WASHINGTON — Jobless Americans are paying millions in unnecessary fees to collect unemployment benefits because of state policies encouraging them to get the money through bank-issued payment cards, according to a new report from a consumer group.

People are using the fee-heavy cards instead of getting their payments deposited directly to their bank accounts. That's because states issue bank cards automatically, require complicated paperwork or phone calls to set up direct deposit and fail to explain the card fees, according to a report issued Tuesday by the National Consumer Law Center, a nonprofit group that seeks to protect low-income Americans from unfair financial-services products. An early copy of the report was obtained by The Associated Press.

Until the past decade, states distributed unemployment compensation by mailing out paper checks. Some also allowed direct deposit. The system worked well for people who had bank accounts and could deposit the check without paying a fee.

It also cost states millions of dollars each year to print and mail the checks.

Banks including JPMorgan Chase & Co., U.S. Bancorp and Bank of America Corp. seized on government payments as a business opportunity. They pitched card programs to states as a win-win: States would save millions in overhead costs because the cards would be issued for free. And people without bank accounts would avoid the big fees charged by storefront check cashers.

However, most of the people being hit with fees already have bank accounts. The bank-state partnerships effectively shifted the cost of distributing payments from governments to individuals. The money needed to cover those costs is deducted from people's unemployment benefits in the form of fees.

Consumer advocates like NCLC are focused on ensuring access to the direct-deposit option so that people can avoid the card fees.

The trouble, the new report says, is that many states make it difficult for people to sign up for direct deposit. The rate of people using direct deposit ranges from a national high of 82 percent in Minnesota to a low of 16 percent in Arizona, the report says.

Minnesota offers direct deposit to people when they apply for benefits, and allows them to change their payment method online or over the phone, the report says.

In Arizona, by contrast, people are automatically enrolled in the card program. After they receive the card, they must find a paper form, fill it out, and submit it by mail. There is no way to change payment methods online or over the phone.

"The difference in direct-deposit rates among states seems primarily due to how hard or easy the state makes it for workers to choose direct deposit," the report says.

In five states – California, Indiana, Kansas, Maryland and Nevada – unemployed people aren't offered direct deposit at all. The report says that setup is illegal under a federal law that bars states from requiring benefits recipients to open an account at a particular bank.

The federal government recommended in 2009 that people with bank accounts receive payments via direct deposit. Nearly four years later, the report says, "there is no excuse for any state not to be offering direct deposit as the first choice for payment of unemployment benefits."

Banks make more money when more people use the cards. In the past, some of their deals with states prevented states from offering direct deposit, or required states to promote the card program as a first option.

To cover the cost of issuing cards and running the programs, banks charge a plethora of fees, including charges for balance inquiries, phone calls to customer support, leaving an account inactive for a period of months, or making a purchase using a personal identification number.

Many states have eliminated some fees and improved consumer protections in the two years since NCLC published its first comprehensive review of state unemployment payments. Banks no longer charge overdraft fees, which skimmed up to $20 from the benefits of card users whose spending exceeded the balance on the card.

Pennsylvania was singled out for praise in the report. Residents of that state will save $5.2 million in card fees each year because the state switched to a lower-fee card offered by JPMorgan.

JPMorgan declined to comment. US Bancorp and Bank of America did not immediately respond to requests for comment.

In part because of the recent improvements, the report says, prepaid cards often are the best option for people who don't have bank accounts. Those people would often pay even bigger fees to storefront check cashing services.

"A well-designed prepaid card is safer, cheaper and more convenient than paying to cash a paper check," said Lauren Saunders, one of the report's authors, in a prepared statement. But she said "it is no substitute for direct deposit to an account of your own choosing."


Daniel Wagner can be reached at . http://www.twitter.com/wagnerreports

Also on HuffPost:

Loading Slideshow...
  • Millionaires

    More than<a href="http://www.huffingtonpost.com/2012/10/02/millionaires-unemployment-benefits_n_1931837.html"> 2,000 millionaires took home unemployment</a> benefits in 2009, according to a recent report from the Congressional Research Service. That comes to a total of $20.8 million.

  • Prisoners

    Prisoners in a variety of states may be improperly receiving unemployment benefits while serving time. An investigation by Illinois officials in July turned up <a href="http://articles.chicagotribune.com/2012-07-11/news/ct-met-inmate-unemployment-20120712_1_unemployment-benefits-greg-rivara-inmates">at least 420 inmates</a> taking home unemployment benefits, according to the <em>Chicago Tribune</em>. In Arizona, the state improperly paid prisoners more than<a href="http://www.foxnews.com/us/2012/07/19/arizona-collects-on-improper-payments-to-prisoners/"> $1.1 million in unemployment benefits</a> over a two-year period, according to Fox News. In one case a convicted killer managed to <a href="http://abclocal.go.com/kabc/story?section=news/local/los_angeles&id=8568004">collect $30,000 in unemployment benefits</a> between 2008 and 2010, the Los Angeles ABC affiliate reports.

  • Dead People

    Among the people improperly receiving unemployment benefits in New York state are those <a href="http://www.wwnytv.com/news/local/Dead-People-Receive-Unemployment-Checks-164616016.html">who aren't even alive</a>, according to the Associated Press. The state's comptroller Thomas DiNapoli said he's stopped more than $1 million in improper benefits to the dead, undocumented immigrants and working people.

  • Government Workers

    In Maryland, one state worker making $9,700 <a href="http://articles.baltimoresun.com/2012-10-02/news/bs-bz-audit-unemployed-workers-20121002_1_unemployment-benefits-overpayments-auditors">took home $5,800 in unemployment benefits</a> at the same time, according the <em>Baltimore Sun</em>.

  • Fired Prison Workers

    The California Corrections Agency <a href="http://articles.latimes.com/2009/mar/31/local/me-prisons31">wrongly paid prison workers</a> that they fired for misconduct $1.3 million in unemployment benefits over two years, the <em>Los Angeles Times</em> reports. Recipients included a prison guard fired after being arrested in a drunken hit-and-run incident and a prison guard involved in a narcotics transaction.

  • People With Jobs

    It may come as no surprise that one of the requirements of receiving unemployment benefits is being unemployed, but in Illinois at least <a href="http://www.pjstar.com/news/x1681146451/Illinois-cracking-down-on-unemployment-fraud">12,000 people wrongly collected</a> unemployment benefits while working, according to the <em>Peoria Journal-Star</em>.

  • Retired Public Workers

    In Massachusetts <a href="http://abcnews.go.com/US/us-seeks-recoup-billions-unemployment-benefits-paid-error/story?id=15921922&page=2#.UGyUF_mfHll">retired public workers collecting</a> benefits became such a problem that local leaders pushed for statewide reform on the issue, according to ABC News. These retirees were receiving public pensions at the same time.