By Brian Miller
Features Editor
While electronic benefit transfer, or EBT, is trumpeted by government reformers as a cost-efficient way to distribute public assistance, the program may end up meeting the computer system in the sky if a federal regulatory liability is not resolved. The Federal Reserve Board ruled last March that governments will have the same Regulation E liability as commercial banks when cards used to access welfare benefits are lost or stolen.
This could derail EBT implementation because the liability could make the system more costly than current paper-based systems. "If Regulation E is implemented without any modification, it could have the effect of killing EBT," said Tom Fashingbauer, director of the Ramsey County, Minn., Department of Human Services, one of the first counties to use EBT. "It would be a real show stopper."
Regulation E is part of the federal Electronic Funds Transfer Act and is intended to shield commercial bank customers from fraudulent use of stolen ATM and credit cards. If a card is lost or stolen and a customer promptly informs the issuing institution, the victim is only liable for up to $50. The balance of the claim is picked up by the issuing bank.
EBT is a system where public assistance such as Food Stamps is accessed using an ATM-like card at supermarkets and banks. This method is expected to save government money by reducing fraud and eliminating manual accounting for paper coupons and checks.
If EBT is included in Regulation E, governments would have to replace benefits "regardless of negligence," said Fashingbauer. "We would end up approving fraud." A recipient could say their access number was on the back of their card when it was lost and request replaced benefits, minus $50.
Under Regulation E, some local government representatives insist, EBT cards and access numbers will be traded for cash. Then the original recipient would go back to the human services office and claim lost or stolen benefits and have them replaced.
State and local governments are nervous because these claims may cost more than current benefit replacement and, therefore, could eat the savings that is the primary purpose behind EBT. It is also unclear how liability would be shared, given that many public benefits are partially funded by the federal government and administered by the states.
The federal government doesn't replace lost or stolen food stamp coupons except in emergencies, and states have their own laws regarding replacement of lost or stolen benefits. But in general, benefits aren't replaced if the check has already been cashed. Clients who repeatedly report lost or stolen checks can be required to go to a government office to pick them up.
EXEMPTION LEGISLATION
State and local governments are disputing Regulation E's application to EBT both in federal court and in Congress. Maryland was readying a lawsuit last fall to challenge the board's decision to saddle EBT accounts with the same liability as commercial bank accounts. The state Attorney General's Office planned to file the lawsuit last month.
Also in response to the board's decision, Sen. Joseph Lieberman, D-Conn., introduced legislation to exempt EBT from Regulation E. A bill was introduced late last session, and a staff member said it will be reintroduced and assigned a bill number when Congress returns to Washington this winter.
State and local government organizations have expressed support for Lieberman's proposed legislation, and groups including the National Association of Counties, National Governors' Association and the American Public Welfare Association have filed support letters and plan to help move the bill through congressional committees. The federal government had not taken a position on the proposed legislation at this writing, and the Clinton administration is exploring what Regulation E means in application and how consumer protection can be balanced with liability.
Meanwhile, some local governments have decided to put their EBT plans on hold until the liability issue is resolved. San Bernardino County, Calif., which was chosen as the state's pilot, told the U.S. Agriculture Department in a letter that it will not begin implementation until the county's liability cost is determined and guaranteed in writing by the federal government.
RESERVE BOARD'S DECISION
The Reserve Board's decision to amend Regulation E to include EBT was made based on the idea of equal protection. "In general, the board felt that it was becoming an equity issue," said John Wood, a senior attorney for the Reserve. "And that Regulation E applies to consumers in general."
The board was unconvinced that EBT should not be covered by Regulation E, and the onus is on governments to show why an exemption should be made. In its ruling, the board said that commentators "should offer explanations why modifications in the regulatory requirements were needed, together with specifics such as data on costs." On the bright side for EBT, the board made the unusual move of delaying Regulation E application until 1997 at the request of the Federal EBT Task Force.
The Reserve Board derives its authority to regulate electronic commerce under the Electronic Funds Transfer Act of 1992. Regulation E is a set of regulations under the act that applies mainly to commercial banks. Included in the regulation are such requirements as offering customer receipts for ATM transactions.
DIFFERENT FROM BANKS?
Governments are also taking issue with the Reserve Board's Regulation E decision to treat public benefits like commercial bank accounts. Governments are arguing that private banks have ways unavailable to the public sector to cover their Regulation E liability. A bank can eliminate card privileges if a customer loses too many cards, for example, and banks can spread the liability cost among its customers.
But governments do not have either of these possibilities. A person's card privileges cannot be denied without due process, and spreading liability translates to public dollars. "It's not something that can be picked up by consumers," said Kelly Thompson, a policy associate for the American Public Welfare Association. "It would be done with taxpayer funds."
AT WHAT COST?
But just how much it would cost governments to pay Regulation E claims is far from clear. Estimates for different layers of government are ranging from about $100 million to $800 million annually. To come up with hard numbers on liability, test projects in New Mexico and New Jersey will run this year, and numbers should be ready in 1996, said Karen Walker, EBT program analyst for the Agriculture Department's Food and Consumer Service. "A big item we will look at will be cost and behavior patterns, such as the type of claims they have," she said. "We will see how EBT looks in a Regulation E environment."
NOT JUST THE FED
While governments are shaken by the Reserve Board's decision, there are groups in agreement with Regulation E coverage of EBT. "We think that it is an important, basic consumer protection," said Michelle Meier, an advocate for Consumers Union.
When Congress passed the Electronic Funds Transfer Act of 1992, the intention was to protect all consumers from fraud, Meier said. "There is no reason to treat poor people any differently," she said. "They are no more at fault than the middle class."
In a letter opposing Lieberman's bill, the group said that Regulation E coverage is necessary to protect aid recipients from computer glitches or other system errors that could wipe out their benefits. Consumers Union also notes, as the board did, that there is no hard evidence that Regulation E will pose a significant cost to governments.
Governments "exaggerate the cost, and say it's not viable," Meier said. "But it's a lot of hyperbole."
