Recent news articles have discussed payday lenders who target Social Security beneficiaries for loans secured by benefit payment checks. The House Ways and Means Subcommittee on Social Security, on which I serve, investigated several such cases at a recent Congressional hearing.

Federal law requires that all Social Security payments be made by direct deposit. As a result, many non-bank financial service providers – such as loan companies, check cashing outlets and payday lenders – now provide direct deposit to their customers and encourage them to deposit their Social Security payments at their branches. An investigation by the Inspector General for the Social Security Administration found more $34 million in Social Security benefits deposited in these risky accounts. These “direct-deposit accounts” offer none of the other features of a typical bank account, such as the ability to write checks against the account or use an ATM card. Instead, these institutions charge multiple fees to “cash” the Social Security check, essentially forcing seniors to pay fees to access their own money.

Payday lenders and others who steer beneficiaries into such direct deposit arrangements with banks may offer short-term, high-interest loans to beneficiaries, secured by their monthly check. Fees, interest and payments for the loan are then deducted through automatic withdrawals before the beneficiary ever has access to his or her benefits. As a result, beneficiaries often lose control over their monthly check.

Payday Lenders are Exploiting Social Security The Social Security Act protects Social Security benefits from certain debt collection procedures and prohibits assignment of benefits to third parties. Section 207 of the Act states that Social Security benefits belong to the individual, are not be transferable or assignable, and cannot be garnished or otherwise seized to satisfy a debt. Yet, certain financial practices may undermine these protections. We owe it to our seniors that the Social Security Act’s protections are observed by financial institutions.

How to Help Protect Yourself From Predatory Lending

The Center for Responsible Lending notes that some common signs of predatory lenders are offering loans with very short repayment terms (as little as two weeks), insisting that borrowers repay the loan in a single balloon payment, prohibiting borrowers from making partial repayments, or pressuring consumers to borrow more money than they need. The Federal Trade Commission (FTC) recommends that consumers investigate alternatives to payday loans, such as applying for a small loan from a bank or credit union insured by the federal government, shopping around for credit offers with lower interest rates, or seeking credit counseling. If have a complaint against an abusive or predatory lender you can call the FTC Consumers Response Center toll-free at 1-877-FTC-HELP (382-4357).

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