Boosting Consumer Protections for Unbanked TANF Households

A couple weeks ago, the New York Times featured a front page story about the vast numbers of Americans who are denied bank accounts due to minor transgressions like a bounced check or overdraft fee. As we discuss frequently in the asset building community, having access to a low-cost bank account is key to participating in the financial mainstream and avoiding the check cashing fees, high interest loans and other fringe financial services that contribute to the high cost of being poor – as powerfully illustrated in the article:

Mr. Korzeniowski, who acknowledges “he made a mistake [by overdrawing his account],” says the fees he pays for cashing checks, paying bills and wiring money cannibalize the paycheck he gets from part-time construction work. “Everything is more expensive,” he said.

Yet for participants in public assistance programs, the barriers to being “banked” go even further. Most fundamentally, many banks don’t cater to lower-income consumers; fees, minimum balance and direct deposit requirements can discourage many who hover near the poverty line from establishing an account. Furthermore, public assistance recipients are often subject to asset limits – as low as $1000 per family in TANF – that can deter saving or even maintaining a bank account.

Establishing direct deposit as the default method for delivering TANF assistance, while providing resources to find an affordable account, would be one way to encourage bank account ownership despite these barriers. Though it varies by region, the current uptake of direct deposit for TANF families tends to be dismally low (for example, 12% in Washington state and a mere 3% in Los Angeles County). We’ve written before about the benefits of connecting more TANF recipients with appropriate bank accounts, which would likely allow TANF families to keep the most of their minimal benefits (on average around $392/month). Yet given the numerous obstacles to account ownership, including those that are beyond TANF recipients’ control, it’s important that alternative methods of delivering benefits come with equivalent benefits and protections.

Electronic Benefit Transfer (EBT) cards became the norm for both SNAP and TANF benefits after 1996 as part of welfare reform, and this move was widely lauded as a way to reduce both stigma and fraud. Yet Congress also decided during this era to explicitly exclude EBT cards and means-tested state benefits from certain protections offered by the Electronic Fund Transfer Act (EFTA), after states “expressed concerns about the costs of compliance.” EFTA, which was enacted by the Federal Reserve’s Regulation E in 1980, gives consumers critical protections concerning electronic transfers of money (think direct deposit of your paycheck), including:

• Protection against liability due to loss, theft, and unauthorized charges;
• Dispute rights in the case of errors;
• A right to account information, including transaction history and balances;
• Disclosure of terms and conditions and fees;
• A ban on credit conditioned on mandatory electronic repayment; and
• Protection from overdraft programs imposed without consumer consent

Advocacy groups have urged federal lawmakers to extend EFTA’s protections to  means-tested benefits, which was one objective of the Benefit Card Fairness Act introduced in the House in 2010—but the so-called “EBT exemption” remains. So if your purse is stolen on the metro and someone uses your debit card, thanks to EFTA, you can get that money back. If the same happens with your cash assistance, you’re out of luck.

In California, the legislature is taking the issue into its own hands. A new bill, AB 1280, authored by Assembly Speaker John Pérez and co-sponsored by the National Consumer Law Center and the Western Center on Law and Poverty, would extend the same protections guaranteed to electronically issued federal benefits (like Social Security) to means-tested state benefits like CalWORKs (TANF) that are directly deposited onto a privately selected prepaid card. Furthermore, the law will prohibit overdraft fees and other credit features from being attached to cards that hold state benefits; the goal of the new legislation is to “ensure benefit recipients are not the victims of predatory practices and that the minimal amount of cash assistance they receive is safe.” The bill will be heard on the state senate floor this week.

California has already taken more action than most states to protect consumers using EBT cards—but AB 1280 will allow CalWORKs beneficiaries to choose to receive their benefits through prepaid cards without sacrificing security. For unbanked consumers, prepaid cards can have several advantages over EBT: they provide access to a wider ATM and merchant network, enable online bill-paying and reduce the stigma of “being recognized as a public assistance beneficiary.”  CalWORKs recipients can already transfer their benefits to a private prepaid card, but the vast majority currently opt for the “Quest” EBT cards. With AB 1280 in place, CalWORKs families could elect to take advantage of prepaid cards’ perks without putting their small allotment of cash assistance at risk.

Providing public assistance recipients with the same protections as other consumers – indeed, the same protections as other assistance recipients – is one small piece of larger effort to connect low-income families with safe, affordable financial products. The very programs that aim to help families move out of poverty shouldn’t exacerbate it—or jeopardize the state’s own investments— by providing inadequate protections for the assistance they distribute.