Statement of the Board of Governors of the Federal Reserve System - to House Committee on Banking and Financial Services, March 27, 1996 - Statements to the Congress

Federal Reserve Bulletin, May, 1996

The Board has been asked to comment on its position with regard to the coverage under the Electronic Fund Transfer Act (EFTA), and the Board's Regulation E, of electronic benefit transfer (EBT) programs. Government benefits that are delivered electronically include food stamps, Aid to Families with Dependent Children, and social security benefits. Under amendments to Regulation E that the Board adopted in February 1994, such EBT programs will be subject to modified Regulation E requirements scheduled to take effect on a mandatory basis on March 1, 1997 (see attached February 24, 1994 notice).(1)

The Board adopted the amendments covering EBT programs pursuant to its authority under 904(c) and (d) of the EFTA. Section 904(c) provides that the rules issued by the Board "may contain such classifications, differentiations, or other provisions ... as in the judgment of the Board are necessary or proper to effectuate the purposes of this title, [or] to prevent circumvention or evasion thereof . . ." Section 904(d) provides that if EFT services "are made available to consumers by a person other than a financial institution holding a consumer's account, the Board shall by regulation assure that the disclosures, protections, responsibilities, and remedies created by this title are made applicable to such persons and services." The legislative history of the EFTA provides guidance on the Board's authority to determine if particular services should be covered by the act. A Senate Banking Committee report, in discussing section 904(c), stated that " since no one can foresee EFT developments in the future, regulations would keep pace with new services and assure that the act's basic protections continue to apply." (Senate Report 915, 95 Cong., 2 Sess. (GPO, 1978)).

In adopting the amendments, the Board noted its belief that the strong similarity of EBT systems and other EFT services, the act's legislative history, and the language of the EFTA and Regulation E supported coverage of EBT programs under the act and regulation. The Board stated that, from a recipient's viewpoint, an EBT system functions much the same as if the recipient had an ordinary checking account with direct deposits of government benefits and with automated teller machine and point of sale service available to access the benefits and that all consumers using EFI services should receive substantially the same protection under the EFTA and Regulation E, absent a showing that compliance costs outweigh the need for consumer protections. The Board noted that it recognized that benefit program agencies were concerned about the operational and cost impacts of coverage, specifically in the areas of liability for unauthorized transfers and effort resolution, but believed that the cost data presented to support exemptions in these areas were not definitive. In response to concerns expressed by the states about the potential impact of Regulation E on EBT programs and at the request of the Federal Electronic Benefits Task Force, which represents all the major federal agencies with benefit programs, the Board delayed the date of mandatory compliance with the final rule for a three year period - to March 1, 1997-so that states could continue to explore opportunities for provision of services through EBT.

Various bills relating to the status of EBT programs under the EFTA have been introduced in the Congress. H.R.4, the "Personal Responsibility and Work Opportunity Act of 1995," which was passed by the Congress and vetoed by the President, contains provisions to exempt EBT programs that distribute needs-tested benefits and are established or administered by states or localities. After careful weighing of congressional intent, consumer rights and the concerns about the impact of Regulation E coverage on development of EBT systems, the Board believes that coverage of EBT programs is required under the law as it currently exists. The Board recognizes that the Congress may well want to reexamine the issues regarding the scope of EFTA coverage in light of developments since its enactment in 1978 and to balance competing objectives in light of changing national priorities. In particular, the Board believes it would be useful for the Congress to address whether or not EBT programs should be exempted from the EFTA. However, if an exemption is limited to particular categories of EBT programs - or to EBT programs administered at the state and local level as may be the case under H.R.4 and similar proposals - varying rules for different government benefit programs would result. This could make it difficult to implement the multipurpose, one-card, unified national delivery system envisioned by the Federal Electronic Benefits Transfer Task Force, established in response to Vice President Gore's 1993 Report of the National Performance Review.

(1.) The attachment to this statement is available from Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551.