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U.S. House of Representatives,
Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to notice, at 2:00 p.m., in room 2128, Rayburn House Office Building, Hon. Peter T. King, [chairman of the subcommittee], presiding.

    Present: Chairman King; Representatives Barr, Sanders, Goode and Gonzalez.

    Chairman KING. We would like to welcome all of you to the first hearing of the Subcommittee on General Oversight and Investigations of the 106th Congress. I want to thank my Ranking Member, Congressman Sanders, for being here, and all our colleagues on the Banking Committee.

    Today the subcommittee meets to discuss EFT '99, the Treasury Department's plan to distribute payments through direct deposit, rather than by paper check. Specifically, we want to talk about how the Federal Government is educating millions of senior citizens, veterans, and others about their rights under EFT '99.

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    EFT '99 affects anyone who receives Social Security, veterans' benefits, Federal retirement benefits or railroad retirement benefits. The goal of EFT '99 is to get more of these people to take their payments by direct deposit, which is faster, safer, and less prone to fraud than a check in the mail.

    This is an issue, though, which has caused concern and anxiety among senior citizens in my district in Long Island and throughout the country. Very frankly, many seniors are worried that their benefits can be cut off. The purpose of this hearing is to put those fears to rest.

    It has come to my attention that even certain sectors of the Federal Government have informed senior citizens and veterans they could lose their paychecks and pensions if they don't open a certain type of bank account right away. One of the purposes of this hearing is to clear that up right now. Your paycheck or benefit check cannot be held up just because you don't want direct deposit.

    Let me give you an example. This is an enlarged copy of a letter sent to a retired person by the Department of Defense on June 22, 1998. Quoting from the letter: ''Please be advised that January 1, 1999, your paycheck will be held unless you enroll in direct deposit.'' This is a false statement, and I would like to, during the course of this hearing, find out just how many retired veterans received this notice. I understand that the Department of Defense has attempted to correct this situation since the letter was sent, and they should be commended for that.

    But I want to see, however, exactly how this is being followed up on. We must make sure that our seniors and veterans are not falsely threatened. These people depend on their monthly checks for food and shelter, and they must not be subjected to false fear.
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    This program is based on legislation adopted in 1996. During the next few years, there were several false starts and a degree of confusion. In 1997, both the House and Senate Banking Committees held hearings on the EFT '99 and its potentially devastating effects on American senior citizens. The Treasury Department, led by our former Under Secretary John Hawke, who is now Comptroller of the Currency, pledged to improve the plan.

    Today we have a series of expert witnesses who are going to update us on what the current status is. We look forward to the hearing, and now I turn it over to the Ranking Member, Mr. Sanders from Vermont.

    Mr. SANDERS. Thank you very much, Mr. Chairman, and let me congratulate you on your ascension to the Chairmanship of this important subcommittee, and I look forward to working with you on a number of important issues. And, I also want to thank you for holding this important hearing.

    I look forward to hearing reports on EFT '99 implementation from the agencies that we have represented before us today. And, I also welcome the AARP into this process. It is imperative that we implement a direct deposit, whether through the proposed Electronic Transfer Council or another method, in a manner that provides the maximum benefit to citizens at a minimum cost and with the least amount of bureaucratic red tape as possible. And, I look forward to working with the Administration and with my colleagues as we accomplish these goals.

    I thank all of you for coming and I look forward to discussing the issue with you. Thank you, Mr. Chairman.
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    Chairman KING. Thank you, Congressman Sanders.

    We have a panel today. I will introduce them. We have John Dyer, who is the Principal Deputy Commissioner of the Social Security Administration; Mr. Donald Hammond, Fiscal Assistant Secretary of the Department of the Treasury; Gregory Bitz, Director of Finance, Department of Defense Finance and Accounting Services Headquarters; and Gwendolyn V. Vaughn, a Volunteer Coordinator with the American Association of Retired Persons, AARP.

    I would ask the first witness, Mr. Dyer, if he could make a statement.

    We expect to have several votes on the House floor, which may interrupt this hearing. I think there will be two or three consecutive votes. If that happens, we will have to recess for that brief period of time.

    We have copies of your prepared statements; if you can possibly condense your oral statements to five minutes, we would appreciate it; if not, we will bear with you.

    Mr. Dyer.


    Mr. DYER. Thank you, Mr. Chairman and Members of the subcommittee, for the opportunity to discuss the Social Security Administration's progress in implementing electronic funds transfer provisions of the Debt Collection Improvement Act of 1996, commonly called EFT '99. SSA has offered the safety, convenience, and reliability of EFT, also known as direct deposit, to our beneficiaries for over twenty years.
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    We have been very successful in our efforts to educate the public about the benefits of direct deposit and to expand its use. For example, beginning in 1998, we made 33 million monthly payments through direct deposit. One year later, we made 36.5 million monthly payments, an increase of more than 10 percent. Only 14.3 million beneficiaries are still paid by check, and about 6 million of these beneficiaries do not have bank accounts. In sixteen States, more than 80 percent of the Social Security beneficiaries are paid by direct deposit, and beneficiaries who use direct deposit have an overwhelmingly positive view of this service.

    SSA is a strong supporter of EFT as a service to our beneficiaries. Direct deposit is convenient. Beneficiaries do not have to be home to receive their payments. They do not have to worry about their checks being lost or stolen. There is an electronic audit trail to ensure that the payment can always be located. Payments can be traced through the banking system and beneficiaries have a permanent record through their bank records. There are also economic advantages for beneficiaries; benefits are credited to the account at the opening of business on the scheduled payment date. Beneficiaries can write checks to pay bills or use ATM machines to get money immediately without the inconvenience of first having to cash a check.

    Also, direct deposit avoids such fees as those for cashing checks or purchasing money orders. Many financial institutions offer free services for customers who use direct deposit. The Debt Collection Improvement Act of 1996 encourages Federal check recipients to convert to EFT for more efficient and cost-effective Government operations.

    The legislation called for phasing in of EFT '99 over several years. In the Phase I, we paid new beneficiaries by direct deposit unless they said they did not have a bank account. If they didn't, we paid them by check. That phase was to last until January, 1999.
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    In September of 1998, the Treasury Department issued a final rule, as required by legislation, outlining when paying by EFT could be waived. Under these rules, SSA began Phase 2. We now request bank account information from applicants. If an applicant with a bank account questions why we plan to pay them by EFT, our interviewer describes the advantages. If the individual indicates that direct deposit is a hardship, we continue to pay by check. We also describe the advantages of direct deposit to those individuals who indicate they do not have a bank account, and we suggest they open an account. For the future, we will advise them of the Treasury-sponsored electronic transfer accounts—ETAs. If none of these alternatives are acceptable to the beneficiary, we will pay by check.

    As I just mentioned, our next task is to inform our beneficiaries about the ETA accounts. An ETA will be a low-cost account at a federally-insured financial institution for those who do not have existing accounts. The Treasury Department has described the proposed ETAs in the Notice in the Federal Register on November 23, 1998. Any federally-insured financial institution may participate and offer a varying combination of services.

    In general, an ETA account would be individually owned; it would be available to anybody who receives a Federal benefit, wage, salary, or retirement payment, and would accept only such payments electronically. The account would be subject to a maximum price of $3 per month and would provide, at no additional charge, at least four cash withdrawals per month through the institution's ATMs. It would provide the same consumer protections that are available to other account-holders and require no minimum balance except that required by Federal or State law. Also, beneficiaries would receive monthly statements. We support the establishment of these accounts and stand ready to work with the Treasury Department to promote them.
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    For those individuals who want to establish an ETA, we will provide information about financial institutions that offer these accounts. We will also advise them about where there may be other direct deposit options available to them. And, they may want to contact other financial institutions in the area.

    In other efforts to increase the number of EFT recipients, we have maintained our longstanding public information campaign and conducted a special national publicity campaign. We are partners with the Treasury Department, the financial community and the National Automated Clearinghouse Association to educate the public about the benefits of EFT '99. The campaign consists of printed materials that we have made available to financial institutions, check stuffers included with monthly checks, as well as public service announcements on television and radio.

    To support the EFT national campaign, SSA created additional materials directed to Social Security beneficiaries and SSI recipients, plus a complete Spanish public information campaign to be used in Puerto Rico.

    We also have initiated projects to make enrolling in direct deposit easier. For example, the quick start program allows financial institutions to provide Federal agencies with enrollment information electronically.

    In conclusion, let me say that SSA has long been in favor of EFT as a preferred method of delivering payments. This is both from the perspective of efficiency as well as convenience and safety of our beneficiaries. And, we will continue to work with the Treasury Department to meet the objectives of EFT '99 as well as the needs of our beneficiaries.
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    Thank you and I will be glad to answer any questions you might have, Mr. Chairman.

    Chairman KING. Thank you, Mr. Dyer.

    Now, Mr. Donald Hammond, the Fiscal Assistant Secretary of the Department of the Treasury.


    Mr. HAMMOND. Thank you, Mr. Chairman. Chairman King and Members of the subcommittee, thank you for the opportunity to appear before you today to discuss the Treasury's efforts to implement the electronic funds transfer requirements of the Debt Collection Improvement Act of 1996. I ask that the subcommittee include the submitted text of my written statement into the record.

    The Act requires the Federal Government to issue most payments, except tax refunds, via EFT after January 1, 1999, and gives the Secretary of the Treasury the authority to prescribe regulations and grant waivers from the requirement to receive payments electronically. The Act also directs Treasury to ensure that recipients required to receive payment electronically will have access to an account at a financial institution at a reasonable cost and with the same consumer protections as other account holders at the same financial institution.

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    In implementing the EFT '99 program, we have consulted extensively with all stakeholders, and especially the Congress, and believe that this consultation has been instrumental in developing a successful program.

    I commend the subcommittee for its interest in carrying out what we refer to as the EFT '99 program in a manner that benefits all Federal payment recipients and American taxpayers. We share these interests as we proceed through the implementation process.

    In implementing EFT '99, we have been guided by four principles: one, that the transition from a paper-based system to an electronic transfer system should be accomplished with the interest of recipients ranking of paramount importance; two, that private sector competition for the business of handling Federal payments should be maximized; three, that all recipients, and especially those recipients having special needs, should not be disadvantaged by the transition to electronic payments; and four, that the EFT '99 program is an opportunity to the maximum extent possible to bring into the mainstream of our financial system those millions of Federal payment recipients who currently do not have bank accounts.

    As a result of the Act and Treasury's public education and outreach programs, we are seeing significant progress in the conversion of check payments to EFT. In Fiscal Year 1998, Treasury's Financial Management Service issued more than 860 million payments on behalf of non-defense agencies. Sixty-eight percent of the Fiscal Year 1998 payments, not including tax refunds, were made electronically. In January, only four months later, almost three-quarters of these payments were made electronically. Since Fiscal Year 1995, total Treasury-disbursed check volume has decreased by 110 million checks annually, resulting in significant recurring savings to the Government. My written statement includes a table of our recent payment experience.
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    On September 25, 1998, Treasury published a final rule in the Federal Register prescribing the implementation of the EFT '99 program. The EFT rule was issued after consideration of the testimony received at four public hearings around the country, and the 212 comment letters that we received from financial institutions, consumer and community-based organizations, Federal payment recipients and other key stakeholders. The EFT rule establishes the circumstances under which waivers are available for payment to recipients, provides the requirements of accounts to which Federal payments may be sent by EFT, and sets forth the responsibilities of Federal agencies and recipients under the regulation. The regulation also provides that any recipient who receives a Federal benefit, wage, salary, or retirement payment is eligible to open a low-cost Treasury-designated account called an ETA or electronic transfer account at a financial institution that offers such accounts. I will be discussing the ETA in more detail later in my remarks.

    The EFT rule emphasizes recipient choice through an accommodative waiver policy, formulated for the purpose of minimizing hardships to Federal payment recipients. We wanted to ensure that any individual receiving a Federal payment may invoke a hardship waiver, based on the recipient's assessment of his eligibility and continue receiving a check. Treasury is confident that this approach will support the goals of the program as more and more individuals become familiar with EFT over time.

    One of the most important considerations in implementing EFT '99 is to ensure that Federal payment recipients, particularly recipients of Federal benefits, salary, and retirement payments, are aware of and understand their options and choices under the program. Federal agencies are required under the EFT rule to notify current check recipients of their options, and we continue to work closely with the major benefit agencies to ensure that this information is available.
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    Agencies are not authorized to withhold, suspend, or delay a payment if a recipient does not respond to a request for a waiver notification under the rule. We are ensuring that full disclosure of these options is being made.

    We continue to work closely with the Federal Reserve and organizations such as the National Automated Clearinghouse Association to expand the flexibility for corporations to receive payments electronically.

    Treasury has also committed extensive resources to an innovative grassroots approach to public education. We have conducted extensive market research to learn more about recipients of Federal payments, and we are using that information to develop an effective nationwide public education campaign. We recognize that a key to the success of the EFT '99 program is providing clear and easy-to-understand information to stakeholder groups and the public about available options.

    Treasury has undertaken extensive outreach efforts, including meetings with various interest groups, to learn about the needs of payment recipients. We have placed a heavy emphasis on consumer and community organizations in our public education efforts, as these groups represent and interact directly with payment recipients on an ongoing basis.

    We have established partnerships with literally hundreds of local community organizations to assist us in our efforts to reach current check recipients. I believe this grassroots effort is critical to the success of converting check recipients to electronic payments.
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    Components of the public education campaign include messages to current check recipients about the program to convert to EFT payments, options available under the EFT rule, and the safety and convenience of EFT, and how to sign up for direct deposit. Another key aspect of the campaign is helping those check recipients make the most informed choices by educating them on basic financial literacy. We do not want to force recipients into choices that are not right for them, and this message will be key to the campaign and included in our literature. Whatever choice is made, recipients' payments will continue to be made on time and without interruption.

    One of the most complex and challenging issues confronting us in the EFT '99 program is how to meet the needs of millions of Federal payment recipients who do not have an account at a financial institution. Treasury is committed to exploring ways to provide greater access to financial institutions for consumers. In response to the requirement that Treasury ensure access to an account to those who are required to have such an account, Treasury is currently designing the ETA.

    Secretary Rubin is committed to providing opportunities to those individuals without an account at a financial institution to join the financial services mainstream. We consider the ETA to be an important stepping stone into a more full-service banking relationship while providing a safe, reliable, and low-cost alternative to recipients who receive and cash checks. Our efforts to implement the ETA are well underway, but significant work remains.

    On November 23, 1998, we published in the Federal Register, for a 45-day public comment, the proposed ETA features. The ETAs, as proposed, will be available to all recipients of Federal benefit payments, wage, salary, and retirement payments at reasonable cost and with comparable consumer protections. Under the proposal, the ETA would accept only electronic Federal payments, be subject to a maximum price of $3 per month, have a minimum of four cash withdrawals per month included in the monthly fee, allow point-of-sale transactions, require no minimum balance and provide a monthly statement.
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    Treasury proposes to compensate financial institutions for each account established. The account may be offered only by federally-insured depository institutions and may not involve linkages between the depository institution and a payment service provider.

    Treasury took extensive steps to seek public comment on the proposal, and through the use of the Internet, and by ensuring that Members of Congress and every financial institution in the country was provided a copy of the ETA notice. In response, we received 198 comment letters. We received comments from financial institutions, financial institution service providers, Federal agencies, Members of Congress, trade associations, consumer groups, and community based organizations.

    The majority of the comments on the proposed ETA features were generally supportive of Treasury's efforts to design a low-cost account for those recipients without accounts at financial institutions. However, the comments reflected divergent views on some proposed ETA features, including account eligibility, set-off prohibition, the monthly fee, the number of cash withdrawals, methods of access, and the monthly statement.

    Treasury also solicited comments on whether to allow ETA providers the option of offering additional features at an additional fee, if any, to the recipients for interest payments on account balances, deposits of electronic funds, and pre-authorized ACH debit capability for recurring bill payment.

    In addition to seeking comment on proposed basic and optional ETA account features, Treasury sought comment on whether the proposed compensation of $12.60 for each ETA opened would incent financial institutions to offer the account and whether the proposed compensation should be paid for ETAs opened by recipients with existing accounts. Financial institutions commenting on the question of compensation for existing account holders indicated that the compensation should not depend on whether the customer currently has an account, pointing out that the cost of opening an account are the same in either circumstance. Consumer organizations also favored not distinguishing for compensation purposes between recipients who have and do not have existing accounts.
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    Our analysis of the public comments is well underway and we are striving to strike a balance between ensuring that a large number of banks will offer the account and ensuring that the objective of providing a low-cost account with full consumer protection is achieved.

    In conclusion, EFT '99 implementation is proceeding very successfully. Implementing the EFT '99 program provides us an important opportunity to deliver the high quality of service that our customers desire to help to bring Federal payment recipients into the financial mainstream, and at the same time to lower the cost of Government to American taxpayers.

    Thank you once again for the opportunity to report on the progress of the program. And I will be glad to answer any questions the subcommittee may have.

    Chairman KING. Thank you, Mr. Hammond.

    We have been joined by Congressman Barr, Congressman Goode, and Congressman Gonzalez.

    I would like to ask Mr. Gregory Bitz, Director of Finance, Department of Defense Finance and Accounting Service to proceed.

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    Mr. BITZ. Thank you, Mr. Chairman.

    Mr. Chairman and Members of the subcommittee, in addition to the written opening remarks previously submitted for the record, I would like to briefly comment on behalf of the Department of Defense and share with you the Department's progress in implementing direct deposit electronic funds transfer.

    Historically, the Department has had a strong voluntary EFT program. As you may recall, it was the Air Force, working with the Federal Reserve System, that tested the first direct deposit electronic fund transfer program in June 1974. The test was successful and implemented throughout the Department because it met our mission readiness and quality-of-life requirements.

    Regardless of where the military member or civilian employee is assigned, payments made by DD/EFT are electronically and safely deposited in a financial institution of their choice. Funds are immediately accessible to family members through the use of personal checks or an ATM, once the payment is credited to the member's or employee's account. One very significant improvement is our readiness to deploy. DD/EFT solves the problems of providing for special arrangements or allotments for financial support of dependents during deployments.

    In April 1992, as a result of experience with deploying personnel during Desert Shield-Desert Storm, the Department of Defense strengthened its electronic fund transfer program by making DD/EFT the standard method of payment for all categories of DOD personnel including civilians, military—both active and reserve—and military retirees, and annuitants. In addition, DD/EFT was made a condition of employment for both civilian and military members. The policy provided for waivers based on written request from the military member or civilian employee if it was determined to be in the best interest of the individual and the Government.
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    On August 15, 1994, the Office of Management and Budget released OMB Bulletin 94–09, which stated that agencies could require employees to receive salaried payments by EFT. Subsequently, Section 402 of the Government Management Reform Act of 1994, dated October 13, 1994, mandated that wage, salary, and retirement payments be made by EFT for all new recipients, effective January 1, 1995.

    With the passage of the Debt Collection Improvement Act of 1996, EFT was mandated for all Federal payments except for income tax refunds. The Department of the Treasury interim regulations made it clear that DD/EFT was mandated for the entire Federal Government with few exceptions. Subsequently, in the final regulations, the Treasury softened the mandatory nature of the law by broadening the waiver provision to enable individual recipients to choose whether they would participate in EFT. The Treasury's action effectively removed EFT as a condition of employment, which had been a DOD policy since April 1992, and a significant cornerstone of the DOD's EFT program.

    Today, the DD/EFT participation rates for the DOD military and civilian personnel exceed 95 percent. The rate for military retirees, annuitants, and reserve component personnel paid by DFAS has reached 94 percent.

    The high percent of retirees and annuitants can be somewhat attributed to the DD/EFT requirement that applied during the retiree's years of employment. During the last few years, the use of EFT for travel payments rose quickly to over 90 percent, since the DD/EFT was already in place for their payroll payments. For child support payments, as you may recall, the Department of Defense obtained concurrence from the Department of the Treasury to continue payment by check until the various States can accept EFT.
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    In summary, Mr. Chairman, to reverse the Department of Defense DD/EFT policy would have a dramatic, negative impact on our mission readiness. It also will raise significant quality-of-life issues for military families, especially when service members, both active and reserve, are deployed overseas on short notice. When service members retire, payments of retired pay are automatically paid by EFT. Any reversion to paper checks would result in decreased customer service.

    Thank you for the opportunity to explain the Department's position on this subject. I would be happy to answer any questions the subcommittee may have.

    Chairman KING. Thank you for your testimony, Mr. Bitz.

    And now Ms. Vaughn from the AARP.


    Ms. VAUGHN. Thank you. Good afternoon. I am Gwendolyn V. Vaughn, AARP volunteer from New York. Thank you, Chairman King and Members of the subcommittee, for this opportunity to present the views and the experience of AARP regarding the progress of implementation of electronic funds transfer, EFT '99.

    The Association has major concerns regarding the participation of payment service providers, also known as ''fringe providers'' and EFT '99. While AARP has not opposed some limited role to these providers, Treasury should regulate any such participation and limit the charges that can be assessed to Federal payment recipients. With no Federal regulations and limited or no State regulations, the number of such operations has been increasing, according to recent consumer studies. These studies show that consumers pay more for services through fringe providers than they would at Federal depository institutions like banks, credit unions, and thrifts.
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    Further, depository institutions are required to comply with community investment regulations, while fringe providers are not. Contractual arrangements between depository institutions and fringe providers raise serious concern because of their potential effect on individual recipients, consumers and the general competitiveness of the financial service market. These arrangements can limit recipient access to the funds in their account. They typically allow the recipient to access his or her money only through the fringe provider, denying access through the bank holding the money. These arrangements can stifle competitiveness. They permit both bank and fringe providers to profits from disparages in the law. At the same time, both sectors skirt consumer protections and community investment rules. These arrangements can evade the assurance of reasonable cost to Federal payment recipients by not restricting fees imposed by fringe providers.

    AARP believes that the $3-per-month service charge with four free ATM transactions proposed for the ETA should set the standard for reasonable costs. These arrangements can negate the principle of equal consumer protection for all account-holders at Federal depository institutions. The law requires that depository institutions offer the same consumer protection to funds in EFT accounts, as for those in that institution's other deposit accounts. Fringe providers should not be permitted to operate at a lower standard. These arrangements can hinder community investment, particularly in inner city, minority, and rural communities.

    The features and availabilities of ETAs will probably be the most influential factor in the success of the EFT '99 mandate and public education campaign. An ETA that is attractive to recipients and widely available could bring many currently un-banked persons into the Nation's financial mainstream. Delays in developing the specifications for the ETA prevent AARP and other organizations from being very specific about the alternatives to fringe financial service providers. Recipients need to be able to understand the benefits and limitations of various types of EFT accounts offered by different institutions, as well as the hardship waiver option, so they can select which best meets their needs.
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    AARP believes that the public education campaign is an essential component of EFT '99. We have worked closely with the Department to assist in its EFT public education campaign by establishing linkages with Treasury's EFT community outreach volunteers in every region. Because older persons make up the majority of those affected by EFT '99, AARP initiated its own education effort entitled, ''Direct Deposit—You Choose,'' to assure that its members were informed about their options under EFT. The Association has produced fact sheets and other materials for public distribution.

    Finally, while AARP is generally pleased with Treasury's public education efforts, we do feel the campaign needs a higher profile, and meet more resources. Treasury should also collect and disseminate information on the availability of free and low-cost accounts in a format that permits comparison shoppers, and provide lists of financial institutions offering ETAs once these accounts become available. However, all of this information needs to be presented in a neutral and unbiased manner.

    This concludes my remarks. Thank you for the opportunity to present AARP's views.

    Chairman KING. Thank you, Ms. Vaughn. I greatly appreciate your testimony.

    I would ask unanimous consent that the full statements of all the witnesses be included in the record. And, if any of the Members want to submit statements, they may after the hearing.
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    My understanding is we are going to have the two final votes of the day coming up within five minutes, so we will start the questioning. And then, probably about five or six minutes after the first vote is called, we will recess for about 20 to 25 minutes.

    I would like to direct my first questions to Mr. Bitz, Department of Defense. I would like to refer you to Chart 1, which I believe is over there to your left. I would ask unanious consent that the documents on Charts 1, 2, and 3 be included in the record.

    This is a letter, dated June 22, 1998, from the Defense Finance and Accounting Service, Cleveland center, reading: ''Please be advised that, effective January 1, 1999, your paycheck will be held unless you enroll in direct deposits.'' Mr. Bitz, can you tell me how many retired or active service members received this notice?

    Mr. BITZ. Mr. Chairman, I don't have the exact number. It would have been the few thousand that would have retired in the month of June, because that letter is computer-generated. As we received the new retirement list, that letter only went out on two mailings, both in June of that year. The Treasury's interim guidance was rescinded toward the end of June; the Treasury contacted us, and we pulled that letter and produced a new one that allows the retiree to continue to receive a check.

[The following information was submitted by Mr. Bitz at a later date:

[No active duty Navy personnel received this letter. This computer-generated letter was sent to 21,043 retirees who had not previously been asked to enroll in Direct Deposit. After it was sent, we received notice that Treasury's interim guidance had been rescinded and that they had softened their mandatory EFT stance. There were no additional bulk mailings because we placed a ''hold'' on all further correspondence with retirees for Direct Deposit. This ''hold'' is still in effect. Shortly after Treasury's new guidance we developed a revised letter that allows the retiree to continue to receive a check. The new letter is only used to reply to retiree-initiated correspondence, as DFAS-Cleveland makes no attempt to convert retirees to Direct Deposit.]
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    Chairman KING. Each of the retirees who received this letter, were they subsequently notified of the mistake in this letter?

    Mr. BITZ. I cannot be absolutely sure right now. I can verify that later. But, we did go out with a broadcast through the Army Times, Navy Times, admitting that that letter went out in error, and that a subsequent letter was mailed to most of the retirees. I cannot be sure we had addresses to get 100 percent, sir. I will have to check.

[The following information was submitted by Mr. Bitz at a later date:
[There was no formal recession letter. Since the letters were not linked to the individual retiree pay accounts, it would have been difficult to identify the June 22, 1998, letter recipients. Because there was no automated record of retirees entering or leaving the non-EFT pool, we cannot provide statistics. This is the reason that the department decided to place a public notice in the Army Times and the Navy Times. These newspapers are widely read by the military members and retirees. All retiree inquiries in response to the newspaper notices received the revised letter.]

    Chairman KING. Thank you. Mr. Bitz, are you aware of anyone's paycheck being withheld because they didn't sign up for direct deposit?

    Mr. BITZ. None.

    Chairman KING. We refer you to Chart number 2, which is a memorandum dated February 23, 1998, which says, ''If on January 1, 1999, you have not elected EFT or the Secretary of the Treasury has not approved a waiver request, your pay will be placed in a suspense account. Money placed in a suspense account will be issued to you on the first pay period after you elect EFT or an approved waiver request is received by Code 45.''
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    Mr. Bitz, are you aware of anyone's pay being placed in a suspense account?

    Mr. BITZ. Mr. Chairman, no one's pay was put in a suspense account.

    Chairman KING. And did you issue a follow-up memorandum indicating that employees need not seek approval for waivers?

    Mr. BITZ. I will have to verify. The Commanding Officer of Fleet Industrial Supply Center is not part of our structure. This letter, and probably similar letters, went out based on the receipt of the interim Treasury guidance. It said that it would be mandatory, 100 percent mandatory, and please prepare everyone as early as possible. All those actions were rescinded in late June of 1998, when the Treasury interim guidance was suspended and replaced with draft permanent guidance that would no longer make it mandatory, nor would it authorize us withholding any payments until such time as someone signed up for EFT.

[The following information was submitted by Mr. Bitz at a later date:
[We contacted the customer liaison office of the Commanding Officer of Fleet Industrial Supply Center. The officer referenced as the Point of Contact for this letter confirmed that upon notification that Treasury had revised their guidance, that the liaison office ceased all efforts to convert employees to Direct Deposit. They refer any employees to Treasury's web page for further information.]

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    Chairman KING. I would also refer you to Chart number 3, which is, I believe, dated November 5 of 1998, a letter from Defense Finance and Accounting Service to Donald Hammond, which basically, I think, put you in compliance with the regulations.

    I would ask you, in your statements, you referred to the impact this would have on your mission, basically. And I would ask how it interferes with the military's mission if a retiree gets paid by check? I can, perhaps, understand if you are talking about somebody in a combat zone. But how can that impact upon the mission of the Defense Department if a military retiree elects to receive a check rather than a direct deposit?

    Mr. BITZ. Mr. Chairman, there are a number of retirees that can be called back to active duty during certain levels of deployment, and it has occurred in the past. And, historically, we have found that anyone that is on EFT, we have a lesser morale problem and issue of their family being behind without access to their finances. So, we have, basically, taken the position that the active duty, reserve and retirees are one population, and we try and treat them all the same, sir.

    Chairman KING. Mr. Hammond, are you satisfied that DOD is in compliance?

    Mr. HAMMOND. It is our understanding, and we have met extensively with folks from the Department of Defense as well as the Defense Finance and Accounting Service, that they have made good-faith efforts to comply with the final terms of our regulations. I think we have made considerable progress in that regard.

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    Chairman KING. But, are they in full compliance?

    Mr. HAMMOND. Not being fully aware of the full extent of their operations and given the disparity, or I should say, the wide range of facilities that they have, I wouldn't be able to speak to that. But, I think, addressing it from a senior management perspective, certainly our discussions with DFAS as well as DOD's Office of the Chief Financial Officer, have given us encouragement that they understand the regulation and are making good faith efforts to comply.

    Chairman KING. Thank you, Mr. Hammond.

    We have ten minutes on this vote. Bernie, do you want to start now?

    Mr. SANDERS. Thank you very much, Mr. Chairman. In Vermont there are, excluding SSI, about 101,320 people who receive Social Security payments, that is 78.5 percent of those who receive Social Security. That leaves approximately 21.5 percent or 21,780 others who are not receiving their Social Security payments through direct deposit at the current time.

    So, what I would like to ask Mr. Dyer, for a start, is, what are some of the reasons that people have chosen, or for whatever reason, have not gone into the direct deposit approach? Have they elected not to select the direct deposit option, or are many of them considered unbanked?

    Mr. DYER. Sir, I would assume that a large portion are probably unbanked. Some are like my mother, whom I have been unable to convince to go to direct deposit. She likes to receive the paper check. Others maybe have a disability or mental problems and they got a reprieve and have not decided to go to EFT. So, there are various reasons, and we just accept it. If somebody says they don't want to go to EFT, we accept that as their waiver request, and we go with their wishes.
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    Mr. SANDERS. OK. Mr. Chairman, do you want to break now?

    Chairman KING. Congressman Barr.

    Mr. BARR. Thank you. I appreciate being able to ask one quick question because I won't be able to come back afterwards.

    I appreciate your testimony.

    What has been the—I guess, Mr. Hammond, you might be in the best position to answer the question. How much has it cost the Government from 1996 to this point worrying about this EFT?

    Mr. HAMMOND. Well, I think, actually, when you look at the overall program and its implementation, both from a cost benefit standpoint, it has actually been a net savings to the Government. We have spent, in addition to internal staff time—the most significant expenditure that we have had for the program has been for public education to the extent of about $11 million. That will take us through the end of this Fiscal Year. In return, over the four-year period, we have reduced annual check volume by about 110 million checks, which represents a savings on an annual basis of about $44 million a year. So, we are very significantly net ahead through implementing this.

    Mr. BARR. So, overall, would you say it is a worthwhile program to continue moving forward on?
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    Mr. HAMMOND. Oh, we think it is a tremendous program. We think, especially now that we believe we have tailored the regulation to accommodate recipients' needs and recipients' individual circumstances, that the cost-benefit for the Government in recurring future cost savings, the efficiency for the recipients, all justify moving aggressively forward with this program.

    Mr. BARR. OK.

    Ms. Vaughn, would you agree with that, that so long as we continue to provide the waivers on the basis that has been indicated today, that it is a worthwhile program to move forward on?

    Ms. VAUGHN. It certainly is, especially if we enforce, or bring into effect, or play the ETA part of this program.

    Mr. BARR. OK. Thank you very much, and thank you, Mr. Chairman.

    Chairman KING. We stand in recess until 3:15 p.m.


    Chairman KING. The hearing will come to order.

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    Mr. Sanders.

    Mr. SANDERS. Thank you very much, Mr. Chairman.

    Mr. Dyer, you were indicating to me some of the reasons why some people in Vermont, and presumably throughout the country, might not be into the program. Now, let us go over this one. If I am one of those people, kind of an old codger in the State of Vermont, that doesn't like all this electronic stuff and thinks the world will come to an end in the year 2000 and prefer to have my piece of paper rather than some electronic money in the bank, right? Say I am one of those folks. What process do I need to go through to make sure that I continue to get my piece of paper?

    Mr. DYER. With us, nothing.

    Mr. SANDERS. Why is that?

    Mr. DYER. Because we assume, if you do not consciously make an effort to go EFT with us, that you want to continue to get it as paper, and that you are exercising your waiver rights.

    Mr. SANDERS. OK. And there is not going to be any problem? I will continue to get my checks the way I did before?

    Mr. DYER. Nothing. You continue getting your check.

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    Mr. SANDERS. And have you guys done a good job in advertising that fact?

    Mr. DYER. Yes, sir. It is in all our information.

    Mr. SANDERS. OK, good, that is good to hear.

    Maybe Ms. Vaughn can pick up on this point, that my understanding, Mr. King a moment ago mentioned some problems with Defense, and concerns that some information that was sent out was not quite accurate. My understanding is that some consumer groups have made similar allegations regarding the Social Security Administration. Is that something that you are familiar with?

    Mr. DYER. I am not aware of it. When we first started implementing EFT under the new legislation, we asked our offices to keep us informed if there were any concerns or worries. Other than a trickle, an item here or there, things have been very smooth as far as I am aware.

    Mr. SANDERS. OK. My understanding is that some consumer groups have complained that Social Services Administration field offices have misinformed citizens by telling them that their payments will be delayed or withheld if they do not sign up for direct deposit. Anyone?

    Ms. VAUGHN. To my knowledge, some of the check-cashing operations, grocery stores, liquor stores have informed certain consumers that they would not be able to cash their checks unless they went through direct deposit. And, this has taken place in some of the inner city areas, minority areas, where these people go to cash checks. And, of course, they are overcharged and they also pay a higher percentage rate. And some of them are the mom-and-pop grocery stores, plus some of the big supermarkets, also. They have used scare tactics to scare the consumer.
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    Mr. SANDERS. OK. So, it is those people doing it, not the Social Security Administration?

    Ms. VAUGHN. That is correct.

    Mr. SANDERS. OK, good. OK.

    Well, Mr. Chairman, thank you very much.

    Chairman KING. OK, Mr. Sanders.

    Mr. Gonzalez.

    Mr. GONZALEZ. Thank you very much.

    Kind of a preliminary question—I am going to apologize, first of all, because I have not read everything that is in front of me. Many times the answer lies before your very eyes, and you ask a question and people will refer you to something that sits there. So, I apologize if it is contained in here.

    This is for Mr. Dyer. How many Social Security recipients do we have that are unbanked? What is the percentage?

    Mr. DYER. We estimate somewhere around 6 million at this time.
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    Mr. GONZALEZ. Any estimations as to how many will opt for electronic transfers?

    Mr. DYER. We are hoping that we will get 1 to 2 million of them over time.


    My question, then, to Mr. Hammond would be, what would motivate a financial institution to offer that service? When we are talking about a $3 fee, four transactions; that is probably a better deal than a lot of people are getting on other types of accounts. So, what is the incentive?

    Mr. HAMMOND. Well, I think there are a couple of incentives. First, we recognize that for financial institutions, the electronic transfer account isn't likely to be a significant source of profitability. But, what we did in designing the account was try to design it so that it would not result in losses to the financial institution.

    So, in essence, on the margin, it is an account that is offered with a small to minimal amount of profitability, but doesn't represent a cost to the offering institution. If you, then, take it from that standpoint, what it offers in conjunction to, say, a typical low-cost banking account that has checking, it is a very low-risk account for the bank to offer. So, they are not taking on the risk of overdraft, for example, that you find with a typical checking product.
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    As a result, when you combine that with the opportunity for them to get more involved in their community and provide initial access to financial services to individuals who today don't have accounts, we think that is a strong motivation. And for some segment of those people that will take ETA accounts, we think that they will step up to more sophisticated financial products over time. In essence, you bring them in at the entry level to the financial services system, and then they graduate as they become more familiar with it.

    Mr. GONZALEZ. OK. Any forecast on which banks would volunteer on this? We will just say the big banks, or are we going to have the community independent banks?

    Mr. HAMMOND. We specifically designed the product so that it could be offered by any insured depository institution, and we have received considerable interest from the smaller community banks, as well as the more—more, what I will say, statewide or perhaps, you know, smaller regional financial institutions. With regard to the large financial institutions, we have had some strong interest from some and we have had some very mixed reviews from others. They are all waiting to see what the final attributes of the account will ultimately be before they decide whether or not they will commit to offering the product.

    Mr. GONZALEZ. Yes. But, realistically, you probably would see the independent or community-based bank be more of a participant?

    Mr. HAMMOND. They have been very excited about the opportunity to participate in this. They are concerned about some of the same details as the larger banks, but probably to a lesser extent. They know their communities and they think that this product represents a real opportunity for them to participate in that regard.
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    Mr. GONZALEZ. Thank you.

    Thank you, Mr. Chairman.

    Chairman KING. Thank you, Mr. Gonzalez.

    Mr. Dyer, do you believe the average Social Security recipient is aware that direct deposit is not mandatory? Is there any way you can gauge what the level of awareness is?

    Mr. DYER. I am not aware of any survey question that we have done that would get at that. I think, though, that the issue we have noticed is that most people who come into our offices are familiar with electronic money. It is the way of doing business nowadays. When you see people come into the office, when you have signup rates almost to 90 percent for EFT, that tells you that they are just comfortable with it; it is the way to go.

    You know, we have been in the business twenty years. The word is out in the community that you are just a lot safer getting it directly in the bank. It is convenient. We just have not had to make a hard sell, and we are looking forward to the ETA because that will let other people who haven't been able to have this convenience take it on, too.

    Chairman KING. Maybe you covered this in the testimony and I missed it, but, are local Social Security offices prepared to educate senior citizens about their options?
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    Mr. DYER. Our thinking is that when ETAs are available, we will put out information about them, either through check-stuffers or direct mailing, or however we decide is the best way to contact folks. In addition to that, when people come into our office, we, as usual, will make them aware that there are other lower-cost options like ETA in the community. We will at least alert them to that fact. We will tell them what banks are certified for ETA——

    Chairman KING. Credit unions also?

    Mr. DYER. Excuse me?

    Chairman KING. Does that include credit unions also?

    Mr. DYER. Yes, credit unions, thrifts.

    Chairman KING. Ms. Vaughn.

    Ms. VAUGHN. Yes, sir.

    Chairman KING. What do you think that Congress could do to educate seniors about EFT '99?

    Ms. VAUGHN. Well, as you know, Mr. Chairman, I am involved in the education part of that. I do feel that Congress is doing its best role in doing what it is doing here today. It is exercising oversight and holding all the parties in this process accountable.
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    And, also to that previous question that I answered earlier about the check-cashers, grocery stores, the liquor stores, telling people that they must sign up for EFT. Apparently, there are some field workers in the Social Security Administration who aren't aware or haven't been informed that this is not the case, because some of them are still telling people that they must sign up for EFT in order to get their Social Security check.

    Chairman KING. Now, as you know, New York, our State, does have a limit on fees that can be charged by check cashers. It is 1.1 percent.

    Ms. VAUGHN. Yes, sir.

    Chairman KING. Do you think we should consider expanding that nationally?

    Ms. VAUGHN. Yes. Also, in New York, too, we have the basic banking——

    Chairman KING. I don't want Mr. Gonzalez from Texas getting jealous about how advanced New York is.


    Ms. VAUGHN. New York has basic banking service. Unfortunately, many of the banks are not making the consumers aware of this. Our basic banking service is very similar to what ETA will be. The $3 minimum and, at least, four free transactions. We do have that in New York.
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    As I said, the problem is the banks are not making the people aware of that. AARP has a campaign going on. We are making an effort to educate the people about this in the State of New York, where I reside, of course, so that they will be aware and will have the opportunity to take advantage of this basic banking service.

    Chairman KING. In the final analysis, do you think most seniors are going to sign up for ETA?

    Ms. VAUGHN. I think that ETA plays a very important part in this. If we are able to put ETA in place, I do believe direct deposit, which is the common, most popularly referred name through EFT, that it will be successful. We are educating the consumers.

    We, also, too, in New York have been using a miniature ATM machine. We have found that many of the seniors are afraid of it; they have never used it. We have had so many of them use our machine, and now they are becoming more familiar with this machine. We are letting them know by showing them how easy it will be for them to access their funds if they can use the ATM machine.

    Chairman KING. Maybe I can make an appointment. I am a guy that still walks around with cash in his pocket all the time.

    Ms. VAUGHN. I will be glad to show you.

    Chairman KING. As long as it is real simple.
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    Mr. Gonzalez, do you have any other questions?

    Mr. GONZALEZ. A question and then an observation, I guess.

    Ms. Vaughn, I commend you for the fine work that you do. My concern is going to be, and you share it with me, that is these new accounts, the individuals, the unbanked individuals. Even though it is not mandatory, obviously, it is going to increase the number that will be going into electronic transfer accounts. These will constitute the smallest of accounts; that generally will equate to the smallest of voices in the business world, in the banking world. That is why—that was my question about who is going to be servicing these individuals. These will be the most powerless of all customers of the banking and financial industry. And so, I am hoping that, you know, your organization, working with Treasury and others, will make sure that we have quality of service in anticipation of these individuals we are going to be dealing with in the near future.

    Ms. VAUGHN. Yes, sir. This is one of the reasons that we have major concerns regarding the participation of the payment service providers. We do feel that rules and restrictions should be placed on them, as they are all the other Federal depositories of the banking organization. They have to have some kind of restriction. At this point, they can charge whatever fee they so desire; there is no restriction as far as their fees are concerned.

    Mr. GONZALEZ. Thank you.

    Chairman KING. Thank you, Mr. Gonzalez. I want to thank all of the witnesses for their testimony today. I want to thank the Government officials, especially, for their cooperation. I want to thank Ms. Vaughn for her testimony and the great work that AARP does.
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    Ms. VAUGHN. Thank you, sir.

    Chairman KING. The hearing stands adjourned.

    [Whereupon, at 3:30 p.m., the hearing was adjourned.]