Table of Contents

• Federal bill would ban unsolicited loan checks
• CA asks to unseal records in case against major insurer
• California eyes new way to distribute food stamps
• Smoothing the way for federal paperless payments
• Per-call surcharges and monthly fees common on prepaid phone cards
• Shopping for a good prepaid phone card? Ask these questions first...
• Phone card company settles with FTC over hidden charges
• What does it mean for consumers when the Federal Reserve raises interest rates
• 1999 fundraiser brings in contributions of $29,165

Federal bill would ban unsolicited loan checks

Since 1996, banks and other companies have been sending out instantly negotiable checks for thousands of dollars to people who have not asked for them. On close inspection, fine print reveals that these are what the financial industry calls "live" loan checksif you endorse and deposit the check you've accepted a loan repayable at interest rates as high as 25%.

Live loan check solicitations target senior citizens, young families in need of credit and individuals who may already be heavily in debt. The checks come in official-looking envelopes with cover letters touting the advantages of instant cash.

"Many people catch on that these are loan solicitations," said Cher McIntyre, Consumer Action director of advocacy. "But we've had reports from people, many elderly, who deposited a check in the belief that it was an insurance or Medicare reimbursement."

Congressman John J. LaFalce (D-NY) was alarmed when he heard from several constituents earlier this year regarding such checks. Introducing a bill to protect consumers from the pitfalls of live loan checks, he told the House on June 24 that a man had asked how his wife, who had earned only $1,850 in the previous year, could possibly qualify for a $5,000 loan check.

LaFalce said another constituent complained that her son in his early 20s had received several live loan checks despite the fact that he worked at an entry-level job and had little credit history.

"The answer is that no responsible credit underwriting was involved," charged LaFalce. "No effort was made to determine whether the recipient had sufficient income to make monthly payments. The lenders don't even care how the loan proceeds would be used. Live loan checks have one purpose onlyto entice and trap consumers into high-cost debt."

Legislation proposed

LaFalce introduced H.R. 2351, which would:

• Prohibit live loan check solicitations.
• Protect consumers from being held liable for the repayment of a debt arising from a live check solicitation.
• Restrict companies from providing adverse information about a consumer to a credit bureau if the information stems from a live loan check solicitation.
• Provide the Federal Reserve with discretionary authority to issue regulations governing "look-a-like" checks, non-negotiable coupons sent by many lenders to solicit second mortgages and home equity loans.

CA's McIntyre welcomed the proposal. "When the financial industry sent out unsolicited credit cards in the 1960s, Congress passed a prohibition against the practice. It makes sense to ban live loan checks as well."

CA asks to unseal records in case against major insurer

Citing the public's right to know how insurance companies use outside "utilization review" firms to deny or drastically reduce insurance claims, Consumer Action has intervened in federal court in Oregon seeking to unseal the records in a key case.

Third-party review firms, used widely by insurance companies, have come under fire in recent years because they promise to reduce insurers' costs, often by generating boilerplate reports to recommend reasons to deny or slash claims.

Motions to intervene and to unseal court records in Foltz v. State Farm were filed in U.S. District Court in Eugene by Trial Lawyers for Public Justice and co-counsel Lawrence Baron and Matthew Whitman. The action was brought on behalf of Consumer Action, United Policyholders (a San Francisco Bay Area insurance advocacy group) and the Insurance Company Accountability Network of Texas Watch in Austin, TX.

The groups in the court secrecy challenge in the Foltz case received good news at the initial hearing on July 6 when U.S. District Judge Michael R. Hogan postponed a ruling on the motion to unseal the records and asked State Farm to give specific reasons why each document it wants sealed should remain sealed. State Farm's brief and a response by the intervenors are due by early September.

Trial Lawyers for Public Justice, based in Washington, DC, is a public interest law firm dedicated to using trial lawyers' skills and resources to advance the public good. It is involved in an ongoing series of cases challenging court secrecy and how sealed records unfairly shield companies from public accountability.

The current case seeks to unseal a federal consumer fraud case against State Farm Mutual Insurance Company. While a few documents have been found to prove that the case existed, the case filed in 1994 in federal court in Oregon and subsequently settled out of court mostly has been erased from the public record.

The few documents available show that Debbie Foltz charged State Farm, her auto insurer, with hiring the California Institute of Medical Research and Technology to defraud her by conducting a fraudulent review of her son's need for medical treatment following an accident. After four years, the parties reached a confidential settlement. As part of the settlement, a federal court order sealed more than 450 documents in the case file.

"It is almost impossible for a member of the public to determine that the case even existed," said Linda Sherry of Consumer Action. "The case files contain vital information for consumers about the existence of these third-party review firms that will go to any lengths to disprove a legitimate claim."

Sherry said that policy holders trust that if they pay insurance premiums in a timely fashion they will be protected in the event of an accident or other catastrophe. "Consumers have a right to know if a major insurance company uses abusive and unfair tactics in allowing outside firms to review claims and come up with phony reasons to deny or reduce benefits," she said.

Joseph A. Power, Jr., president of the Trial Lawyers for Public Justice Foundation, called the situation "absolutely outrageous. A lawsuit charging one of the nation's largest insurers with cheating its policy holders basically has been excised from the court records. [We all] have a right to know what State Farm is so eager to hide."

In Idaho, when a case similar to the Foltz suit against State Farm did reach trial, plaintiff Cindy Robinson prevailed. The jury awarded Robinson $2,500 in damages under her policy, $100,000 in additional damages for in tentional infliction of emotional distress and $9.5 million in punitive damages.

The judge in that case upheld the jury verdict and damages, noting that "the evidence was overwhelming that the utilization review company...was a completely bogus operation" that compiled "cookie-cutter" reports assem-bled on a computer to support the denial of claims. (State Farm is appealing the Robinson verdict.)

"Third-party claims review may have a valid place, and is even required in two states," said Sherry. "But if consumers are being abused by the system, it's our role to let them know."

California eyes new way to distribute food stamps

By 2001, Californians who receive food stamps will no longer use coupons. Recipients will instead pay for their groceries with a plastic card indistinguishable from an ATM, debit or credit card.

After many months of delays, the California Department of Social Services (DSS) has issued an "invitation to partner" to companies to run the state's paperless food stamps program.

Like many other states, California is interested in making food stamps and possibly welfare benefits available electronically, using a plastic debit card, instead of by check.

But while the new card will resemble an ATM card, there is no guarantee that recipients can use it at ATMs. The state requires only that the winning company offer four free withdrawals at "point-of-sale" terminals in retail establishmentsnot through ATM networks. Even if the system eventually allows recipients to withdraw funds at an ATM, each withdrawaleven balance inquiries would be subject to fees.

Shelley Curran of Consumers Union, one of the groups invited to give its input to the DSS on the bid process, noted: "The food stamp program offers no option for direct deposit into a consumer's own bank account."

California's program will give individual counties the option of adding welfare cash payments not just food Stamps to the system or continuing to issue paper checks. Counties also have the option to offer cash benefits by direct deposit to a recipient's bank account.

This concerns advocates, because if in fact some counties do not choose to offer direct deposit, recipients may only be able to withdraw benefits from point-of-sale terminals with $200 per day limits, which could eat up limited monthly free transactions quickly.

"A specific provision for direct deposit into a banking account should be included in the plan," said Curran.

Removes social stigma

Many believe that the debit card systemcalled electronic benefits transfer (EBT)removes the social stigma of using food stamps. EBT also has the potential to reduce fraud by eliminating the chance that welfare checks and food stamps will be lost or stolen in the mail.

Program organizers say that EBT will allow food stamp benefits to be accessed online at approximately 17,000 grocery stores statewide.

However, experiences from the states that have switched to EBT point to some potential problems:

• If the card is lost or stolen, it must be reported immediately so that a stop can be put on it. If money is taken from the account before the card is reported missing, then the recipient suffers the loss.
• Homebound food stamp recipients currently can send a caregiver to the store with a few coupons. But with EBT, they will have little choice but to give caretakers the personal identification numbers for their cards. This could invite an unscrupulous caregiver to steal benefits.
• Many recipients use food stamps at farmers markets, good sources of affordable, fresh food. It is unlikely that farmers markets will have the technology to accept EBT cards.

The state will accept EBT program bids from interested companies until February of next year, and expects to have a program in place by mid-2001.

Curran said that Consumers Union hopes that the state will hold a public hearing on the bid request before the contract is awarded, so that advocates and recipients can suggest improvements to the EBT proposal.

For more information, visit the Consumers Union web site at www.consumersunion.org.

Smoothing the way for federal paperless payments

CA spreads word about low cost 'ETA' accounts with debit card access

Now there is an easy and inex-pensive way for people with- out bank accounts to open special accounts to receive federal government benefits. The new type of electronic accounts offering ATM and point-of-sale access will be available even to people with poor credit and past banking problems.

The government, banking industry and consumer groups spent almost two years on the details of the accounts, which became final earlier this summer.

"It is vital to the success of the government's electronic banking initiative to provide a low-cost account to all federal benefits recipients, regardless of their past banking history," said Ken McEldowney, executive director of Consumer Action (CA).

"We worked hard to balance our concerns for recipients with industry concerns about cost and potential problems."

Checks on way out

Since January, recipients of federal payments such as Social Security, veterans or disabled benefits or retired federal or railroad workers' pensions have been asked by the government to accept their benefits through electronic direct deposit instead of paper checks. But because an estimated 10% of federal beneficiaries do not have bank accounts, the government designed a new kind of bank account to allow the "unbanked" access to electronic payments.

On July 17 the Treasury Department, the federal agency charged with issuing guidelines for the "electronic funds transfer" (EFT) program, issued eagerly awaited final rules on special "electronic transfer accounts" (ETAs) for people who have problems affording or opening a bank account.

ETAs were designed by the Treasury Department to ensure that all recipients have access to a reasonably priced account with the same consumer protections enjoyed by other bank customers. Anyone who receives a federal benefit, wage, salary, or retirement payment is eligible to open an individually owned ETA account at a participating financial institution. (The accounts must be federally insured.)

The accounts will be offered voluntarily by financial institutions that wish to participate. The government will reimburse financial institutions for each new account they open.

The accounts must not cost more than $3 per month and cannot have any minimum balance requirement. Account holders must be allowed a minimum of four cash withdrawals and four balance inquiries per month without additional fees as well as access to any available on-line point-of-sale (POS) network. The account may be either an interest-bearing or non-interest-bearing account, and must include a monthly statement.

The Treasury department estimates that ETA will be available to recipients beginning in the fall of 1999.

Educational efforts

The Treasury Department continues to fund an informational campaign called Electronic Funds Transfer 99 (EFT 99) to educate the public about the new direct deposit program. CA has led the EFT 99 educational effort in 14 western states. The grassroots educational campaign, working with community-based agencies, educates community representatives, social workers and benefits recipients about the advantages of direct deposit and ETAs.

Several related educational publications were developed by the Treasury Department for free bulk distribution to community-based agencies. (CA has provided translation services to the Treasury Department on EFT 99 educational materials.)

On Sept. 16, CA and the California/Nevada Community Action Association will hold the second of two regional meetings on EFT 99 for representatives of community-based agencies in 14 western states. The meeting will be at Preservation Park, a non-profit conference center in Oakland, California.

Per-call surcharges and monthly fees common on prepaid phone cards

Prepaid phone card rates are lower and new government regulations are in place protect consumers from abuses. But other, less consumer-friendly changes have also become the norm in the prepaid market, with the majority of companies charging per-call connection charges and even monthly "maintenance" fees.

"We were taken aback when we noticed that some cards actually debit the card by a dollar or so each month that it's active," noted Linda Sherry, CA's editorial director. "The most widely sold prepaid phone cards now have monthly fees."

When Consumer Action (CA) first surveyed the fledgling prepaid phone card market in 1995, many people had never heard of the concept of paying for long distance calls in advance. And, at an average cost of 45¢ per minute for domestic calls, the prices were not very enticing.

$4 billion in sales

Since then, the prepaid phone card industry has seen phenomenal growth. In 1995, sales revenues were $750 million. This year, gross annual sales are expected to exceed $4 billion.

A lot has changed in the prepaid phone card market. In 1995 Consumer Action News reported on the glaring lack of state regulations to protect consumers. Now, following Florida's lead, 10 states have implemented disclosure requirements and other protections, or are proposing such rules.

While rates have fallen drastically5¢ per minute interstate rates can be foundthe practice of including additional charges has increased markedly. It can be difficult to find a prepaid phone card that does not levy a per-call surchargeadding fees of up to $2 on each new call you place.

The fees and monthly charges show up only in very fine print, or not at all if there is no state disclosure requirement, noted Sherry.

(In March, the Federal Trade Commission fined a New York City-based carrier for failing to disclose actual costs, including per-call surcharges and monthly minimums, on its prepaid cards. See story at right.)

Disclosure requirements are in effect for prepaid phone cards in Alabama, California, Florida, Louisiana and Washington. Proposed rules are pending in Alaska, New Jersey, New York, Texas and Vermont.

New California law

California's law became effective on July 1. It requires that cards carry printed contact information about the issuing company and expiration date.

When consumers buy a card, the law requires that they be given information about:

• Any surcharges or fees.
• Minimum per-call charges.
• Charges for uncompleted calls.
• How calls are billed (such as by the full minute or by seconds).
• Any refund policy.
• International rates, if these are different from domestic rates.

In addition, all prepaid phone companies must register with the California Public Utilities Commission and provide 24-hour customer service phone numbers with live operators to answer questions and respond to complaints.

Tough to stop fraud

But regulations need to be enforced, and many complaints stem from companies that ignore tariffing and licensing requirements and do not participate in industry organizations such as the Washington, DC-based International Telecard Association, which runs a toll-free consumer hotline (1-800-333-3513).

Ingrid Ricks, communications manager for JDS, a Utah-based prepaid long distance company, supports marketing standards, but noted that legitimate businesses can be hard pressed to compete with "the people who fight dirty and don't follow the rules. It's not hard to understand that if licenses and tariffs are not filed, taxes are not paid and deceptive surcharges are not disclosed, that cards can be sold for a lot less than your legitimate competitors."

Shopping for prepaid phone cards can be confusing. For some questions to ask to help protect yourself and save money, see the story below.

Shopping for a good prepaid phone card? Ask these questions first...

Consumers have a right to know how prepaid phone cards work before they buy them. Before buying a phone card, we recommend you copy down the customer service number in the store and call to ask these questions. If the service representative can't answer all the questions fully, keep shopping until you find a company that can.

• What is the per-minute rate for calls within the U.S.?
• What is the rate for my in-state calls?
• Are the rates the same 24 hours a day?
• Is there a higher rate for the first minute?
• Will I be charged for calls that are not completed, or when I reach your toll-free number but do not place a call?
• Are there any connection fees or surcharges?
• Are there any monthly maintenance fees?
• What is the per-minute rate for calls to the country or countries of your choice?
• Is there a connection fee for international calls? If so, how much?
• What is the surcharge for calling from a payphone?
• Can I place more than one call without redialing the PIN?
• Will I be notified when one minute is remaining?
• Can I reach a customer service operator 24 hours a day?
• When does the card expire?

Phone card company settles with FTC over hidden charges

PT-1 Communications, a carrier based in Brooklyn, NY, agreed in March to pay $300,000 in monetary relief as part of a settlement of Federal Trade Commission deceptive marketing charges.

The FTC charged that while PT-1 regularly advertised its prepaid phone cards with per-minute rates of 19¢, the actual rate was higher because of hidden connection fees and monthly charges.

PT-1 Communications, which also markets the "10-16-868" access number included in CA's survey of dial around plans in March, sells its PT-1 card nationwide at newsstands, grocery stores and pharmacies and on the Internet.

The ads and packaging didn't disclose higher first minute rates due to a per-call connection charge or that the company imposed a 25¢ per month "maintenance fee" if the cards still carried a balance after a month or longer.

In addition to the $300,000 payment, the settlement prohibits the company from falsely representing its rates and requiring that it prominently disclose the amount of any connection, service or other fees or charges. The company agreed to provide records and reports to help the FTC monitor its compliance.

What does it mean for consumers when the Federal Reserve raises interest rates?

The Federal Reserve has raised the federal funds ratethe rate banks charge each other for overnight loans, by a half a percentage point in recent weeks in a move to reign in inflation. When the federal funds rate goes up, the Prime Rate goes up, too. The Prime Rate, usually 3 percentage points higher than the federal funds rate, is linked to some key consumer rates, such as variable credit card rates, auto loans and home equity rates.

But you may not see an instant change, as many companies adjust rates quarterly. If you carry a balance on a variable rate credit card, consider transferring your balance to a lower fixed rate card.

If you want to finance a new car, dealer financing might be more affordable than a bank loan. Used car loans are even slower to follow moves in the prime rate.

On the good news side: Federal funds increases usually mean more interest earned on certificates of deposit (CDs)

1999 fundraiser brings in contributions of $29,165

Pictures taken at the Fundraiser Event
1999 Consumer Excellence Awardee John Schweizer (L), Chief of Staff for the Hon. Jackie Speier, with Andy Reinhardt, Bureau Chief of Business Week.	Joe Ducey and Chris McMurray of KRON-TV's Contact 4 consumer unit, a recipient of CA's 1999 Consumer Excellence Award.
Jon Golinger of CALPIRG, recipient of a 1999 Consumer Excellence Award, is seen with Shelley Curran of Consumers Union.	Lisa Boyette and Ben Singer of PacifiCare Health Systems attended CA's fundraiser on June 24.

Consumer Action's annual fundraising party on June 24 brought in $29,165 in donations from corporations, individuals and community organizations.

The party, held at the Atrium, a San Francisco restaurant, attracted close to 100 guests and featured CA's annual Consumer Excellence Awards ceremony. This year, awards were given to:

Jon Golinger of the California Public Interest Research Group (CALPIRG), a watchdog organization based in Los Angeles. CA highlighted Golinger's tireless efforts to inform the public about consumer problems and remedies, including privacy, identity theft and rising bank fees.

KRON-TV's "Contact 4," one of San Francisco's premiere consumer news teams. On hand to accept the award were Joe Ducey and Emerald Yeh, reporters, and Sandy Lee and Chris McMurray, producers. (Teri Aitkens, another producer, was unable to attend.) CA congratulated Contact 4 on its excellent ongoing consumer exposes, including breaking a story about the San Francisco District Attorney's probe of alleged deceptive marketing tactics by the locally based credit card issuer Providian Bank. (At presstime, the DA has brought no charges against Providian.)

John Schweizer, chief of staff for the Hon. Jackie Speier (D-San Mateo). Schweizer, who moved to the public sector this year from a long career with Pacific Bell, has worked closely with Consumer Action and other consumer groups on protection initiatives and education campaigns for phone customers.

Kathy Li of CA's staff co-chaired the party with board member Molly Hopp.

"We are overwhelmed by the generosity of our supporters," said Li. "The funds raised at this event support CA's activities throughout the year."

Li noted that the funding was being put to good use to reprint out-of-stock consumer education publications and to support the consumer referral switchboard.

This year, CA's "Inner Circle" of companies donating at least $2,500 included AT&T, GTE, Pacific Bell/SBC, PG&E and the Southern California Gas Company.

Executive Director Ken McEldow-ney specially thanked the Inner Circle members for their support.

"We have long and excellent working relationships with these companies. These associations are an important facet of CA's mission to protect consumers. With the partnership and support of corporate leaders, we can advance the consumer agenda from the inside out."

All publications are free and available in bulk to community-based organizations.