Consumer Concerns for Older Americans

Electronic Funds Transfer:
What Senior Advocates Should Know About Electronic Deposit of Social Security and SSI

In 1996, Congress passed a law requiring that the federal government make most payments, including Social Security and SSI payments, using electronic funds transfer (EFT).  The federal government has been implementing the EFT law over the past few years.  The EFT law may have caused some seniors, especially those who never have had a bank account or used an ATM, some needless anxiety.  Many of these seniors may not be aware that there are a number of exceptions to the EFT law.  Even worse, the EFT law may have caused some low-income seniors to fall prey to check cashers and other high cost financial services providers.

Under the EFT law, there are a number of options to receive federal benefits electronically, including regular and low-cost bank accounts.  There is also a generous provision for hardship waivers, so that recipients can continue to receive paper checks.  The most important thing advocates can do is to make sure their clients are not needlessly spending money on expensive accounts at check cashers and other financial sharks.

Direct Deposit into a Bank Account

A simple way to receive benefits electronically is for the senior to arrange for direct deposit into a regular bank checking account.  A bank account will help seniors avoid financial sharks and ultimately save them money on financial services.

Unfortunately, many mainstream banks have failed to open up full-service branches in low-income and minority communities.  Instead, banks have chosen to partner with check cashers and financial sharks, contributing to the bleeding of resources from these communities.

A good alternative to banks are credit unions, which are a type of nonprofit cooperative financial institution.  There is a special type of credit union, called a community development credit union, which serves low- and moderate-income communities.

Electronic Transfer Accounts (ETAs)

Another alternative to regular bank accounts are “electronic transfer accounts” (ETAs).  ETAs are special, low-cost, no-frills accounts developed by the federal government in order to implement electronic benefits delivery.  An ETA costs $3.00 per month or less, and allows for four (4) free withdrawals.  Depending on the bank, recipients can make these free withdrawals from a teller, ATM, or both.  Additional withdrawals or withdrawals from certain ATMs may cost a fee.  To locate a bank or credit union that offers ETAs, call 1-888-382-3311 or go to www.eta-find.gov.  ETAs are only available to Social Security, SSI, and other federal payment recipients.

ETAs are a good option for benefits recipients who do not have bank accounts, because they are open to all recipients regardless of credit history.  However, the availability of ETAs is limited because only some banks offer them.  Many banks have not eagerly embraced ETAs, and those who have them are not marketing them aggressively.

Check Cashers

Check cashers and fringe financial providers have rushed to fill the vacuum left by mainstream banks, sometimes with the banks’ assistance.  A significant number of check cashing companies now offer accounts to receive federal (and state) benefits electronically.  Often, these accounts are much more expensive than a regular checking account.  For example:

• One check casher in Philadelphia charged a monthly fee of 2.5% for each electronic benefit deposit.
• That check casher also charged $1.50 for use of an ATM other than its own.  In addition, the foreign ATM’s owner charged a fee of $2.
• A typical recipient might receive benefits of $500 per month.  Her cost per month to receive and use her benefits (assuming only one withdrawal at a foreign ATM) would have been:

In comparison, an ETA account, even with the same foreign ATM fees and surcharges, would only cost $6.50 per month or $78 per year.  A regular bank account might cost anywhere from $60 to $110 per year.

Furthermore, recipients who collect their benefits from these financial sharks become excellent prospects for other high cost financial products, such as:

• Payday loans
• High cost home-secured loans
• Expensive money orders
• Rent to own contracts
• Pawn transactions

Clients should be advised to avoid opening electronic accounts at check cashers and fringe providers.  They should also be warned about the other high cost financial products listed above.  For more information on these high cost financial products, see NCLC’s Consumer Concerns for Immigrants, “High Cost of Financial Services, Loans, and Rent-to-Own for Low-Income Borrowers:  The Challenges of the Private Marketplace.”

Waiver

An alternative for seniors having trouble finding an ETA or low-cost bank account is to simply continue receiving a paper check.  Under Treasury regulations, a recipient can obtain a hardship waiver from the EFT requirement on the following grounds:

• financial hardship
• geographic barrier
• language barrier
• literacy barrier
• physical disability
• mental disability

A recipient who lacks convenient access to an ETA and wants to avoid expensive check cashers can obtain a waiver on the basis of financial hardship.  Note that the waivers are self-certifying, i.e., the recipient decides whether receiving payment by EFT would cause a hardship for the recipient.

One of the most important aspects of the waiver rules is that a recipient can claim a hardship waiver at any time.  This means that all federal recipients, regardless of the date of eligibility for federal payments, regardless of whether they have a bank account, and regardless of whether they have previously signed up to have their federal moneys electronically deposited, can claim a hardship waiver.

Furthermore, if a recipient is currently receiving a paper check and takes no action to request a waiver, he will continue to receive a paper check.   The paper check is the default system for current recipients.

Authorized Payment Agents

In the past, nursing homes have had residents sign their monthly benefit checks over to the nursing home for payment of services rendered.  The Treasury regulations do not permit nursing homes to be authorized payment agents just for purposes of receiving electronic deposit of federal payments.  Recipients residing in nursing homes must either pay the nursing home by check or cash, or determine they are eligible for a waiver of the electronic deposit requirement and continue receiving the paper check.  Only if the nursing home qualifies to be a representative payee under the Social Security or VA rules may it qualify as an authorized payment agent to receive direct electronic deposit of its residents’ federal payments.

The National Consumer Law Center publishes a manual for advocates entitled Consumer Banking and Payments Law that contains more detailed information about Electronic Fund Transfers.  This publication can be ordered by calling the NCLC publications Department at 617-542-9595 or going to www.consumerlaw.org.  NCLC also wants to hear your concerns and ideas and is available to help.  For more information, please contact:

77 Summer St. 10th. Fl.
Boston, MA  02110
Phone:  617-542-8010
Fax:    617-542-8028

This publication was supported, in part, by a grant #90-AP-2647 from the Administration on Aging, Department of Health and Human Services, Washington, D.C. 20201. Grantees undertaking projects under government sponsorship are encouraged to express freely their findings and conclusions. Points of views or opinions do not, therefore, necessarily represent official Administration on Aging policy.

June 2006

This brochure was supported, in part, by a grant from the Administration on Aging, Department of Health and Human Services, Washington, D.C. 20201. Grantees undertaking projects under government sponsorship are encouraged to express freely their findings and conclusions. Points of views or opinions do not, therefore, necessarily represent official Administration on Aging policy.