[Federal Register Volume 66, Number 134 (Thursday, July 12, 2001)]
[Proposed Rules]
[Pages 36495-36502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17212]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 274

[Amendment No. 392]
RIN 0584-AC37


Food Stamp Program, Regulatory Review: Standards for Approval and 
Operation of Food Stamp Electronic Benefit Transfer (EBT) Systems

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

-----------------------------------------------------------------------

[[Page 36496]]

SUMMARY: This action will revise Food Stamp Program rules affecting the 
standards for approval and operation of Food Stamp Electronic Benefit 
Transfer systems. The changes will increase State agency flexibility in 
administering the program and maximize the advantages afforded by the 
technology. We are proposing the revisions to streamline program 
administration and improve customer service.

DATES: Comments must be received on or before September 10, 2001 to be 
assured of consideration.

ADDRESSES: Comments should be submitted to Jeffrey N. Cohen, Chief, 
Electronic Benefit Transfer Branch, Benefit Redemption Division, Food 
and Nutrition Service, USDA, 3101 Park Center Drive, Alexandria, 
Virginia, 22302. Comments may also be datafaxed to the attention of Mr. 
Cohen at (703) 605-0232, or by e-mail to [email protected]. All 
written comments will be open for public inspection at the office of 
the Food and Nutrition Service during regular business hours (8:30 a.m. 
to 5 p.m., Monday through Friday) at 3101 Park Center Drive, 
Alexandria, Virginia, Room 718.

FOR FURTHER INFORMATION CONTACT: Questions regarding this rulemaking 
should be addressed to Mr. Cohen at the above address or by telephone 
at (703) 305-2517.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be significant and was reviewed by 
the Office of Management and Budget under Executive Order 12866. This 
rule, however, is not economically significant, since it is not 
expected to have an economic impact on the economy of $100 million or 
more in any one year.

Executive Order 12372

    The Food Stamp Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.551. For the reasons set forth in the final 
rule in 7 CFR Part 3015, Subpart V and related Notice (48 FR 29115), 
this Program is excluded from the scope of Executive Order 12372 which 
requires intergovernmental consultation with State and local officials.

Executive Order 13132, Federalism

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments and 
consult with them as they develop and carry out those policy actions. 
The Food and Nutrition Service (FNS) has considered the impact of this 
rule which proposes numerous changes to the requirements for approval 
and operations of Electronic Benefit Transfer (EBT) systems to deliver 
food stamp benefits. All of the provisions in this rule are 
discretionary. FNS is not aware of any case where any of these 
provisions would in fact preempt State law. Prior to drafting this 
proposed rule, we received input from State agencies at various times. 
Several of the provisions are in direct response to State agency 
concerns and some, in fact, codify policies already implemented by 
State agencies operating EBT systems. Since the Food Stamp Program 
(FSP) is a State administered, federally funded program, our national 
headquarters staff and regional offices have informal and formal 
discussions with State and local officials on an ongoing basis 
regarding EBT implementation issues. This arrangement allows State 
agencies to provide feedback that forms the basis for many 
discretionary decisions in this and other FSP rules. In addition, we 
sent representatives to regional, national, and professional 
conferences to discuss our issues and receive feedback on EBT 
implementation.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). Eric M. Bost, 
the Under Secretary for Food, Nutrition, and Consumer Services has 
certified that this proposed rule will not have a significant economic 
impact on a substantial number of small entities. State and local 
welfare agencies will be the most affected to the extent that they 
administer the Program.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, this 
proposed rule announces our intent to revise information collection 
0584-0083 and reduce the amount of information collected as part of the 
Advanced Planning Documents (APD) required of State agencies requesting 
funding for an Electronic Benefit Transfer (EBT) system for food 
stamps.
    Comments on this proposed rule must be received by September 10, 
2001.
    Send comments to Office of Information and Regulatory Affairs, OMB, 
Attention: Desk Officer for FNS, Washington, DC, 20503. Please also 
send a copy of your comments to Jeffrey N. Cohen, Chief, Electronic 
Benefit Transfer Branch, Benefit Redemption Division, Food and 
Nutrition Service, U.S. Department of Agriculture, 3101 Park Center 
Drive, Alexandria, VA 22302. For further information, or for copies of 
the information collection, please contact Mr. Cohen at the above 
address.
    Comments are invited on: (a) Whether the proposed collection of 
information is necessary for the performance of the functions of the 
agency, including whether the information will have practical utility; 
(b) the accuracy of the agency's estimate of the burden of the proposed 
collection of information including the validity of the methodology and 
assumptions used; (c) ways to enhance the quality, utility and clarity 
of the information to be collected; and (d) ways to minimize the burden 
of the collection of information on those who are to respond, including 
through the use of appropriate automated, electronic, mechanical, or 
other technological collection techniques or other forms of information 
technology.
    All responses to this notice will be summarized and included in the 
request for OMB approval. All comments will also become a matter of 
public record.
    For Further Information Contact: Jeffrey N. Cohen, (703) 305-2522.
    Title: Operating Guidelines, Forms and Waivers.
    OMB Number: 0584-0083.
    Type of Request: Revision of a currently approved collection.
    Abstract: Under section 7(i) of the Food Stamp Act of 1977, as 
amended (FSA), (7 U.S.C. 2016(i)) the Secretary is authorized to permit 
State agencies to implement Electronic Benefit Transfer (EBT) systems. 
The Secretary is authorized to establish standards for the required 
testing prior to implementation of any EBT system and may require 
analysis of the implementation results in a limited pilot project area 
before expansion of the system. Any State requesting funding for an EBT 
system must submit a written plan of action called an Advance Planning 
Document (APD) to the Food and Nutrition Service (FNS).
    In this proposed rulemaking, we are revising Food Stamp Program 
rules affecting the standards for approval and operation of Food Stamp 
EBT systems. Several of the provisions will reduce the amount of 
information required for a State agency to submit as part of the 
standard APD. We are proposing these revisions in response to the 
evolution of EBT over time, which has rendered some of the information 
we are currently collecting unnecessary.
    With provisions in this regulation, we are proposing to eliminate 
or reduce the reporting requirements as described below.

[[Page 36497]]

     State agencies will no longer need to provide FNS with the 
written planning and implementation APD approvals from other 
participating Federal agencies, or indicate that approval is being 
sought simultaneously from other participating Federal agencies.
     State agencies will be required to submit a substantially 
abbreviated planning APD compared to what is currently required. The 
document will include a brief letter of intent, a budget, a cost 
allocation plan and a schedule of activities and deliverables.
     State agencies will no longer need to submit an acceptance 
test report unless FNS is not present at the testing or if serious 
problems are found during the test.
     State agencies will no longer have to submit quarterly 
pilot project reports, but rather, report problems or issues to FNS 
when they occur or are identified.
     State agencies will not be required to submit a pilot cost 
analysis.
     The State agency will not need to submit an APD update 
requesting FNS approval to expand EBT operations beyond the pilot area 
unless there are substantive changes to the implementation plan. State 
agencies may expand EBT simultaneously with pilot operations, unless 
significant problems arise.
    As currently approved by OMB, the estimated time to gather 
information and complete an EBT APD is 45 hours per respondent. The 
recordkeeping burden includes maintaining a copy of the system design 
specifications, the APD submission, approvals and APD updates. A total 
of 39 States are operational with EBT systems and we expect 41 States 
to operate EBT systems within the next year. In addition to the 
remaining States, some EBT States will be entering new contracts as 
their current contracts expire. We estimate 10 State agencies will 
submit an APD each year, for a total of 450 hours.
    Estimates of Burden: We estimate the provisions of this proposed 
rule, as listed above, will reduce the amount of time each State agency 
spends on an APD for EBT by 10 hours, for an overall decrease in burden 
hours of 100 hours annually, bringing the total time down to 35 hours 
per respondent.
    Respondents: State agencies.
    Estimated number of Respondents: 10 State agencies per year.
    Estimated number of Responses per respondent: One.
    Estimated annual number of responses: 10.
    Estimated Total Annual Burden on Respondents: 350 hours.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is intended to have preemptive effect with 
respect to any State or local laws, regulations or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Effective Date'' paragraph of this 
preamble. Prior to any judicial challenge to the provisions of this 
rule or the application of its provisions, all applicable 
administrative procedures must be exhausted. In the Food Stamp Program, 
the administrative procedures are as follows: (1) For Program benefit 
recipients--State administrative procedures issued pursuant to 7 U.S.C. 
2020(e)(1) of the FSA and regulations at 7 CFR 273.15; (2) for State 
agencies--administrative procedures issued pursuant to 7 U.S.C. 2023 of 
the FSA and regulations at 7 CFR 276.7 (for rules related to non-
quality control (QC) liabilities) or 7 CFR Part 283 (for rules related 
to QC liabilities); (3) for Program retailers and wholesalers--
administrative procedures issued pursuant to Section 14 of the FSA (7 
U.S.C. 2023) and 7 CFR 278.8.

Public Law 104-4

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on state, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
FNS generally must prepare a written statement, including a cost-
benefit analysis, for proposed and final rules with the ``Federal 
mandates'' that may result in expenditures to State, local, or tribal 
governments in the aggregate, or to the private sector, of $100 million 
or more in any one year. When such a statement is needed for a rule, 
section 205 of the UMRA generally requires the FNS to identify and 
consider a reasonable number of regulatory alternatives and adopt the 
least costly, more cost-effective or least burdensome alternative that 
achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus, this rule is not economically significant, nor subject to 
the requirements of sections 202 and 205 of the UMRA.

Background

    In this rule, FNS is proposing to revise food stamp regulations 
affecting the standards for approval and operation of Food Stamp 
Electronic Benefit Transfer Systems. The revisions will streamline 
administration of the program, offer greater flexibility to State 
agencies in enacting policy, and improve customer service. Other 
provisions have been clarified in order to facilitate implementation by 
State agencies.

Electronic Benefit Transfer Issuance System Approval Standards--7 
CFR 274.12

    On April 1, 1992, the Department issued a final rule establishing 
standards for operation of on-line Electronic Benefit Transfer (EBT) 
Systems as an alternative to coupons. Those regulations were 
promulgated in accordance with the Mickey Leland Memorial Domestic 
Hunger Relief Act of 1990 (Leland Act), Pub. L. 101-624, as part of a 
package of items aimed at improving the efficiency and effectiveness of 
program operations.
    The Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 (PRWORA) signed by the President August 22, 1996, further 
authorizes use of off-line EBT technology, which uses a self-contained 
benefit access device, commonly known as a smartcard, to access 
benefits. The provisions of this rulemaking pertain to both on-line and 
off-line systems, unless otherwise specified. Currently, no industry 
standards exist for off-line smartcard systems. We intend to propose 
standards for off-line EBT systems in the future once those industry 
standards are developed. However, we have learned a great deal about 
off-line EBT systems from those currently operating. State agencies 
interested in implementing off-line systems may submit proposals for 
approval which will be evaluated on a case by case basis, pending the 
publication of specific off-line standards.
    When the EBT regulations were initially issued, EBT systems were 
still in their infancy and had only been implemented in a few pilot 
areas. However, as more and more State agencies went on-line with EBT, 
other State and federal agencies implementing EBT were able to learn 
and benefit from those early efforts. As a result, State agencies have 
been able to roll-out their systems more aggressively and with greater 
ease by replicating the system designs of operational State agencies, 
with some State-specific modifications. In order to keep pace with the 
strides

[[Page 36498]]

made in EBT implementation, the Department has reviewed the EBT 
regulations and is proposing modifications to the rules to reflect a 
more standardized and streamlined approach to EBT system approvals. 
Provisions which would improve program administration through greater 
State agency flexibility, automation and integrity have also been 
proposed in this rulemaking. Other provisions would be clarified by 
reorganizing or deleting paragraphs, in order to simplify 
implementation for State agencies. The major revisions are discussed 
below.

System Approvals

    Current regulations at 7 CFR 274.12(b)(1) require that State 
agencies submit APDs for approval of EBT systems. We are clarifying in 
this proposed rule our expectation that State agencies continue to 
follow the APD process when procuring subsequent EBT systems after the 
initial system contract comes to an end.
    Current regulations at 7 CFR 274.12(b)(4) require that the State 
agency provide written approval to FNS of the Planning and 
Implementation Advanced Planning Documents from other participating 
Federal agencies or indicate that approval is being sought 
simultaneously from participating Federal agencies. This requirement 
was intended to keep FNS informed on where other Federal agencies were 
in the EBT project approval process, including any issues that could 
potentially effect project approval by other agencies. However, in May 
1994, FNS was designated the ``lead program agency'' for the Federal 
Government with regard to State EBT systems. In this role, FNS now 
coordinates document approvals and provides State agencies with a 
single point of contact in the Federal Government, when necessary. 
Since State agencies no longer need to coordinate document approvals 
from relevant Federal agencies, we propose eliminating this 
requirement.
    The Department is also proposing to reduce the amount of State EBT 
planning documentation to be submitted for EBT systems approval, as 
required in 7 CFR 274.12(c)(1). The Department is confident that State 
agencies recognize the importance of careful and thorough project 
planning for EBT system implementation. There is no longer a need for 
FNS to receive the current level of detail on planning activities to 
provide sufficient agency oversight. Therefore, this rule proposes to 
modify regulations at 7 CFR 274.12(c)(1)(i) and 274.12(c)(1)(ii) to 
make Planning Advanced Planning Documents (PAPD) less burdensome and 
less prescriptive in terms of the information required, by:
    (1) Eliminating the specifications contained in (i) and (ii) for 
pilot project site and expanded site descriptions and description of 
major contacts; and
    (2) Indicating that only minimal information be contained in the 
PAPD, including a brief letter of intent, planning budget, cost 
allocation plan, and schedule of activities and deliverables.

System Testing

    To further decrease the burden on State agencies to document all 
aspects of the EBT planning process, the proposed regulations at 7 CFR 
274.12(c)(2)(i) would no longer require a functional demonstration test 
plan or report. This was operationalized in our streamlined procedures 
implemented in 1994. Although we no longer require the documentation, 
we continue to recommend that State agencies demand a functional 
demonstration test of their vendors, particularly if functions of the 
system are new for that vendor. Without such a test for the State 
agency's benefit, avoidable functional problems could arise later in 
the acceptance test and result in the project's delay.
    In general, extensive acceptance testing must be successfully 
completed prior to system operation, as stipulated in section 
274.12(c)(2)(iii)(B). Since experience has shown that EBT systems are 
often modified over the life of a State agency's contract with a 
particular vendor, it may be necessary to repeat any or all of these 
tests if significant changes are made to the system after the system is 
operational. Therefore, the Department is clarifying this provision by 
indicating that FNS reserves the right to require such re-testing, if 
warranted.
    The Department is also proposing to revise the current provisions 
at 7 CFR 274.12(c)(2)(iv), which require the State agency to provide an 
acceptance test report. Under most circumstances, FNS will no longer 
require this report; however, a report will be necessary if FNS is not 
present at the testing or serious problems are uncovered during the 
test.

Pilot Operation and Reporting

    Current requirements at 7 CFR 274.12(c)(4)(i) stipulate that pilot 
project reports contain standard information as prescribed in 
subparagraphs (A) through (R). Now that EBT is no longer in its 
infancy, this information has proven to be excessive, and is often 
irrelevant to the task of identifying issues that have surfaced during 
the pilot shakedown period. The general intent of pilot project reports 
is to identify any problems which need to be resolved prior to 
expansion. The Department is proposing to delete 7 CFR 
274.12(c)(4)(i)(A) through (c)(4)(i)(R) and replace them with less 
rigid requirements and to allow State agencies latitude to discern 
which details are relevant for their particular pilot. Reporting would 
no longer be required on a quarterly basis, rather, it would occur as 
issues or problems arise.
    Current regulations at 7 CFR 274.12(c)(5) require the State agency 
to conduct a cost analysis comparing the actual EBT pilot project costs 
to the costs of the EBT system operations projected in the 
Implementation APD and the costs of the coupon issuance system being 
replaced. This data was collected for information purposes only. 
However, it is a particularly cumbersome and costly requirement for 
State agencies and FNS has been waiving the requirement for some time. 
Therefore, the Department is proposing that this requirement be 
eliminated.
    Current regulations at 7 CFR 274.12(d) require a minimum of three 
months of full pilot project operation prior to obtaining approval for 
expansion. State agencies complained that this requirement led to 
unnecessary delays in project expansion and additional costs while they 
wait for completion of analyses and FNS approval. FNS recognized that 
EBT systems have matured to the point where it is unusual to have 
significant problems. There remains, however, a statutory requirement 
for a pilot.
    Consequently, FNS has been allowing State agencies to expand beyond 
the pilot area prior to the end of the three month period as long as 
they provide the required information on the pilot area. In keeping 
with this policy, we are now proposing that FNS negotiate a suitable 
pilot area with each State agency to be the basis of the three-month 
analysis and reporting. State agencies will not need to cease expansion 
activities as long as this pilot area operates without major 
difficulties. Expansion may continue as agreed in the implementation 
plan; however, FNS reserves the right to halt roll-out activities if 
problems arise during pilot or project expansion.

Retailer Management

    Current regulations at 7 CFR 274.12(f)(4)(v) require State agencies 
to ensure that retailer equipment is replaced or repaired within 24 
hours. We have found, however, that under certain circumstances, 
particularly in rural settings, it may be impossible for State agencies 
to guarantee this

[[Page 36499]]

standard. Therefore, we propose that this timeframe be extended to 48 
hours.
    Current regulations at 7 CFR 274.12(f)(4)(vi) require State 
agencies to ensure that retail store employees are trained in system 
operation prior to implementation. This requirement was originally 
established to facilitate EBT conversion and to ensure that retailers 
were provided with the training needed to effectively participate in 
the program. However, the infrastructure has matured, commercial POS 
deployment is more prevalent and more stores are using their own 
systems. Consequently, mandating that all retailers receive specialized 
training provided by the State agency is no longer necessary. We are, 
therefore, proposing that State agencies continue to ensure that 
training is offered to all retailers, but allow retailers to opt out of 
this instruction if they desire. For tracking purposes, State agencies 
shall direct retailers to confirm in writing that they are waiving 
their training option.
    Current regulations at 7 CFR 274.12(f)(4)(vii) require that FNS 
compliance investigators be provided access to State EBT systems in 
order to conduct investigations of program abuse and alleged 
violations. We are expanding this requirement for ``access'' to include 
other FNS staff involved in compliance activity from FNS regional and 
field offices and as well as staff from the Department's Office of 
Inspector General, and specifying that they have on-line access to a 
State agency's EBT system. This may demand the deployment of 
administrative terminals to Compliance Branch Area offices, Regional 
offices and Field offices in order to achieve this requirement. Also, 
FNS compliance investigators, as well as investigators from the 
Department's Office of Inspector General, must have access to EBT cards 
with accounts that are updated as necessary for use in food stamp 
investigations.

Transaction Receipts

    Current regulations at 7 CFR 274.12(g)(3)(ii) require that the 
information contained on transaction receipts comply with the 
requirements of 12 CFR part 205 (Regulation E). The provisions of 12 
CFR part 205 allow card numbers to be truncated on the printed receipt. 
However, it does not require truncation. Regulations at 7 CFR 
274.12(g)(3)(iii) require that the primary account number or a coded 
transaction number be included on the receipt. FNS recognized the 
vulnerability that results from printing the entire card number on a 
receipt in EBT systems due to the existence of manual and key-entered 
transactions and recommended to State agencies that a truncated card 
number be printed on the receipt. While this policy has been adopted in 
every operational project to date, we want to be sure it remains this 
way. Therefore, in the interest of consistently protecting client 
information, FNS proposes to require truncation of the card number in 
addition to requirements of 12 CFR part 205.

Benefit Issuance and Replacement

    The Department is proposing a revision to the regulations at 7 CFR 
274.12(g)(5)(i) which require Personal Identification Number (PIN) 
selection. The use of PIN assignment is becoming more widespread in the 
commercial world and is of interest to State agencies because of the 
potential cost savings it provides. Several States have requested 
waivers to allow this approach and it has already been implemented in 
many States. Therefore, we propose that this section be amended to 
allow PIN assignment in accordance with commercial industry standards, 
as long as clients have the ability to later select their PIN if they 
so desire and are informed of this alternative.
    Current regulations at 7 CFR 274.12(g)(5)(ii) require a State 
agency to replace lost or stolen EBT cards within two days. At the same 
time, the preamble in our April 1, 1992 rule (57 FR 11230) invites the 
State agency to request a waiver to allow for a replacement time up to 
five days if the State agency is using centralized issuance. Several 
State agencies have received such a waiver and have not reported any 
significant inconvenience to clients.
    In order to save costs, many State agencies now issue EBT cards 
centrally through the mail rather than over-the-counter at the local 
office. This approach also saves recipients from having to make a 
separate trip to have their cards issued. However, it is impossible for 
State agencies to meet a 24-hour time limit for card replacements when 
issuing cards centrally. Moreover, for security purposes, State 
agencies are required to send the EBT card and the PIN separately when 
cards are issued through the mail. Security expectations are generally 
that there should be at least 3 days between when the card arrives at a 
home and when the PIN arrives. For these reasons, we propose that this 
section be amended to permit up to five days for card replacement when 
a State is using centralized mail issuance.
    At the same time, we are clarifying that the intent of ``card 
replacement'' requirements is to ensure that clients are given access 
to their benefits within the specified time frame. This means that 
regardless of what time frame the State agency has indicated for card 
replacement (e.g., 2 days, 5 days) the client must have in hand an 
active card and PIN, with available benefits on the card, within the 
time frame specified by the State agency.

Household Training

    Current provisions at 7 CFR 274.12(g)(10) call for a ``hands-on'' 
approach to household training. This leads to considerable costs for 
State agencies and is not the only effective means to provide this 
service to clients. In EBT projects to date, several State agencies 
have sought waivers in this area to allow for mail training, videos, 
and kiosk approaches in lieu of a ``hands-on'' component. Since State 
agencies are in the best position to decide which approach is most 
viable for their particular environment and client population, the 
Department proposes amending this section to continue to require 
household training without specifying a particular method for the 
general population. However, hands-on training must be available as a 
back-up for those clients who request it, for special needs populations 
such as the elderly, or for those individuals identified as having 
problems with the EBT system.

Retailer Participation

    FNS Authorization: Current regulations at 7 CFR 274.12(h)(1)(ii) 
include procedural directions for FNS field offices regarding 
authorizations of Food Stamp retailers. Since these requirements are 
not directed at State agencies, we are proposing to delete the 
provisions from this citation. This would not change current policy.
    Fees: Current law at section 7(h)(2) of the Food Stamp Act (7 
U.S.C. 2016(h)(2)) and regulations at 7 CFR 274.12(h)(2) state that 
authorized retailers shall not be required to pay costs essential to 
EBT system operations that are utilized solely for the Food Stamp 
Program. The Department wishes to reiterate that retailers cannot be 
required to pay for costs related to EBT for Food Stamps. This includes 
any fees associated with food stamp transactions. Note that while 
retailers cannot be charged fees for such transactions on government-
provided terminals, they can be charged for commercial/third party 
processor food stamp transactions. This issue has also surfaced in 
operating projects with regard to potential bank charges. There have 
been some instances where banks have attempted to impose a fee on 
retailers for food

[[Page 36500]]

stamp EBT redemption services. This is contrary to regulations.
    State agencies have argued and the Department agrees that this 
prohibition on charging retailers should not be extended to cover the 
following costs which result from abuses, breach of contract, or 
negligence on the part of the retailer:
    (1) cost for the replacement of lost, stolen or damaged equipment;
    (2) materials and supplies for POS terminals not provided by the 
State agency; and
    (3) telecommunication costs for any non-EBT use by retailers when 
lines are provided by the State agency. This would also allow the State 
agency to remove phone lines that they have installed and maintained 
for food stamp transactions in instances where there is significant 
misuse of the lines.
    Several State agencies have sought waivers to allow charges to 
retailers in these circumstances in the interest of avoiding abuses in 
these areas. Therefore, we propose to revise this section to allow 
State agencies to charge retailers reasonable fees only in the 
circumstances outlined above.
    POS Deployment: Current regulations at 7 CFR 274.12(h)(4)(ii) 
prescribe a formula for minimum POS deployment ``up to the number of 
lanes in each store.'' The Department believes that this provision has 
been interpreted by some to be unnecessarily restrictive. State 
agencies have the flexibility under current regulation to deploy 
terminals at customer service booths or other locations in the store 
for balance inquiry or other purposes, as many State agencies have 
done. However, because this policy has been often misinterpreted to 
prohibit such deployment, we are proposing to clarify that State 
agencies may deploy terminals beyond the number of lanes in a store at 
the State agency's discretion.

Minimum Card Requirements

    Current regulations at 7 CFR 274.12(i)(6)(i)(B) require that FNS's 
statement of non-discrimination be printed on the card or card jacket. 
Several issues have arisen as a result of this requirement. Since many 
States are implementing multi-benefit programs on a single card, the 
inclusion of this statement, which is specific to FNS benefit programs, 
is no longer practical. In addition, many households are unclear about 
the circumstances under which they should contact the State, the 
State's contractor, or FNS about a particular problem. Consequently, 
the address provided to notify FNS of discrimination incidents has been 
misused and has been a source of client confusion and frustration.
    Furthermore, since publication of the regulations, a Departmental 
non-discrimination statement has been issued in Departmental Regulation 
4300 (DR 4300) and now replaces the FNS statement. The non-
discrimination statement in DR 4300 differs from that in the EBT rules 
by directing recipients to report instances of discrimination to the 
USDA Office of Civil Rights rather than to FNS. The statement reads, 
``In accordance with Federal law and the U.S. Department of Agriculture 
policy, this institution is prohibited from discriminating on the basis 
of race, color, national origin, sex, age, religion, political beliefs, 
or disability. To file a complaint of discrimination, write USDA, 
Director, Office of Civil Rights, Room 326-W, Whitten Building, 1400 
Independence Avenue, SW., Washington, DC 20250-9410 or call (202) 720-
5964 (voice and TDD). USDA is an equal opportunity provider and 
employer.''
    Since State Agencies are already expected to provide this non-
discrimination statement on application forms, handbooks, manuals and 
other material distributed to the system users, the Department is 
proposing that this statement be removed from the card or card jacket. 
Recipients must be notified of their non-discrimination protections as 
part of household training. FNS regulations at 7 CFR 274.12(g)(10) 
would be revised to reflect this change.

Concentrator Bank Responsibilities

    Current regulations at 7 CFR 274.12(j)(1)(iii) describe the 
reimbursement procedures for crediting retailers through the Payment 
Management System. This mechanism has been phased-out and replaced by 
the Automated Standard Application for Payment (ASAP) system developed 
for the U.S. Treasury Department by the Federal Reserve Bank of 
Richmond. Therefore, the Department is proposing revisions to this 
section which update the new crediting procedures. ASAP improves 
service to retailers in that it allows for a much later cut-off window 
than the previous system, and, at the same time, ensures next-day 
reimbursement even with the later cut-off time. State agencies will 
need to accommodate the new communication linkages and data flow 
requirements as prescribed by FNS.
    In conjunction with the ASAP system, FNS has entered into a 
partnership with the Federal Reserve Bank of Richmond to develop the 
Account Management Agent (AMA) system. The AMA system supports the 
Department's efforts to improve accountability, oversight and 
management of State EBT systems. State agencies will need to provide 
data in a format established by FNS to the FNS Account Management 
Agent. This proposed requirement is specified in section 
274.12(k)(2)(iii).

Management and Reporting

    In order to take advantage of the extensive audit trail available 
in EBT systems, FNS has designed and implemented the Anti-fraud Locator 
for EBT Redemption Transaction (ALERT) system to collect and examine 
EBT transaction data for the purpose of detecting and investigating 
retailer fraud and abuse. In support of the system, State agencies will 
need to provide retailer transaction data to FNS on a monthly basis in 
accordance with the format specified by FNS. The standardized format 
was developed in consultation with EBT processors. This provision would 
replace the current requirement specified in 7 CFR 274.12(k)(2)(ii) for 
EBT exception reports.

Federal Financial Participation

    Current regulations at 7 CFR 274.12(l)(2) indicate that State 
agencies can receive enhanced funding for development of EBT systems 
that are fully integrated components of the State's complete automated 
data processing (ADP) system. This enhanced funding has not been 
available for ADP development since the April 1, 1994 enactment of 
Public Law 103-66 amending the FSA. Therefore, this provision has been 
removed.

Back-up System

    Current regulations at 7 CFR 274.12(m) require the State agency to 
ensure that a manual purchase system is available for use during times 
when the EBT system is inaccessible. Electronic store-and-forward 
transactions are available to retailers in commercial debit systems and 
are preferable to manual vouchers for some retailers who do not wish to 
spend time obtaining telephone authorization for the transaction when 
the system is down. This type of transaction is stored in the POS 
device with an encrypted PIN and sent to the host at a later point in 
time. Several operational EBT States obtained FNS approval to 
incorporate this into their system. In keeping with this policy, the 
Department is proposing to allow use of a store-and-forward alternative 
for those retailers who elect to assume liability for these 
transactions. In order to protect against applying the transaction to 
future

[[Page 36501]]

months' benefits, the retailer would be able to forward the transaction 
to the host one time within 24 hours of when the transaction occurred. 
If the system is inoperable for more than a 24 hour period, the 
retailer would have 24 hours from the point when the system resumes 
operation. In an instance where the store and forward transaction is 
denied due to insufficient funds, the retailer could re-present for the 
balance in the account. The balance of this transaction could not be 
re-presented in future months.

Implementation

    The Department is proposing that the provisions of this rulemaking 
be implemented no later than 180 days after publication of the final 
rule.

List of Subjects in 7 CFR Part 274

    Administrative practice and procedure, Food stamps, Fraud, Grant 
programs--social programs, Reporting and recordkeeping requirements, 
State liabilities.
    Accordingly, 7 CFR part 274 is proposed to be amended as follows:

PART 274--ISSUANCE AND USE OF COUPONS

    1. The authority citation for 7 CFR part 274 continues to read as 
follows:

    Authority: 7 U.S.C. 2011-2036.

    2. In Sec. 274.12,
    a. the first sentence in paragraph (b)(1) is amended by adding the 
words ``for development and implementation of initial and subsequent 
EBT systems'' at the end;
    b. paragraph (b)(4) is amended by removing the first sentence;
    c. paragraphs (c)(1) and (c)(2)(i) are revised;
    d. paragraph (c)(2)(ii) is removed, and paragraphs (c)(2)(iii) 
through (c)(2)(vii) are redesignated as paragraphs(c)(2)(ii) through 
(c)(2)(vi), respectively;
    e. newly redesignated paragraph (c)(2)(ii)(B) is amended by 
removing the semicolon at the end of the second sentence and adding a 
period in its place and by adding a sentence to the end of the 
paragraph;
    f. the first sentence of newly redesignated paragraph (c)(2)(iii) 
following the paragraph heading is revised;
    g. paragraph (c)(4)(i) is revised and paragraph (c)(5) is removed;
    h. paragraph (d) is revised;
    i. paragraph (f)(4)(v) is amended by removing the words ``24 
hours'' and adding in their place the words ``48 hours'';
    j. paragraphs (f)(4)(vi) and (f)(4)(vii) are revised;
    k. a new paragraph (f)(4)(viii) is added;
    l. the first sentence in paragraph (g)(3)(iii) is revised;
    m. paragraphs (g)(5)(i) and (g)(5)(ii) are revised;
    n. the first sentence in paragraph (g)(6)(ii) is amended by 
removing the word ``pilot'' and adding in its place the word 
``project'';
    o. paragraph (g)(10)(ii) is removed, and paragraphs (g)(10)(iii) 
through (g)(10)(viii) are redesignated as paragraphs (g)(10)(ii) 
through (g)(10)(vii), respectively;
    p. newly redesignated paragraph (g)(10)(v) is amended by adding a 
sentence after the first sentence;
    q. the last two sentences of paragraph (h)(1)(ii) are removed;
    r. paragraph (h)(2) is revised, and paragraph (h)(4)(ii)(D) is 
amended by adding a sentence to the end of the paragraph;
    s. the second sentence of paragraph (i)(5)(i) is amended by 
removing the word ``publish'' and adding in its place the words ``make 
available to third party processors'';
    t. paragraphs (i)(6)(i), (j)(1)(iii), and (k)(2)(ii) are revised, 
and paragraph (k)(2)(iii) is added;
    u. paragraph (l)(2) is removed, and paragraphs (l)(3) through 
(l)(5) are redesignated as paragraphs (l)(2) through (l)(4), 
respectively;
    v. paragraph (m) introductory text is revised.
    The revisions and additions read as follows:


Sec. 274.12  Electronic Benefit Transfer issuance system approval 
standards.

* * * * *
    (c) * * * (1) EBT planning APD. The State agency shall comply with 
the two-stage approval process for APDs in submitting an EBT system 
proposal to FNS for approval. The Planning APD shall contain the 
requirements specified under Sec. 277.18(d)(1) of this chapter, 
including a brief letter of intent, planning budget, cost allocation 
plan, and schedule of activities and deliverables.
    (2) * * *
    (i) Functional demonstration. A functional demonstration of the 
functional requirements prescribed in paragraph (f) of this section in 
combination with the system components described by the approved System 
Design is recommended in order to identify and resolve any problems 
prior to acceptance testing. The Department reserves the right to 
participate in the Functional Demonstration if one is conducted.
    (ii) * * *
    (B) * * * FNS may require that any or all of these tests be 
repeated in instances where significant modifications are made to the 
system after these tests are initially completed or if problems that 
surfaced during initial testing warrant a retest;
* * * * *
    (iii) * * * The State agency shall provide a separate report after 
the completion of the acceptance test only in instances where FNS is 
not present at the testing or when serious problems are uncovered 
during the testing that remain unresolved by the end of the test 
session. * * *
* * * * *
    (4) Pilot project reporting. (i) The State agency is required to 
report to FNS all issues that arise during the pilot or shakedown 
period. Reports to FNS shall be provided as problems occur. In 
instances where the State agency must investigate the issue, FNS must 
receive the information no later than one month after completion of 
pilot operations.
* * * * *
    (d) Expansion requirements. The pilot and expansion schedule must 
be delineated in the State agency's approved implementation plan. As 
part of the plan, the State agency must indicate a suitable pilot area 
to serve as the basis of the three-month analysis and reporting, 
however, expansion can occur simultaneously with pilot operation. 
Submission of an Advanced Planning Document Update to request FNS 
approval to implement and operate the EBT system in areas beyond the 
pilot area is only required in instances where there are substantial 
changes to the implementation plan. However, if significant problems 
arise during the pilot period or expansion, the Department can require 
that roll-out be suspended until such problems are resolved.
* * * * *
    (f) * * *
    (4) * * *
    (vi) Ensure that retail store employees are trained in system 
operation prior to implementation. Retailer training shall be offered 
by the State agency and include the provision of appropriate written 
and program specific materials. Retailers have the option to waive 
instruction by the State agency if they desire. State agencies shall 
direct retailers to confirm in writing that they are waiving their 
option to training;
    (vii) Provide on-line access to State EBT systems for compliance 
investigations. The State agency may be required to deploy 
administrative terminals to FNS Compliance Branch Area offices, 
Regional offices and Field

[[Page 36502]]

offices so that FNS compliance investigators, other appropriate FNS 
personnel and investigators from the Department's Office of Inspector 
General have access to the system in order to conduct investigations of 
program abuse and alleged violations;
    (viii) Ensure that FNS compliance investigators and investigators 
from the Department's Office of Inspector General have access to EBT 
cards and accounts that are updated as necessary to conduct food stamp 
investigations.
    (g) * * *
    (3) * * *
    (iii) Identify the food stamp household member's account number 
(the PAN) using a truncated number or a coded transaction number. * * *
* * * * *
    (5) * * *
    (i) The State agency shall permit food stamp households to select 
their Personal Identification Number (PIN). PIN assignment procedures 
shall be permitted in accordance with industry standards as long as PIN 
selection is available to clients if they so desire and clients are 
informed of this option.
    (ii) In general, the State agency shall replace EBT cards within 
two business days following notice by the household to the State agency 
that the card has been lost or stolen. In cases where the State agency 
is using centralized card issuance, replacement can be extended to take 
place within up to five calendar days. In all instances, the State 
agency must ensure that clients have in hand an active card and PIN 
with benefits available on the card, within the time frame the State 
agency has identified for card replacement.
* * * * *
    (10) * * *
    (v) * * * This shall include the statement of non-discrimination 
found in Departmental Regulation 4300-3 (available from USDA, Office of 
Civil Rights, Room 326-W, Whitten Building, Washington, DC 20250). * * 
*
* * * * *
    (h) * * *
    (2) Authorized retailers shall not be required to pay costs 
essential to and directly attributable to EBT system operations as long 
as the equipment or services are provided by the State agency or its 
contractor and are utilized solely for the Food Stamp Program. In 
addition, if Food Stamp Program equipment is deployed under contract to 
the State agency, the State agency may, with USDA approval, share 
appropriate costs with retailers if the equipment is also utilized for 
commercial purposes. State agency may choose to charge retailers 
reasonable fees in the following circumstances:
    (i) Cost for the replacement of lost, stolen or damaged equipment;
    (ii) The cost of materials and supplies for POS terminals not 
provided by the State agency;
    (iii) Telecommunication costs for all non-EBT use by retailers when 
lines are provided by the State agency. In addition, State agencies may 
remove phone lines from retailers in instances where there is 
significant misuse of the lines.
* * * * *
    (4) * * *
    (ii) * * *
    (D) * * * State agencies may provide retailers with additional 
terminals beyond the number of lanes in a store at customer service 
booths or other locations if appropriate.
* * * * *
    (i) * * *
    (6) * * *
    (i) The address of the office where a card can be returned if found 
or no longer in use should be printed on the card.
* * * * *
    (j) * * *
    (1) * * *
    (iii) Initiating and accepting reimbursement from the appropriate 
U.S. Treasury account through the Automated Standard Application for 
Payment (ASAP) system or other payment process approved by FNS. At the 
option of FNS, the State agency may designate another entity as the 
initiator of reimbursement for food stamp redemptions provided the 
entity is acceptable to FNS and U.S. Treasury;
* * * * *
    (k) * * *
    (2) * * *
    (ii) State agencies must provide retailer transaction data to FNS 
on a monthly basis. This data must be submitted in the specified format 
in accordance with the required schedule.
    (iii) Data detailing by specified category the amount of food stamp 
benefits issued or returned through the EBT system shall be provided in 
a format and mechanism specified by FNS to the FNS Account Management 
Agent as the benefits become available to recipients. This data will be 
used to increase or decrease the food stamp EBT benefit funding 
authorization for the State's ASAP account.
* * * * *
    (m) Re-presentation. The State agency shall ensure that a manual 
purchase system is available for use during times when the EBT system 
is inaccessible. As an alternative to manual transactions, State 
agencies may allow retailers, at the retailer's option and liability, 
to perform store-and-forward transactions when the system is down. The 
retailer would be able to forward the transaction to the host one time 
within 24 hours of when the transaction occurred. If the system is 
inoperable for more than a 24 hour period, the retailer would have 24 
hours from when the system resumes operation. In instances where the 
store-and-forward transaction is denied due to insufficient funds, the 
retailer could re-present for the balance in the account. This 
transaction could not be re-presented in future months.
* * * * *

    Dated: July 2, 2001.
Eric M. Bost,
Under Secretary for Food, Nutrition and Consumer Services.
[FR Doc. 01-17212 Filed 7-11-01; 8:45 am]
BILLING CODE 3410-30-U