fund transfer of payments to any person entitled to the receipt of public assistance benefits who authorizes the direct deposit of the benefits into the person's qualifying account at the financial institution of his or her choice. Each county treasurer has no obligation to determine whether the account at the financial institution of the person's choice is a qualifying account, as defined in paragraph (3). 11006.2. (b) (5) For purposes of this section, each county treasurer and county welfare department shall not be held liable for authorizing a direct deposit of public assistance payments into a prepaid card account, designated by the person entitled to receipt of public assistance benefits, that does not comply with paragraph (3).(5)(6) PRIOR VOTES Assembly Floor: 74 - 0 Assembly Appropriations: 17 - 0 Assembly Human Services: 5 - 2 POSITIONS Support: National Consumer Law Center (Sponsor) Western Center on Law and Poverty (Sponsor) Coalition of California Welfare Rights STAFF ANALYSIS OF ASSEMBLY BILL 1280 (John A. Pérez) PageN Organizations, Inc. Oppose: None on file -- END --