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

    The subcommittee met, pursuant to call, at 3:00 p.m., in room 2220, Rayburn House Office Building, Hon. Sue W. Kelly, [chairwoman of the subcommittee], presiding.

    Present: Chairwoman Kelly; Representatives Tiberi, Gutierrez, Inslee, Moore and Shows.

    Chairwoman KELLY. The hearing of the House Financial Services Subcommittee on Oversight and Investigations will come to order. Without objection, all Members' opening statements and answers to their questions then will be made part of the record.

    Good afternoon. We are here to examine the status of electronic funds transfer requirements of the Debt Collection Improvement Act of 1996, known as the EFT 99 program.

    The purpose of this hearing is to examine how far we have come in moving toward a checkless system for paying Federal salaries, pensions, vendor payments, and Social Security benefits, and whether or not the change has reduced costs as was promised when the Act was passed.
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    We will also discuss the use of electronic transfer accounts, (ETAs) that allow low- and middle-income Federal payment recipients who do not have bank accounts to receive their funds electronically.

    The ETA can be the first step for the unbanked toward participating in the financial system, and a lifetime of sound money management and personal savings toward that first house, a child's education, and a secure retirement.

    Further utilization of ETA accounts should save the Government money, ensure speed and efficiency of the distribution of Government benefits, save a beneficiary's time, increase the security of beneficiaries' benefits and provide a sector of the population who have been without bank accounts with this necessary service.

    This program, should its full potential be realized, can be a winner for all involved. We need to ensure that the program is reaching the population it needs to reach. And in order to do so, we should investigate who is not using this service and why.

    In addition, we need to ask what problems these accounts pose to the beneficiaries, the banks, and the Government, so that we may ensure adequate steps can be taken to correct any problems that may be occurring.

    Finally, we need to investigate what the fraud level is with these accounts, and what steps might be taken to stop such problems.

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    The Ranking Member of the Subcommittee, Mr. Gutierrez of Illinois, and I, are committed to the long-term success of the EFT and ETA programs.

    To ensure that the greatest amount of Federal payments are made electronically, and all eligible recipients who want to open ETAs can do so, we are today asking the General Accounting Office (GAO) to start a comprehensive review of the EFT program and of the use of ETAs.

    At this point, I would like to let Members of the subcommittee and the subcommittee staff know that it is my intention to enforce the 5-minute rule, and I would appreciate their cooperation in this.

    At this time, I would like to turn to the Ranking Member, Mr. Gutierrez, my good friend who is also very interested in the success of this program.

    Mr. Gutierrez, your opening statement.

    Mr. GUTIERREZ. Good afternoon, and thank you, Chairwoman Kelly, for holding this important hearing. I was very proud that you and I were able to send this letter out from the Committee on Financial Services to get a GAO report so that we can work in a bipartisan fashion. I think that's the first step to get information from all the relevant sources. I look forward to continuing working with you in this endeavor. I think it's extremely important.

    I would like to start by commending the Department of the Treasury for its continued efforts in helping bring into the mainstream of our financial system the millions of Federal payment recipients who currently do not have bank accounts.
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    Today, we have a series of witnesses who are going to bring us up to date with the progress of the EFT 99 Program and the status of ETAs.

    I would like to welcome Mr. Donald Hammond from the Department of the Treasury and Ms. Margot Saunders from the National Consumer Law Center.

    I would also like to welcome my friend, Mr. Richard Carrion, President and CEO of Banco Popular de Puerto Rico and Banco Popular, whose vision and foresight has played an instrumental role in the success of Banco Popular being the number one ETA provider in the United States and in Puerto Rico, a success story I think that this subcommittee has to examine very, very carefully.

    They've obviously shown how it can be done, and so I'm excited to hear his testimony and his insight and his vision as to how he's getting it done there.

    ETAs offer a unique opportunity to fill consumer protection voids, increase the attractiveness of the account for those outside the banking mainstream, and build positive relationships between banks and communities they serve, not requiring a minimal monthly balance to maintain an ETA, except as provided by State or Federal law, setting a maximum fee of $3 per month, providing a monthly statement, and making ETAs voluntary are important inclusions that demonstrate commendable sensitivity to many low-income Federal payment recipients who must live on what is essentially a fixed income.

    However, I believe there are some flaws with current requirements of the ETAs. One of the problems is that it sets a minimum number of ATM and tele-transactions that consumers must do in a month, and it also leads to the financial institution, rather than the account holder, deciding whether to use a teller, an ATM, or both.
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    Prospective ETA account holders average 61 years of age. ATM usage decreases with age and only 33 percent of consumers over 64 years of age use an ATM card. Therefore, teller access is an important factor in encouraging the use of ETAs by these prospective account holders.

    It is also a crucial factor in assuring that the goal of bringing those without bank accounts into the mainstream financial system is realized.

    ETA prospectives are not likely to enroll in a pure debit card product. For this group, the branch is their primary choice for any type of transaction. Therefore, it should be up to the account holder, not the financial institution, to decide whether to use an ATM or a teller.

    Another concern is that the ETA does not provide means for account holders to pay bills. Consequently, they must withdraw cash and then purchase a money order.

    These and other issues really do have a detrimental effect. An important aspect of implementing the Act and establishing ETAs is the confidence of recipients in the system. It is vital that the unbanked receive effective, targeted education about the availability of the account and how to use it.

    Recipients should be given clear and understandable information about the nature of the account, associate fees, free items, additional fees, types of transactions that are allowed. Any educational effort must consider potential cultural and language barriers that could inhibit understanding of the ETA in the unbanked population.
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    For this reason, it's important to ensure that informational materials are provided and customer service lines are available in a wide variety of languages.

    I thank you again for coming here today, and I look forward to hearing the testimony. And I thank you, Madam Chairwoman.

    Chairwoman KELLY. Thank you very much, Mr. Gutierrez. With unanimous consent, I would like to include a copy of the letter to the GAO in the subcommittee record.

    Our first witness today is Mr. Donald V. Hammond, Fiscal Assistant Secretary of the United States Treasury Department. Mr. Hammond was named Fiscal Assistant Secretary on September 28th, 1998. As Fiscal Assistant Secretary, he provides policy oversight for the Financial Management Service and the Bureau of the Public Debt.

    Assistant Secretary Hammond chairs the Treasury Working Group on implementing the statutory mandate for the EFT program.

    Assistant Secretary Hammond also serves as the Treasury's liaison with the Federal Reserve System in its capacity as the Government's fiscal agent.

    Mr. Hammond, we welcome you here today. We welcome your testimony on the EFT and the ETA programs. Without objection, your entire written testimony will be included in the record, and we invite you to begin your 5-minute oral summary now, and I will notify you when you have about a minute remaining by just simply tapping a little bit with this handle.
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    Chairwoman KELLY. Please proceed, sir.

    Mr. HAMMOND. OK. Thank you very much.


    Mr. HAMMOND. Good afternoon Chairwoman Kelly, Ranking Member Gutierrez. Thank you for the opportunity to appear before you today to discuss Treasury's efforts to implement the electronic funds transfer, or EFT, requirement of the Debt Collection Improvement Act of 1996, the DCIA.

    The DCIA requires the Federal Government to issue most payments via EFT and directs Treasury to ensure that any recipients who are required to receive payment electronically 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.

    We believe the program thus far has been very successful, resulting in approximately 80 percent of all Federal payments currently being made electronically and generating considerable efficiencies for the Federal Government, financial institutions, and payment recipients.

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    In fact, the reduction in the number of check payments alone, since the end of fiscal year 1995, has saved the Federal Government almost $250 million and will generate recurring savings each year.

    We expect to expand on these accomplishments by increasing our percentage of electronic payments in the future.

    I commend the subcommittee for its continued interest in and support of increasing the Government's usage of electronic payments in a way that balances the interests of our payment recipients and the cost to Government operations.

    Treasury intends to continue with the implementation of this important initiative in the same manner going forward.

    In developing the EFT rule, Treasury followed four principles. The interest of recipients should be of paramount importance. Treasury's policies should maximize private sector competition for the business of handling Federal payments in order to promote the greatest possible convenience, flexibility, efficiency and security.

    Recipients, especially those having special needs, should not be disadvantaged by the transition, and recipients without accounts at financial institutions should be brought into the mainstream of the financial system to the greatest extent possible.

    As a result, the EFT rule emphasizes recipient choice through an accommodative waiver policy formulated for the purpose of minimizing hardships to Federal recipients.
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    Treasury is confident that this balanced approach supports the goals of the program, and the widespread use of EFT by payment recipients indicates broad acceptance of EFT by the public.

    Through the DCIA and the Government's education and outreach programs, we have made tremendous progress in the conversion of check payments to EFT among Treasury and non-Treasury disbursed agencies.

    A couple of examples are noteworthy. Today, nearly 8 out of every 10 Social Security and Veterans Administration benefit payments, and 98 percent of all Federal salary payments, are made electronically.

    Half of all Supplemental Security Income (SSI) payments are currently electronic, compared to just 24 percent for fiscal year 1995.

    We attribute our success to our public education effort, our efforts to publicize and explain the requirements of the DCIA and Treasury rules to key stakeholders and our efforts to assist agencies operationally in converting more payments to EFT.

    The most complex and challenging task that has confronted us in increasing the number of EFT payments, is how to meet the needs of the millions of Federal payment recipients who do not have an account at a financial institution.

    Despite our waiver policy in keeping with the DCIA's intent for access to a reasonable cost account, Treasury designed the low-cost electronic transfer account, or ETA. The ETA is being voluntarily offered by federally-insured financial institutions that choose to offer the account, subject to the terms and specifications prescribed by the Treasury.
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    We anticipate that we will have a national presence of over 600 ETA providers with more than 16,000 locations by the end of this year.

    As of April 2001, Federal payment recipients have opened almost 11,000 ETAs. We project that the number of ETAs opened will gradually increase over the next few months, and substantially in the years to follow.

    With regard to education, in fiscal 1997, Treasury began developing a comprehensive public awareness and education campaign to inform Federal payment recipients of their options under the EFT legislation and to promote the safety and reliability of EFT.

    The components of the campaign included development and distribution of printed materials, an educational video, public service advertising for radio, television and print media, public relations activities and a precedent-setting grassroots community outreach initiative.

    To expand EFT 99 public awareness to a grassroots level, Treasury developed a regional network for its public education efforts. Through that network, we reached over 1400 local organizations and held more than 3500 consumer sessions through the grassroots campaign.

    With regard to ETA-specific activities, during the past 18 months, we have brought together providers and community groups in order to expand our marketing opportunities and increase awareness of the program.
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    Let me now turn to costs and savings. Costs to implement EFT 99, including portions of the ETA program, from fiscal 1997 to 2001 are approximately $21 million. The public education campaign that I just described has cost approximately $18 million over the same period, with most of the funds expended in the first 3 years.

    Specifically for the ETA, we have reimbursed financial institutions approximately $100,000 and project an additional $155,000 in the year to come.

    Our costs for the Federal Reserve Bank of Dallas, who is our fiscal agent in this endeavor, have been $2.7 million. Therefore, total program costs have been $24 million.

    In return, we have received——

    In summation——


    Mr. HAMMOND.——What we've received from these expenditures is an annual savings of 140 million checks accumulating to $580 million, an annual recurring savings of at least $70 million a year going forward.

    In addition we've saved in excess of $41 million through a decrease in fraudulent checks. We believe the program has been a tremendous success. We look forward to its continuation. And I look forward to the questions from the panel.
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    Chairwoman KELLY. We thank you very much, Mr. Hammond.

    We have been joined by Mr. Shows. Mr. Shows, have you an opening statement of any kind?

    Mr. SHOWS. No. Thank you.

    Chairwoman KELLY. Thank you very much.

    Mr. Hammond, one of the reasons for converting paper checks to electronic funds transfer is to reduce the costs associated with fraud and paper checks.

    What are the risks of fraud with the ETAs, and—well, let's just stop right there. What are the risks of fraud with these ETAs?

    Mr. HAMMOND. We think that the risk of fraud with an ETA is actually slightly less than the risk of fraud with a conventional bank account. We designed the ETA to try to minimize the risk of fraud, understanding that financial institutions are very concerned about that important component of their costs.

    As a result, the ETA only offers additional deposits at the discretion of the offering financial institution. We limit the types of transactions. For example, there's no check writing against the ETA permitted as check management was both an issue that was a concern to the recipient population, but also a concern to the financial institutions offering the accounts.
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    Obviously, you can't design any product in today's day and age that totally eliminates the risk of fraud. And, in all honesty, the ETA has some incidence. We think the account is designed to minimize that incidence and to give the financial institution offering it the opportunity to close the account if it has been abused.

    Chairwoman KELLY. Can an individual who is not eligible open an ETA?

    Mr. HAMMOND. An individual could open—if I understand the question correctly—an individual who would not be a Federal benefit recipient, they can attempt to open an ETA. In fact, we've had cases, particularly on the West Coast, where accounts have been opened by members of the public who do not receive a recurring Federal payment.

    What we quickly discover though, through the financial institution, is that when no Federal payment is direct deposited into the account, the institution then closes the account based on non-eligibility.

    So there have been cases where it's happened. It's been a relatively small percentage of the accounts that have been opened, and there is an easy way for the institution to verify their eligibility and to close the account.

    Chairwoman KELLY. And you find that's working?

    Mr. HAMMOND. Yes.
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    Chairwoman KELLY. I'm wondering if you could submit to the subcommittee any recommendations the Treasury might have for amending the Act or regulations to further advance the EFT to other Government programs.

    For example, on the business side of Government, Treasury has really made dramatic strides in converting Federal payments to vendors from paper checks to the EFT.

    I'm wondering if you've also made progress in converting to electronic bill presentment? In other words, can the Federal Government bill directly to the vendor and have the vendor pay through the account?

    Can all of that happen electronically? I'm interested obviously in paper reduction and also in an anti-fraud mechanism.

    Mr. HAMMOND. We would be happy to get you some legislative recommendations or proposals, specifically addressing the business processes.

    The aspects of Federal procurement and making that an all-electronic process have been a very high priority of both the Procurement Executives Council, as well as OMB, for some time.

    It's a very difficult process, because it involves every aspect of the organization's management as well as the vendor community, but it is something that is very high on the management initiatives of the Administration going forward, but I can get you some more information on that.
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    Chairwoman KELLY. And perhaps we can also ask the GAO to take a look at it. Do you think it would offer any major savings or efficiency in the Federal procurement programs if we were able to get that put together?

    Mr. HAMMOND. Absolutely. I think you can see an example of the kind of efficiency that you can find in Federal procurement from the adoption of the Government credit card program a couple of years ago, and the number of steps it has reduced in the procurement process for small purchases, the efficiency that it has created on the bank end processing for paying those bills, you can, through electronic processes for larger procurements, where a credit card would not be an appropriate payment mechanism, presumably extract similar, or maybe even greater, savings.

    Chairwoman KELLY. I'm a little concerned about the fact the subcommittee has tried to get information from the Treasury on how the ETA program is working. Although the Treasury can tell us how many ETA accounts have been opened, they are not able to tell us apparently who is opening them, or whether they are Social Security retirees or VA beneficiaries. Treasury apparently can't even tell us how many ETAs have been opened for residents just in the City of New York, even though we know that there are thirteen banks offering them there.

    And you, at Treasury, have to pay each bank $12.60 for every account. We haven't been able to find out from Treasury, except anecdotally, why people refuse to open an ETA.

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    Apparently, Treasury also doesn't know how long an ETA may be opened and whether or not some of these accounts, after being opened with $12.60 paid by the Federal Government, are quietly closed and converted to a regular account.

    These are questions we can ask the GAO in its study, but I really have to ask if you can also give us some answers to questions like these. Without more detailed data on how the program is working, I don't know how we can accurately assess its effectiveness.

    And also, any other issues that you think the GAO should analyze during their review, and what data you would like to see come out of it.

    You don't have to answer that verbally right now. I just want you to answer that in writing or in discussions with the staff.

    I think it's interesting the fact that only 11,000, less than 1/10 of 1 percent of the people eligible have opened an account, even after we've mailed, done a lot of public education. It tells me that something may not work, and doesn't that tell you something may not be working with these accounts?

    We'll hear testimony from someone who will testify later who has done a great deal of outreach in making these accounts work. It seems to me that maybe the outreach isn't working. And I'd like to have some more explanation about that.

    Also, I want to know what Treasury is able to do to beef up its ability to monitor the programs.
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    So there are some questions, just a big block.

    I've run out of time. I'm going to time limit myself also, and we will move now to Mr. Gutierrez.

    Mr. GUTIERREZ. Thank you, Madam Chairman. I'm going to follow up right where you ended.

    Mr. Hammond, thank you for being here this afternoon.

    There are approximately 10 million unbanked recipients in the United States of America. Only 11,000 ETA accounts have been established since ETA became available in 1999.

    So we have a pool of 10 million people. I don't even want to estimate what the percentage is. I didn't do the percentage, but 11,000 out of 10 million people. That means there are 10 million people that are still getting their checks in the mail after the program has been implemented.

    To what do you attribute the numbers? I mean, I know that the Chairperson has asked you, and I certainly look forward to your comments in writing, but if you could just enlighten us this afternoon, what's going on?

    Mr. HAMMOND. Sure. There are a couple components to that response. First, that the ETA is really a two-step program. The first was to interest financial institutions in offering the account, market it to the financial institutions such that there would be an account structure available.
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    As a result, outreach to the ultimate recipient population had to lag the enrollment of financial institutions who are not only interested in offering the account, but also prepared to offer it in their systems environment at that point in time.

    It would make no sense for us to market the account before the accounts were available in a particular county, only to have consumers go ask questions and find out it wasn't available.

    Once we got a critical mass of recipients available in an area, then we began to market the account to the ultimate recipient population.

    Now keep in mind, we're marketing two messages at the same time. We're marketing the message EFT and electronic payment and the availability of the option of the ETA account.

    We do find that as our numbers continued to increase, we suspect that a significant number of unbanked recipients of that original 10 million person estimate have signed up for some sort of account relationship.

    I use, as an example, the Supplemental Security Income (SSI) program. In composing that original estimate of 10 million unbanked recipients, we estimated that 50 percent of SSI recipients were unbanked.

    Today, 50 percent of SSI recipients receive electronic payment.
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    Mr. GUTIERREZ. So what do we need to do to have that same kind of success story with the 10 million population?

    I understand what you're doing with the financial institutions. Has there been a lag in the number of financial institutions that wish to engage in the program?

    Mr. HAMMOND. I think it's more a question of the timing, and we were a little unfortunate in our timing of rolling out the account in that, at the time of initiation, the preparations for the Y2K systems conversions.

    Mr. GUTIERREZ. How many financial institutions in the United States of America, of the 10,000 banks, FDIC-insured, offer this service?

    Mr. HAMMOND. Right now approximately 600.

    Mr. GUTIERREZ. Six hundred out of 10,000. You think maybe that's a little bit of our problem?

    Mr. HAMMOND. Well, except I think we have some encouraging signs in that there are some very large financial institutions who are committed to the program that give us great geographic reach. Bank of America is now rolling it out in all their branches. Wells Fargo is completing their roll-out of the program. FirStar, which has just recently merged with U.S. Bank, increases the penetration throughout the Midwest, and the upper Midwest, and then Bank One.
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    So, I think you can't necessarily look to just the absolute number. You want to look to the reach and where they hit the geographic portions.

    Mr. GUTIERREZ. But we're still at 600 of 10,000 financial institutions?

    Mr. HAMMOND. Yes, we are.

    Mr. GUTIERREZ. Some have probably reached smaller communities, larger communities. Geography must have something to do with this. In terms of languages the people speak, cultural.

    I mean, where are the, especially all of the different kinds of financial institutions that can out as long as they are FDIC-insured?

    Shouldn't we start maybe looking at some regulations, since there are some that are obviously on the leading edge, and we're going to hear from one soon, that other financial institutions are bound to encourage, either through regulations or through a change?

    Because otherwise I have a funny feeling that they're just not going to be involved in the program and we're going to stay at that 600 level. Six hundred to 10,000, it's not a lot, it's 6 percent of all the financial institutions.

    Mr. HAMMOND. Well, I think you make some very good points. I think the question we've got in designing the product was, one, to make it so that financial institutions truly had to be interested in offering the account.
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    As you'll see later on, the success that Banco Popular has enjoyed requires a real commitment by the offering financial institution.

    To simply require an institution to offer this account and expose themselves to a new product offering, is something that really should be voluntary.

    Mr. GUTIERREZ. Let me, just so that I can continue, because the sign says ''sum up'' and I have to. I have the luxury of being here and watching the sign light up.

    It says ''stop.''

    Real quick, just in coordination with the Chairwoman's request, please look at what steps can be taken to increase the number of financial institutions from the 600 to the 10,000 eligible FDIC-insured institutions. What we can do to expand that, and what measures have worked in the past specifically, as you said with the Social Security checks, and what is the plan to get the other 10 million; roadblocks, obstacles, and how we're going to overcome that.

    I know we're going to learn a little bit about that in a minute, and as we're into the private sector, maybe you might want to have a consulting contract with Banco Popular to expedite your process.

    Thank you, Madam Chair.

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    Chairwoman KELLY. Thank you, Mr. Gutierrez.

    I know that we can again ask the GAO to investigate the issues that you've raised.

    I'm just going to use the privilege of the Chair to do one follow-up with my colleague's question.

    And that is, I want to know if you're partnering to present this to the public with any minority-owned radio, TV stations, with any minority-owned print, any print mechanisms to advertise ETAs?

    Because as we were talking just before we began the hearing, we both recognized that one of the problems that people have is a fear of the mechanics themselves. Many people fear a machine, the use of that kind of machine.

    The second thing is that people cannot utilize the machines because of language barriers.

    What is your outreach?

    Mr. HAMMOND. We've done a lot of outreach.

    Chairwoman KELLY. With minority stations?

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    Mr. HAMMOND. Very definitely. In fact, our public service announcement materials were prepared in both English and Spanish and the print materials were, in fact, produced in a number of other languages. I think I can get the answer for you explicitly for the record, but I believe it was in 16 different languages at one point in time.

    Chairwoman KELLY. And you advertised in that, or you just printed things?

    Mr. HAMMOND. We've used no paid advertising as part of our program. Quite honestly, that's a factor of cost.

    Chairwoman KELLY. Have you used public service announcements?

    Mr. HAMMOND. Yes, we have. And we found that we had some success with print, actually substantial success with print advertising, limited success with radio, and from a personal standpoint, somewhat disappointing success with television PSA advertising. And I think that's consistent with Government programs in general.

    Chairwoman KELLY. Well, we thank you very much, Mr. Hammond. I know that both Mr. Gutierrez and I have further questions. We will submit them to you in writing, because I will hold the record open for 30 days. There are no more questions, but I know there will be these additional questions and we'll have 30 days for Members to submit those questions to the witnesses and get those responses placed in the record.

    Mr. Hammond, I'm going to excuse you with the subcommittee's great appreciation for your time. We really appreciate your being here.
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    Before I empanel the second group to speak, I want to say to the people standing here at the door, there are seats so why don't we just take a moment while Mr. Hammond leaves this table, and feel free to walk through here and sit down. You don't have to stand for the second half of this hearing.

    Thank you very much, Mr. Hammond.

    Mr. HAMMOND. My pleasure, and we'll have the responses to you very timely.

    Mr. GUTIERREZ. Thank you, Mr. Hammond.

    Chairwoman KELLY. For the purposes of the introduction of our first witness, I am going to turn that privilege over to my Ranking Member, Mr. Gutierrez.

    Mr. GUTIERREZ. Thank you very, very much. I really appreciate the distinct privilege and honor of going out of the regular order and allowing me to make these introductions.

    Our second panel consists of Mr. Richard L. Carrion, the President, Chairman of the Board, and CEO of Banco Popular of Puerto Rico and Popular Incorporated, the holding company that holds Banco Popular, and Ms. Margo Saunders, Managing Attorney for the National Consumer Law Center.

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    First, Mr. Carrion. Banco Popular is the largest bank in Puerto Rico and one of the largest in the United States and throughout Latin America. Banco Popular North America, a subsidiary of Banco Popular, Banco Popular Incorporated, is the largest Hispanic bank in the United States.

    It operates over 100 branches in the continental USA, including over 30 in New York, and I might say gaining quickly in Chicago.

    Mr. Carrion is President of the Committee for the Economic Development of Puerto Rico, a member of the Executive Committee of the Puerto Rico Banking Association, President of Banco Popular Foundation, and a member of the International Olympic Committee.

    He received a Bachelor's degree from Wharton School of Finance and Commerce, and an MS in Management Information Systems from the Massachusetts Institute of Technology.

    During Mr. Carrion's tenure at Banco Popular, he was the driving force to implement the ATM system throughout the branch network in Puerto Rico and the United States, as well as successful electronic services to facilitate banking transactions.

    In fact, Banco Popular Puerto Rico is ranked first in the entire Nation as the bank with the largest number of electronic transfer accounts. It is precisely this expertise in this field that makes Mr. Carrion's testimony so relevant for today's hearing.

    Mr. Carrion, we are especially pleased that you are here to discuss your outstanding performance in opening ATAs, and we deeply appreciate your traveling from Puerto Rico to be with us today.
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    Chairwoman KELLY. Thank you very much.

    Before I introduce our next witness, I want to say that I have given Anibal Acevedo-Vila, my colleague who is a Member of Congress from the Commonwealth of Puerto Rico, the subcommittee privilege of sitting with us today, and we welcome you.

    Next we have, as a witness, Ms. Margot Saunders. Margo Saunders is the Managing Attorney of the National Consumer Law Center (NCLC).

    Since 1969, the National Consumer Law Center has been providing legal services, attorneys, and others representing low-income clients, with technical and legal consulting, training and publications that cover all major topics in consumer law.

    Since its' founding, the NCLC has established itself as the Nation's consumer law specialist, making its' legal expertise available to low-income clients, private and legal services attorneys, and to State and Federal agencies.

    Ms. Saunders has been the managing attorney there since 1991. She is a prolific writer and a witness on consumer issues. She's also been a member of the Federal Reserve Board's Advisory Council, and Chairperson of the North Carolina Bar Committee's Consumer Credit Committee.

    She received her law degree from the University of North Carolina Law School.
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    We thank you both for joining us here today to share your thoughts on this issue.

    Without objection, your written statements will be made part of the record. You will each be recognized for 5 minutes in summary of your testimony. And once again, I remind you, if you go over, I will remind you.

    So we thank you very much, and we will begin with you, Mr. Carrion.


    Mr. CARRION. Thank you, Madam Chairperson and thank you Congressman Gutierrez and Congressman Acevedo-Vila for being here and for your kind words.

    My name is Richard Carrion. I am President and CEO of Popular, Inc., and Banco Popular Puerto Rico. Banco Popular Puerto Rico was founded on October 5th——

    Chairwoman KELLY. Mr. Carrion, I'm sorry to interrupt, but could you pull that microphone closer?

    Mr. CARRION. I sure will.

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    Chairwoman KELLY. It's difficult for those in the back of the room to hear you.

    Mr. CARRION. It that better?

    Chairwoman KELLY. Better.

    Mr. CARRION. Banco Popular Puerto Rico was founded on October 5th, 1893, when Puerto Rico was still under Spanish domination. We have assets exceeding $28 billion and we are the oldest and largest financial institution on the island.

    We are also the 35th largest bank holding company in the United States and 8th in Latin America.

    The bank operates over 200 branches in Puerto Rico, 100 in the continental United States, as well as the U.S. and British Virgin Islands.

    We also operate several subsidiaries including Popular Mortgage, Popular Securities, Popular Leasing in Puerto Rico and we also have a presence in over 30 U.S. States with our Equity One Mortgage Subsidiary, Popular Cash Express, Banco Popular National Association and Banco Popular North America, the largest Hispanic bank in the mainland.

    Throughout its history, Banco Popular has embraced several institutional values upon which we have based our business objectives generation after generation.

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    Two of those values are innovation and social responsibility. We are particularly proud of our initiatives to convert the so-called unbanked segment of the population in Puerto Rico, as well as in the continental United States.

    In the 1950s, Banco Popular put in place an outreach program serving then-isolated communities with mobile units, buses, a fleet of buses that then operated as bank branches throughout the island.

    We introduced Farmers Home Administration loans in Puerto Rico and we are still one of the five Small Business Administration lenders in the continental United States.

    Two months ago, we launched a new product: ''Acceso Popular'' and a new outreach program: ''El Banco en al Comunidad'' or ''The Bank in the Community,'' also directed to converting the unbanked segment.

    Moreover, since its inception, Banco Popular de Puerto Rico has ranked first in the entire Nation as the bank with the largest number of electronic transfer accounts, or ETAs—4,349 as of May.

    Likewise Banco Popular North America ranks fourth after Banco Popular de Puerto Rico, Firstar Bank-Milwaukee and Wells Fargo & Co., San Francisco.

    Another Popular, Inc. subsidiary, GM Group, is in charge of processing electronic payments of the U.S. Department of Agriculture Nutrition Assistance Program to over 450,000 beneficiaries in Puerto Rico.
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    Individual benefits are electronically accessed through our network of 624 ATMs on the island, a network we have owned and operated since 1983.

    Several years later, we also introduced the point-of-sale technology and we currently own and operate over 40,000 terminals. Both initiatives have been responsible for a dramatic transformation of consumer behavior in Puerto Rico.

    In the year 2000, our ATMs and point-of-sale terminals processed 184.9 million electronic transactions. Our clients averaged 11 transactions a month at our point-of-sale terminals, and 9.6 at our ATM network, a user pattern that doubles the U.S. average.

    In total, our clients conduct 76 percent of all their transactions electronically, which represents the highest usage of electronic banking in the entire United States.

    In Puerto Rico, Banco Popular owns and operates the local ATM and POS switching networks. This allows us to provide free and unlimited access to the ATM and POS networks since the marginal cost of processing these additional transactions is extremely low.

    I believe this has been one of the principal reasons for the success we've had with the ETA and other similar products in Puerto Rico.

    If the U.S. Federal Government and the U.S. Congress are committed to the expansion of ETAs and EFTs in general, there are two areas on which it should focus.
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    One, access to the national ATM networks. Some mechanism must be found to enable a lower cost of access to the ATM network for these account holders. While I instinctively recoil from mandated subsidies or additional regulations, I think that a voluntary agreement can be reached with the major ATM networks.

    Again, the marginal cost of processing these additional transactions is small and it is in the long-term interest of these networks to promote a shift toward electronic transactions.

    Second, a check-cashing or money exchange industry. There are currently over 10,000 check-cashing locations in the United States. They are the primary providers of basic financial services to the unbanked, mostly check-cashing, money transmission and bill payment.

    I would urge this subcommittee to include them in your discussions.

    And for the record, I will mention that our subsidiary, Popular Cash Express, currently operates 87 check-cashing locations in the U.S.

    It is imperative that we recruit the support of these institutions in promoting electronic transactions among their clients and reevaluate both the Bank Secrecy Act and anti-money laundering regulations that currently curtail this industry's possibilities of growth and of servicing the unbanked population.

    Madam Chairperson, as telecommunications redefine the banking industry, we need to move forward in providing equal access to this technology.
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    Thank you, Madam Chairperson.

    Chairwoman KELLY. And I thank you, and I thank you for observing the 5-minute rule.

    Ms. Saunders.


    Ms. SAUNDERS. Madam Chairwoman and Mr. Gutierrez, thank you for inviting us here today to testify.

    I offer my testimony today on behalf of our low-income clients as well as the Consumer Federation of America and Consumers Union.

    Treasury has accomplished a great deal of good things in the past few years regarding implementation of EFT 99. We especially applaud them for the excellent waiver system that they adopted.

    They have aggressively ensured that no recipient is led to believe that a bank account is necessary to receive Federal benefits, which was a tremendous concern originally. There was a lot of misinformation out there.

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    The Treasury has adopted an excellent education program. We are hearing from all around the country from our local communities and our partners, that the education effort Treasury has engaged in is really a leader in the Government efforts.

    The design of the ETA account is excellent in many ways. We especially like that it's open to all Federal recipients regardless of credit status, that it appropriately limits fees for basic services—and this is very important—that it prohibits attachment by judgment creditors for all exempt proceeds in the account. And we believe that is of significant importance to many of our clients.

    However, we do think there is a problem with the ETA in that it does not provide any payment mechanisms for recipients, and it does not limit charges for additional services.

    As you have already noted, the ETA account has currently only opened 11,000 new accounts. Whether this is 1/10 of 1 percent, which is my math on that, or some higher number, it's clear that the ETA account has not begun to reach its full potential.

    We in the consumer community feel strongly that a number of things have to be done differently. One big problem the Treasury has already acknowledged is the lack of regulation of the method of receiving all Federal payments.

    Treasury has said in its regulations that all Federal payments must be deposited in an insured financial institution, in an account established in the name of the recipient.
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    However, Treasury has not required that the recipient actually have access to that account directly. As a result, many check-cashers and other fringe bankers, unregulated financial service providers, have established accounts through their own storefronts. While we don't have any idea of the actual number of these relationships, we believe that it is a substantial number of low-income recipients of Social Security and SSI benefits who receive their Federal benefits through the check casher.

    I indicated in my written testimony just a few examples of how much this can cost a low-income recipient. For example, in Philadelphia, in one of several programs offered, recurring monthly recipient fees are typically charged to access $500 of monthly benefits that total approximately $234 a year. On a yearly basis, half-a-month's benefits is being spent on accessing the benefits through the check-cashers.

    Why is this a problem? We think it's not only a problem because of the fees necessary to access the Federal payments, but it is also a problem because it feeds these recipients into the other onerous services that these financial services alternative fringe bankers are providing, such as payday loans, and other sources of high cost credit.

    We think the law is absolutely clear. The Treasury has the mandate to provide access to an account at a financial institution at reasonable cost to all recipients. That's what the law says, that's what Congress said when it adopted the DCIA.

    But I'm afraid that the establishment of the ETA, as good as it is, does not fulfill Treasury's obligations under the law.
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    I've run out of time. I don't want to see that stick, so I will stop there.

    Chairwoman KELLY. You still have a little time if you want to take it.

    Ms. SAUNDERS. I've supplied you with lots of paper, and if you have any questions, I'd be glad to answer them.

    Chairwoman KELLY. Thank you very much. We appreciate your testimony.

    I'd like to begin the questioning actually by utilizing your testimony and addressing Mr. Carrion.

    Ms. Saunders raised the issue of banks partnering in with check-cashers in which a Federal benefit is electronically transmitted to a bank, and then the beneficiary withdraws the benefit at a check-casher.

    Does Banco Popular have a product like this?

    Mr. CARRION. No, we don't. We're aware that is done, but we don't have that product.

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    Chairwoman KELLY. Would that be a helpful thing?

    Mr. CARRION. What I think would be helpful is to take advantage of the fact that there are 10,000 locations where these accounts could be opened—ETA or similar type of account—could be opened.

    And I would use that infrastructure and I would bring them into the discussion rather than leave them out.

    Chairwoman KELLY. You'd like to see us bring the check-cashing industry into the ETA account system?

    Mr. CARRION. Yes, I would.

    Chairwoman KELLY. If I understand you correctly.

    Ms. Saunders suggests that we should then, if we were to do that, subject the check cashing industry to Federal regulation in order to increase that usage and also to make sure that everything works properly. Do you agree with that?

    Mr. CARRION. Far be it from me to request Federal regulation of anything, but I would say that insofar as the specifications for the product that is to be offered should be mandated by the Treasury in the same way that the specifications for the ETA product through banks was mandated by Treasury, and that means inevitably regulating the costs and the revenues that are associated with that product.
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    Chairwoman KELLY. Well, as you probably know in New York, the check-cashers are pretty heavily regulated.

    Mr. CARRION. Yes, they are.

    Chairwoman KELLY. It's one of the States where we do have regulation on the check cashing industry, and it does work.

    I'm wondering, though, with regard to that, what improvements you would like to suggest to the ETA program itself?

    Mr. CARRION. Well, as I mention in my testimony, I think the main factor of our success in Puerto Rico, and we've also had success in the United States, but our main factor in Puerto Rico has been the fact that we own and operate the ATM network, and that we have really not charged for access to that network. I think that is a big part.

    Obviously, the outreach programs and the communications and education associated with those programs have been a part of our history and it's something that we continue to do, and that it has been a large part of our success here in the States where we are actually in those communities and we do spend a lot of time and resources on the outreach.

    Chairwoman KELLY. You mentioned that you thought a voluntary agreement could be reached with the networks?

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    Do you think it could work?

    What kind of a process or structure do you think you would envision there?

    Mr. CARRION. There are two major and several regional ATM networks, and they're all owned by banks. I think the fact is that we are moving away from the paper-based system which imposes higher costs on the banking system and moving toward an electronic system which essentially has a very low marginal cost associated with it.

    I think this would be very positive and convince the networks to do it.

    There is also using the Community Reinvestment Act (CRA), these kinds of things, to stimulate this kind of activity. I think it would be helpful, as well.

    Chairwoman KELLY. I'd like both of you, just quickly, to answer what issues you think you would like to see the GAO review and what data you think that it would be helpful to have them determine so that we can get a better handle on this situation.

    Let me just ask both of you that question.

    Ms. SAUNDERS. I think there is still some controversy over how many unbanked Federal recipients there are. And I think actually clarifying that question would be helpful.

    But you've already asked that and I think that's the most important question.
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    I would like to find out how many check-cashers and alternative service providers actually have established these relationships. And if we're talking about a few thousand, then I don't need to spend all my time worring about it.

    But if we're talking about tens of thousands, as we believe, then it becomes an altogether different matter, so I think that's the primary other question.

    We have an alternative way that we have long proposed to Treasury to address this problem, and I don't know if the efficacy of that proposal is something that might be within GAO's purview.

    But if I could explain it, you might be interested.

    Chairwoman KELLY. Well, I think that's something that the subcommittee and I would be very interested in talking with you about it later, and we could perhaps develop something for GAO.

    I have run out of time, but I think, Mr. Carrion, perhaps with the indulgence of my colleague, perhaps he would be willing to allow you to answer that question also.

    Mr. CARRION. Well, I think you've all proposed the right questions. I would look at the difference in the profile in terms of socioeconomic profile, ethnic profile of recipients that are currently signed up for the ETA and those that are not signed up, and look at the difference amongst them.
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    And of course, our database is open for whatever help we can provide in this matter.

    Chairwoman KELLY. Thank you very much.

    Mr. Gutierrez.

    Mr. GUTIERREZ. Thank you. Well, I just want to go over some things because, as I understand it, Banco Popular of Puerto Rico currently has more than 4,000 ETAs. The approximate number of ETAs opened in my home State of Illinois is 500, and that includes 40 banks in Illinois that currently provide these accounts to consumers.

    Now this is only 500 accounts opened and there are 12.3 million people in Illinois, compared to 3.8 million in Puerto Rico. Of those 12.3 million, almost 2 million are Social Security recipients and nearly 1 million are recipients of Veterans Administration benefits.

    I guess we have a lot. I simply raise the issue just to compare a State to financial institutions to a population which is 1/3 the population with many more people participating and yet such a higher rate. So I think Mr. Carrion, if you would open up your books to us in terms of showing us who it is that's getting engaged and maybe, you know, the education. Sometimes I can get a little sensitive.

    I know that technology and fear of technology, and something that has nothing to do particularly with education is that I have a Bachelor's degree, but my daughter who is in seventh grade uses the computer. I always think it's going to break down on me.
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    Chairwoman KELLY. My husband can't turn one on.

    Mr. GUTIERREZ. You know, so I mean just technology, education, understanding and anything that you have insight.

    I think also it's important to understand, given my own personal experience, because I think Mr. Carrion has explained why his program works, it's because they go out into the community and they actually do the outreach.

    You know, we don't have a CRA problem with Banco Popular, because Banco Popular is opening and expanding branches throughout Chicago, Houston, in Florida, in New Jersey, in areas where, quite honestly, before were under-served communities.

    I think part of the solution here is to get the 600 financial institutions that are already in the program, congratulate them, give them incentives and then figure out how we get the other 9400 FDIC-insured institutions to do what Banco Popular has already done in terms of doing that.

    And I would just like to say that part of, I think, making this work—and I may be wrong, and once we get the information about just who it is who is signing up and who isn't signing up, Madam Chairman, and you and I will talk about that in terms of their education level, in terms of their social standing—is trust that people have.

    I have a feeling that a lot of people are staying away because they would rather still have that piece of paper in their hand at the end of the month, because they don't trust the financial institution to take that piece of paper away from them.
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    And so we may have to gear ourselves especially to—you know, we're talking about Veterans, we're talking about Social Security recipients. They tend to be older. They come from a different time. And maybe we should examine how it is, trust.

    Because I know one of the things that, if you were in Puerto Rico, when you think about Puerto Rico and you think of the different icons of the Puerto Rican society and culture, and I'm sure the resident commissioner will share on this, is that when my mom and dad went from Puerto Rico to Chicago, and they saw Banco Popular, they went there.

    They went there because they saw it as an institution that they knew and had learned about and trusted. And so I think that's part of the success that I think Mr. Carrion has been very good about not telling us, because I'm sure he's very proud of it.

    But I'll tell you that's why I think part of the reason Banco Popular is part of the society and if it's part of the society and the makeup of the society in terms of financial, in terms of philanthropic and other kinds of endeavors and it's part of the fabric of a society, then people tend to sign up.

    That's why I think people sign up.

    Thank you.

    Chairwoman KELLY. Thank you very much.

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    I would like to go now to Mr. Moore.

    Mr. Moore, thank you for joining us. Have you any questions?

    Mr. MOORE. I have no questions. I hate to come into a hearing late. Not hear what's gone before. Madam Chairman, thank you for the invitation for questions. I apologize for coming in late. I had another hearing earlier and I don't like to come into hearings in the middle of a hearing and then ask questions that may have been asked, so thank you very much.

    Chairwoman KELLY. I'm holding the record open for 30 days, should you have some.

    Mr. Tiberi.

    Mr. TIBERI. Ditto.

    Chairwoman KELLY. Thank you both.

    Mr. Acevedo-Vila do you have anything you would like to say?

    Mr. ACEVEDO-VILA. I just have one question and one comment. Welcome Mr. Carrion and Ms. Saunders.

    As Louis just said, Banco Popular is part of the Puerto Rican society. It's my bank. I've been using this for the last 50 years. I have never seen a paycheck for the last 10 years, and now I don't even issue checks anymore, because I pay almost everything through the internet. So it's really a success story.
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    But I have a question. You point out the fact that you don't charge customers when they use ATMs because you own them. But, other banks have ATMs in Puerto Rico, don't they?

    Mr. CARRION. Yes.

    Mr. ACEVEDO-VILA. And they don't charge either, because they are following you?

    Mr. CARRION. Yes.

    Mr. ACEVEDO-VILA. So that's also very important.

    I live half of the time here, half of the time in Puerto Rico, and I'm shocked whenever I go here and have to use any card, and they charge me $1 or $1.50.

    In Puerto Rico, even if you go using this one, to another one that is not owned by Banco Popular, they don't charge you.

    Why? Because they have basically established the lead, and everybody's following.

    Chairwoman KELLY. Thank you very much.

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    I must say that I am very impressed with what Banco Popular has been able to do in this regard, and we do thank you for taking your valuable time, Mr. Carrion.

    And Ms. Saunders, also, I know you are a busy woman.

    We thank both of you.

    If there are no more questions then, the Chair notes that some Members may have additional questions, and as I stated before, they may wish to submit them in writing, so without objection, the hearing record is going to remain open for 30 days.

    The second panel is now excused with the subcommittee's great appreciation for your time.

    And this hearing is adjourned.

    Mr. CARRION. Thank you, Madam Chair.

    [Whereupon, the hearing was adjourned.]