WASHINGTON -- The Federal Reserve's effort to update funds transfer rules could sound the death knell for state-run electronic benefit transfer programs, according to one program director.

"We're calling Reg E an unfunded mandate," said Dale Brown, project director for Maryland's pilot electronic benefit transfer program. The Fed's Regulation E governs electronic funds transfers.

"We'll be mandated to do something, and there's no money in the pot to pay for it," she added. "Reg E will be a real showstopper, because states just don't have the funds."

Currently, Reg E applies to banks and other financial institutions. But in 1997, the rules will be extended to hold state agencies that run electronic benefit transfer programs responsible for losses of more than $50 from debit card fraud.

The new rules would have a chilling effect on states that might be interested in starting EBT programs, according to Ms. Brown.

At an oversight hearing earlier this month, Rep. Stephen L. Neal, D-N.C., agreed with Ms. Brown's assessment.

"As with any system like this, there's going to be abuse," he said. "Who's going to pay for it? You can't just dump it on the states. This could result in an unfunded mandate of up to $1 billion."

Before switching over to an electronic system, those who lost benefits in Maryland because of lost or stolen food stamps or welfare checks could only get replacement benefits twice every 12 months, Ms. Brown said. There was also a dollar limit on the amount replaced by the state.

Under the electronic benefit transfer, or EBT, system 1osses are repaid to recipients out of eviction and gas and electricity emergency cutoff funds. Ms. Brown fears that once Reg E goes into effect, these repayments will go through the roof.

"Under Reg E, there will be no limits and no standard as to the amount the state may have to pay back - just the $50 floor," Ms. Brown said. "With a 5% fraud rate, it would add as much as $25 million to the Maryland state budget."

EBT systems have been implemented in six states, but at least 20 others are considering such a program.

Under Reg E, financial institutions must disclose information regarding fees and accounting errors that occur with electronic funds transfers.

Until now, EBT programs have been exempt from Reg E bank Iiability and disclosure rules.

But in January 1993, the Fed governors overruled a staff proposal to continue broad exemptions for government EBT programs and decided to bring the programs under Reg E.

Early this year, the Fed voted to delay extending Reg E to government agencies until 1997. Federal and state welfare and food stamp officials had argued that without at least temporary regulatory relief, EBT system start-up costs would be too high.

A series of meetings with the Clinton administration in November 1993 led to the delay. Advocates of extending Reg E's consumer protections to EBT programs say that states are basing their fears of exorbitant costs on general assumptions. "States are making the same arguments that banks did when Reg E first came out," said Michelle Meier, government affairs counsel for Consumers Union. "Their dire predictions never came true."

The Maryland project started in 1987 and expanded statewide in April 1993. More than 168,000 households in Maryland currently receive public assistance benefits through the EBT debit card program. The statewide program authorized more than $55 million in August. The funds are accessible through automated teller machines on the Most network and point of sales machines in stores.

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