Jobless Americans continue paying unnecessary fees to withdraw their unemployment benefits from prepaid debit cards, a report released Tuesday said.
Five states, including California, violate federal law in requiring those collecting unemployment benefits to sign up for the state vendor's debit cards, according to the report by the National Consumer Law Center.
In recent years, states have turned to prepaid debit cards to distribute unemployment benefits to reduce costs associated with printing and mailing paper checks.
But the debit cards, issued by various banks, come with many fees and restrictions, undermining the potential benefits of using the cards, the report said. Those using the cards faced overdraft fees and incurred charges for balance inquiries, for instance.
The National Consumer Law Center, a nonprofit that advocates for low-income Americans against unfair financial practices, found that many of those fees have been eliminated since an initial report two years ago.
But in its report released Tuesday, the group urged states to remove hurdles for jobless Americans to sign up for direct deposit to receive unemployment benefits.
"Direct deposit to the worker’s own account should always be the first choice for payment of
unemployment benefits," the report said. "States should encourage that choice and make it easy to select."
The group said some states automatically enroll unemployment benefits recipients into receiving the prepaid cards. To sign up for direct deposit, recipients have to fill out additional paperwork and often do not have the option of enrolling online.
Among states that use the cards and also offer direct deposit, Minnesota has the highest rate of people signed up for direct deposit, 82%. Arizona is the lowest at 16%, and the median rate is 57%.
The report also gives state debit cards rankings that are based on fees incurred, ease of use and other factors.
California's prepaid debit card, issued by Bank of America, ranks among the best, even though the report said the state violates federal law by not offering direct deposit first.
A message left with the California Employment Development Department was not immediately returned Tuesday.
[Updated, 4:30 p.m., Jan. 29: A spokeswoman for the state's Employment Development Department said the report mischaracterized the state's direct deposit option.
Though the state doesn't directly disperse funds, those collecting unemployment benefits can enroll for direct deposit through Bank of America, which is the state's vendor for the debit card program.
"We don’t require customers to have a Bank of America account and they have a direct deposit transfer option," said Loree Levy, a spokeswoman for the state agency.
She added that the agency does not believe it violated federal law, as the report claims.]
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