Management of Federal Agency Disbursements

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 208

RIN 1510-AA56

Management of Federal Agency Disbursements

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Notice of proposed rulemaking; notice of public hearings.

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SUMMARY: Section 31001(x) of the Debt Collection Improvement Act of

1996 (the ``Act'') amends 31 U.S.C. 3332 to require Federal agencies

(``agencies'') to convert all Federal payments (other than payments

under the Internal Revenue Code) from checks to electronic funds

transfer (``EFT'') in two phases. Phase one began July 26, 1996. All

recipients who become eligible to receive Federal payments on or after

that date are required to receive such payments by EFT unless the

recipient certifies in writing that the recipient does not have either

an account with a financial institution or an authorized payment agent.

The Department of the Treasury (``Treasury'') issued an interim rule on

July 26, 1996, to implement these requirements.

Phase two begins January 2, 1999. The Act provides that, subject to

the authority of the Secretary of the Treasury (the ``Secretary'') to

grant waivers, all Federal payments (other than payments under the

Internal Revenue Code) made after January 1, 1999 must be made by EFT.

This proposed rule, to implement the requirements that take effect

after January 1, 1999, is being published for comment.

DATES: Written comments on the proposed rule must be received no later

than December 16, 1997. Public hearings on the proposed rule will be

held in Dallas on October 14, 1997, in New York City on October 27,

1997, and in Baltimore on October 30, 1997. Requests to speak at one of

the three public hearings must be received 14 days before the date of

that hearing. See the Supplementary Information for further details

concerning the hearings.

ADDRESSES: Comments should be sent to Cynthia L. Johnson, Director,

Cash Management Policy and Planning Division, Financial Management

Service, U.S. Department of the Treasury, Room 420, 401 14th Street

S.W., Washington, D.C. 20227. A copy of the proposed rule is available

on the Financial Management Service's EFT web site at http://

www.fms.treas.gov/eft/. Public hearings will be held in Dallas on

October 14, 1997, in New York City on October 27, 1997, and in

Baltimore on October 30, 1997. Requests to present oral comments at one

of the public hearings should be directed to Martha Thomas-Mitchell by

calling (202) 874-6757, or by sending an Internet e-mail to

[email protected]. See the Supplementary

Information for further details concerning the hearings. Comments on

the proposed rule and transcripts of the hearings will be available for

public inspection and downloading at the web site address shown above

and for public inspection and copying at the Department of the Treasury

Library, Room 5030, 1500 Pennsylvania Avenue, N.W., Washington, D.C. To

make an appointment to inspect comments and transcripts, please call

(202) 622-0990.

FOR FURTHER INFORMATION CONTACT: Robyn Schulhof, Financial Program

Specialist, at (202) 874-6754; Diana Shevlin, Financial Program

Specialist, at (202) 874-7032; Cynthia L. Johnson, Director, Cash

Management Policy and Planning Division, at (202) 874-6590; Sally

Phillips, Senior Financial Program Specialist, at (202) 874-6749;

Margaret Marquette, Attorney-Advisor at (202) 219-3320; or Natalie

Diana, Attorney-Advisor at (202) 874-6827.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

Section 31001(x) of the Act amends 31 U.S.C. 3332 to require

agencies to convert from paper-based payment methods to EFT under

regulations issued by the Secretary. The Act, which exempts only

payments under the Internal Revenue Code of 1986, provides that the

conversion from checks to EFT be made in two phases.

During the first phase, which began July 26, 1996, all Federal

payments to recipients who become eligible to receive those payments on

or after that date must be made by EFT unless the recipient provides a

written certification that the recipient does not have an account with

a financial institution 1 or an authorized payment agent. On

July 26, 1996, Treasury issued an interim rule to implement these

requirements. 61 FR 39254. The interim rule will remain in effect

through January 1, 1999.

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\1\ As used herein, ``financial institution'' means any

institution included in the definition of depository institution in

12 U.S.C. 461(b)(1)(A), excluding subparagraphs (v) and (vii), and

any agency or branch of a foreign bank as defined in 12 U.S.C. 3101.

See also the related section-by-section discussion of this term

defined in the proposed rule at Sec. 208.2(e).

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Phase two begins on January 2, 1999; after that date all Federal

payments must be made by EFT unless a waiver is available. Under 31

U.S.C. 3332(f)(2), the Secretary is authorized to waive the EFT

requirement in specified circumstances based on standards developed by

the Secretary. The Act requires recipients of Federal payments (1) to

designate a financial institution or authorized agent to which the

Federal payments shall be made and (2) to provide the agency that makes

the payments with the information needed to make the payments by EFT.

12 U.S.C. 3332(g). The final rule, which will take effect on January 2,

1999, is intended to provide guidance to agencies and recipients

regarding compliance with these requirements.

The Act makes EFT the standard for Federal payments. In

implementing the Act, Treasury seeks to bring into the mainstream of

the financial system those millions of Americans who receive Federal

payments and who currently do not use the financial system to receive

funds, make payments, save, borrow or invest. Treasury's goals in the

implementation process are simple, and focus on payment recipients.

These goals include the following: making certain that recipients have

access to their funds at a reasonable cost; providing appropriate

consumer protection; ensuring that the system delivers payments and

information accurately, conveniently, and in a timely manner; and

significantly increasing participation by recipients in the country's

financial system.

The Financial Management Service (the ``Service''), a bureau in the

Department of the Treasury, is responsible for implementation of the

Act. As the Federal Government's financial manager, the Service is

responsible for collecting and disbursing public money. In fiscal year

1996, the Service issued more than 850 million payments. Approximately

81 percent of those payments (685 million payments) were made to

individuals under various benefit programs such as Social Security; the

remaining payments consisted of salary, vendor, loan, grant, and tax

refund payments.

In fiscal year 1996, approximately 53 percent of Treasury payments

were made by EFT. Making payment by EFT benefits both recipients and

the Government. Agency records indicate that recipients are 20 times

less likely to have a problem with an electronic payment than with a

paper check. Unlike check payments, electronic

[[Page 48715]]

payments are not susceptible to being lost, stolen, or damaged in

transit. In those few cases where an electronic payment is misrouted,

it can be traced and rerouted to the recipient, usually within 24 hours

after a claim of non-receipt is received, compared to an average of 14

days for a check. Further, electronic payments are far less susceptible

to forgery or alteration than checks. Each year, the Government handles

claims relating to approximately $60 million in forged checks, $1.8

million in counterfeit checks, and $3.3 million in altered checks.

EFT payments are also less costly than checks. A check costs the

Government approximately 43 cents, including postage, paper check stock

and labor costs. An EFT payment costs approximately two cents. Full

implementation of the Act is expected to achieve Government-wide

savings of about $100 million per year.

Over the past two decades, Treasury has developed numerous products

and services to enable agencies to make EFT payments. These include

Direct Deposit, Vendor Express, the Automated Standard Application for

Payments (``ASAP'') and electronic benefits transfer (``EBT'').

The Direct Deposit program is used by agencies to make benefit

payments, as well as wage, salary, retirement, allotment, and travel

advance and reimbursement payments.

The Vendor Express program transfers payments directly into the

accounts of vendors and other commercial payees. It also provides

identifying information about the payment, referred to as remittance

data, in an addendum to the payment.

The ASAP system is an electronic payments system used to deliver

time-sensitive Federal funds to organizations that have a continuing

relationship with the Federal Government. ASAP is used for grant

payments and ``same day'' payments to contractors.

The above products primarily use the Automated Clearing House

(``ACH'') network, a nationwide processing and delivery facility that

provides for the distribution and settlement of electronic financial

transactions. Some of Treasury's payment services use Fedwire, a funds

transfer system operated by the Federal Reserve System. Fedwire is used

primarily for large dollar, small volume payments that need to be

confirmed immediately, such as payments to businesses, State and local

governments, and educational institutions.

Treasury, along with other agencies, is continuously researching

and developing new electronic payment products. In the near future,

Treasury expects to publish for comment a proposal to amend its

regulation dealing with the use of the ACH network by agencies. The

revision of 31 CFR Part 210 will accommodate the current and future use

of the ACH network by agencies.

B. Participation in Rulemaking Process

Treasury believes that the success of the conversion to EFT depends

on the involvement of all interested parties in the rulemaking process.

In developing the proposed rule, Treasury used a wide variety of

approaches to obtain data and solicit input from these parties.

The interim rule specifically invited the public to comment on

obstacles to receiving payments electronically, the availability of

banking services, suggestions for new and improved electronic payment

methods, the role of authorized payment agents, and the needs of

recipients without bank accounts. The financial industry was invited to

discuss electronic payment processing capabilities and suggestions for

new and improved electronic payment methods. Agencies were asked to

submit implementation plans that describe the types of payments they

make by check, the obstacles they face in converting such payments to

EFT, suggestions for removing these obstacles, timetables for

converting payments, and whether assistance is needed.

Since the publication of the interim rule, Treasury has held

numerous meetings with representatives from consumer interest

organizations and the financial industry. Treasury also hosted a

consumer briefing session attended by representatives from over 30

consumer organizations and a similar briefing for industry that was

attended by representatives from 13 financial trade associations.

In addition, Treasury contracted for two research studies related

to the electronic payment mandate. The studies were used primarily to

obtain information regarding the characteristics of Federal check

recipients and to better understand the needs of those recipients,

particularly with respect to Federal benefit payments. The studies are

available on the Service's EFT web site at http://www.fms.treas.gov/

eft/.

Treasury obtained input from agencies through a number of forums,

including 11 regional meetings that were attended by more than 1100

agency representatives. Treasury also established an EFT Interagency

Policy Workgroup consisting of representatives from 25 executive branch

agencies. Finally, Treasury has reviewed the agency implementation

plans submitted in response to the interim rule.

C. Public Hearings

In addition, Treasury will hold three public hearings on the

proposed rule. The first hearing will be held in Dallas on October 14,

1997, at the Federal Reserve Bank of Dallas, 2200 North Pearl Street,

Dallas, Texas. The second hearing will be held in New York City on

October 27, 1997, at the U.S. Alexander Hamilton Customs House, 1

Bowling Green, New York, New York. The third hearing will be held in

Baltimore on October 30, 1997, at the Baltimore Branch of the Federal

Reserve Bank of Richmond, 502 South Sharp Street, Baltimore, Maryland.

The hearings in Baltimore and Dallas will begin at 9:00 a.m. The

hearing in New York City will begin at 10:00 a.m.

Requests to present oral comments at one of the public hearings

should be directed to Martha Thomas-Mitchell by calling (202) 874-6757

or by sending an Internet e-mail to martha-thomas-

[email protected] not later than 14 days before the date of the

hearing. Requests to present oral comments must be accompanied by an

outline of topics to be discussed. In order to facilitate the

distribution of the comments to attendees at the hearings, presenters

must submit, in writing, the text of the comments to be made, at least

three business days prior to the hearing. Presentations will be limited

to approximately 10 minutes or less. Treasury reserves the right to

impose further time or other restrictions on all presentations.

Please notify Martha Thomas-Mitchell prior to the date of the

public hearing if any special arrangements or auxiliary aids or

services are needed.

II. Comments on the Interim Rule

Treasury received 33 comment letters on the interim rule.\2\ The

letters were submitted by four consumer organizations, nine trade and

labor organizations and associations, two banks, four non-financial

institutions, two State government agencies, and nine Federal agencies

and offices. Three organizations submitted two letters. The comment

letters generally supported the Act and the interim rule, although

commenters expressed a wide range of views regarding how best to

achieve the Act's objectives.

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\2\ Comments on the interim rule are available for public

inspection and copying at the Treasury Library, Room 5030, 1500

Pennsylvania Avenue, N.W., Washington, D.C.

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The principal issues addressed in the comment letters were the

needs of

[[Page 48716]]

recipients who do not have bank accounts; the need for consumer

protection in connection with EFT; the definition of authorized payment

agent and the regulation of such entities; the costs associated with

EFT; waivers; vendor payments; and the importance of educating

recipients about the EFT mandate. Specific comments are discussed below

in the section-by-section analysis.

III. Section-by-Section Analysis

A. Section 208.1--Scope and Application

With one exception, proposed Sec. 208.1 is the same as the

corresponding provision in the interim rule. The interim rule requires

agencies to make payments by EFT, ``unless a waiver is granted.''

Treasury proposes to replace this phrase with a reference to Sec. 208.4

indicating that agencies and recipients may rely upon the waivers

described in that section.

B. Section 208.2--Definitions

Section 208.2(a)--Agency

The definition of agency is identical to the definition in the

interim rule. For a discussion of this term, see 61 FR 39254, 39255.

Section 208.2(b)--Authorized Payment Agent

The term authorized payment agent was the focus of extensive

comment and discussion. Some consumer organizations urged Treasury to

prohibit certain entities from acting as authorized payment agents,

while other organizations suggested that Treasury impose a variety of

substantive restrictions on such entities. Some commenters supported

defining this term as including non-financial institutions as well as

financial institutions on the ground that this would allow recipients

without bank accounts to have greater access to electronic payments,

while others urged Treasury to limit the category to Federally-insured

financial institutions. Concern was expressed about non-financial

institutions that charge what was described as excessively high fees

for check cashing and other financial services. Treasury was urged to

limit the fees charged by authorized payment agents for recipients to

access their funds and to regulate the contractual arrangements between

authorized payment agents and recipients.

One commenter recommended that if non-financial institutions were

included in the definition of ``authorized payment agent,'' they should

be required to provide the same level of consumer protection as

financial institutions.

One consumer organization argued that only financial institutions

and ``possibly the U.S. Post Office'' should be permitted to act as

authorized payment agents because no limitations on the contractual

relationship between the non-financial institution and the recipient

could protect the recipient adequately. A group representing the

elderly expressed concern that if nursing homes, assisted living

facilities, or other institutions with a financial interest in the

recipient's payment are permitted to act as payment agents, they could

impose excessive service fees.

A group representing check cashers urged Treasury to define

``authorized payment agent'' in a manner that would allow check cashers

to be designated as authorized payment agents. The group commented that

check cashers were in a unique position to deliver payments to Federal

recipients because of their locations in areas where there are few bank

branches and because of the customer service they provide.

A national money transmitter commented that Treasury should allow

money transmitters to be authorized payment agents because of their

numerous locations nationwide and because of their experience in

serving those without bank accounts.

In formulating the proposed regulation, Treasury has considered the

language of the Act, as well as the protection of recipients, the

comments received, and consistency with other Treasury regulations.

The Act refers to ``authorized payment agent,'' ``authorized

agents,'' and ``agent.'' Section 3332(e)(2) directs an agency to waive

the requirement to receive payment by EFT during phase one of the EFT

mandate if the recipient certifies in writing that he or she ``does not

have an account with a financial institution or an authorized payment

agent.''

Section 3332(g) provides that:

Each recipient of Federal payments required to be made by

electronic funds transfer shall--

(1) designate 1 or more financial institutions or other

authorized agents to which such payments shall be made; and

(2) provide to the Federal agency that makes or authorizes the

payments information necessary for the recipient to receive

electronic funds transfer payments through each institution or agent

designated under paragraph (1).

(Emphases added.)

The Act, however, does not define ``authorized payment agent,'' and

the legislative history is silent on the meaning of this term. Treasury

believes that all three terms--``authorized payment agent,''

``authorized agents,'' and agent''--refer to the same entity or

entities and are to be construed identically. The language quoted above

suggests that an authorized payment agent is an entity other than a

financial institution. Further, this language could be read as meaning

that payment may be made to an authorized payment agent, either

directly to an account held by an authorized payment agent, or to an

account held by a financial institution in the name of the authorized

payment agent.

At the present time, however, Treasury cannot deliver a Federal

payment by EFT directly to an entity other than a financial institution

because electronic financial transactions are made primarily through

the ACH network and membership in the ACH network system is limited to

financial institutions. Further, as a general rule, the Federal Reserve

Banks provide ACH and wire services only to financial institutions.

Therefore, it is not possible from an operational standpoint to deliver

Federal payments by EFT directly to any entity that is not a financial

institution.

It is possible operationally to deliver a payment by EFT to an

account in the name of an authorized payment agent held by a financial

institution. However, the deposit of a Federal payment into an account

controlled by a third party other than the person entitled to the

payment raises concerns about the protection of the recipient's

interests. Specifically, Treasury is concerned about the potential

failure of agents to honor their obligations, especially since, except

in limited cases, there is no Federal oversight of such arrangements.

Additionally, non-financial institutions may not be subject to Federal

consumer protection laws. Therefore, defining ``authorized payment

agent'' broadly and permitting Federal payments to be deposited into

accounts controlled by a wide range of entities may expose recipients

to the credit risk associated with the failure of such authorized

payment agents. However, there is one situation in which experience

suggests that it is in the best interest of the recipient to make a

Federal payment to someone other than the recipient. This situation

involves recipients who are physically or mentally incapable of

managing their payments.

Proposed Sec. 208.2(b) defines ``authorized payment agent'' as any

individual or entity that is appointed or otherwise selected as a

representative payee or fiduciary, under regulations of the Social

Security Administration (``SSA''), the Department of Veterans

[[Page 48717]]

Affairs (``VA''), the Railroad Retirement Board (``RRB'')(collectively,

the ``benefit agencies'' for purposes of the section-by-section

analysis), or other agency making Federal payments, to act on behalf of

an individual entitled to a Federal payment. The Social Security Act

permits the SSA to make a benefit payment to ``another individual, or

an organization'' when doing so is in the best interest of the

recipient.3 The Veterans' Benefits Act 4 and the

Railroad Retirement Act 5 contain similar provisions. SSA

and the RRB use the term ``representative payee'' to refer to

individuals and organizations that have been selected to receive

benefits on behalf of a beneficiary who is ``legally incompetent or

mentally incapable of managing benefit payments.'' The VA uses the term

``fiduciary'' to refer to individuals or organizations appointed to

serve in similar circumstances.

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\3\ 42 U.S.C. 1383(a)(2)(A)(ii)(I).

\4\ 38 U.S.C. 5502.

\5\ 45 U.S.C. 231k.

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Other agencies, such as the Office of Personnel Management, also

make Federal payments to individuals and provide for representative

payees and fiduciaries. While not included by name, the phrase ``or

other agency'' in the proposed definition is intended to refer to these

agencies.

SSA, the VA, and the RRB have issued detailed regulations

addressing the qualifications and duties of representative payees and

fiduciaries.6 The rules governing these representational

relationships are long-standing and well established. In addition, the

definition of the term ``recipient'' in Treasury's regulation governing

the use of ACH by agencies refers to representative payees and

fiduciaries. See 31 CFR 210.2. In fiscal year 1996, approximately 10

percent of Social Security benefit payments (60 million payments) were

made to approximately five million representative payees. Therefore,

Treasury believes that it is appropriate to define the term

``authorized payment agent'' by reference to existing practice and the

regulations of the agencies making Federal payments.

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\6\ See 20 CFR Parts 404, 410, 416, 266, and 348; and 38 CFR

Part 13.

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The effect of the proposed definition in Sec. 208.2(b), together

with the requirement in Sec. 208.6, which outlines account requirements

for purposes of this rule, is that all Federal payments will be made to

an account at a financial institution. Such account must be in the name

of the recipient or in the name of an authorized payment agent who

stands in the shoes of the recipient for purposes of

payment.7 The involvement of a financial institution at this

stage provides recipients and agencies with important protections,

namely, deposit insurance in most cases 8 and the safety and

soundness associated with a regulated financial institution. Treasury

specifically invites public comment on the proposed definition of

``authorized payment agent'' in Sec. 208.2(b) and the provision,

Sec. 208.6, in which this term is used.

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\7\ Section 208.6 also permits a Federal payment to be deposited

into an account in the name of a securities broker or dealer. See

discussion below.

\8\ Treasury is aware that a few financial institutions that are

capable of receiving Federal payments through the ACH system may not

have deposit insurance. The proposed rule does not place any

additional requirements on these institutions, i.e., recipients who

currently receive Federal payments by EFT through such institutions

will not be required to make any changes to existing arrangements.

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Section 208.2(c)--Electronic funds transfer

The proposed definition of electronic funds transfer in

Sec. 208.2(c) is similar to the definition of that term in the Act. It

is identical to the definition in the statute and the interim rule

except that the proposed definition includes a statement that the term

includes a credit card transaction.

Treasury recognizes that the definition of ``electronic funds

transfer,'' as proposed, is somewhat broader than the definition of

that term in the Electronic Fund Transfer Act, 15 U.S.C. 1693

(``EFTA''). Specifically, the credit card transactions referred to in

the proposed rule do not satisfy the definition of an EFT in the EFTA

in that the transaction does not debit or credit a consumer asset

account. In addition, ACH transactions to or from a commercial account

would not be covered by the EFTA.

Section 208.2(d)--Federal Payment

The definition of Federal payment is the same in the proposed rule

as in the interim rule, except for minor technical changes in the

miscellaneous payments section.

Section 208.2(e)--Financial Institution

The definition of financial institution has been changed from the

definition of that term in the interim rule. The proposed rule defines

``financial institution'' to mean a depository institution as defined

in 12 U.S.C. 461(b)(1)(A), excluding subparagraphs (v) and (vii), and

an agency or branch of a foreign bank as defined in 12 U.S.C. 3101.

Under this definition, banks, savings banks, credit unions, savings

associations, and United States-based foreign bank branches would be

considered ``financial institutions.'' This change has been made to

reflect the class of entities that can participate directly in the ACH,

i.e., financial institutions that are authorized by law to accept

deposits.

Section 208.2(f)--Individual

Treasury proposes to add a definition of individual. Proposed

Sec. 208.2(f) defines ``individual'' to mean a natural person.

Section 208.2(g)--Recipient

Treasury proposes to add a definition of recipient. Proposed

Sec. 208.2(g) is based on the definition of ``recipient'' in 31 CFR

210.2 and provides that ``recipient'' means an individual, corporation,

or other public or private entity that is authorized to receive a

Federal payment from an agency.

Section 208.2(h)--Secretary

Proposed Sec. 208.2(h) defines Secretary to mean Secretary of the

Treasury.

Section 208.2(i)--Treasury

Proposed Sec. 208.2(i) defines Treasury to mean the United States

Department of the Treasury.

The interim rule contains a definition of the terms ``benefit

payment'' and ``payment.'' Since the proposed rule defines the term

``Federal payment,'' Treasury proposes to omit the definition of

``benefit payment'' and ``payment'' from the rule.

C. Section 208.3--Payment by Electronic Funds Transfer

Proposed Sec. 208.3 implements 31 U.S.C. 3332(f)(1) and provides

that, notwithstanding any other provision of law, all Federal payments

made by an agency after January 1, 1999, must be made by EFT, unless

one of the waivers set forth in Sec. 208.4 applies. Under the

definition of ``Federal payment,'' payments made under the Internal

Revenue Code of 1986 (i.e., tax refunds) are excluded from the EFT

mandate.

D. Section 208.4--Waivers

The Act authorizes the Secretary to waive the requirement to make

Federal payments by EFT for individuals or classes of individuals for

whom compliance imposes a hardship; for classifications or types of

checks; and in other circumstances as may be necessary. 31 U.S.C.

3332(f)(2)(A). Subparagraph (B) of Sec. 3332(f)(2) directs the

Secretary to make waiver determinations based on standards developed by

the Secretary.

The interim rule invited public comment on the need for waivers. In

the

[[Page 48718]]

public comments and in meetings with agencies, the public, and

industry, several themes were expressed repeatedly, regarding the

standards that should be developed for waivers.

The first standard is the need for waivers where the conversion

from check to EFT imposes a hardship on the recipient. Consumer

organizations urged Treasury to make waivers readily available to all

recipients who assert that receiving payment by EFT would impose a

hardship.

The second standard is ``impossibility.'' Agencies noted that, for

a payment to be made by EFT and for the recipient to gain access to the

funds, certain conditions must be present. EFT requires a modern

communications system and the participation of financial institutions

with the requisite operational capabilities. In addition, in foreign

countries, EFT requires a reasonably stable political environment. If

these conditions are not present, EFT becomes more difficult and, in

some cases, impossible.

The third standard is ``cost-benefit.'' Agencies described cases in

which they make small dollar payments or one-time payments and urged

Treasury to authorize agencies to take into account the costs and

benefits of using EFT in such cases.

The fourth standard relates to law enforcement and national

security. Agencies engaged in law enforcement and national security

described circumstances in which making a payment by EFT would endanger

the safety of an agent or a person cooperating with an agency.

Based on these four standards, Treasury proposes to adopt the eight

waiver categories set forth in Sec. 208.4. Treasury considered adopting

a process under which agencies would apply to Treasury for a waiver.

However, Treasury believes that an application process would impose an

unnecessary administrative burden on the agencies and Treasury and

could delay the processing of Federal payments. For these reasons, the

proposed regulation does not require agencies to apply to Treasury for

the waivers that are available to an agency. Instead, the proposal

contemplates that agency officials will determine whether a payment or

class of payments falls within one of the waiver categories described

in subsections (c) through (h). As appropriate, Treasury will provide

guidance to agencies regarding the various waiver categories.

In the case of the waivers available for individuals, Treasury

plans to develop, and make available to agencies, model language that

an individual would use to certify to the agency that receiving payment

by EFT would impose a hardship due to one of the enumerated barriers.

The certification would be based on the individual's own evaluation of

his or her circumstances. Treasury believes that this subjective

approach is consistent with Congressional interest in minimizing the

hardship associated with conversion from check to EFT for some

recipients, and recognizes the wide variety of circumstances in which

recipients live and work. The proposed rule does not anticipate that

agencies will evaluate an individual's circumstances; rather, Treasury

expects that a waiver from payment by EFT will be automatic and based

solely on the individual's certification.

Proposed Sec. 208.4 (a) and (b) provide waivers from the

requirement to receive payment by EFT for certain classes of

individuals for whom such requirement would impose a hardship.

Specifically, proposed Sec. 208.4(a) sets forth two waivers for those

individuals who have an account with a financial institution and who

became eligible for a Federal payment before July 26, 1996, and

Sec. 208.4(b) sets forth three waivers for individuals who do not have

an account with a financial institution, regardless of when they became

eligible for payment. There are no waivers for individuals who have an

account with a financial institution and who become eligible for a

Federal payment on or after July 26, 1996 (``newly-eligible

recipients''), although there may be circumstances in which an

individual is paid by check because the agency's obligation to pay by

EFT is waived pursuant to a waiver described in subsections (c) through

(h).

Treasury's proposal to tie the availability of a waiver for an

individual who has a bank account to the date an individual became

eligible for the Federal payment is based on a review of its

experience, and the experience of the agencies responsible for the vast

majority of Federal payments, during phase one. As noted above, the Act

and Treasury's interim rule provide that newly-eligible recipients must

receive payment by EFT unless the recipient certifies in writing that

he or she does not have an account with a financial institution. The

SSA, which certifies 71% of the payments made by Treasury each month,

reports that approximately 76% of the recipients who became eligible to

receive Social Security and Supplemental Security Income payments since

July 26, 1996, are receiving payment by EFT.9 Benefit

agencies report that very few of these recipients have indicated that

receiving payment by EFT would cause a hardship of any kind.

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\9\ The VA and the RRB report similar experiences.

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Based on the favorable experience of SSA and the other benefit

agencies, and the fact that newly-eligible recipients do not have a

history of receiving their Federal benefit payments by check and,

therefore, would not experience a change in the manner in which they

receive payment, Treasury proposes to take an approach with respect to

newly-eligible recipients who have an account with a financial

institution that parallels the approach taken during phase one.

Therefore, the proposed rule provides no waivers for these recipients,

although one or more of the waivers described in subsections (c)

through (h) may apply.

Under proposed Sec. 208.4(a), an individual who has an account with

a financial institution and who became eligible to receive payment

before July 26, 1996, would not be required to receive payment by EFT

where the use of EFT would impose a hardship due to either a physical

disability or a geographic barrier.

The Act does not define the term ``hardship.'' The legislative

history mentions geographical, physical, mental, educational, and

language barriers, but does not define these terms. Treasury and the

benefit agencies believe that, for the reasons discussed more fully

below, three of the five categories mentioned--mental, educational, and

language--do not pose a barrier to the use of EFT. These factors can

affect an individual's ability to use any method of payment, whether

check or EFT, and, therefore, there is no need to provide waivers for

these categories. In fact, for many individuals, the safety and

reliability associated with EFT outweigh the difficulty associated with

a new method of payment.

With regard specifically to mental disabilities, Treasury notes

that, as mentioned above in the discussion on ``authorized payment

agent,'' some agencies have already provided in their regulations for

recipients who are mentally incapable of managing their payments. Under

these regulations, an individual or entity may be appointed or

otherwise selected to act on behalf of an individual entitled to a

Federal payment. For example, when an application for Social Security

or Supplemental Security Income benefits is filed by or on behalf of an

individual who is not able to manage his or her benefit payment, SSA's

regulations provide for the appointment of a representative payee. This

person or entity receives the payment and arranges for the funds to be

used for the benefit of the individual. The method by

[[Page 48719]]

which payment is made to the representative payee has no effect on the

actual recipient.

The proposed rule does not provide waivers based on the recipient's

educational level, limited literacy skills, or lack of fluency in

English. The experience of Treasury and the benefit agencies suggests

that the obstacles posed by these factors are not uniquely associated

with the use of EFT. Educational and language barriers can interfere

with the comfortable and successful use of any method of payment,

including checks and EFT. In implementing EBT, the benefit agencies

have found that educational and language barriers present a challenge

in making the transition to EFT, but the transitional hurdle is short-

lived and ameliorated by educational programs targeted to the specific

needs of recipients. The benefit agencies and the financial industry

have developed, and are continuing to develop, educational materials

that assist recipients with limited education or literacy skills in

making the transition to EFT. In addition, Treasury intends to conduct

an extensive education campaign on receiving payment by EFT.

Finally, with respect to language, the benefit agencies and the

financial industry have programs to assist recipients who do not speak

English. For example, in those parts of the country where a language

other than English is predominant, SSA employees assist recipients in

their native language. In these areas, many ATMs and POS terminals

offer the choice of on-screen instructions in the predominant language

as well as English. Also, materials provided during the public

education campaign will be available in selected languages other than

English to accommodate non-English speaking recipients.

Treasury believes, however, that there are two instances in which

recipients who have an account with a financial institution and who

have previously been receiving payment by check should not be required

to convert to receiving payment by EFT; namely, where a physical

disability or a geographic barrier would result in a hardship to the

individual.

For example, Treasury believes that a waiver should be available to

a recipient with a physical disability who currently has an arrangement

with a nearby grocery store to cash his or her monthly check, but would

have great difficulty traveling even a short distance to a bank or ATM

to get his or her payment by EFT. Similarly, Treasury believes that a

waiver should be available to someone who lives in a rural area or on

an Indian reservation with limited access to transportation or banking

facilities and who would have great difficulty getting to a bank or ATM

to receive payment by EFT.

The proposed rule does not define physical disability or specify

what constitutes a geographic barrier. In the case of physical

disability, Federal law contains several definitions, including those

found in the Americans with Disabilities Act, the Social Security Act,

and the Veterans' Benefits Act. Treasury believes that referencing in

Part 208 all applicable definitions of disability would be unwieldy and

confusing, and that creating a new definition for purposes of Part 208

would create an unnecessary administrative burden for agencies and

recipients. In addition, in light of the approach the proposed rule

takes with regard to the waiver process, Treasury does not believe that

it is necessary to define physical disability or specify what

constitutes a geographic barrier.

Under proposed Sec. 208.4(b), an individual who does not have an

account with a financial institution is not required to receive payment

by EFT where the use of EFT would impose a hardship on the individual

due to a physical disability or a geographic barrier, or where the use

of EFT would impose a financial hardship on the individual.

Waivers are provided for individuals with a physical disability or

a geographic barrier for the reasons discussed above. In addition, a

third waiver category--financial hardship--has been provided for

individuals who do not have bank accounts, and for whom Treasury will

provide an account as described in Sec. 208.5. Although financial

hardship is not mentioned in the legislative history, Treasury is aware

that some individuals who do not have accounts with a financial

institution cash their checks at grocery stores and other locations at

little or no cost. Treasury does not believe that Congress intended

such individuals to pay more to receive payment by EFT than they

currently pay to receive payment by check, particularly low-income

recipients whose Federal payment may be their sole source of income.

Therefore, Treasury is proposing to make a waiver available for these

individuals on this basis. The financial hardship waiver is not

available to recipients who already have accounts with financial

institutions because these individuals presumably will not incur any

additional expense to receive payment by EFT.

The financial hardship waiver proposed in Sec. 208.4(b) will, as a

practical matter, take effect upon the availability of the account

described in Sec. 208.5. Under the Act, Treasury is required to ensure

that individuals who are required to have an account at a financial

institution in order to receive Federal payments will have access to

such an account at a reasonable cost and with the same consumer

protections as other account holders at the same financial institution.

Treasury is in the process of designing such an account. While Treasury

is hopeful that the account will be available nationwide by January 2,

1999, and will make every effort to achieve that goal, it is possible

that the account will not be available on a nationwide basis by that

time. For this reason, the requirement to receive payment by EFT is

automatically waived for all individuals who certify that they do not

have an account with a financial institution until the earlier of

January 2, 2000, or the date as of which the Secretary determines that

the account referred to in Sec. 208.5 is available.

Proposed Sec. 208.4(c) provides that an agency is not required to

make a payment by EFT where the political, financial, or communications

infrastructure in a foreign country does not support payment by EFT.

This waiver category responds to concerns expressed by agencies that

make international payments. For example, the SSA certifies benefit

payments to recipients in 132 countries around the world but, at the

present time, international Direct Deposit is available only in 10

countries. Treasury also recognizes that in some countries, payment by

EFT is feasible in some areas, such as large cities, but is not

feasible outside these areas. In such cases, payments should be made

electronically to any area within the country where the necessary

infrastructure exists, unless the recipient qualifies for one of the

other waivers.

Proposed Sec. 208.4(d) proposes a waiver in those cases where a

natural or other disaster makes payment by EFT not feasible. This

waiver responds to concerns raised by the Federal Emergency Management

Agency and other disaster assistance agencies who advised Treasury

that, in areas affected by natural disasters, financial institutions

may be closed or inaccessible due to electrical or telecommunications

failure or structural damage.

Treasury recognizes that agencies that respond to emergencies must

have the flexibility to fulfill their missions, and that providing

payments to emergency victims and emergency personnel must

[[Page 48720]]

be done in the most efficient and expedient manner possible. Therefore,

Treasury is proposing a waiver for disaster assistance agencies making

payments to recipients residing in areas that are designated by the

President or an authorized agency administrator as a disaster area. The

waiver period would last for 120 days from the date the disaster is

declared. The disaster assistance agencies indicated that most

emergency response phases do not last longer than 120 days and that,

after that time, the financial and communications infrastructure

typically is restored so that recipients can receive their payments

electronically. If the emergency response time exceeds 120 days, the

agency is expected to notify Treasury in writing of the need to extend

the waiver period. The notification should include a justification for

the extension and state the length of the extension period required.

Proposed Sec. 208.4(e) provides a waiver for payments made in

response to contingency operations conducted by the Department of

Defense. A contingency operation is defined in 10 U.S.C. 101(a)(13) as

a military operation that either is designated by the Secretary of

Defense as an operation in which armed forces undertake military

actions against an enemy or results in a call or order to, or retention

on, active duty of members of the armed forces during a war or national

emergency declared by the President or Congress.

Proposed Sec. 208.4(f) provides a waiver from the mandatory EFT

requirement where payment by EFT may pose a threat to national

security, jeopardize the life or physical safety of an individual, or

compromise a law enforcement action. Agencies engaged in law

enforcement and national security, as well as the military, advised

Treasury that in many cases payment by EFT is not feasible or could

endanger employees or other individuals. For example, the physical

safety of undercover agents or participants in a witness protection

program could be jeopardized by the audit trail left by an electronic

payment. Under the proposed rule, a waiver also would be available for

military or other sensitive operations where the provision of bank

routing information to third parties might compromise the security of

the operation, thereby jeopardizing national security.

Under proposed Sec. 208.4(g), an agency would not be required to

make a payment by EFT if the cost of using EFT for making a non-

recurring payment is greater than the cost of making that payment by

check. Treasury considers non-recurring to mean a frequency of not more

than once in a 12-month period to the particular recipient. In comments

and in discussions with Treasury, agencies frequently identified non-

recurring payments as a payment class in which a check might be more

cost-effective than an EFT given the administrative cost of enrolling a

recipient for an ACH payment. Since one of the principal purposes of

the Act was to reduce the Government's cost, Treasury believes this is

an appropriate waiver category.

Agencies also questioned the wisdom of requiring small dollar

payments to be made by EFT. Proposed Sec. 208.4(g) should not be read

as a waiver for all small dollar payments. The cost associated with

making a $100 payment is proportionately higher than the cost of making

a $10,000 payment, regardless of the payment method used. Thus, a

factor in addition to the dollar amount of an individual payment is

whether it is a small dollar single payment or a small dollar recurring

payment.

Proposed Sec. 208.4(h) provides that agencies are not required to

make payments by EFT when public necessity suggests that payment by

methods other than EFT is in the best interest of the Government. An

agency may determine that a need for goods and services is of such

unusual and compelling urgency that the Government would be seriously

injured if payment were required to be made by EFT. Alternatively, an

agency may determine that, where there is only one source for goods or

services, payment by a method other than EFT would prevent serious

injury to the Government. Unusual and compelling urgency means that

there is a need to act without delay to protect a legitimate Government

interest. Serious injury means that the Government faces an imminent

loss of money or property, or the disruption of a Federal program or

activity.

Treasury received a number of comments from agencies expressing

concern that the Act would interfere with their efforts to obtain goods

or services deemed essential to the agencies' missions in a timely

fashion. For example, in some cases, an agency may have only one

supplier of an essential material or service, and that supplier may not

be able to accept payment by EFT. While the Act clearly requires

vendors to accept payment by EFT, Treasury recognizes that, in limited

cases, agencies require flexibility in dealing with vendors who are

unable to receive EFT payments.

Agencies and other commenters asked Treasury to consider making a

waiver available for vendor payments where, because of system

limitations or cost, remittance data is not available to the vendor. As

noted above, remittance data is information that identifies the

payment. This data permits the vendor to reconcile funds received

against outstanding invoices.

A number of commenters stressed the importance of passing

remittance data on to the vendor, stating that the lack of remittance

data is the primary reason why vendors are reluctant to receive payment

by EFT. Several commenters noted that many financial institutions lack

the capability to provide remittance data to their depositors which

requires the translation of data from machine readable to human

readable form. It is estimated that of the approximately 11,000

financial institutions which can accept an electronic payment, fewer

than a thousand are capable of translating remittance data into a human

readable form. In addition, financial institutions sometimes charge

their customers for remittance data, which also reduces the incentive

for smaller vendors to accept payment by EFT.

Treasury is working with agencies, the financial industry, and

vendors to solve the remittance data problem. For example, several

pilots are underway to test the feasibility of making remittance data

available through a variety of methods, including on an agency's web

site. The proposed rule does not contain a waiver for vendor payments

because Treasury expects that, as a result of these efforts, the

problem of making remittance data readily available will be solved by

January 1999. However, Treasury will monitor developments closely and

will reconsider the need for a waiver at that time.

Finally, several agencies noted that the Federal Acquisition

Regulation (``FAR'') interim rule on Payment by Electronic Funds

Transfer, published on August 29, 1996,10 exempts certain

classes of contracts from the Act. Treasury is working with the

appropriate agencies to reconcile any differences between the two

rules.

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\10\ 61 FR 45776.

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E. Section 208.5--Access to Account Provided by Treasury

Proposed Sec. 208.5 provides that where an individual certifies

that he or she does not have an account at a financial institution, or

where an individual fails to respond to a request for information

pursuant to Sec. 208.8, Treasury will, pursuant to the Act's mandate,

provide the individual with access to an account at a Federally-insured

financial institution selected by Treasury. (All such individuals will,

of course, retain

[[Page 48721]]

the right to establish their own account relationships at institutions

of their choice.)

This section addresses the problem of delivering Federal payments

by EFT to individuals who do not have an account at a financial

institution. In order to use Direct Deposit, a recipient must have an

account at a financial institution.11 It is estimated that

approximately 10 million individuals who receive Federal payments do

not have an account at a bank, savings association, savings bank, or

credit union, and, therefore, cannot receive payment by Direct Deposit.

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\11\ See 31 CFR 210.4(a).

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One of Treasury's domestic policy objectives is to encourage

individuals who do not have an account at a financial institution to

move into the financial services mainstream. Since the Act was passed,

Treasury has been working with agencies and the financial industry on

educational efforts designed to encourage individuals to open an

account at a financial institution so that they can receive their

Federal payments by Direct Deposit. In addition, Treasury and the

financial industry are participating jointly in the marketing of Direct

Deposit Too, which is a model for a simple, low-cost, electronically

accessible deposit account. Treasury hopes that many recipients without

accounts will open accounts as a result of these public and private

sector educational and marketing efforts. However, Treasury recognizes

that a certain percentage of individuals who are required to receive

payment by EFT, i.e., individuals who are not eligible for a waiver,

likely will not have accounts by the January 1999 deadline, and the Act

specifically requires that Treasury regulations ensure access to an

account by individuals who are required to have an account because of

the EFT mandate.12

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\12\ 31 U.S.C. 3332(i)(2).

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Treasury considered several approaches to implementing this

requirement. Several commenters suggested that Treasury require

financial institutions to provide a basic account at a reasonable price

to individuals without accounts. Treasury does not believe that

financial institutions should be required to provide these types of

account services as a result of the Act. Another approach involves the

development of a model deposit account with an invitation to financial

institutions to offer this account, at a specified price or at a price

below some ceiling determined by Treasury, to individuals without

accounts. Treasury believes that identifying institutions willing to

participate in a voluntary program and monitoring their activities

would require the creation and maintenance of a regulatory

infrastructure. In addition, it is possible that, in some geographic

areas, no institutions would be willing to participate, resulting in

gaps in coverage.

A third approach is for Treasury to engage one or more Federally-

insured financial institutions to act as Treasury's financial agent for

the provision of accounts to those individuals. Treasury believes that

this approach will enable Treasury to perform its obligation under 31

U.S.C. 3332(i)(2) to ensure that all individuals required to receive

payments electronically will have access to an account at a financial

institution at a reasonable cost and with consumer protections

comparable to those afforded other account holders at such

institutions. In addition, a number of consumer organizations strongly

urged Treasury to permit only Federally-insured financial institutions

to act as agent for Treasury to hold accounts for individuals who do

not have such accounts. Treasury takes seriously the concern expressed

by these commenters, and specifically invites comment on this issue.

Treasury plans to obtain such account services through a

competitive process that will select one or more entities to act as

Treasury's agent to provide these services to recipients that do not

have, or do not choose to open, accounts at financial institutions of

their own choice. Any financial institution designated by Treasury as

its financial agent will perform those functions that involve the

disbursement of public funds, including the establishment of the

recipient's account and the crediting of the Federal payment to the

account. Other functions, however, may be performed by non-financial

institutions working in partnership with the financial

agent.13

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\13\ The notice of proposed rulemaking for Treasury's rule

relating to electronic benefits transfer, 31 CFR Part 207, describes

the disbursement of public funds and the statutory basis for the use

of financial agents. 62 FR 25572.

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The proposed regulation does not attempt to define the specific

characteristics of the account that will be made available. Following

the close of the comment period on this notice of proposed rulemaking,

Treasury will develop proposed terms, conditions, and attributes of the

account to be offered and will publish this proposal for a limited

period of public comment. After evaluating comments received, Treasury

will determine the specific terms, conditions, and attributes of the

account to be offered and will request that interested organizations

submit bids on the cost of providing such an account within defined

geographic areas. Bidders also may be requested to submit bids on

different permutations of alternative account structures and geographic

areas. It is anticipated that such accounts will be offered on the

basis of a specified periodic service charge paid by the recipient.

Treasury believes the design of these Federally-provided accounts

is critical to the successful implementation of the Act. While no final

decisions have been made as to the attributes of the account, it is the

preliminary view of Treasury that each recipient should have an

individual account at a Federally-insured financial institution that

can be directly accessed via plastic debit card at any location of that

institution, including any automated teller machines or point-of-sale

terminals that accept transactions by the institution's cardholders.

Treasury has retained the services of a consultant to evaluate and

provide advice to Treasury with respect to both the account structure

and the design of the competitive selection process for the account

providers. In addition, Treasury is seeking public comment on this

subject.

Commenters are encouraged to provide their views on any issues that

they believe are important to the successful design of this new

account. In submitting views, commenters should consider that the cost

of the account to be offered by bidding institutions is likely to be

affected by the range of attributes required to be included in the

account, as well as the institutions' expected average balance, i.e.,

float, for the account. In particular, Treasury requests comments on

the following questions:

Should Treasury make available a debit card-based account

to individuals who are required to receive Federal payments by EFT and

who do not have an account of their own with a financial institution?

Should the cost of the account to the recipient be the

most important factor for selecting the account structure and/or the

account providers, or should the account structure be designed to meet

other objectives even if the cost to recipients is increased as a

result? If the latter, which objectives? What is an appropriate

standard by which to weigh tradeoffs between increased costs and

additional account features?

Should the account be structured to provide only a basic

withdrawal service at the lowest possible cost, with additional service

charges for additional features, or should the account offer a range of

services at a fixed monthly cost,

[[Page 48722]]

even if greater than the cost of a basic account?

How many withdrawals should be included in the base price

of the account? Should the account terms address the charges imposed by

automated teller machine owners other than the account provider?

Should the account structure provide for additional

electronic or nonelectronic deposits within the basic monthly service

charge? If so, what number of deposits?

Should the account provide for some number of third-party

payments, such as payments for rent or utility bills? If so, how many

third party payments should be provided for and should they be priced

in the basic monthly service charge?

Should the account include a savings feature? How would

such a feature operate? Would additional free withdrawals or the

capability to accept deposits other than the Federal payment act to

foster savings by the recipient?

How important is a broad geographic reach to meeting the

access objectives that most recipients will want? How should Treasury

best meet access needs in underserved areas?

Treasury has been urged to adopt restrictions for the account that

it furnishes that would preclude arrangements between the financial

institution at which the account is maintained and third parties, such

as check cashers and money transmitters, under which recipients might

be provided with additional means of accessing the account. Those

favoring such restrictions argue that recipients should be protected

against excessive charges that might be imposed for such services.

These arguments raise important concerns, particularly with respect to

low-income recipients who have in the past paid high fees to cash

government checks. In light of these concerns, Treasury requests

comment on some additional questions relating to the account it will

design and make available to recipients who do not have bank accounts:

Should access to the account be provided at outlets in

addition to those normally offered by the financial institution

providing the account? For example, should arrangements be permitted

under which third parties may offer other means by which a recipient

may, in effect, withdraw funds from the account. If yes, should there

be any restrictions on where additional access may be provided or under

what terms it can be offered?

If additional access is offered through arrangements with

third parties, should the cost of this additional access be included in

the pricing proposal in the competitive bid process?

Which account design would provide the appropriate

opportunity for non-financial institutions to participate in the

delivery of services to Federal payment recipients?

Treasury will make every effort to ensure that the account referred

to in Sec. 208.5 will be available throughout the country by January 2,

1999. Moreover, Treasury has been working with a number of States to

link the delivery of Federal payments to State EBT programs. Where such

linkage occurs, recipients who receive a Federal payment, such as

Supplemental Security Income, as well as benefits under a State-

administered program, for example, Food Stamps, will be offered an

option of accessing both benefits by means of a single card. However,

as discussed above in connection with proposed Sec. 208.4(b), in the

event that the account described in Sec. 208.5 is not available, the

requirement to receive a Federal payment by EFT will be waived for

individuals who certify that they do not have an account with a

financial institution until the earlier of January 2, 2000, or the date

as of which the Secretary determines that the account is available.

F. Section 208.6--Account Requirements

Proposed Sec. 208.6 addresses account requirements for Federal

payments made by EFT. The proposal sets forth a general rule for all

Federal payments, and then provides two exceptions from the general

rule for situations that involve an authorized payment agent or an

investment account established through a registered securities broker

or dealer.

Under Sec. 208.6(a), all Federal payments made by EFT must be

deposited into an account in the name of the recipient at a financial

institution, unless one of the exceptions described in subsection (b)

applies. The requirement to deposit the payment into an account in the

name of the recipient 14 is consistent with Treasury's

regulations governing use of the ACH 15 and thus provides

continuity with existing arrangements for the Direct Deposit of Federal

payments.

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\14\ Section 208.6 would not prohibit the use of a joint account

between the recipient and a spouse or other member of the

recipient's family so long as the recipient has the right to

withdraw funds from the account.

\15\ 31 CFR 210.4.

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Proposed Sec. 208.6(b)(1) addresses cases in which an authorized

payment agent has been selected or designated. In such cases, the

account may be titled in any manner that satisfies the regulations of

the appropriate agency. See the discussion of ``authorized payment

agent'' in the section-by-section analysis of Sec. 208.2(b) above.

Proposed Sec. 208.6(b)(2) permits a Federal payment to be deposited

into an account in the name of a broker or dealer registered under the

Securities Exchange Act of 1934 with whom the recipient has an account.

Treasury is aware that many brokers and dealers offer services that

combine investment and transaction features. In these services, funds

deposited into an account at a financial institution--which may be in

the name of the securities broker or the name of the customer--are

swept out of such an account on a regular basis and into an investment

vehicle owned by the recipient. When the customer uses the funds for

transaction purposes, whether by credit or debit card or check, the

funds needed to cover the transaction are transferred out of the

investment vehicle.

Such services offer cash management features, and Treasury sees no

reason to discourage recipients of Federal payments from using these

services, provided certain protections are available, namely, that the

broker or dealer is registered under the Securities Exchange Act of

1934 and that the recipient's funds are protected by deposit insurance

during the time the funds are on deposit at the financial institution.

The registration requirement ensures that the broker or dealer is

subject to certain basic requirements such as membership in the

appropriate self-regulatory organization, membership in the Securities

Investor Protection Corporation, recordkeeping and reporting

requirements, and net capital requirements. In addition, such brokers

and dealers are subject to inspections by the Securities and Exchange

Commission and the self-regulatory organizations. The requirement that

the account and associated records be structured so that the

recipient's interest is protected under applicable Federal or state

deposit insurance regulations ensures that the recipient's interest in

a master account is individually insured to the same extent it would be

if the account were in the name of the recipient alone.

Other than payments made to an authorized payment agent or an

investment account, Federal payments made by EFT must be deposited to

an account at a financial institution. The proposed rule is silent on

the role that non-financial institutions may play in the delivery of

Federal payments to

[[Page 48723]]

recipients with bank accounts and the relationship between non-

financial institutions and such recipients. Treasury anticipates that

non-financial institutions will continue to have the opportunity to

partner with financial institutions and to market products and services

to recipients. Treasury's research and the comments received on the

interim rule indicate that non-financial institutions have performed

such functions in the past and are developing new products and services

that will allow them to serve recipients who receive their Federal

payments by EFT. Treasury specifically invites comments on this

opportunity for market innovations.

The use of such products and services would be purely voluntary on

the part of recipients who would continue to be able to access their

payments directly at a financial institution of their choice if they

chose not to use the services of a non-financial institution. These

relationships are distinguished from the account that Treasury proposes

to provide for individuals who do not have an account with a financial

institution. See Sec. 208.5.

Treasury has been urged to interpret the Act as requiring

regulation of the fees charged by financial institutions and the

imposition of certain consumer protections on the services they offer.

Consumer organizations urged Treasury to limit the fees that authorized

payment agents may charge for their services, and suggested that

reasonable costs for recipients without bank accounts should range from

no cost to low cost. Some commenters suggested that Treasury either

subsidize or regulate account fees. Other commenters stated that

efforts to reduce costs for the Government should not place an undue

financial burden on the private sector. These commenters opposed

Treasury's defining ``reasonable cost'' or establishing limits on fees,

and expressed concern that their costs would exceed any ceiling on fees

set by Treasury. They considered ``reasonable cost'' to include all

costs plus a reasonable profit and argued that to regulate otherwise

would discourage the private sector from developing systems to address

problems posed by the electronic payment mandate.

Section 3332(i)(2) provides:

Regulations under this subsection shall ensure that individuals

required under subsection (g) to have an account at a financial

institution because of the application of subsection (f)(1)--

(A) will have access to such an account at a reasonable cost;

and

(B) are given the same consumer protections with respect to the

account as other account holders at the same financial institution.

This provision could possibly be interpreted in two ways. The

requirement that Treasury ensure access to an account could be read

very broadly to refer to all individual recipients who receive their

Federal payments by EFT, whether or not they already have an account.

Such a broad interpretation potentially would place Treasury in the

position of determining the reasonableness of prices charged by

thousands of financial institutions, for a wide variety of account

services, to individuals who have account relationships at institutions

they have chosen voluntarily.

Section 3332(i)(2) also could be read more narrowly as referring to

those individuals who, as of January 2, 1999, have not voluntarily

selected or opened an account at a financial institution and who will

need access to such an account in order to receive a Federal payment by

EFT.

Treasury believes the latter interpretation is the better one,

i.e., that Sec. 3332(i)(2) should be read to require Treasury to

provide ``unbanked'' individuals with access to a reasonably-priced

account at a financial institution. Treasury does not believe that

there should be widespread regulation of the prices of deposit services

voluntarily obtained by recipients in a competitive marketplace.

Gathering information about the prices charged for accounts by

financial institutions throughout the United States and evaluating

those prices to determine their reasonableness would impose a heavy

administrative burden both on the industry and on Treasury. In

addition, widespread price regulation would interfere with the

functioning of the market for account services. Accordingly, the

reasonable cost and consumer protection standards will be applied as

specified in Sec. 208.5 to any account provided by Treasury to

individuals who do not otherwise have access to an account.

G. Section 208.7--Agency Responsibilities

Section 208.3 of the proposed rule sets forth the general rule

that, effective January 2, 1999, all Federal payments for which a

waiver is not available must be made by EFT. Proposed Sec. 208.7

describes the agencies' operational responsibilities in carrying out

this mandate.

First, under proposed Sec. 208.7(a), an agency must collect from

each recipient who is required to receive payment by EFT and who has an

account with a financial institution the information required to make

the payment. This information can be collected electronically through

the ACH system by use of an Automated Enrollment Entry (ENR). The ENR

is a new ACH entry that was specifically designed to meet the needs of

agencies as a replacement for the paper form that has been used for

enrollment in the Direct Deposit program. The phrase, ``who is required

to receive payment by electronic funds transfer,'' is an acknowledgment

that waivers will apply in some cases.

Under this section, agencies are required to collect the

information needed to make a payment through the ACH network, namely,

the recipient's account number and the financial institution's name and

routing number. Treasury encourages agencies to collect this

information at the earliest possible opportunity in their dealings with

potential recipients of Federal payments. For vendor payments, agencies

are encouraged to collect this information as a condition of awarding a

contract, issuing a purchase order, or formalizing an agreement to

obtain goods or services. Collection of this information as a condition

of award ensures that the agency is doing business only with vendors

who are willing and able to accept an EFT payment and consequently

ensures that all vendor payments, unless waived under Sec. 208.4, will

be made by EFT.

In order to ensure compliance by January 2, 1999, agencies must

take action as early as possible in 1998 to inform recipients who still

receive checks of the requirement to convert to EFT. Collection of the

required information should begin no later than July 1, 1998, and

recipients should be encouraged to convert to EFT as soon as possible.

Under proposed Sec. 208.7(b), agencies are directed to obtain from

individuals who do not have an account at a financial institution a

written certification that the individual does not have an account with

a financial institution unless the individual has determined that he or

she needs a hardship waiver. Treasury will provide individuals who

certify that they do not have an account with access to an account in

accordance with Sec. 208.5.

Proposed Sec. 208.7(c) directs agencies to obtain from any

individual who applies for a waiver under Sec. 208.4 (a) or (b) a

written certification that receiving payment by EFT would impose a

hardship. As indicated above, agencies may rely upon the individual's

assertion that a hardship exists; Treasury does not expect agencies to

go beyond the certification to evaluate the individual's circumstances.

[[Page 48724]]

H. Section 208.8--Recipient Responsibilities

Proposed Sec. 208.8(a) implements 31 U.S.C. 3332(g), which requires

recipients of Federal payments who are required to receive payment by

EFT to designate a financial institution or an authorized payment agent

to which payment will be made and provide the agency that makes or

authorizes the payment with the information needed in order to deliver

the payment by EFT. Under the Privacy Act (5 U.S.C. 552a), such

information is considered confidential with respect to individuals, and

may not be disclosed by the agency except as authorized by law.

Proposed Sec. 208.8(b) provides that an individual who is required

to receive payment by EFT and who does not have an account at a

financial institution must certify in writing to the agency making the

payment that he or she does not have an account. Such an individual

will be provided with access to an account provided by Treasury unless

he or she is eligible for a waiver. See the discussion of Sec. 208.5

above.

Proposed Sec. 208.8(c) requires all individuals who apply for a

waiver under Sec. 208.4 (a) or (b) to certify in writing that receiving

payment by EFT would impose a hardship. As discussed above in the

section-by-section analysis of Sec. 208.4, an individual's

certification would be based on the individual's own evaluation of his

or her circumstances.

I. Section 208.9--Compliance

Section 208.9 of the proposed rule provides for Treasury to monitor

agencies' compliance with the EFT mandate. It further provides that

agencies that fail to make payment by EFT as required under this part

may be assessed a charge in accordance with 31 U.S.C. 3335.

Treasury expects agencies to be in compliance with the Act and this

part by January 2, 1999, and will begin to monitor compliance as of

that date. In order to avoid placing an unnecessary administrative

burden on agencies, Treasury does not intend to impose an ongoing

reporting requirement on agencies that are in compliance with the EFT

mandate. Agencies found to be in noncompliance, however, may be

required to submit information on the methods by which they make

payments. Further, such agencies may be assessed a charge equal to an

amount determined by the Secretary to be the cost to the general fund

of the Treasury caused by such noncompliance.

J. Section 208.10--Reservation of Rights

Proposed Sec. 208.10 specifically authorizes the Secretary to waive

any provision of the rule. This provision has been included in the

event that circumstances make such a waiver necessary or appropriate.

Under this provision, the Secretary could grant a waiver not

specifically provided for in this part without having to amend the

rule.

IV. Special Analysis

Although it has been determined that this proposed regulation is a

significant regulatory action for purposes of section 3(f)(4) of

Executive Order 12866, the Office of Management and Budget (``OMB'')

has waived the preparation of a Regulatory Assessment.

Pursuant to the Regulatory Flexibility Act, it is hereby certified

that the proposed regulation, if adopted, will not have a significant

economic impact on a substantial number of small entities. Treasury has

included eight categories of waivers in the proposed rule. The first

two categories are designed specifically to alleviate hardships that

might be imposed on individuals, including sole proprietors, as a

result of the mandatory conversion from check to EFT. Further, the

proposed rule does not prohibit small entities from participating in

the delivery of services to recipients who receive their Federal

payments by EFT. Therefore, Treasury believes the rule does not have a

significant economic impact on a substantial number of small entities

and that a regulatory flexibility analysis is not required. Treasury

welcomes, however, all comments and specifically any comments related

to the impact of the proposed rule on small entities.

The Paperwork Reduction Act of 1995 requires that collections of

information prescribed in the proposed rules be submitted to the OMB

for review and approval. Under this Act, an agency may not conduct or

sponsor, and a person is not required to respond to, a collection of

information unless it displays a valid OMB control number. Comments on

the collection of information may be submitted to the Office of

Management and Budget, Office of Information and Regulatory Affairs,

Attention: Desk Office for the Department of the Treasury, Financial

Management Service, Washington, D.C. 20503, with copies to Jacqueline

Perry, Public Reports Clearance Officer, Financial Management Service,

3361 75th Avenue, Landover, Maryland 20785.

The collection of information in this proposed regulation is

contained in Sec. 208.8. The information (name of financial

institution, routing number, and account number) is required to enable

an agency to pay a recipient of a Federal payment by EFT. The

collection of information is mandatory. Section 3332(g), as amended,

requires recipients of Federal payments to ``provide to the Federal

agency that makes or authorizes the payments information necessary for

the recipient to receive electronic funds transfer payments.'' The

likely respondents vary depending on the agency making the payment. For

the Service, the likely respondents are employees of the Service who

currently receive payments, such as payments for salary, travel

reimbursement, or retirement, by check; and individuals and vendors

that currently receive vendor payments by check.

The estimated total annual reporting burden is 46 hours. The

estimated burden hours per respondent is 0.25 hours. The estimated

number of respondents is 183. These figures represent the burden

imposed by the Service. The reporting burden imposed by other agencies

will be addressed by those agencies.

Comments are specifically requested on:

1. Whether the proposed collection of information is necessary for

the proper performance of functions of the Service, including whether

the information will have practical utility;

2. The accuracy of the estimated burden associated with the

proposed collection of information;

3. How the quality, utility, and clarity of the information to be

collected may be enhanced; and

4. How the burden of complying with the proposed collection of

information may be minimized, including through the application of

automated collection techniques and other forms of information

technology.

List of Subjects in 31 CFR Part 208

Accounting, Banks, Banking, Electronic Funds Transfer.

Authority and Issuance

For the reasons set out in the preamble, Part 208 of Title 31 is

proposed to be revised to read as follows.

PART 208--MANAGEMENT OF FEDERAL AGENCY DISBURSEMENTS

Sec.

208.1 Scope and application.

208.2 Definitions.

208.3 Payment by electronic funds transfer.

208.4 Waivers.

208.5 Access to account provided by Treasury.

208.6 Account requirements.

208.7 Agency responsibilities.

208.8 Recipient responsibilities.

[[Page 48725]]

208.9 Compliance.

208.10 Reservation of rights.

Authority: 5 U.S.C. 301; 31 U.S.C. 321, 3301, 3302, 3321, 3325,

3327, 3328, 3332, 3335, and 6503.

Sec. 208.1 Scope and application.

This part applies to all Federal payments made by an agency and,

except as specified in Sec. 208.4, requires such payments to be made by

electronic funds transfer. This part does not apply to payments under

the Internal Revenue Code of 1986 (26 U.S.C.).

Sec. 208.2 Definitions.

(a) Agency means any department, agency, or instrumentality of the

United States Government, or a corporation owned or controlled by the

Government of the United States.

(b) Authorized payment agent means any individual or entity that is

appointed or otherwise selected as a representative payee or fiduciary,

under regulations of the Social Security Administration, the Department

of Veterans Affairs, the Railroad Retirement Board, or other agency

making Federal payments, to act on behalf of an individual entitled to

a Federal payment.

(c) Electronic funds transfer means any transfer of funds, other

than a transaction originated by cash, check, or similar paper

instrument, that is initiated through an electronic terminal,

telephone, computer, or magnetic tape, for the purpose of ordering,

instructing, or authorizing a financial institution to debit or credit

an account. The term includes, but is not limited to, Automated

Clearing House transfers, Fedwire transfers, and transfers made at

automated teller machines and point-of-sale terminals. For purposes of

this part only, the term electronic funds transfer includes a credit

card transaction.

(d) Federal payment means any payment made by an agency.

(1) The term includes, but is not limited to:

(i) Federal wage, salary and retirement payments;

(ii) Vendor and expense reimbursement payments;

(iii) Benefit payments; and

(iv) Miscellaneous payments including, but not limited to:

interagency payments; grants; loans; fees; principal, interest, and

other payments related to U.S. marketable and nonmarketable securities;

overpayment reimbursements; and payments under Federal insurance or

guarantee programs for loans.

(2) For purposes of this part only, the term ``Federal payment''

does not apply to payments under the Internal Revenue Code of 1986.

(e) Financial institution means:

(1) An entity described in section 19(b)(1)(A), excluding

subparagraphs (v) and (vii), of the Federal Reserve Act (12 U.S.C.

461(b)(1)(A)). Under section 19(b)(1)(A) of the Federal Reserve Act and

for purposes of this part only, the term ``depository institution''

means:

(i) Any insured bank as defined in section 3 of the Federal Deposit

Insurance Act (12 U.S.C. 1813) or any bank which is eligible to make

application to become an insured bank under section 5 of such Act (12

U.S.C. 1815);

(ii) Any mutual savings bank as defined in section 3 of the Federal

Deposit Insurance Act (12 U.S.C. 1813) or any bank which is eligible to

make application to become an insured bank under section 5 of such Act

(12 U.S.C. 1815);

(iii) Any savings bank as defined in section 3 of the Federal

Deposit Insurance Act (12 U.S.C. 1813) or any bank which is eligible to

make application to become an insured bank under section 5 of such Act

(12 U.S.C. 1815);

(iv) Any insured credit union as defined in section 101 of the

Federal Credit Union Act (12 U.S.C. 1752) or any credit union which is

eligible to make application to become an insured credit union pursuant

to section 201 of such Act (12 U.S.C. 1781);

(v) Any savings association (as defined in section 3 of the Federal

Deposit Insurance Act) (12 U.S.C. 1813) which is an insured depository

institution (as defined in such Act) (12 U.S.C. 1811 et seq.) or is

eligible to apply to become an insured depository institution under the

Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.); and

(2) Any agency or branch of a foreign bank as defined in section

1(b) of the International Banking Act, as amended (12 U.S.C. 3101).

(f) Individual means a natural person.

(g) Recipient means an individual, corporation, or other public or

private entity that is authorized to receive a Federal payment from an

agency.

(h) Secretary means Secretary of the Treasury.

(i) Treasury means the United States Department of the Treasury.

Sec. 208.3 Payment by electronic funds transfer.

Subject to Sec. 208.4, and notwithstanding any other provision of

law, effective January 2, 1999, all Federal payments made by an agency

shall be made by electronic funds transfer.

Sec. 208.4 Waivers.

Payment by electronic funds transfer is not required in the

following cases:

(a) Where an individual who became eligible for a Federal payment

before July 26, 1996, and who has an account with a financial

institution, certifies that payment by electronic funds transfer would

impose a hardship on him or her due to a physical disability or

geographic barrier;

(b) Where an individual certifies that he or she does not have an

account with a financial institution and that payment by electronic

funds transfer under Sec. 208.5 would impose a hardship due to a

physical disability or geographic barrier, or would impose a financial

hardship. In addition, the requirement to receive payment by electronic

funds transfer is automatically waived for all individuals who certify

that they do not have an account with a financial institution until the

earlier of January 2, 2000, or the date as of which the Secretary

determines that the account referred to in Sec. 208.5 is available;

(c) Where the political, financial, or communications

infrastructure in a foreign country does not support payment by

electronic funds transfer;

(d) Where the payment is to a recipient within an area designated

by the President or an authorized agency administrator as a disaster

area. This waiver is limited to payments made within 120 days after the

disaster is declared;

(e) Where either:

(1) A military operation is designated by the Secretary of Defense

in which armed forces undertake military actions against an enemy, or

(2) A call or order to, or retention on, active duty of members of

the armed forces is made during a war or national emergency declared by

the President or Congress;

(f) Where a threat may be posed to national security, the life or

physical safety of any individual may be endangered, or a law

enforcement action may be compromised;

(g) Where the payment is non-recurring and the cost of making the

payment via electronic funds transfer exceeds the cost of making the

payment by check. For purposes of this rule, ``non-recurring'' means

the agency does not expect to make more than one payment to the same

recipient within a one-year period; and

(h) Where an agency's need for goods and services is of such

unusual and compelling urgency that the Government would be seriously

injured unless payment is made by a method other than electronic funds

transfer; or, where there is only one source for goods

[[Page 48726]]

or services and the Government would be seriously injured unless

payment is made by a method other than electronic funds transfer.

Sec. 208.5 Access to account provided by Treasury.

Where the requirement to pay by electronic funds transfer is not

waived under Sec. 208.4 and an individual either certifies that he or

she does not have an account with a financial institution, or fails to

provide information pursuant to Sec. 208.8, Treasury shall provide the

individual with access to an account at a Federally-insured financial

institution selected by Treasury. Such account will be provided at

reasonable cost to the individual and with the same consumer

protections as other accounts at the same financial institution.

Sec. 208.6 Account requirements.

(a) All Federal payments made by electronic funds transfer shall be

deposited into an account at a financial institution. The account at

the financial institution shall be in the name of the recipient, except

as provided in paragraph (b) of this section.

(b) (1) Where an authorized payment agent has been selected, the

Federal payment shall be deposited into an account titled in accordance

with the regulations governing the authorized payment agent.

(2) Where a Federal payment is to be deposited into an investment

account established through a securities broker or dealer registered

under the Securities Exchange Act of 1934, such payment may be

deposited into an account in the name of the broker or dealer, provided

the account and all associated records are structured so that the

recipient's interest is protected under applicable Federal or state

deposit insurance regulations.

Sec. 208.7 Agency responsibilities.

An agency shall:

(a) Obtain from each recipient who is required to receive payment

by electronic funds transfer and who has an account with a financial

institution, the information required to make such payment;

(b) Obtain from each individual who is required to receive payment

by electronic funds transfer and who indicates that he or she does not

have an account with a financial institution, a written certification

that the individual does not have an account with a financial

institution; and

(c) Obtain from each individual who applies for a waiver under

Sec. 208.4(a) or (b) a written certification that receiving payment by

electronic funds transfer would impose a hardship.

Sec. 208.8 Recipient responsibilities.

(a) Each recipient who is required to receive payment by electronic

funds transfer and who has an account with a financial institution

must, within the time frame specified by the agency making the payment,

designate a financial institution through which the payment may be made

and provide the agency with the information requested by the agency in

order to effect payment by electronic funds transfer.

(b) Each individual who is required to receive payment by

electronic funds transfer and who does not have an account with a

financial institution must certify in writing, within the time frame

specified by the agency making the payment, that he or she does not

have an account with a financial institution. Such individual will be

provided an account as indicated in Sec. 208.5.

(c) Each individual who qualifies for, and wishes to apply for, a

waiver under Sec. 208.4(a) or (b) must certify in writing, within the

time frame specified by the agency making the payment, that receiving

payment by electronic funds transfer would impose a hardship.

Sec. 208.9 Compliance.

(a) Treasury will monitor agencies' compliance with this part.

Treasury may require agencies to provide information about the methods

by which they make payments.

(b) If an agency fails to make payment by electronic funds

transfer, as prescribed under this part, Treasury may assess a charge

to the agency pursuant to 31 U.S.C. 3335.

Sec. 208.10 Reservation of rights.

The Secretary reserves the right, in the Secretary's discretion, to

waive any provision(s) of the regulations in this part in any case or

class of cases.

Dated: September 11, 1997.

Russell D. Morris,

Commissioner.

[FR Doc. 97-24553 Filed 9-15-97; 8:45 am]

BILLING CODE 4810-35-P