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CU comments regarding the proposed amendment addressing payroll cards

Supplemental Comments of:
Consumers Union of U.S., Inc.
Consumer Federation of America
National Consumer Law Center
U. S. Public Interest Research Group

March 9, 2005
Jennifer L. Johnson, Secretary
Board of Governors
Federal Reserve System
20th and Constitution Ave., N.W.
Washington, DC 20551
By email: regs.comments@federalreserve.gov
and by fax: 202-452-3819
Re: Supplement Comments to Docket No. R-1210
Dear Ms. Johnson,
This comment supplements the October 28, 2004 comments submitted by consumer, community development, and civil rights groups supporting the proposed amendment to federal Regulation E addressing payroll cards. In our main comments, we had suggested that, in addition to express coverage of payroll cards, federal Regulation E also be amended to plainly cover those types of stored value cards which hold funds important to consumers and families, including prepaid debit cards marketed or used as account substitutes, child support cards, unemployment cards and tax refund related cards. All of these cards hold assets that are significant to the economic status of the household.
A recent push by tax refund anticipation lenders makes it clear how much this amendment is needed vis a vis tax refund related cards. A newly issued report describes how stored value cards have emerged as the next generation of tax-time financial products. One RAL lender, Santa Barbara Bank & Trust, is encouraging tax preparers to move customers to their stored value card by offering tax preparers a $1,000 bonus for processing 200 cards. The nation’s largest tax preparation chain, H&R Block, has a pilot project in several cities that offers a stored value card issued by Bank of America.
Tax refund and RAL funds placed on a stored value card are very important to the households receiving them. According to the most recent IRS data for 2003, the average tax refund was $2,050. The average EITC amount is over $1,800 (not including overwithholding). Thus, the average dollar value of the consumer’s assets that are likely to be delivered by a stored value card is about $2,000 per household. Since 70% of EITC recipients have adjusted gross incomes of less than $20,000 per year, this is 10% of the average household’s annual income for these families.
Applying the protections of Regulation E to stored value cards receiving tax refund monies is also important for efforts to move taxpayers away from RALs and into more beneficial products. In the tax refund setting, stored value cards can be a low cost- alternative to RALs, depending on the fees charged. Stored value cards can deliver the speed of an e-filed/direct deposit refund, of 8 to 15 days, for taxpayers without a bank account. (In some cases, however, the stored value card is not an alternative to a RAL, but simply an additional product on top of the RAL that siphons off more fees from the taxpayer.) However, consumers using stored value cards instead of RALs need to know their tax refund monies will be protected in case of error or theft. For example, Regulation E’s protections would be critical if the card issuer fails to load the correct amount of the refund sent by IRS onto the stored value card.
Applying the protections of Regulation E will be critical to ensuring that stored value cards can develop into a consumer-friendly substitute for RALs.
We recognize that the comment period has closed, but ask the Board in its discretion to consider this supplemental comment, which supports the proposals previously made with information about developments after the close of the comment period.
Chi Chi Wu Gail Hillebrand
National Consumer Law Center Consumers Union
(on behalf of its low-income clients)
Jean Ann Fox Edmund Mierzwinski
Consumer Federation of America U.S. Public Interest Research Group