[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]


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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).

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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
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    \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).
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    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:
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    \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).
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     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.
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    \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).
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    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.
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    \8\ 12 CFR Part 205.
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    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.
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    \9\ 63 FR 64820, 64823 (Nov. 23, 1998).
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    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
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    \10\ 63 FR 51490, 51498 (Sept. 25, 1998).
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    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.''
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    \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.
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    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]
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