April 3 (Bloomberg) -- The U.S. Treasury Department paid Comerica Inc. $32.5 million to run a debit-card program for the poor and elderly that the bank had agreed to run for free, an inspector general audit found.
The Treasury watchdog also faulted the department’s office that made the payments, the Bureau of the Fiscal Service, for lax oversight of the program used to pay government benefits to about 5 million people. The fiscal service didn’t “identify, consider, or document all the available options before deciding whether and how much to compensate Comerica,” the report said.
The program, called Direct Express, was set up in 2008 to deliver payments electronically rather than by paper check. Under the original contract, Dallas-based Comerica didn’t charge the government and planned to make money on the deal from user fees.
In 2011, the fiscal service amended the contract so that the bank would be paid $5 for each new enrollee and as much as $20 million for costs it incurred to build customer services such as call centers. The government paid Comerica $32.5 million as of June 2013, the report said.
The reason the fiscal service gave for revising the deal was that “they did not want Comerica to fail for providing the government a service,” the audit said, noting that the bank had $65.2 billion in assets as of December. It was not clear from the report whether Comerica asked for the payments or fiscal service officials decided independently to revise the agreement.
Comerica spokesman Wayne Mielke declined to comment.
Fiscal service spokesman Thomas Santaniello referred to the bureau’s comments to the inspector general. The response said the decision to compensate Comerica followed a 2010 Treasury rule requiring more payments to be made electronically, which “radically changed the scope and scale” of the program.
The number of cardholders rose to more than 4 million from about 1.5 million in two years, and the fiscal service “discovered that the newer cardholders had very different banking and customer-service requirements,” the bureau said in its response. Direct Express is an “enormously successful” program that saves taxpayers money and ensures that recipients get their payments “more safely and securely,” it said.
Comerica had told the Treasury it could “readily scale” to 20 million cardholders in the program, according to the report, which was dated March 26.
Initially, Comerica’s income from Direct Express was lower than expected because recipients, including veterans and the disabled who receive supplemental Social Security benefits, used the cards to get cash rather than make purchases that would generate fees for the bank.
While the inspector general’s office, led by Eric Thorson, didn’t disagree with the government’s selection of Comerica, it said the fiscal service couldn’t support the conclusion that the bank “would provide the lowest cost/highest quality service to the cardholders.”