[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
PROTECTING SOCIAL SECURITY BENEFICIARIES
FROM PREDATORY LENDING AND OTHER
HARMFUL FINANCIAL
INSTITUTION PRACTICES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SOCIAL SECURITY
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JUNE 24, 2008
__________
Serial No. 110-89
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
CHARLES B. RANGEL, New York, Chairman
FORTNEY PETE STARK, California JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington DAVE CAMP, Michigan
JOHN LEWIS, Georgia JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee JERRY WELLER, Illinois
XAVIER BECERRA, California KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas RON LEWIS, Kentucky
EARL POMEROY, North Dakota KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon DEVIN NUNES, California
RON KIND, Wisconsin PAT TIBERI, Ohio
BILL PASCRELL, JR., New Jersey JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
Janice Mays, Chief Counsel and Staff Director
Brett Loper, Minority Staff Director
______
SUBCOMMITTEE ON SOCIAL SECURITY
MICHAEL R. MCNULTY, New York, Chairman
SANDER M. LEVIN, Michigan SAM JOHNSON, Texas
EARL POMEROY, North Dakota RON LEWIS, Kentucky
ALLYSON Y. SCHWARTZ, Pennsylvania KEVIN BRADY, Texas
ARTUR DAVIS, Alabama PAUL RYAN, Wisconsin
XAVIER BECERRA, California DEVIN NUNES, California
LLOYD DOGGETT, Texas
STEPHANIE TUBBS-JONES, Ohio
C O N T E N T S
__________
Page
Advisory of June 24, 2008, announcing the hearing................ 2
WITNESSES
Nancy Smith, Vice-Chair, AARP National Policy Council............ 7
The Honorable Patrick P. O'Carroll, Jr., Inspector General,
Social Security Administration................................. 16
Margot Saunders, of Counsel, National Consumer Law Center........ 20
Jean Ann Fox, Director of Consumer Protection, Consumer
Federation of America.......................................... 53
Dallas L. Salisbury, President and Chief Executive Officer,
Employee Benefit Research Institute............................ 67
Marianna LaCanfora, Assistant Deputy Commissioner of Retirement
and Disability Policy, Social Security Administration.......... 85
Gary Grippo, Deputy Assistant Secretary for Fiscal Operations,
U.S. Department of the Treasury................................ 89
Steve Fritts, Associate Director, Risk Management Policy and
Examination Support Branch, Division of Supervision and
Consumer Protection, Federal Deposit Insurance Corporation..... 93
SUBMISSION FOR THE RECORD
The Community Financial Services Association of America,
statement...................................................... 109
PROTECTING SOCIAL SECURITY
BENEFICIARIES FROM PREDATORY
LENDING AND OTHER HARMFUL
FINANCIAL INSTITUTION PRACTICES
----------
TUESDAY, JUNE 24, 2008
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Social Security,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:00 a.m., in
room B-318, Rayburn House Office Building, the Honorable Earl
Pomeroy presiding.
[The advisory of the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON SOCIAL SECURITY
CONTACT: (202) 225-39439
FOR IMMEDIATE RELEASE
May 03, 2007
HL-9
Subcommittee on Social Security Chairman McNulty Announces a Hearing on
Protecting Social Security Beneficiaries From Predatory Lending and
Other Harmful Financial Institution Practices
Congressman Michael R. McNulty (D-NY), Chairman, Subcommittee on
Social Security of the Committee on Ways and Means, today announced
that the Subcommittee will hold a hearing to examine how certain payday
lending and other financial institution practices may harm vulnerable
Social Security beneficiaries, and may undermine the intent of the
Social Security Act. The hearing will take place on Tuesday, June 24,
2008, in room B-318 Rayburn House Office Building, beginning at 10:00
a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Subcommittee and
for inclusion in the printed record of the hearing.
BACKGROUND:
Because Social Security and Supplemental Security Income (SSI)
benefits are intended to provide basic income, the Social Security Act
contains special provisions to protect these benefits from creditors in
order to ensure that funds are available for food, clothing and
shelter. Social Security Act Section 207 (42 U.S.C. 407) states that
the right of an individual to any future benefit payment ``shall not be
transferable or assignable,'' and that none of the benefits ``shall be
subject to execution, levy, attachment, garnishment, or other legal
process, or to the operation of any bankruptcy or insolvency law.''
(There are limited exceptions for alimony, child support, and federal
debts.)
However, a number of financial institution practices have come to
light which may undermine the intent of these protections:
Banks and credit unions may place a freeze on a
beneficiary's bank account in response to a court order issued
on behalf of creditors or debt collectors seeking to garnish
the assets in the account.
Some banks accept ``direct deposits'' of Social
Security benefits which are then distributed to the beneficiary
only through a check-cashing store, with multiple fees charged
by the bank as well as the check-cashing store. 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.
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.
The news media and consumer advocates have described how freezing
of accounts by banks on behalf of creditors has harmed beneficiaries.
Other reports have revealed that certain lenders and check-cashing
operations may be targeting vulnerable Social Security and SSI
beneficiaries, assessing needless fees for direct deposit arrangements
and potentially exerting undue control over a beneficiary's monthly
check. Moreover, the Social Security Administration (SSA), Treasury and
the bank regulating agencies have been contemplating a number of policy
changes in response to these problems.
In announcing the hearing, Chairman McNulty stated ``The Social
Security Act explicitly protects Social Security benefits from certain
debt collection procedures and prohibits assignment of benefits to
third parties. Yet, certain financial practices may undermine these
protections. Beneficiaries should not lose control over how their funds
are spent simply because they lack bank accounts and are steered into
abusive direct deposit arrangements. Nor should seniors and people with
disabilities be required to navigate through complex legal channels in
order to ensure that benefit protections are enforced. We owe it to our
most vulnerable citizens to ensure that the Social Security Act's
protections are observed by financial institutions.''
FOCUS OF THE HEARING:
The hearing will examine certain financial practices of banks and
other institutions regarding account freezes, garnishment of
beneficiary accounts, and high-fee direct deposit arrangements with
certain payday lenders and check-cashing businesses. It will also
evaluate how these practices may conflict with benefit protections in
the Social Security Act, examine the response of SSA and federal
agencies that regulate financial institution practices, and consider
whether further action is required.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Any person(s) and/or organization(s) wishing to submit
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noted above.
Mr. POMEROY [presiding]. The Subcommittee will come to
order. Chairman McNulty asked that I preside over today's
hearing, as he is unable to attend, due to a family illness. I
understand that Sam Johnson, Ranking Member, also dealing with
a family illness today. Our thoughts are with the families of
each of them. Due to the urgency of the subject matter,
Chairman McNulty asked that this hearing move forward, and has,
therefore, asked me to Chair it.
We are going to look at today how certain banking, debt
collection, and lending practices may undermine provisions of
the Social Security Act intended to protect beneficiaries'
basic income. We are concerned that these practices have the
potential to harm vulnerable beneficiaries.
So, the thrust of our hearing, I think, is going to be
twofold: looking at the problem, and basically ascertaining
what I think is broad agreement about the problem; and then
looking at the absence of a Federal response, and trying to get
to the bottom of where a response is. If there is an agreement
there is a problem, why isn't a response in place? I think
those will be the twin barrels of our inquiry today.
The Social Security Act contains special provisions
protecting Social Security and SSI benefits from creditors, in
order to ensure that funds are available for basic needs, such
as food, clothing, and shelter. Section 207 of the Social
Security Act generally protects benefits from garnishment,
assignment, and other legal proceedings related to collection
of debt.
However, a number of financial practices have come to light
which undermine these practices--or these protections, rather.
These practices include freezes on beneficiary bank accounts,
garnishments, high fee direct deposit arrangements, and payday
lending to unbanked Social Security beneficiaries.
What really puts this into focus as an important issue to
vulnerable beneficiaries is the fact that the average Social
Security monthly benefit is $990; for SSI, it's $477. The
testimony today is going to show that fees to access these
benefits from check cashing stores can add up to as much as
three percent of the total benefits. Bank fees related to bank
freezes can reach $175, and additional bounced check fees can
reach $40.
We consider that Social Security provides more than half of
the monthly income for 54 percent of senior couple, 74 percent
of the non-married seniors, and the Social Security check is
the only income for 29 percent of non-married seniors, these
fees represent a significant portion of funds intended to
provide for basic needs.
As I mentioned, there is a general consensus among the
relevant Federal agencies and Consumer Protection Act advocates
that these practices present a problem, and they should be
addressed. However, it's been a long, slow road to nowhere, in
my view, in terms of getting the kind of action that people
have the right to expect.
In 1996, the EFT-99 law was enacted, which mandates that
Federal payments be made electronically by 1999. Many of the
problems we're seeing today were actually foreseeable back to
the 1996 legislation, some of which discussed as late as the
1990s.
In April of 2007, the Wall Street Journal reports on debt
collectors garnishing bank accounts with Federally protected
funds and bank freezing accounts, and charging fees, even
though the funds in those accounts are protected under the
Social Security Act.
The Committee on Financial Services Chairman, Barney Frank,
sends a letter in June of 2007, requesting better oversight on
banks' compliance with the Social Security Act, and asking for
information from FDIC in return.
August 2007, Senate Finance Committee sends a letter. The--
August 2007, FDIC Chairman Blair proposes a Federal financial
institute examination council task force. August of 2007, SSA
Commissioner Astrue asks OMB to conduct a multi-agency process
to issue a rule to protect Federal benefits from creditors.
August of 2007, FDIC issues information to banks about
Section 207, the section holding these funds exempt, but public
comments indicate that clear rules on how banks should treat
benefits are necessary.
September 2007, Senate Finance Committee holds a hearing.
November 2007, Senate Finance Committee sends a letter to OMB,
strongly supporting Astrue's request for multi-agency rule-
making. November 2007, close of 60-day comment on the FDIC
notice.
Early 2008, pursuant to the FDIC statement, bank agencies,
benefit payment agencies met with banks and consumer groups.
May 2008, Treasury staff brief Senate finance, House Ways and
Means and Senate Special Committee on Aging on progress on
interagency rule-making where the policy in the potential rule
was described, but no time line for rule-making or
implementation proposed.
June of 2008, House Ways and Means staff asks for
information on when rule-making can be expected, and are told
that discussions between Treasury, banking agencies, and SSA
are still needed.
So, again, I think, while the first panel will be extremely
valuable to the Committee in putting on the record the
underlying problem, which really isn't in dispute, between any
of the related Agencies--or, for that matter, as far as I know,
Members of Congress overseeing this matter--the second panel
will perhaps bring us information about why we don't have
resolution yet, in terms of a Federal response.
I view this hearing as a classic case of pretty clear
issue, pretty clear need for a response, no response
forthcoming. Here we're going to try to get to the bottom of
what are we waiting for.
So, with that, I would turn to my Ranking Member of the
day, for his statement. Thank you.
Mr. BRADY. Thank you, Chairman Pomeroy, for holding the
hearing today. I am, as well, pinch-hitting for Sam Johnson,
Ranking Member on the Subcommittee on Social Security. With
your permission, I would like to read his statement into the
record.
Those of us who have the privilege of serving on this
Subcommittee are especially aware of the vital income support
that Social Security provides, especially those who are most
vulnerable. Social Security is the only source of income for
one in four of our seniors. To prevent debt collectors from
depriving beneficiaries of the funds they need for their daily
living expenses, the Social Security Act prohibits the taking
of Social Security benefits to collect debts, with few limited
exceptions.
Similar protections apply to other Federal benefits,
including SSI, veterans' benefits, and railroad retirement.
Protecting these benefits until debts are fairly negotiated is
critically important during these tight economic times and very
high gas prices.
Yet, despite these protections, creditors are able to
obtain state court judgments against Social Security
beneficiaries to collect their debts, and financial
institutions then place a freeze on their accounts. The account
holder can't access their own money, until they go to court and
prove that the funds in their account are protected by Federal
law.
In the meantime, on the hook for high fees, if they bounce
a check they have to pay other bank costs. To address these
issues, we know banking regulators have been doing a lot of
talking. Today we will learn when we see action.
The second key issue we will hear about today is the impact
of certain direct deposit arrangements referred to as master/
sub-accounts. Generally, Treasury rules require that Federal
benefit payments be deposited only in an account with the
beneficiary's name, with certain exceptions. For years, Social
Security has allowed certain individuals to have their benefits
paid by direct deposit into a master account, under which the
master account maintains separate sub-accounts for each of the
seniors.
This arrangement began in order to make direct deposits to
beneficiaries' investment accounts, and has expanded to nursing
homes and religious orders, as long as the sub-accounts meet
certain requirements, including that the beneficiary has
complete access to their funds, being able to terminate the
arrangement.
Social Security has learned that these master/sub-account
arrangements have been undermined by some institutions,
exposing beneficiaries to predatory lending practices. We will
hear what action Social Security is taking in response.
Predatory lending is a terrible crime with devastating
consequences to its victims. While determining how to stop
these bad actors is a task that extends beyond the scope of our
hearing today, and frankly, beyond the jurisdiction of this
Subcommittee, this hearing will shine a bright light on the
problem and the need for change.
There are many potential solutions to protecting
beneficiaries, as we will hear from our Treasury witness today.
One is the greater use of a pre-paid debit card offered to
Social Security and SSI recipients who wish to receive their
benefits electronically. Treasury has designated the Comerica
Bank, headquartered in Dallas, as their fiscal agent to issue
these cards. What better way to ensure the protection of
essential benefit from garnishment and from bad actor lenders?
We can also protect beneficiaries by enforcing the law.
State and Federal laws regulate the businesses we are
discussing here today. I hope the Administration will assure us
today that it is doing its job to ensure that these laws are
followed.
Finally, and perhaps the most important way to protect
beneficiaries is education. Individuals must be empowered to
make the right choice. This includes full disclosure by banks
and lending services of the cost of doing business, as well as
public education about who the bad actors are, and how they can
be avoided. It is important that people make a fully informed
choice. Helping to educate the American people on making the
right choice is always a good choice for Congress.
With that, I would yield back, Mr. Chairman.
Mr. POMEROY. Thank you, Mr. Brady. Before we turn to our
first witness, the Chair asks unanimous consent that any
additional opening statements submitted by Committee members be
included in the record.
Without objection, the Chair asks that all witnesses
statements be included in the record in their entirety, and so
I will respectfully remind my colleagues to please keep your
oral testimony to 5 minutes.
I now recognize our panel. Our first witness, Nancy Smith,
Vice-Chair of AARP National Policy Council--we will just go
right down the row--second, the Honorable Patrick O'Carroll,
inspector general, Social Security Administration. Next, we
will hear from Margo Saunders, of--the counsel for the National
Consumer Law Center. Then, Jean Ann Fox, Director of Consumer
Protection, Consumer Federation of America. Finally, Dallas
Salisbury, President and CEO of the Employee Benefit Research
Institute.
So, Ms. Smith, please proceed.
STATEMENT OF NANCY SMITH, VICE-CHAIR, AARP NATIONAL POLICY
COUNCIL
Ms. SMITH. Chairman Pomeroy, Ranking Member Brady, Members
of the Subcommittee on Social Security, I am Nancy Smith, a
volunteer member of AARP's National Policy Council, which
recommends policy changes to the board of directors.
AARP commends this Committee's long-standing bipartisan
concern that beneficiaries have unimpeded access to their
Social Security benefits. Given Social Security's critical role
in Americans' economic security, any action that blocks
beneficiaries' access to their full Social Security benefits is
a serious and unnecessary threat to the health and well-being
of our older population.
This is particularly critical for the millions of
beneficiaries who rely almost exclusively on Social Security.
For almost one in three beneficiaries, Social Security
represents at least 90 percent of their income. About 20
percent of elderly beneficiaries have only Social Security to
live on.
The law in this matter is crystal clear. Section 207 of the
Social Security Act says specifically that Social Security
benefits are not assignable, transferable, or subject to
garnishment. This section protects Social Security
beneficiaries against destitution.
Despite this clear prohibition in the law, banks continue
to freeze accounts containing exempt Federal funds. Other
institutions, like payday lenders and check-cashing stores, are
discovering ways to gain control of beneficiaries' money.
AARP believes all banks--preferably voluntarily, but
through legislation or regulation, if necessary--should
implement safeguards for customers whose accounts contain
exempt funds. Some banks already do this, and they are not just
the small, local banks. Citibank is one large banks that has
found a way to protect its clients' funds.
In addition, imposing fees and penalties resulting from
illegal garnishment is an unfair practice that must be stopped.
If fees have been charged, they should be refunded. Banks may
argue they lack the ability to discover which accounts have
exempt funds, but we know this is not true. We are pleased to
learn that the bank regulators are finalizing a proposal that
would safeguard a specific amount of exempt funds from
garnishment. We look forward to the opportunity to comment on
this promising action.
Another practice that has emerged is the use of master/sub-
account arrangements by payday lenders in check-cashing
businesses. These arrangements were originally meant for people
who have their check directly deposited into a brokerage
account, or for nursing home patients who are required to
contribute to the cost of their care, as well as for nuns with
vows of poverty.
However, these arrangements have become a way for payday
lenders and check cashers to gain control of Social Security
checks to secure a payday loan and/or generate revenues from
fees and surcharges. SSA has taken notice of this trend, and
asked for comments on how to handle master/sub-accounts. We
believe the Agency should exert even greater oversight on how
these accounts are used, and by whom.
To a large extent, the beneficiaries can avoid payday
lenders and check cashers through direct deposit to a bank
account. The Federal Government has made a concerted effort to
encourage beneficiaries' use of direct deposit. AARP agrees
that direct deposit is the preferred method of receiving
benefit payments.
For the unbanked, the new Treasury Department debit card
option offers a chance to receive benefits without going to a
check cashing outlet.
Mr. Chairman and Members of the Subcommittee, illegal
garnishments are an improper use of master/sub-account
arrangements, deprives Social Security beneficiaries of full
access, control, and use of their monthly benefits. This is of
great concern to AARP. We hope that the efforts underway today
will address these concerns. If not, we will be back to ask for
a legislative remedy.
Thank you for allowing us to appear before you today, and I
look forward to a robust conversation through questions and
answers.
Mr. POMEROY. Thank you.
Mr. O'Carroll.
[The prepared statement of Nancy Smith follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF PATRICK P. O'CARROLL, JR., INSPECTOR GENERAL,
SOCIAL SECURITY ADMINISTRATION
Mr. O'CARROLL. Good morning, Mr. Chairman, Congressman
Brady, and Members of the Subcommittee. I thank you for your
invitation to talk with you today, and for your interest in
protecting Social Security beneficiaries.
As you know, Social Security beneficiaries are our most
vulnerable and easily exploited citizens. Like you, we view any
attempt to extract any part of these critical benefits to be an
affront, even when it's not an actual crime.
Mr. Chairman, following news reports that indicated payday
loan companies were preying on beneficiaries, you asked me to
assess the scope of this problem. We recently completed this
report, and I would like to share our findings with you.
By way of background, the Debt Collection Improvement Act
of 1996 mandated that most Federal payments be made by
electronic funds transfer or direct deposit. This process
protects beneficiaries from some types of fraud, such as stolen
checks. Unfortunately, it also creates a risk, in that neither
SSA nor the beneficiary retains full control of the funds
through the payment process.
Banks are at liberty to deduct fees from these direct
deposits. In cases involving the payday lenders and other non-
bank financial service providers, or FSPs, there is a second
entity that has an access to the funds before the beneficiary
does.
The Social Security Act has always prohibited the
attachment or the garnishment of benefits. There are limited
exceptions, such as income tax levy and child support. The
advent of direct deposit brings new challenges.
Currently, FSPs can themselves establish accounts at
traditional banks to receive Social Security benefits on behalf
of an individual beneficiary. Unlike traditional checking or
savings accounts, beneficiaries do not have direct access to
the funds in these accounts. Instead, the funds are under the
effective control of the FSP. Our work indicates that the banks
deduct their fees, then they make the funds available to the
FSP, which in turn deducts additional fees before ultimately
making the remaining balance available to the beneficiary.
We studied five banks that we knew, from review of SSA
records, to have financial relationships with FSPs, and found
that SSA deposited over $34 million in benefits for over 63,000
supplemental security income recipients into accounts
controlled by FSPs.
On average, check-cashing fees are conservatively estimated
to be between $9 and $16. This means that the banks and the FSP
partners charge these individuals between $567,000 and just
over $1 million in check-cashing fees every month. Additional
funds may be assessed for other services provided by the FSPs.
We also studied the demographics of the 63,000
beneficiaries: 96 percent were disabled, higher than the 82
percent of disabled individuals reflected in the SSI population
at large; in addition, 55 percent of these individuals suffered
from a mental disability. We found that the most prevalent
mental conditions for this group included mental retardation,
mood disorders, and psychotic disorders. Further, 76 percent of
the individuals in our sample were minorities.
Interestingly, 42 percent had representative payees,
individuals appointed by SSA to handle funds for those
incapable of handling them on their own. This percentage closer
reflects the overall SSI population. Although many of these
representative payees could be family members who are also
without bank accounts, this still raises the question in some
cases as to whether the benefits are being used in the best
interest of the beneficiaries.
While SSA has published for comment policy changes in this
area, an act which I applaud, current policy is inconsistent.
While some SSA policies appear to prohibit payday loan
companies and similar organizations from engaging in this
activity, other policies not only permit this, but provide
instructions on how to facilitate the establishment of such
accounts.
In fact, in some cases, SSA offices encourage this
arrangement, especially for homeless beneficiaries. In at least
one case, employees of an SSA office visited several FSPs, and
then recommended their services to beneficiaries.
I am aware of the precarious balance SSA must strike in
this area. The Agency must ensure that beneficiaries receive
their benefits in a safe, electronic, and timely manner, while
ensuring that beneficiaries retain absolute control over their
funds. The proposed policy changes that SSA published in April
are a step in the right direction. I believe more needs to be
done to protect the funds that many of these beneficiaries so
desperately need.
I look forward to working with you towards this common
goal. I thank you for your interest, and I will be happy to
answer any questions.
[The prepared statement of the Honorable O'Carroll, Jr.
follows:]
Prepared Statement of The Honorable Patrick P. O'Carroll, Jr.,
Inspector General, Social Security Administration
Good morning, Chairman McNulty, Congressman Johnson, and Members of
the Subcommittee, and thank you for your invitation to be here this
morning to talk with you about an issue that causes my office as much
concern as it causes the Subcommittee.
The Office of the Inspector General (OIG) for the Social Security
Administration (SSA) is charged by statute with preventing and
detecting fraud, waste, and abuse in SSA's programs and operations.
While the majority of our work focuses on fraud, through our conduct of
criminal investigations, and waste, through our audit work, the issue
we are confronting today is one of abuse. Individuals receiving
Supplemental Security Income are often among the most vulnerable
members of our society. The elderly and the infirm often rely on Social
Security payments for their very existence, living month to month on
little or nothing but the assistance they receive each month from SSA.
For a person or an organization to seek to extract what, for these
individuals, are precious dollars, is certainly a crime, even though no
criminal statute prohibits it.
Mr. Chairman, in a letter dated February 26, 2008, you asked my
office to look into payday loan companies that may be taking advantage
of some of SSA's most vulnerable beneficiaries to identify the nature
and scope of the problem and suggest solutions to stop this abuse. We
recently completed the requested report, and I'd like to share our
findings with the Subcommittee.
Background
The ability of both banks and non-bank financial service providers
(FSPs), such as payday loan and check-cashing companies, to access and
assess fees against individuals' Social Security benefits exists purely
as an as-yet unaddressed side effect of the advent of direct deposit.
The Debt Collection Improvement Act of 1996 mandated that most Federal
payments be made by electronic funds transfer (EFT), or direct deposit.
Title II beneficiaries and Title XVI recipients for whom payment by EFT
would impose a hardship may request to be exempted from the EFT
requirement. Recipients determine what constitutes a hardship, and SSA
does not verify or document these self-determinations.
While EFT reduces the Government's workload, eliminates fraud
associated with stolen checks and, in most cases, is safe and
convenient for beneficiaries, it also creates a process by which
neither SSA nor the beneficiary have full control over the funds
throughout the entire payment process. Once sent by EFT, the receiving
bank is able to assess such fees and deductions as it wishes. In cases
where a non-bank FSP is involved, there are then two entities which are
able to control, and assess fees against, these funds before the money
is made available to the person for whom it was intended.
Since 1935, it has been illegal for Social Security payments to be
garnished, attached, or subject to other legal process. The few
exceptions to this prohibition currently include levy by the Internal
Revenue Service and garnishment for child support. Of course, times
change, and technology changes with them. It is critical that we
examine whether current law is sufficient to protect the aged and the
disabled from predatory practices in the EFT era.
How FSPs Function with Regard to Social Security Benefits
With beneficiary approval, non-bank FSPs can themselves establish
accounts at traditional financial institutions and use those accounts
to receive SSA payments intended for the beneficiary. Unlike
traditional bank accounts, the beneficiary does not have direct access
to deposited funds. Instead, the financial institution makes the funds,
less a transaction fee, available to the non-bank FSP for disbursement
to the beneficiary. The non-bank FSP then deducts additional fees for
their services and makes the remaining balance available to the SSA
beneficiary.
This practice appears to be inconsistent with Section 207 of the
Social Security Act, which protects a beneficiary's right to receive
benefit payments directly and use them as he/she sees fit by
prohibiting the assignment of benefits. Assignment is the transfer of
the right to, or payment of, benefits to a party other than the
beneficiary or his/her representative payee. It also appears to be
inconsistent with SSA policies prohibiting payment of benefits to
anyone other than the beneficiary or representative payee.
Specifically, SSA's policy states that ``Any arrangement in which the
claimant shares control of the funds from his or her benefit with a
person or entity that has an interest in charging or collecting money
from the claimant is an assignment-like situation that violates SSA's
policy.''
To further exacerbate an already troubling issue, we have seen
cases in which a beneficiary using an FSP-established bank account for
direct deposit notified SSA that he wanted to terminate the EFT
agreement, and the following month, the FSP and the bank re-established
the EFT against the beneficiary's wishes.
On April 21, 2008, SSA published in the Federal Register a proposed
policy change to prevent deposits to ``third party'' accounts such as
those I've described. I applaud this step, and encourage SSA to take
all possible action to protect its beneficiaries.
Results of Our Audit
Our auditors performed a limited review of SSI payments
electronically deposited into accounts at five banks known to have
financial relationships with non-bank FSPs. While these are by no means
the only banks used by FSPs to facilitate third-party accounts, we
identified these five banks either because (1) their bank routing
number appeared on payment records of SSI recipients whose address
reflected the business name of a non-bank FSP; or (2) SSA identified
the bank to us as the result of complaints received from SSI
recipients.
Our review determined that, as of March 2008, SSA deposited the SSI
payments of at least 63,065 individuals into accounts established and
controlled by non-bank FSPs at these five banks. Monthly SSA payments
deposited into these accounts total more than $34 million.
In a few hundred cases, SSA payment records reflected the non-bank
FSP's name and address--indicating that SSA was aware that payments
were going to the non-bank FSPs. However, in most cases, SSA payment
records did not directly indicate non-bank FSP involvement in the
payment transaction. In these instances, it appeared that SSI
recipients or their representative payees entered into agreements with
non-bank FSPs who, in turn, opened bank accounts on the recipients'
behalf at traditional financial institutions with Department of
Treasury-assigned routing numbers. Either the recipients submitted
electronic deposit requests to SSA, providing the bank routing and
account numbers used by the non-bank FSP, or the financial institution
sent direct deposit auto-enrollment information directly to Treasury.
In either case, once the direct deposit requests were processed, SSA
began sending these individuals' payments to accounts effectively
controlled by the non-bank FSPs. Once received, the financial
institutions made the funds available to the non-bank FSPs for
disbursement to the recipients. Before disbursement, the non-bank FSPs
subtracted their fees from the recipients' funds.
Consumers who use non-bank FSPs typically pay higher costs in the
form of transaction fees for financial services than individuals with
traditional banking relationships. Treasury research indicates that
Social Security recipients pay an average of between $9 and $16 in fees
just to cash their Government check at a non-bank FSP. This suggests
that the five non-bank FSPs and their financial institution partners
charge the 63,065 recipients between $567,585 and $1,009,040 in monthly
check cashing fees.
We also studied the demographics of the 63,065 beneficiaries in our
sample. Seventy-six percent of these recipients were minorities.
Ninety-six percent of the recipients were disabled--slightly higher
than the 82 percent of disabled individuals reflected in the overall
SSI population. Fifty-five percent of the individuals in our sample
received SSI payments based on mental disabilities including mental
retardation, mood disorders, and psychotic disorders. The age range of
individuals in the sample was from four months old to 105 years old,
and the median age was 42 years.
It is also notable that 42 percent of the population had
representative payees--persons appointed by SSA to handle the payments
of recipients unable to administer their own funds. While this
percentage is closely reflective of the SSI recipient population at
large, we believe the use of FSPs by representative payees casts doubt
on whether the payments are in fact being used for the benefit of the
recipient. We note, however, that SSA pointed out that many of these
representative payees are equally poor family members who also may not
have access to a traditional bank account.
SSA's Prevention of the Transfer of Payments to FSPs
As I stated earlier, SSA has published proposed policy changes to
address these issues. However, at the time of our review, we found that
in most cases, SSA was not aware that it was depositing SSI payments
into accounts controlled by non-bank FSPs. Further, we identified no
action taken by SSA to prevent the transfer of payments to payday
lenders or any other non-bank FSP. On the contrary, though some SSA
policies appear to prohibit these types of arrangements, other policies
outline steps to follow to send payments directly to non-bank FSPs.
For example, one SSA policy states that, with the exception of
Internal Revenue Service levy, child support (and/or alimony)
garnishment, or state reimbursement, ``. . . do not pay benefits to
anyone other than the beneficiary (or his/her representative payee).''
Another policy states that the Agency should ``. . . avoid payment
situations that give physical control over a benefit payment to someone
other than the beneficiary; e.g., sending a benefit payment, either by
check or electronically, to a loan company where the beneficiary has a
loan . . . .'' Yet another policy states that ``Direct deposit payments
cannot go directly to any of the following types of institutions:
credit card companies,
finance companies,
insurance companies, or
other non-traditional financial service companies.''
Yet, in an apparent contradiction, another policy states that
``Since direct deposit is now the presumed method of payment and will
be required for all Government payments in the final phase of the new
direct deposit requirements, many non-bank financial service providers,
such as loan companies and check cashing facilities [emphasis added],
now offer direct deposit for their customers. The direct deposit may be
arranged in one of the following ways . . . .'' The policy goes on to
describe how to set up these direct deposits by stating, ``This type of
arrangement is acceptable and does not constitute assignment of
benefits if all the following requirements are met:
The benefits must be deposited in an account owned by
the beneficiary at a Financial Institution . . .
Enrollment must be voluntary on the part of the
beneficiary.
The beneficiary must be able to terminate the direct
deposit arrangement upon request.
Funds paid to a representative payee through a non-
bank Financial Service Provider must be used for the
beneficiary's current needs.''
Despite this, in our review we identified two field offices that
openly encouraged homeless SSI recipients to receive payments through
local FSPs. Field office management visited local non-bank FSPs and
compiled a short list of preferred vendors that wanted SSA customers.
Conclusion
Certainly SSA recognizes that this issue must be addressed, and the
OIG acknowledges that electronic banking has increased the complexity
of benefit delivery. SSA and the OIG agree that we must find a way to
balance the need to pay beneficiaries in a safe, electronic, and timely
manner with the need to ensure that beneficiaries have absolute control
over their funds.
We look forward to continuing to work with SSA, and with this
Subcommittee, to find solutions to these challenges and to protect and
serve these most vulnerable beneficiaries and recipients. Again, I
thank you for the invitation to speak to you today, for your interest,
and for your continued support of our efforts. I'd be happy to answer
any questions.
Mr. POMEROY. Thank you, Mr. O'Carroll.
Ms. Saunders.
STATEMENT OF MARGOT SAUNDERS, COUNSEL, NATIONAL CONSUMER LAW
CENTER
Ms. SAUNDERS. Thank you, Mr. Pomeroy and Mr. Brady, Members
of the Committee. I am Margot Saunders, an attorney with the
National Consumer Law Center. I represent the legal services
attorneys across the nation who see the recipients of Social
Security and other Federal benefits, and who have tried to help
these recipients deal with the problems you are looking at
today. I am here today on behalf of a broad coalition of both
Federal, national, and state and local legal services and
consumer advocates.
We very much appreciate the attention that this Committee
and your staff, as well as the Senate Finance Committee, has
paid to this problem. This issue has been growing at a faster
rate for legal services clients across the country than any
other legal problem.
We estimate that, on a monthly basis, tens of thousands of
low-income recipients of Social Security, SSI, and other
Federal benefits, whose benefits are entirely exempt from the
claims of judgment creditors, are temporarily destitute when
banks allow the attachments and garnishments to freeze the
assets of these recipients.
We believe our estimate of over one million recipients of
Social Security and other Federal benefits a year affected by
this problem is conservative. My analysis is in a footnote. A
million people a year have their benefits illegally seized by
the banks to pay debts for which that money cannot be received.
We have been working with the Federal agencies--to
Treasury, to the Social Security Administration, to the five
Federal banking regulators. We have explained that the law is
clear, that the remedy is within their means. As you obviously
already know, everybody is pointing the finger at everybody
else.
I was asked to explain in some detail exactly what happens
to a recipient when their exempt money is frozen. The money is
in the account, and the attachment order comes to the bank. The
bank at that point, in most cases, simply applies the
attachment order to the account, and the money in the account
is frozen. In almost every state, the recipient must then find
a lawyer, go down to the courthouse, file papers, and attempt
to prove, through the use of both the account statements and
other evidence, that the money in the account is exempt from
collection.
If the recipient is dealing with a debt collector that has
some feeling of responsibility, occasionally the money will be
released once the recipient presents the proof. In most cases,
that's not the situation, because the debt collectors knew that
the recipient's money consisted of exempt funds all along.
In most cases, even when the recipient is able to go prove
to the creditor and collector that the funds were exempt, the
debt collector will not release the funds. When this happens,
the only way for the funds to be released from the freeze is by
court order and this requires a full court hearing. You have to
have an attorney to have a full hearing, which leaves most low-
income recipients dependent upon legal services. As you may
know, legal services programs are woefully underfunded, and
simply do not have the means to represent all the people that
come through their doors on these problems.
Why is this problem so much bigger today than it was 10
years ago? Largely as a result of EFT-99, that was passed, as
you have heard, in 1996 to require all Federal benefits to be
electronically deposited. That has pushed more and more low-
income, previously unbanked recipients into the banking system,
allowing their money to now be accessible to judgment
creditors.
The second reason is because of the credit card practices
of many of this nation's banks. Credit card issuers routinely
make credit cards available to people whom they know exist
primarily or exclusively on exempt funds. So, when this credit
is extended, these banks know that the money available to pay
the debts are entirely exempt. Nevertheless, the credit is
provided.
The third big issue that changes the complexion of the
proposed--of a resolution is that the banks now can tell which
funds are exempt and which funds are not. All the bank has to
do in almost every situation is simply look at one more screen,
and determine whether the money in the account came from a
Federally exempt source.
Commingling of exempt funds should not stop the resolution
here, because as we understand, as much as 80 percent of the
accounts into which low-income recipients have their Social
Security and other monies paid is commingled with other funds,
even if it's only a $100 gift certificate, or $50 from a
cousin.
There is a proposed solution on the table that I would like
to comment on, but I can't, because I am out of time. I will
say very quickly that it is not a solution to this problem to
push people who are now using bank accounts out of bank
accounts into the direct deposit card. One of the purposes of
EFT-99 was to encourage low-income recipients of Federal
benefits to use banks, and to ensure that they were not
provided with second-class bank accounts. It would be a crime
if, because of EFT-99, we then are pushing them back out of the
banking system. Thank you.
[The prepared statement of Ms. Saunders follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. POMEROY. Thank you.
Ms. Fox.
STATEMENT OF JEAN ANN FOX, DIRECTOR OF CONSUMER PROTECTION,
CONSUMER FEDERATION OF AMERICA
Ms. FOX. Chairman Pomeroy, Representative Brady, Members of
the Committee, I am Jean Ann Fox. I am director of financial
services for Consumer Federation of America. I am also
testifying today on behalf of the National Consumer Law Center
and Consumer Action.
We appreciate your attention to the problems that low-
income Federal benefit recipients are experiencing with high-
cost financial service providers. These companies are stripping
hundreds of millions of dollars in taxpayer-funded benefits
from the pockets of Social Security, SSI, and other Federal
beneficiaries.
As others have told you, this money is supposed to be safe
from attachment, from the reach of credit providers. This money
is supposed to provide for subsistence income for the most
needy in our country. Yet, financial service providers have
found a way to put their hands in this pot of reliable Federal
money in order to deliver financial services, but to gain
access to exempt funds.
There are several types of financial arrangements that have
been described in the news coverage of this issue, and I would
like to separate those out for you, because the solutions
differ, depending on how the financial services are being
provided. In my written testimony, I give you a great deal of
detail about the providers that we have some information on.
We need to separate out recipients into two groups. About
80 percent have bank accounts, and they are vulnerable to
payday lenders. The unbanked recipients are susceptible to the
direct deposit providers. There are a handful of banks that
partner with check cashers, stores, installment loan companies
and other storefront financial providers, to use the master/
sub-account arrangement for exempt funds to be deposited to
them, and then it's made available to the check casher. The
recipient comes in, and that electronic deposit is converted
back into a paper check, which they then pay to cash, or it can
be loaded onto a prepaid debit card that comes with a lot of
fees.
Let me give you an example of what this means to a
recipient. A Philadelphia SSI recipient who was getting about
$580 a month only received about $566 in a cashier's check
every month when he went to the check-cashing outlet to get
direct deposit of his benefits. The bank took out $9.95 a month
to deliver the payment to the check casher. They deducted $2.95
for the check casher to print this electronic transmission back
into a cashier's check, and then this gentleman had to pay to
cash the check.
The average check-cashing fee to cash a government benefit
check, based on a 2006 survey we did, is 2.44 percent of the
face value of the check. So, this gentleman was paying about
$24 a month out of his meager $580, just to get the money into
his pocket. He did not have control of the direct deposit of
his funds.
This bank also offered a cash advance product, turning this
direct deposit arrangement into a credit transaction. They
would loan up to $200 a month. They took out $10 for their
finance charge, they took out $10 for the check casher's part
of the finance charge, and delivered a $180 cashier's check for
the proceeds of the loan.
Every month, when his SSI benefits were direct deposited
into that master account, they paid back the loan in full,
leaving him extremely short. So, of course, he took out another
loan every month. Over a period of about 33 months, this
gentleman paid almost $660 in finance charges to use $180 over
and over. That is permitted, under this master-sub-account
arrangements.
Another one of the providers is Republic Bank and Trust,
which has a Currency Connection program that is marketed to
check cashers and loan companies. It's marketed as a way to
help loan companies collect payments from exempt funds, and
also as a way to deliver proceeds to the folks over the
counter. They charge to handle each check, and then they charge
to produce each check, and then they charge to cash each check,
deducting funds from people.
They also have an overdraft feature on this direct deposit
account that will let you overdraw your account, and they will
charge you 25 percent of the amount. So, if you have the loan
out for a whole month, you are paying 300 percent annual
interest for access to exempt funds which are supposed to be
safe from creditors.
The story in the Wall Street Journal that got a lot of
attention was a gentleman in Alabama who went to his local
small loan company every month to get what was left over from
his Federal benefits check after the bank and the lender
deducted their fees and his installment loan payment. That
company markets its services by claiming that beneficiaries
will be able to make their monthly loan payment as soon as the
benefits become available at the bank. Those are the services
that target the unbanked.
Now that we have so many Federal benefit recipients who
have bank accounts, they are now eligible to get payday loans,
and those are quick cash advances for a few hundred dollars
that are secured by your personal check written for the amount
of the loan, plus a finance charge or an electronic debit to
your account, held until your next payday, and then all of that
money gets paid back in one balloon payment.
Those loans cost 390 percent annual interest or higher.
Recipients who are getting $25,000 a year, which would be a
couple getting two Social Security payments or somebody who is
also getting other income and Social Security, would be in the
hole $158 if they pay back the average payday loan on time out
of their exempt benefits.
We urge this Committee to exercise your authority to
encourage the Social Security Administration to stop the use of
master/sub-accounts to deliver exempt funds to recipients. We
urge Treasury to finish the job they did not do when EFT-99
rules were being written, to prevent financial service
companies from being a conduit for the direct deposit of
benefits, and we urge your attention to the payday loan issue.
I would be glad to answer your questions.
[The prepared statement of Ms. Fox follows:]
Prepared Statement of Ms. Fox, Director of Consumer Protection,
Consumer Federation of America
Chairman McNulty, Congressman Johnson, and Members of the
Committee, my name is Jean Ann Fox and I am director of financial
services for the Consumer Federation of America (CFA).\1\ I am
testifying today on behalf of CFA and National Consumer Law Center \2\
on behalf of its low income clients. I appreciate the opportunity to
offer our comments on financial services and credit products that harm
Social Security and SSI recipients.
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\1\ The Consumer Federation of America is a nonprofit association
of over 280 pro-consumer groups, with combined membership of 50 million
people. CFA was founded in 1968 to advance consumers' interest through
advocacy, research and education.
\2\ The National Consumer Law Center is a non-profit organization
specializing in consumer issues on behalf of low-income people. NCLC
works with thousands of legal services, government and private
attorneys, as well as community groups and organizations, who represent
low-income and elderly individuals on consumer issues.
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Federal benefit recipients are being charged steep fees for direct
deposit arrangements and exorbitant interest rates for loans based on
future receipt of exempt federal funds. Check cashers and loan
companies partner with a few banks and intermediaries to provide
``direct deposit'' of Social Security, SSI, VA benefits, and federal
pensions through accounts only accessible at the local check casher or
loan company or through a high-fee debit card. Not only are these
second-class bank accounts expensive, they deprive recipients of
control over their exempt funds and divert protected funds to repay
high cost loans either to the bank handling the direct deposit or to a
loan company partnering with the bank.
Federal Benefits Needed for Basic Essentials, Not Harmful Financial
Products
Federal law protects the subsistence income provided by tax-payers
to retired workers, disabled Americans, orphans and survivors, veterans
and federal retirees. This income is intended to relieve poverty and
ensure minimum subsistence income. Creditors are prohibited by Section
207 of the Social Security Code from attaching, garnishing, or
otherwise taking funds meant to provide basic essentials.\3\ Despite
federal protection of exempt funds, Treasury and the Social Security
Administration have permitted exempt funds to be funneled through
master/sub accounts at fringe financial outlets. In addition, payday
lenders make triple-digit interest rate loans to beneficiaries, secured
by unfunded checks or debit authorizations for bank accounts into which
exempt funds are deposited.
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\3\ Social Security Act, at 42 U.S.C. Sec. 407(a).
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Federal Policy Exposes Recipients to Harmful Financial Products
The Congressional decision to mandate distribution of federal
benefits by direct deposit had the unintended side effect of exposing
recipients to new forms of high cost financial services.\4\ Unbanked
federal recipients were mandated to open bank accounts to get direct
deposit instead of receiving paper checks in the mail each month. Those
who opened bank accounts became eligible for payday loans. Those who
did not have access to mainstream bank accounts and claimed a hardship
waiver were solicited to get direct deposit through their corner check
cashers and similar outlets. Under procedures permitted by the Social
Security Administration, a few banks receive direct deposit of exempt
federal benefits into master accounts to enable loan companies to
deduct payments and fees before the remaining monthly SS, SSI or other
federal payment was handed to the beneficiary.
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\4\ Debt Collection Improvement Act of 1996, called ``EFT'99.''
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Earlier this year the Wall Street Journal published a front page
story, titled ``Social Insecurity: High Interest Lenders Tap Elderly,
Disabled,\5\'' which described the high cost and unfair terms of
financial arrangements that target low-income recipients of taxpayer-
supported federal benefits. Readers were shocked to learn that the
Social Security Administration would direct deposit SS and SSI benefits
into a bank account controlled by a loan company, not by the recipient.
Maps illustrated the clustering of high cost payday lenders near
Section 8 housing in six major cities to show the concentration of high
cost lenders in neighborhoods with low income populations. We
appreciate the response from this Committee and the Social Security
Administration to address the problems exposed by the report.
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\5\ Ellen Schultz and Theo Francis, ``Social Insecurity: High
Interest Lenders Tap Elderly, Disabled,'' Wall Street Journal, February
12, 2008, A1.
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Social Security Administration Reexamines Delivery of SS and SSI
Benefits through Master/Sub Account Arrangements
The Social Security Administration requested comments from the
public on whether they should terminate delivery of benefits through
master/sub accounts. We appreciate their attention to this problem and
filed comments in that docket, urging a halt to delivery of benefits
through financial service companies. But even if the SSA stops the
master/sub account delivery of SS and SSI checks, that does not protect
other recipients of exempt federal funds, including veterans, railroad
pensioners, and federal pension recipients. In addition, only Congress
can enact protections against securing loans with unfunded checks or
required debit access to bank accounts. That is why your attention to
this problem is so important.
Financial Products Target Exempt Benefits and Bank Accounts
Hi-jacking direct deposit of benefits: The Social Security
Administration and Treasury permit delivery of exempt benefits through
master/sub account arrangements that can include a bank, an
intermediary, and the outlet where consumers go to pick up their
``checks.'' Unbanked recipients are targeted by these ``third-party
direct deposit providers'' as a means of getting faster access to their
checks that is safer than receiving paper checks in the mailbox. Loan
companies also use the direct deposit arrangements to secure repayment
of loans before recipients gain access to their funds. There are at
least three variations on these arrangements:
Third-party direct deposit arrangements for
delivering federal benefits to unbanked recipients through
check cashers and other financial outlets.
Master/sub account arrangements that deduct loan
payments from exempt funds before the balance is paid to
recipients at loan company offices.
Third-party direct deposit accounts that extend high
cost credit via debit card overdrafts and cash advances on the
next month's benefits.
Payday loans secured by bank accounts into which exempt funds are
direct deposited: A new and growing threat to exempt funds is posed by
payday loan companies that make loans to federal benefit recipients who
have bank accounts of their own and borrow by writing a post-dated
check for the loan and finance charge which deducts exempt funds from
their bank accounts. Some payday loans also use electronic
authorization to withdraw payment directly from borrowers' bank
accounts as soon as exempt funds are deposited.
The key feature of the master/sub account product is that the bank,
direct deposit intermediary, and financial outlet control the
recipient's exempt funds, deducting fees, account charges, loan
repayment and/or finance charges before the recipient gets control of
her benefits. Taxpayer dollars intended to lift recipients out of
poverty are skimmed off by banks and their partners as exempt funds are
diverted to financial service providers at the expense of federal
benefit recipients.
Direct Deposit Delivery of Exempt Funds through Check Cashers and Loan
Companies
Four million or so unbanked Social Security and SSI recipients
either receive their benefits as paper checks that must be cashed or
through electronic deposit at their local check casher, loan company,
or payday lender. Recipients who just get a paper check in the mail pay
a high cost just to cash the check. On average, check cashers charge
2.44 percent of the face value of a government benefit check to cash
it. For a $1,002 SS check, a recipient pays $24.45 a month or almost
$300 a year just to turn the check into cash, according to a 2006
survey of check cashers conducted by CFA.\6\ It costs even more to get
direct deposit of benefits routed through financial outlets.
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\6\ Jean Ann Fox, and Patrick Woodall, ``Cashed Out: Consumers Pay
Steep Premium to `Bank' at Check Cashing Outlets,'' Consumer Federation
of America, November 2006.
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As Treasury and the Social Security Administration urged recipients
to get their benefits through direct deposit, check cashers and a few
banks came up with products that permitted them to hold onto this
segment of their business. According to the check cashing trade group,
seven percent of their customers reported using Social Security benefit
payment services in 2006, up from three percent in 2000. Over three-
fourths of these recipients reported accessing the payment service at a
check cashing outlet.\7\
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\7\ Patricia J. Cirillo, Cypress Research Group, ``Survey of Key
FiSCA Member Organizations on Transaction Volumes,'' Attachment 1,
October 2007, slide 20.
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Master/Sub Account Direct Deposit of Exempt Funds Costly to Recipients
In Appendix A, we describe in detail the direct deposit products
targeted at federal benefit recipients by four banks, their
intermediaries and the check cashers, loan companies, and other outlets
where recipients go to pick up their checks. Here is how this process
typically works:
Banks set up a master account to receive exempt funds in the name
of the recipient. The beneficiary goes to the check cashing outlet and
pays to receive and then cash the ``check'' printed to deliver their
funds or to have funds loaded onto a prepaid debit card. Fees are
charged to set up the account, to deliver each payment, and to cash
each check. The direct deposit accounts offered by check-cashers simply
convert the electronic payment of benefits back into a paper check.
When the benefits are delivered by debit card, recipients are provided
a stored value card which appears to be not covered by Reg E
protections which provide limits on liability for unauthorized
transfers, procedures to resolve disputes, disclosures, and other
substantive protections.
Recipients who are enrolled in these third-party direct deposit
accounts have no direct control over their funds. The bank deducts its
fees and those paid to the check casher or other entity that delivers
the ``check'' or provides the debit card. Contracts include fine print
that permits the bank to channel exempt funds to make loan payments on
behalf of the recipient before handing over the rest of that month's
check. Recipients get what is left over.
Some of the direct deposit bank/intermediary accounts and debit
cards come with credit features of their own that are repaid out of
exempt funds as first priority. Cash advance or overdraft loans tied to
direct deposit of exempt funds into master/sub accounts appear to
violate SSA requirements against assignment of benefits to pay
debts.\8\
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\8\ SSA, POMS, GN 02402.045.B, Direct Deposit and Assignment of
Benefits. A request for direct deposit that assigns or transfers the
right to future payment to someone other than the beneficiary is an
assignment of benefits.
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A Philadelphia SSI recipient who received $579.40 per month only
received $566.50 in a cashier's check each month after the bank
deducted $9.95 per month for the direct deposit account plus $2.95 to
the check casher for printing out the check. Then the check casher
charged its fee to turn that check into cash. The River City Bank
Dollar$$$ Direct account came with a credit feature. For a $200 cash
advance, the bank deducted $20 in finance charges, handing over a $180
cashier's check for the loan plus a check for the SSI benefits. Each
month the bank collected payment in full by deducting $200 from his
exempt funds, leaving him short. The loan was renewed for thirty-three
months, with the SSI recipient paying $660 for the use of $180 for less
than three years.\9\
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\9\ River City Bank account summary, dated March 9, 2006 for client
of Philadelphia Community Legal Services, on file with CFA.
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Several of the bank/intermediary direct deposit programs market
themselves to loan companies as a way to collect loan payments out of
exempt funds.
Republic Bank & Trust/Currency Connection promotes its service to
loan companies to ``enhance(s) collection efforts for in-house
lending.'' \10\ The RB&T contract states, in part, ``You agree that the
Bank may, unless prohibited by law, debit funds from your Account to
pay all or portions of any amounts you may owe the Bank or your EFI . .
. Upon Account closure, the Bank will return to you the available
balance in your Account less any fees or charges, claims, set-offs, or
other amounts you owe the bank or EFI.'' \11\
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\10\ https://www.ccrbt.com/check_products.aspx, ``Benefits to Check
Casher.''
\11\ ACE CheckDirect Deposit Account Application and Agreement,
acquired 2008, on file with CFA.
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River City Bank Dollar$$$ Direct agreement states:
``I further authorize the Bank to pay all of the fees and
charges due to the EFD upon receipt by the Bank of the Direct
Deposit.'' \12\ The bank's Cash Advance Program makes loans of
$200 to recipients that are repaid in full out of the next
deposit of exempt funds. The bank charges a $10 fee and permits
the EFD to also collect $10 for a one-month $180 loan.\13\
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\12\ River City Bank Dollar$$$ Direct Application, Authorization,
Certification, Agreement. On file with CFA.
\13\ River City Bank--Dollars Direct page, retrieved by Google on
February 9, 2006. On file with CFA.
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First Citizens Bank/FirstNet/Cornerstone Community
Bank is the direct deposit provider in the WSJ account of Mr.
Bevel's loan payments out of exempt funds. FirstNet describes
the benefits of its Government Benefits Processing for loan
companies. ``The process allows you to provide a safe, secure
way for your customers to receive their benefits and make their
monthly loan payment as soon as the benefits become
available.'' \14\ (Emphasis added.)
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\14\ https://www.weballotments.com/fedsys.asp, visited June 12,
2008.
Treasury Failed to Protect Recipients
When EFT'99 was initiated, Congress directed Treasury to adopt
regulations to ensure that federal recipients who were required to get
direct deposit of benefits would be protected. Accounts were to be at
financial institutions with access to accounts at a reasonable cost and
with the same consumer protections as other account holders at the same
financial institution.\15\ Treasury's regulations governing the direct
deposit system require that benefit payments may be deposited only into
accounts at a financial institution in the name of the recipient.\16\
Master/sub account arrangements do not meet those requirements under
the EFT statute or Treasury's regulation.
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\15\ 31 U.S.C. Sec. 3332(i)
\16\ 31 CFR 208.6, 210.5.
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In 1999 Treasury issued an ANPRM to request comments on regulating
access to federal benefits through payment service providers. Despite
extensive comments from consumer organizations, no further
consideration was given by Treasury, at least in any public forum, to
protecting this nation's most vulnerable recipients of federal benefits
from the greed and opportunism of financial providers. Treasury has the
authority to prohibit financial institutions accepting electronic
deposits of federal payments from contracting with payment service
providers to be conduits for the delivery of federal payments. Treasury
adopted such a prohibition when it established Electronic Transfer
Accounts.\17\ Inexplicably Treasury failed to extend that same
protection to recipients who were sold direct deposit services by check
cashers, loan companies, and other retail outlets.
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\17\ 63 Fed. Reg. 64823 (Nov. 23, 1998).
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Payday Lenders Get First Claim to Exempt Funds in Bank Accounts
Banked federal benefit recipients are also vulnerable to high cost
quick cash loans that extract exempt funds from consumers' bank
accounts. As federal benefit recipients have acquired their own bank
accounts to receive direct deposit from Treasury, they have also become
eligible for loans based on checks/debits drawn on those accounts and
held for future deposit. Since federal benefits are modest and payment
is made on a monthly basis, many recipients struggle to make ends meet
until the next check arrives at the first of the month.
Payday loans are small cash advances for less than $1,000,
typically in the $300 to $500 range, based on holding the borrower's
unfunded personal check or electronic debit for the amount of the loan
and the finance charge. To get a payday loan, a borrower must have an
open bank account, a source of income, and identification. Loans are
due and payable in full on the borrower's next payday and typically
cost 390 to 780 percent annual percentage rate (APR) for two-week
terms. Finance charges are typically expressed as dollars per hundred
borrowed, in the $15 to $30 per $100 range.
Payday loans are single payment balloon loans. On the next payday,
a borrower can bring in cash and ``buy back'' the check, or the check
can be deposited for payment, or the borrower can pay only the finance
charge and renew the loan for another pay cycle without reducing the
principal. Most checks written to get payday loans are never deposited
and are bought back by customers who are then encouraged to take out
another loan. Failure to bring in cash will result in the check/debit
being deposited and exempt funds withdrawn from the account.
For more information on payday lending, please visit CFA's website
for consumers: www.paydayloaninfo.org. Case studies on payday loan use
by federal recipients are included in Appendix B.
Benefit Recipients Pay an Estimated $860 Million for Triple-digit
Payday Loans
The payday loan industry projects $50.7 billion in annual loan
volume through both storefront and online payday lenders, with $8.6
billion paid by consumers in finance charges.\18\ The Colorado Attorney
General's office reports that ten percent of payday loan customers list
``benefits'' as their source of income on loan applications.\19\ This
group of consumers includes recipients of state as well as federal
benefits and pensions. Assuming Colorado is typical of payday lending
in other states, ``benefit'' recipients' share of the payday loan
market is $5 billion in loans, costing $860 million in finance charges.
This may be a conservative estimate. The California Department of
Corporations commissioned a study of payday loan customers in 2007.
Over twelve percent of surveyed respondents listed a Government
assistance check (General Relief/Social Security) as their first or
second form of regular income.\20\ The average borrower uses eight to
twelve loans per year, becoming trapped in repeat borrowing. All of the
money paid to renew payday loans is diverted from meeting the basic
needs of retirees, welfare recipients, veterans, disabled, survivors
and dependents.
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\18\ Dennis Telzrow and David Burtzlaff, ``Payday Loan Industry:
Industry Report,'' Stephens Inc. Investment Bankers, April 17, 2008 at
4.
\19\ ``Payday Lending Demographic and Statistical Information: July
2000 through December 2007,'' Administrator of the Colorado Uniform
Consumer Credit Code, Office of Attorney General, February 4, 2008 at
3.
\20\ California Department of Corporations--2007 Payday Loan Study,
Applied Management and Planning Group, Table 27: Source of Paycheck or
Regular Income for Respondent, page 46. Table 54 noted that 9.1 percent
of respondents were retired, the largest occupation listed besides
``other.''
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Payday Loans Modern Equivalent of a Wage Assignment
Securing payment of a debt by the borrower's unfunded check drawn
on the next Social Security or other exempt federal funds to be
deposited in the bank or by electronic authorization to access pay
deposited into an account is the modern banking equivalent of a wage
assignment. The Federal Trade Commission ruled decades ago that a wage
assignment that could not be withdrawn was an unfair trade practice
under the Credit Practices Rule. The FTC Credit Practices Rule outlaws
credit contract provisions analogous to check holding, such as wage
assignments, confessions of judgment, and the taking of a non-purchase
money security interest in household goods. Holding the consumer's
signed check is even more advantageous for a lender than holding a
confession of judgment. With the check, the creditor goes directly to
the bank to collect without filing suit or going to court to get a writ
of execution. Since Federal policy is for federal payments to be direct
deposited, a loan based on access to the funds that will be deposited
into the account on the next payday is very close to a wage assignment.
The Electronic Fund Transfer Act prohibits conditioning the
extension of credit on requiring electronic payment of debts for
periodic payment loans, but is silent on the single payment electronic
payday loan model. Typically an online payday loan can be renewed
several times, with only the finance charge withdrawn from the account.
Some of these payday lenders use remotely created demand drafts to
collect directly from bank accounts when consumers exercise their
rights to revoke access to accounts under the EFTA. Social Security and
SSI recipients who sign these contracts lose control of the exempt
funds in their accounts. For example:
CashNetUSA's Deferred Deposit Loan Agreement:
You promise to pay us the Total of Payments . . . You grant us a
security interest in your ECheck/ACH Authorization in the amount of the
Total of Payments (the ``ECheck/ACH'') which we may negotiate on the
Payment Date or thereafter . . .
The ECheck/ACH Authorizations set forth in this Loan Agreement are
to remain in full force and effect for this transaction until your
indebtedness to us for the Total of Payments, plus any NSF fee
incurred, is fully satisfied. You may only revoke the above
authorizations by contacting us directly, and only after you have
satisfied your indebtedness to us.\21\ (Emphasis added.)
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\21\ http://www.cashnetusa.com/secure/contract/contract, July 30,
2007.
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Payday Lending Fosters Coercive Collection Tactics
Making loans based on holding unfunded checks until the next SS
deposit arrives fosters coercive collection tactics. Some payday
lenders imply, while others outright threaten, criminal consequences
for failing to ``make good'' on the check used to get the loan. Some
states, such as Missouri and Colorado, even impose criminal sanctions
on payday loan borrowers who subsequently close their bank accounts or
stop payment on the check used to get the loan. An incident in Virginia
illustrates the problem.
Donald and Gail Storer, an elderly couple in
Virginia, both have serious medical problems and their only
income is SSI. They borrowed $500 from a licensed payday lender
and agreed to pay $75 per month in finance charges at an APR of
185%. After repeatedly renewing the loan, rising health
expenses made it impossible for them to continue. A complaint
filed on their behalf, Storer v. Buckeye Check Cashing of
Virginia, Inc., alleged a ``campaign of relentless harassment
by the Defendant, a Payday Lender, which included specifically
prohibited threats of criminal prosecution, in violation of the
Virginia Payday Loan Act.'' A collector left a taped telephone
message stating:
``This message is for Gail and Donald Storer. This is Check Smart
calling again, Mr. and Mrs. Storer. We are not going away. We are going
to continue calling, and eventually what is going to happen is our
legal department is going to press charges against you. So I would
pretty much try to call the Smithfield office to work out a time frame
when you will be able to handle the matter at hand. The number is 757-
365-9711. You are only hurting yourself.'' \22\
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\22\ American Arbitration Association Award of Arbitrator, Re: 16
434 R 00441 07, Donald Storer and Gail Storer and Buckeye Check Cashing
of Virginia, Inc., issued December 5, 2007.
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The plaintiffs' SSI income was protected by federal law from
assignment, levy, garnishment or other legal process.\23\ The American
Arbitration Association found that language threatening to ``press
charges'' amounted to a threat of criminal prosecution and found that
Checksmart violated the Virginia payday loan law.\24\
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\23\ Donald Storer and Gail Storer v. Buckeye Check Cashing of
Virginia, Inc., d/b/a Check$mart, Complaint and Demand for Jury Trial,
Circuit Court for Isle of Wight County, Virginia, filed with the
American Arbitration Association on May 14, 2007.
\24\ American Arbitration Association Award of Arbitrator, page 4.
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Veterans Are Not Protected from Payday Lending by Military Lending Act
and DOD Regulations
In 2006 Congress enacted the Talent-Nelson amendment to the Defense
Authorization act to protect Service members and their families from
high cost lending that harmed readiness and damaged morale. Although it
appears that active-duty service members are being protected from
payday lending under DOD regulations that took effect October 1, 2007,
veterans and non-active duty personnel are still fair game for 500% APR
loans based on direct access to bank accounts into which military pay
and exempt federal funds are deposited. The Navy Marine Corps Relief
Society assists Navy and Marine retirees as well as active duty
personnel. They report requests for assistance totaling $206,573 for
payday loans from 145 retirees in 2007. That is up from the 115
retirees who requested help with $167,214 in payday loans during
2006.\25\
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\25\ Dotty Clayton, Navy Marine Corp Relief Society, electronic
communication to CFA, June 17, 2008.
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In order to protect veterans and retirees from triple-digit
interest rate payday loans that directly access exempt funds deposited
into their bank accounts, the protections of the Military Lending Act
would have to be extended to all consumers. Those protections would
stop loans based on personal checks held for future deposit or on
electronic access to bank accounts as well as cap interest rates at 36%
APR including fees.
Policy Issues and Recommendations
1. The Social Security Administration recognizes the problems caused
by delivery of exempt benefits through master/sub account arrangements
and requested public comment on a proposal to discontinue that
arrangement. We filed comments to assist SSA, providing examples of
Master/sub account providers as well as case studies of exempt
recipient victims.
We respectfully request that this Committee give its
strong support to terminating direct deposit of exempt funds by
Social Security Administration through Master/sub accounts at
financial service companies.
2. Treasury failed to protect unbanked federal benefit recipients.
Because Treasury failed to enact regulations governing third party
direct deposit of federal benefits ten years ago, consumers who most
need protections get direct deposit of their exempt federal benefits
through inferior, unsafe arrangements between a few banks and check
cashing outlets, small loan companies and other storefront and online
providers.
We urge the Ways and Means Committee to strongly
recommend that Treasury complete its work under EFT'99 by
protecting all federal benefit recipients from substandard and
high cost bank account arrangements.
3. Payday loans function as defacto wage assignments against exempt
funds which are supposed to be safe from attachment. It is especially
important for Congress to safeguard tax-payer funded benefits that
recipients have been mandated to receive by direct deposit into bank
accounts.
We request that this Committee do everything in its
power to protect all consumers from loans secured by unfunded
personal checks held for future deposit or by required
electronic debits to their bank accounts. A bill is pending in
Congress that, if enacted, would protect SS and SSI recipients,
veterans, and federal retirees from defacto assignment of
benefits.\26\
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\26\ ``Payday Loan Reform Act of 2007,'' HR 2871
Thank you. I would be glad to answer your questions.
Appendix A
There are at least four bank/intermediary services that offer
direct deposit of federal benefits through check cashers, loan
companies, money transmitters and other retail outlets.
1. Currency Connection/Republic Bank & Trust (RB&T) is a Direct
Deposit Program marketed to check cashers and similar entities. Exempt
federal funds are delivered to recipients either as cashiers checks or
loaded onto a debit card. The RB&T program is targeted to consumers
receiving payroll, government benefits (Social Security, SSI-
Supplemental Security Income, VA-Veterans Affairs), child support,
unemployment, retirement or any other regular direct deposit.
Currency Connection claims customers benefit by receiving payment
two to four days earlier than payment is received by mail, by the
safety of picking up the check rather than receiving a check in the
mail, convenience in picking up the check where it is to be cashed, and
FDIC insurance for deposits.\27\ The benefits for check cashers are
stated as: ``Check cashers can ensure their customers will come back
month after month with the Currency Connection DirectDeposit Program.
Enroll in this FREE program to become a Republic Bank Electronic Funds
Issuer and start increasing your customer retention and overall
profitability.'' \28\
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\27\ https://www.ccrbt.com/check_faqs.aspx, last visited February
14, 2008.
\28\ https://www.ccrbt.com/check_products.aspx, last visited
February 14, 2008.
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Currency Connection's Cashier's Check fees include $3 to Republic
Bank for the 1st direct deposit per month, plus a $3 bank fee charged
to customers for each additional deposit. The bank's partner Electronic
Funds Issuer (EFI) can charge customers an additional $1 to $5 fee for
printing a paper check to deliver the funds for a total of up to $6 per
check in addition to the fee to cash the check. Currency Connection
does not set limits on the fee check cashers can charge to then cash
the paper check.
Currency Connection's debit card fees include $19.95 to set up the
account and a monthly $19.95 service fee. ATM transactions at Republic
Bank & Trust terminals are free, but RB&T charges $2 each time a
customer uses another bank's ATM plus deductions are made for whatever
the ``foreign'' ATM charges. Point-of-sale or balance inquiry fees are
$1 each.\29\
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\29\ http://www.ccrbt.com/card_fazs.aspx, last visited June 11,
2008.
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Both the bank and the check casher/loan company gain direct access
to deposited exempt funds to pay fees or make loan payments before the
recipient has access to federally-protected funds for living expenses.
Currency Connection touts its service to loan companies to
``enhance(s) collection efforts for in-house lending.'' \30\ The
contract signed by benefit recipients with RB&T authorizes both the
bank and the EFI to withdraw funds from the deposit to repay
obligations to either the bank or the check casher/loan company. The
Agreement states:
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\30\ https://www.ccrbt.com/check_products.aspx, ``Benefits to Check
Casher''
---------------------------------------------------------------------------
You agree that the Bank may, unless prohibited by law, debit funds
from your Account to pay all or portions of any amounts you may owe the
Bank or your EFI. You acknowledge that the Bank may set-off against
your Account in order to recover any ineligible benefits or payments
you may have withdrawn if the Bank is obligated to return the funds to
the entity that originates your payment (``Direct Deposit
Originator''). Either you, or the Bank may transfer or close your
Account at any time. Upon Account closure, the Bank will return to you
the available balance in your Account less any fees or charges, claims,
set-offs, or other amounts you owe the Bank or EFI.\31\ (Emphasis
added.)
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\31\ ACE CheckDirect Deposit Account Application and Agreement,
acquired 2008, on file with CFA.
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ACE Cash Express, a large check cashing/payday loan provider, has a
private label version of Currency Connection, branded CheckDirect,
which delivers Social Security, SSI, VA and retirement benefits via a
cashier's check or a prepaid debit card.\32\ Store fliers display an
image of a U.S. Treasury Social Security, SSI and VA check: ``Get your
check up to three days earlier than by mail. Avoid the hassle of a lost
or stolen check. Pick up and cash your check at over 1,000 locations
offering ACE CheckDirect.'' \33\ Ace check cashing fees vary, depending
on state fee caps. A volunteer was told by an Arkansas ACE outlet that
2 percent is charged to cash the paper check generated from the Check
Direct account. For a recipient receiving $800, it would cost $21.95
monthly just to access Social Security funds via CheckDirect ($3 RB&T
fee, $2.95 for ACE to print the check plus $16 to cash the check.)
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\32\ http://www.acecashexpress.com/ss_directdeposit.php, last
visited February 14, 2008
\33\ ACE CheckDirect flier, picked up at Arkansas outlet, February
2008. On file with CFA.
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RB&T Currency Connection Debit Card Program also provides an
optional ``Overdraft Protection'' Feature which turns the direct
deposit delivery card into a credit instrument.\34\ Currency Connection
Overdraft $hield fees cost 25 percent of each overdraft per payment
period up to a maximum of $100. It is available to Currency Connection
customers who receive at least $400 per payment deposited into Republic
Bank & Trust. A Social Security recipient who elected the Overdraft
feature would be charged at least 300% APR for a cash advance, assuming
the loan was outstanding for a full month. A recipient who overdrew on
the card a week before the next SSI deposit was due would pay 1,300
percent APR ($25 per $100 borrowed for one week). Overdraft loans are
repaid out of the next deposit into the account.\35\ This gives the
bank first claim on exempt funds.
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\34\ http://www.electrobanking.com/users/
serview.asp?xss'ElectroBanking&suid'515&page` . . . Last visited April
29, 2008.
\35\ AMsource Currency Connection FAQ, on file with CFA.
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Recipients can also borrow from RB&T when their funds are delivered
via cashier's check. The standard Currency Connection Cashier's Check
which is generated by the non-bank partner includes a Truth in Lending
box to disclose the amount financed, the finance charge, total of
payments, and the Annual Percentage Rate. Fine print states that
borrowers will not be entitled to a refund of any part of the prepaid
finance charge.\36\
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\36\ Id.
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2. Dollars Direct (River City Bank)
River City Bank of Kentucky offers a direct deposit program to
check cashers through its Dollar$$$Direct program. The bank's marketing
materials to check cashers explain:
Only banks can offer direct deposit. UNTIL NOW!
Now YOU can offer direct deposit to your customers! The
Dollar$$$Direct program makes it possible for these ``unbanked''
individuals to continue receiving and cashing their checks while
complying with the government's wishes to go paperless . . . You can
establish a check printing fee from $0--$9.99 for each check that you
print. Also, providing direct deposit will keep your customers coming
back to you each and every month!\37\
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\37\ http://www.dollars-direct.com/visited May 2, 2006.
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River City Bank Dollar$$$Direct delivers exempt funds by either a
cashiers check or a debit card. The direct deposit agreement permits
the bank to deduct fees for both River City Bank and the Electronic
Funds Distributor (EFD) before exempt funds are made available to the
recipient.\38\ Once the funds have been transferred from the bank to
the check casher or other outlet, the bank takes no responsibility for
failure of their partner to correctly deliver the check to the
payee.\39\
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\38\ ``Fees and Charges: I authorize the Bank to deduct from the
proceeds of my monthly or other periodic disbursement, all fees and
charges related thereto as described in the Dollar$$$
Direct account disclosures, and fee schedule. I further authorize the
Bank to apply all of the fees and charges due to the EFD upon receipt
by the Bank of the Direct Deposit.'' CITE
\39\ Application-Authorization-Certification-Agreement, Terms and
Conditions of the Account, Deposits and Withdrawals, accessed at http:/
/www.debitcardone.com June 16, 2008. ``I hereby appoint the EFD as my
agent for purposes of receiving from the Bank and delivering to me my
monthly or other periodic check(s). I hereby release, absolve, and
forever discharge the Bank from any and all liabilities whatsoever as a
result of (e) the failure of the EFD to deliver my monthly or other
periodic check(s) to me; or (ii) the fraudulent endorsement or
negotiation of my monthly or other periodic check(s). In the event of
the occurrence of the events described at (i) and (ii) of this
paragraph, I acknowledge that the only claims I have are against the
EFD, and not the Bank.''
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Fees and charges: I authorize the Bank to deduct from the proceeds
of my monthly or other periodic disbursement, all fees and charges
related thereto as described in the Dollar$$$Direct account disclosures
and fee schedule. I further authorize the Bank to pay all of the fees
and charges due to the EFD upon receipt by the Bank of the Direct
Deposit.\40\
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\40\ River City Bank Dollar$$$Direct Application, Authorization,
Certification, Agreement. On file with CFA.
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The Dollar$$$Direct fee schedule includes the following:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Account Setup Fee $14.50
----------------------------------------------------------------------------------------------------------------
Cashier's Check Fee $2.95 (for each check issued for first
deposit)
$1.95 (for each subsequent payment deposited)
----------------------------------------------------------------------------------------------------------------
Dollar$$$Direct Debit Card
----------------------------------------------------------------------------------------------------------------
Monthly Service Charge $10
----------------------------------------------------------------------------------------------------------------
Transaction fee $1
----------------------------------------------------------------------------------------------------------------
Overdraft Privilege Fee $7.50 41
----------------------------------------------------------------------------------------------------------------
Cash Advance Fee $10
----------------------------------------------------------------------------------------------------------------
Dollar$$$Direct's debit card comes with an overdraft ``privilege''
of up to $250 over the account balance,\42\ enabling recipients to
borrow from the bank by overdrawing the account. A River City Bank web
page cached by Google from February 9, 2006 explains its cash advance
program to check cashers and other outlets as a loan product.
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\41\ http://www.debitcardone.com/terms.html, June 16, 2008. Fee
schedule dated 09/03. A version provided by Community Legal Services in
Philadelphia, dated 04/07, did not list the Overdraft Privilege Fee,
but included a $10 Cash Advance Fee. On file with CFA.
\42\ http://www.debitcardone.com/features.html, visited June 16,
2008.
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Welcome to the Cash Advance Program page. Here you will find
information about how direct deposit customers can get Cash Advances on
any benefit or payment including SSA, SSI and VA as well as Payroll and
Welfare.
What is CAP?
The Cash Advance Program or CAP is a program within the
Dollar$$$Direct program where an EFD (Electronic Funds Distributor) is
allowed to print and distribute Cash Advances taken on any recurring
payment received by a direct deposit customer. An EFD can offer money
anytime to direct deposit customers who simply cannot wait until their
next deposit arrives. If the customer qualifies, he or she could
receive part of their direct deposit whenever they need it.
Offering Cash Advances to your customers will increase your check
printing and cashing volume. Cash Advances are only available as $200
loans from River City Bank. The bank charges a $10 fee for each Cash
Advance, and we can deduct up to $10 per Cash Advance for your fee as
well. Offering CAP could also increase your customer base since some
customers are more interested in the Cash Advance option than they are
the direct deposit option. Finally, offering CAP through our program
relieves you of the risk involved in loaning funds.''\43\ (Emphasis
added.)
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\43\ River City Bank--Dollars Direct page, retrieved by Google on
Feb. 9, 2006. On file with CFA.
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Dollar$$$Direct agreement permits one cash advance per direct
deposit. The APR quoted for a one week loan is 277.44%, and for 28 days
as 68.61% APR. If the check casher adds an additional $10 fee per $200
loan, the cost of this loan doubles to 554.88% APR for one week and
137.22% APR for 28 days. The APR disclosure the customer sees prior to
getting a loan does not include other fees which could be charged by
the bank's store front partner. To get a cash advance, the borrower has
to sign over the next direct deposit of exempt federal funds to the
bank. The agreement states:
I authorize the bank to access the designated Direct Deposit
Account once the direct deposits have been made into the Direct Deposit
Account and to disburse the monies deposited therein (less all
applicable loan payoffs, fees and charges) as a cashier's check made
payable to me.\44\
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\44\ River City Bank--Dollars Direct Agreement, Cash Advance
Product, on file with CFA.
3. Petz Enterprises Quick Acce$$ advertises to check cashers that
``Giving Money Away has Never Been So Profitable . . . .The majority of
your check-cashing customers come to you because they don't have a
checking account. QuickAcce$$ allows you to print and cash payroll and
benefits checks all in one place, giving your customers the speed and
security of direct deposit without having to use a conventional bank
while you get to keep a percentage of every transaction (emphasis in
ad.)'' \45\ In a 2005 Petz newsletter, the QuickAcce$$ 2004 program was
described as follows: ``QuickAccess allows your customer's funds to be
directly deposited into a trust account, and you are authorized to
print a check made payable to the recipient at your location for the
amount of the benefits, less any applicable QuickAccess fees.'' \46\
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\45\ QuickAcce$$ ad, Checklist, Vol. 10 No. 3, 2007, p. 62.
\46\ Petz Enterprises Newsletter 2005 ``What's Better than Money in
the Bank?'' available at www.petzent.com.
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QuickAccess partners with Bank of Agriculture and Commerce in
California to receive direct deposit of SS and SSI benefits. Their
electronic benefit distribution method is advertised to check cashers,
grocery stores, convenience stores, and pawn brokers. Types of benefits
processed include Social Security payments, retirement benefits, and
payments from more than 27 Federal Entitlement Programs. QuickAccess
transaction fees to retail service centers are $3 per check for all
transactions greater than $10 with no fee for smaller transactions.
Retailers are charged $195 Annual Membership Fee per location with the
fee waived for locations with more than twenty-five registered
recipients. QuickAccess pays rebate bonuses to service centers of up to
fifty cents per check based on monthly transaction volume.\47\ We do
not have a fee schedule for charges to benefit recipients for receiving
their SS or SSI payments at check cashers or other retailers using
QuickAccess.
---------------------------------------------------------------------------
\47\ http://www.petzent.com/quickaccess/pricing.asp, last visited
May 22, 2008.
4. First Citizens Bank/FirstNet/Cornerstone Community Bank. In the
Wall Street Journal example of Mr. Bevels and the Small Loan Company in
Alabama, SSA deposited his exempt federal funds into an account at
Cornerstone Community Bank in Chattanooga, TN. Mr. Bevel's funds were
immediately deducted to make payments to the Small Loan Company. The
bank statement directed inquiries to a phone number for First Citizens
Bank's FirstNet operation based in Radcliff, KY. First Citizens Bank
describes its ``Federal Benefits Program'' direct deposit service for
loan companies as follows:
``FirstNet pioneered the first third-party federal benefits payment
processing system for the consumer finance industry in 1992. This
system allows companies operating as Financial Service Providers to
accept and process direct deposits on behalf of federal benefit
recipients. This system can also be used for anyone using direct
deposit, including non-federal benefits. This service has proven to be
beneficial in increasing branch traffic, increasing processing fees,
and building customer loyalty. Industries successfully using this:
Consumer Finance, Money Transfer. Key Benefits: Increased branch
traffic. Increased fee revenue. Availability of funds on opening of
business on beneficiary pay date. Flexible movement of funds. Automatic
electronic enrollment.'' \48\
---------------------------------------------------------------------------
\48\ http://www.first-citizens.com/
allot.asp?IF'fedben.asp&FTR'altfooter.asp, last visited May 22, 2008.
---------------------------------------------------------------------------
FirstNet's website further explains the benefits of its
``Government Benefits Processing'' for loan companies. ``The process
allows you to provide a safe, secure way for your customers to receive
their benefits and make their monthly loan payment as soon as the
benefits become available. (Emphasis added.)'' \49\ The social worker
who assisted Mr. Bevels recalls that he had multiple loans at the same
loan company, each permitting the loan company's bank to deduct loan
payments from his exempt funds, leaving him with about $200 from the
$600 monthly check to live on.\50\
---------------------------------------------------------------------------
\49\ https://www.weballotments.com/fedsys.asp, visited June 12,
2008.
\50\ Telephone communications with social worker
---------------------------------------------------------------------------
Appendix B
Case Studies of Federal Beneficiaries and Harmful Financial Products
and Practices
A Houston, Texas Social Security recipient borrowed
$360 from Cash Express and its True Financial Services, LP
partner in a ``credit services organization'' (CSO) form of
payday lending. Finance charge for this loan was $75.25 ($3.25
interest to True Financial and $72 fee to CSO) and the APR
231.20 percent. The loan was issued on August 31, 2007 and was
due in full on October 3, 2007 for a payment of $363.25 due to
True Financial Services, LP and $72 on the same day to Cash
Express for its CSO fee. He paid $72 every month for six
months, thinking he was paying down the loan. After paying $432
back on a $360 loan, he was told that he still owed the full
$360 amount for loan principal and another CSO fee. The loan
was secured by authorization to permit the lender to withdraw
funds through the automated clearinghouse system from his bank
account. The contract language does not permit the borrower to
terminate the ACH authorization:
Automated Clearing House (``ACH'') Authorization. You agree to
provide us ACH authorization to debit your checking account
(``Account'') at your bank (``Bank''). If you do not pay us on time,
either directly or in care of the CSO, you authorize us or our agent,
to initiate an ACH debit to your Account for any amount due to us with
regard to this loan. You are not authorizing us to initiate ACH debits
on your Account to recur at substantially regular intervals. However,
Lender or its agent may resubmit an ACH debit up to three times if the
debit is not honored by your Bank. You will maintain a balance of
available funds in your Account at least equal to the amount due and
owing under this Agreement. You understand that your Bank may impose
charges for each ACH debit that is not honored by your Bank. You agree
that an ACH debit authorized under this Agreement may be combined with
an ACH debit that you authorized your CSO to make with regard to your
loan.\51\
---------------------------------------------------------------------------
\51\ Loan Disclosure and Promissory Note, True Financial Services,
LP, on file with CFA
A Berea, KY consumer, whose sole income was a $475 to
$620 monthly SSI benefit for disabilities, got payday loans
costing 180% APR and check cashing services from Cash Express
LLC. She was required to furnish a post-dated check for the
amount of the loan plus the fee. The lender knew that the $460
loan check constituted more than eighty percent of the
borrower's monthly income, making it likely that loans would be
renewed or rolled over on a monthly basis. According to a
complaint filed in arbitration, she paid the $60 finance charge
and rolled over the principal numerous times. The monthly fees
alone were about ten percent of her income. She became unable
to pay her rent and was evicted from subsidized, Section Eight
housing on which she paid rent of $118 a month. Storage for her
furniture cost $75 per month. Eventually she closed her bank
account and offered to make $25 monthly payments on her $500
debt to Cash Express. During a visit to discuss payment
arrangements, Cash Express offered to cash her SSI check for a
fee. The lender refused to return any funds to the consumer,
keeping all of her cashed SSI check to pay on the loan, leaving
her with no income for the month. This caused extreme emotional
distress.\52\
---------------------------------------------------------------------------
\52\ Complaint, Riva Banks vs. Cash Express of Tennessee, LLC d/b/a
Cash Express LLC, American Arbitration Association in the Commonwealth
of Kentucky, filed December 27, 2007.
---------------------------------------------------------------------------
A Franklin, New Hampshire resident whose only income
was from SSI, got a loan from Advance America, expecting to be
able to repay the loan with SSI funds after the town welfare
office helped with her living expenses. The $350 loan for one
month cost $70 finance charge and 240 percent APR. When
assistance was denied, Advance America refused to provide an
extended payment plan. She stopped payment on the check used to
get the loan and offered to make $5 payments. Advance America
staff visited her home to demand payment and made repeated
telephone calls demanding payment. Despite accepting her $5
payments, Advance America told her to stop sending the payments
and that they would take her to court if she didn't pay in
full. Only after a legal services attorney explained the exempt
status of SSI funds and the terms of the New Hampshire debt
collection law did calls stop.\53\
---------------------------------------------------------------------------
\53\ Electronic communication, Sarah Mattson, New Hampshire Legal
Assistance, received by CFA June 2, 2008.
---------------------------------------------------------------------------
A Colorado consumer ``GM'' posted a message to the
Arkansas coalition opposing payday lending
(www.StopPaydayPredators.org). GM had twelve payday loans open
at the same time. He paid interest-only fees until no longer
able to do so and was being accused of writing checks on a
closed account. His only income is SSI and Social Security
benefits. He stated he was ``extremely terrified because I know
that I won't survive in prison'' and saw homelessness as his
only way to repay the twelve loans.\54\ Colorado permits payday
lenders to charge $20 per $100 for the first $300 loan and
$7.50 per $100 for loan amounts from $300 to $500. A two-week
$300 payday loan costs 520% APR.\55\
---------------------------------------------------------------------------
\54\ Electronic communication from H.C. Klein, on posting at
www.StopPaydayPredators.org Feb. 24, 2008.
\55\ See State Information, www.paydayloaninfo.org Click on
Colorado on the map for details.
---------------------------------------------------------------------------
Peter Dixon, a disabled Virginia resident, whose sole
income consists of Social Security Disability Insurance
Benefits of about $700 per month, got payday loans from NFC
Payday Advance in Danville. To borrow $300, Mr. Dixon wrote an
unfunded check for $345 for a 30-day loan at an APR of 219%. He
paid NFC $45 per month in interest on the original $300 loan.
At the end of twenty months, he had paid $900 in interest for
$300 principal borrowed but still owed the original balance. In
order to pay off the $345 owed, Mr. Dixon got another payday
loan and sold a vehicle.\56\
---------------------------------------------------------------------------
\56\ Complaint, Peter Dixon v. NFC Check Cashing Services, Inc., d/
b/a NFC Payday Advance, Circuit Court for the City of Danville, on file
with CFA.
---------------------------------------------------------------------------
Cynthia Wimberly, who was unemployed and had no
income, obtained payday loans from Advance America in Arkansas,
secured by the Veterans Administration and Social Security
benefits provided to her granddaughter. She was charged 150.30%
APR for one-month loans which were repeatedly renewed for
interest-only payments. When she asked for an extended payment
plan to retire the debt, Advance America refused. Nehemiah
Bailey, another Arkansas consumer whose only income came from
Veterans Administration benefits borrowed $350 and agreed to
repay $390.37 by the end of the month for a loan costing
150.35% APR. The Advance America contract granted the lender
access to funds deposited in the borrowers' bank accounts. If
borrowers did not return to the store to ``repurchase'' the
check with cash, the lender would deposit or present the check
at a bank to be repaid from funds on deposit in the borrower's
account. \57\
---------------------------------------------------------------------------
\57\ Complaint, Kelvin White, Cynthia Wimberly, and Nehemiah Bailey
vs. Advance America Servicing, et al, Circuit Court of Ouachita County,
Arkansas, May 31, 2007.
Appendix C
Social Security and SSI Beneficiaries Cannot Afford Payday Loans
Consumers who rely on Social Security or SSI or VA benefits for
most or all of their income simply cannot afford to repay the typical
payday loan in a single monthly balloon payment. A retiree with $25,000
in annual income and typical expenses based on the 2006 Bureau of Labor
Statistics budget for people in the $20,000 to $30,000 per year income
range would have a deficit of $158 after repaying a $325 payday loan at
the end of the month. This income category would apply either to one
recipient who gets about half her income from Social Security and half
from another source or for two recipients who only receive Social
Security. About two-thirds of retirees get half of their income from
Social Security, making this scenario fit the majority of SS
recipients.
$25,000 per Year Income Not Sufficient to Repay Payday Loan 58
------------------------------------------------------------------------
------------------------------------------------------------------------
Income: Monthly income before taxes $2,083
------------------------------------------------------------------------
Household Expenditures per month
------------------------------------------------------------------------
Food 345
------------------------------------------------------------------------
Housing/utilities 896
------------------------------------------------------------------------
Transportation 422
------------------------------------------------------------------------
Healthcare 201
------------------------------------------------------------------------
Total Expenditures: 1,864
------------------------------------------------------------------------
Net Paycheck minus essentials: 219
------------------------------------------------------------------------
Average Payday Loan 325
------------------------------------------------------------------------
Average Payday Loan Payment with Interest 377
------------------------------------------------------------------------
Monthly Deficit if payday loan paid on time $-158
------------------------------------------------------------------------
---------------------------------------------------------------------------
\58\ Analysis by Leslie Parrish, Center for Responsible Lending.
http://www.socialsecurity.gov/policy/docs/chartbooks/fast_facts/2007/
fast_facts07.html and http://www.ssa.gov/policy/docs/quickfacts/
stat_snapshot/and Bureau of Labor Statistics Consumer Expenditure
Survey 2006.
---------------------------------------------------------------------------
Mr. POMEROY. Thank you very much.
I think Dallas, we will take your testimony, and then we
will proceed to vote. Dallas, being a very experienced witness,
knows that the five-minute rule will allow us still time to
hear you out, and get over to vote. Thank you.
STATEMENT OF DALLAS L. SALISBURY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, EMPLOYEE BENEFIT RESEARCH INSTITUTE
Mr. SALISBURY. Chairman Pomeroy, Ranking Member Brady,
Members of the Committee, thank you for having me today.
Since first working on these issues at the Department of
Labor in 1975, I regret that, in spite of dramatic advances in
technology, education, delivery, and financial services, issues
related to financial literacy of our population have grown
greater, rather than declined.
I was asked today specifically to speak to issues of
financial literacy and financial education. People do tend to
make bad choices with their money. One of the questions asked--
and, as you well know, an entire field of psychology, and
otherwise termed ``behavioral finance'' has developed in recent
years to answer the question. What, consistently, that work
says in its simplest form is that people prefer immediate gain,
they prefer immediate gratification, they focus most readily on
the short-term, and are highly subject to messages and the way
they are framed.
Individuals, in short, prefer to be sold, and to be given
the easy route. When these factors are taken into consideration
against the substantial documentation of low financial literacy
among all age groups, it makes bad decision-making, and people
being taken advantage of, quite understandably.
Thus, individuals become victims of predatory lending,
choose to pay high check-cashing or lending fees that they may
not understand, or make bad choices when they have choices, in
terms of financial management. Advances such as EFT-99, seeking
to solve the problem called ``the unbanked,'' of which there
are still another 40 million in this country, end up creating
secondary difficulties, the subject of this hearing today.
I also was asked to provide an overall assessment of
financial literacy in our nation today. It's been well
documented that financial literacy in the population is very
low. This is especially true and is true across all
demographics, even though we do find higher rates as education
and income increases.
As a result of the termination, interestingly, of home
economics classes in our schools in the 1970s, far fewer
individuals receive financial literacy education in our nation
than they did in the 1950s, 1960s, and 1970s. Our surveys
indicate that, while 80 percent of high school students are
offered the opportunity for financial literacy education, only
8 percent choose to take it.
It is this absence of financial literacy education at the
earliest ages that used to be provided on a mandatory and
common basis that likely underlines why the JumpStart
Coalition's 31-question survey of youth financial literacy
revealed lower literacy among seniors high school last year
than in the prior 5 years. There is a lot of learning, if you
will, that needs to be done.
Other surveys find that an amazing low percentage of the
population actually understands the concept of compound
interest. That's the positive kind, when you're earning it.
Even fewer understand it when it is applied to such things as
credit card debt or interest on fees.
The financial literacy of seniors, including what we know
about how they make decisions is also not encouraging. A recent
survey by AARP found that among those 50 and over, Americans
are befuddled by financial jargon, confusion results in doubts,
missteps, and lost opportunities, and Americans believe the
financial services industry does a poor job of communicating.
Everyone here, I'm sure, in a recent prescription has
received the lengthy document that describes all of the
pharmacology. I was amazed in that AARP survey that 96 percent
of the population said they found that easier to understand
than the mutual fund prospectus they were shown.
The AARP bulletin also recently commissioned a nationwide
poll to examine financial literacy on consumer subjects for
those above 50. Fifty percent of poll respondents failed the
financial literacy quiz, meaning they could not get at least
half the questions right. My testimony goes into many of those
findings.
The Employee Benefit Research Institute that I helped found
in 1978 has now done 18 successive retirement confidence
surveys, which include special surveys of those over age 65.
Those surveys underline that individuals have relatively low
understanding of many of the topics important to them.
Ironically, they have very high confidence in Social Security
and Medicare, in spite of some of the fiscal challenges faced.
The important protection Social Security provides
beneficiaries, such as my mother, who next month will turn 92
and, Congressman Brady, is one of those that relies exclusively
on Social Security for income, these are especially important
issues.
In conclusion, there are many partnerships out there, many
activities out there, that are seeking to educate seniors. The
Federal Government has been central to many of them. There is
much more that could be done. The data on financial literacy
across the population underlines its necessity. Thank you very
much for having me.
[The prepared statement of Mr. Salisbury follows:]
Prepared Statement of Dallas L. Salisbury, President and Chief
Executive Officer, Employee Benefit Research Institute
Chairman McNulty, and Members of the Subcommittee on Social
Security of the Committee on Ways and Means, I thank you for the
opportunity to provide testimony on this important topic. Since first
working on related issues at the U.S Department of Labor in 1975, I
regret that in spite of dramatic advances in technology, education
delivery, and financial services, issues related to the financial
literacy of our population have grown greater, not declined. I am
pleased to comment on the specific questions sent to me by the
Committee.
Why do people make bad choices when it comes to their
money?
An entire field of psychology and behavioral finance has developed
in an effort to answer this question (see http://en.wikipedia.org/wiki/
Behavioral--finance). Put it its simplest form, people prefer immediate
gain and gratification, focus most readily on the short term, and are
highly subject to messages and the way they are framed. Individuals
prefer to be ``sold.''
When these factors are taken into consideration against the
substantial documentation of low financial literacy among all age
groups, it makes bad decision-making understandable.
Thus, individuals become victims of predatory lending practices,
choose to pay high check cashing or lending fees when they have other
choices, or make bad choices when they have choices in terms of
financial management. They frequently make choices from among what they
think they know or are presented with, rather than undertaking a search
on their own. Behavioral research also finds that they prefer making
choices from a narrow set of options, as opposed to a wider set.
Many individuals at lower income levels may not have a choice in
cases where they have little or no income and/or face emergencies.
These individuals face desperation and make choices that allow them to
survive today, regardless of the longer-term consequences.
Your overall assessment of the financial literacy of
our nation and whether there are significant variations between
certain demographic groups.
It has been well-documented that financial literacy in the
population is quite low. This is essentially true across all
demographics, even though we do find higher rates as education and
income increase. As a result of the termination of most ``home
economics'' courses in our public schools, we provide a lower rate of
mandatory financial education today than in the 1970s and earlier.
Nearly 80% of our young are offered elective opportunities for
financial education, but our surveys indicate that fewer than 8% choose
to take the courses.
The 31-question Jump$tart Coalition's biennial survey of youth
financial literacy
survey revealed that high school seniors have a lot to learn about
important financial concepts. Among the findings in the survey:
Forty-eight percent correctly said that a credit card
holder who only pays the minimum amount on monthly card
balances will pay more in annual finance charges than a card
holder who pays their balance in full.
Seventeen percent correctly answered that stocks are
likely to yield higher returns than savings bonds, savings
accounts and checking accounts over the next 18 years, even
though there has never been an 18-year period where this wasn't
true.
Forty percent correctly answered that they could lose
their health insurance if their parents become unemployed.
Thirty-six percent think a house financed with a
fixed-rate mortgage is a good hedge against a sudden increase
in inflation, compared with 45 percent in 2006.
An amazingly low percentage of the total population actually
understands the concept of ``compound interest,'' and this includes not
understanding it when it applies to the interest you will have to pay
on a loan or your credit card.
The financial literacy of ``seniors,'' including what
we know about how they make their decisions, is also not
encouraging.
A recent survey by AARP found among those over 50 that:
Americans are befuddled by financial jargon.
Confusion results in doubt, missteps and lost
opportunities.
Americans believe the financial services industry
does a poor job of communicating.
The AARP Bulletin recently commissioned a nationwide poll to
explore financial literacy on important consumer subjects among people
ages 40 and older. Fifty percent of the poll respondents ``failed'' the
financial literacy quiz, meaning they could not get at least half the
questions right.
Additional findings include the following:
Medicare coverage. Less than one-third (31%) of the
respondents correctly identified all of the items that Medicare
does not cover.
Car buying regrets. Nearly two-thirds (63%) of the
respondents incorrectly stated that federal law allows one to
cancel a car purchase within three days if it was bought at a
car dealership.
Bankruptcy. Roughly one-third (32%) of the poll
respondents correctly reported that bankruptcy is growing
faster amongst Americans age 65 and older than any other age
group.
Social Security benefits. Only 32% of the respondents
correctly reported that a person of full retirement age or
older may keep 100% of his Social Security benefits even if he
is currently employed, regardless of how much he earns at his
current job.
The Retirement Confidence Survey' includes results for
the population over age 65. Over the 18 years that this survey has
collected data, confidence in having enough money to live comfortable
throughout retirement has changed very little overall. Confidence in
Medicare and Social Security continuing to provide benefits of equal
value in the future has risen. Savings among those over 65 have
remained well below the value of Social Security benefits for the vast
majority, with declines in recent years. Forty-four percent reported
this year that they are more concerned about their financial future
than before they retired. While these measures do not speak to
financial literacy per se, they do speak to the reliance seniors place
on continuation of public programs at current levels. This also
suggests the education challenges facing the public sector in the
future.
Any information you can provide about what efforts
are being tried in both the public and private sector and what
works.
Numerous campaigns are underway that specifically relate to our
nation's seniors, with resources at web sites such as these:
Sec. Financial Literacy Public-Private Partnership (FLPPP) http:/
/www.dfi.wa.gov/flppp/seniors.htm
Sec. Financial Literacy for Older Adults http://www.albany.edu/
aging/fl/resources/pres-financialliteracy.pdf
Sec. Seniors Protecting Themselves from Securities Fraud http://
www.asc.state.al.us/InvestorED/-3-04SeniorsTakeControlPortrait.pdf
Overall, research finds that individuals seek the path of least
resistance, and respond to sales efforts. As a result, many people
become victims of predatory lending practices, choose to pay high check
cashing or lending fees when they have other choices, and make bad
choices when they have choices in terms of financial management.
For many, the 2007 National Risk Behavior Study found that fraud
was most common when individuals:
1. Rely on friends, family and co-workers for advice.
2. Are open to `new' investment information and attending free
seminars.
3. Fail to check on the background of the person doing the
selling.
4. Are unable to spot persuasion tactics used by con men and
women.
One program that I have been involved with as a member of the Board
of the FINRA Investor Education Foundation provides information at
www.SaveAnd Invest.org
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Working with the SEC, the State of Washington, and the AARP, a
pilot investor protection campaign for older investors has just been
completed. This work has found that Direct education on fraud risk
behaviors, social influence tactics and prevention strategies--such as
asking questions and checking registration status of the professional
and the investment--can reduce investment fraud susceptibility.
Sec. Interviews of con-artist criminals reveal that they do not
like to be questioned.
Sec. Call center research found that providing fraud targets with
questions they could ask produced the largest reduction in
victimization rates.
Sec. Older investors who received a workshop on outsmarting
investment fraud and influence tactics were 50% less likely to ``open
the door'' to a fraudulent investment pitch by accepting additional
communications.
Conclusion
The nation needs to continue to focus on increasing financial
knowledge, providing meaningful consumer protections, and finding ways
to protect vulnerable populations from fraud. Many good programs exist,
but the absence of requirements for financial education in public
schools underlines that the nation is missing opportunities--if
financial literacy is an objective--even when it has ``captive''
populations.
As the FINRA coalition research found in 2007, high income and
extensive education do not alone protect seniors from fraud. These are
issues for the entire U.S. population.
Dallas Salisbury is president & CEO of the nonpartisan Employee
Benefit Research Institute (EBRI) and chairman of American Savings
Education Council. EBRI does not take policy positions and does not
lobby. www.ebri.org
Mr. POMEROY. Thank you very much, Mr. Salisbury, and panel.
It is a single vote. We will be asked to register how we feel
about adjournment. We will get our daily stroll and come back
and begin immediately with questions. Thank you.
[Recess.]
Mr. POMEROY. All right, we will resume. I apologize for
those interruptions, and I think we're okay for a little while.
The--I will begin my questions, and that way we will try
and expedite this. I think part of the--we want to make certain
we have plenty of time for the second panel to fully evaluate
what has not happened by way of regulatory response to this
issue.
In beginning my own questions, I would submit for the
record three articles that appeared in the Wall Street Journal:
the first one dated April 28, 2007, detailing the business of
debt collection in these accounts; another article, April 28,
2007, regarding bank use of set-off against Social Security
accounts; and an article from February 12, 2008, involving the
linkage between these accounts and the payday lenders, as has
been described in testimony.
Is there objection to having these in the record?
[No response.]
Mr. POMEROY. Without objection, so ordered.
[The articles are not provided.]
Mr. POMEROY. What I am trying to understand is basically
the dimensions of this as a rising problem, and broad
concurrence that it's a problem, it's inappropriate, and that
something ought to be done.
So, in that regard, start with Ms. Saunders, who has done
extensive work, written extensively, on this topic. The Wall
Street Journal article describes practices of, basically, in
this automated age, debt collectors buying large volumes of
uncollected debt, and just routinely, fairly electronically,
sending out garnishments to the extent that individuals and
banks can be identified, and that this has substantially
expanded the reach of this kind of attachment process on bank
accounts, including exempt funds. Would you care to elaborate?
Ms. SAUNDERS. Yes. Mr. Pomeroy, the problem--the reason
this has suddenly become such a big problem is because the
amount of bad debt that is being collected has exploded in the
last few years.
First of all, credit card companies largely have been
making credit to people--making credit available to many people
who cannot afford to repay it, with the expectation that,
despite the fact that they can't afford to repay it, they will
try for many, many months or years. Much of this credit is made
available to Social Security recipients, whose sole income is
exempt from the reach of creditors.
When the credit becomes unpayable, and the bank itself
writes it off, it generally sells the debts, these debts, to
debt buyers for pennies on the dollar. So, if the debt is for
$500, they might sell the debt to a particular debt buyer for
$25 or $50. The debt buyer figures anything that it gets from
the consumer, the recipient, is then gravy.
Once the consumer pays even $10 on that debt, it reignites
the validity of the debt, for purposes of the statute of
limitations, and the debt buyers are quite vigilant in trying
to get any money out of these borrowers, out of these
consumers.
That is, we think, the main reason--or one of the main
reasons--that this problem has exploded. We have seen--I have
never seen anything like it, the number of complaints coming
from legal services office to the National Consumer Law Center,
``What do we do with this problem?'' ``How can we help?'' It's
just exploded, as I explained.
Mr. POMEROY. Mr. O'Carroll, is there any question as to the
status of Social Security funds as an exempt asset of the asset
holder?
Mr. O'CARROLL. No, Mr. Pomeroy. They are exempt. There is
no misunderstanding about it.
What we have found kind of interesting is, with the
different types of banks, when we're taking a look at SSA funds
going into accounts, we're finding the smaller, local type of
bank usually knows who its customers are, its client base, and
they very rarely are touching Social Security funds. They're
being left untouched.
We are finding also it is kind of unusual that the bigger
banks, which have a very good financing and auditing track
record, are able to identify the Social Security funds, and in
many cases, aren't touching them. What we're seeing now is the
explosion of mid-sized banks, which are, in many cases,
acquiring other banks' new accounting systems, they're not able
to identify them, and they're the ones that are attaching these
Social Security accounts.
Mr. POMEROY. Is there an electronic way these banks can
fairly easily identify exempt from non-exempt assets in a co-
mingled account?
Mr. O'CARROLL. We are finding with the Social Security
ones, which are the only ones I can speak to, yes. I have heard
in other cases, with other types of government accounts, that
they have trouble identifying. In the Social Security one,
we're being told that they can identify it.
Mr. POMEROY. So, upon receipt of a garnishment order, they
would basically be able, through just entirely electronic
means, to know which funds were basically exempt from that
garnishment order and which funds weren't?
Mr. O'CARROLL. Well, to tell you the truth on that one, we
have been asked by Senate Finance to take a look at
garnishment, and we're in the process of doing that right now.
So, rather than go on record on which ones they are and which
they aren't, I will probably have to defer that for about
another week, until that report comes out.
Mr. POMEROY. As to the question of the status of this
exemption, is there a dispute among the relevant agencies, to
your knowledge, as to the status of this--these assets, as
exempt?
Mr. O'CARROLL. I will tell you I will have to answer that.
I will double-check on that one, because as it stands now, I
think we have been only looking in terms of the SSA benefits,
and we haven't been talking to any of the other agencies to
determine what their issues are. If we have, I will let you
know.
Mr. POMEROY. All right. Are these relationships with
check--where a deposit is made in a bank, and the only access
to those funds are through a check-cashing, a related check-
cashing entity, is that legal?
Mr. O'CARROLL. It gets into a gray area, Congressman. What
we're finding is that in most cases, the beneficiary is
allowing that check casher to be a co-sponsor on the account.
So, the beneficiary is giving the check casher permission to do
it. So, in those cases, it's not illegal. Giving another person
the availability of sharing your account with you isn't
illegal. It's sort of a gray area.
Mr. POMEROY. A gray area, although the marketplace
practice, you note, is 96 percent of the individuals, the
Social Security recipients doing this, have some kind of
disability, and more than half of them have a mental
impairment?
Mr. O'CARROLL. Yes, Mr. Pomeroy, that is one of the
problems with the client base of SSI, is that it's going to be
very high, in terms of mental disorders and issues like that.
So, you're right, you're wondering----
Mr. POMEROY. Is it your conclusion then, that it's
questionable legality, but there is no question about the
marketplace focus, and that is on the most vulnerable impaired
recipients of Social Security dollars, because in a straight-up
proposition, people would not choose to enter such a very
costly arrangement for getting their Social Security check
cashed?
Mr. O'CARROLL. Yes, Mr. Pomeroy. That is the case. In most
of these cases, it is sort of a check casher of last resort.
Mr. POMEROY. Finally, an issue that I worked on with Mr.
Salisbury for some time, financial literacy, it is pathetic
that, in the days of expanded credit and defined contribution
retirement savings plans, which heap the responsibility on the
individual, and all of the other complexities of 21st century
finance, that what we offer in schools on a universal basis is
a pale remnant of what was offered in the 1970s.
I mean, this is a case where we have taken dramatic steps
backward in the face of much greater need for it than ever
before. We better get with that. It is----
Mr. SALISBURY. I think that is very true, and other
Committees of Congress are dealing with that. It should be a
very, very high priority.
One thing in the Social Security area that is specific to
this issue would be just to underline the critical nature of
the Social Security benefit statement that goes to every
individual over the age of 25 shortly before their birthday.
That type of a communication can also be used very effectively
to educate individuals to concerns they should be aware of,
relative to Social Security. It does not, obviously, deal with
the high rate of mental disability of many of the people that
get it. The education need is huge.
Mr. POMEROY. Thank you. With Committee members here, I
won't take any more time with my own line of inquiry. Mr.
Brady?
Mr. BRADY. Thank you, Mr. Chairman. Like you, I want to
thank the panelists. Every one of you brought a unique
perspective to today's hearing, and I really appreciate it.
Mr. O'Carroll, for the hearing record, your report says in
most cases it appeared the Social Security Administration did
not know SSI payments were being sent directly to non-bank
financial service providers. Is that the case?
Mr. O'CARROLL. Yes, Mr. Brady. All they're really going on
is a routing number. So, they don't know who the account is
titled to.
Mr. BRADY. Okay. A number of the practices you refer to in
your report are already prohibited by Federal and state law.
Will you refer violations of these laws to the proper
enforcement agency?
Mr. O'CARROLL. Well, Mr. Brady, from our study in this case
what we're finding is the only thing that is really illegal is
when you start to re-enroll somebody.
So, in other words, let's say somebody enters into an
agreement with you, you go into the joint account, and then
that individual realizes that the account is being charged, or
whatever, has a complaint, and then contacts Treasury and lets
Treasury or SSA know that they want their account changed to a
different account holder.
Then, if the loan agency, then changes that back, that
would be illegal. That was mentioned in the Wall Street Journal
article. We've got to tell you that's very rare. In fact, in
that one instance, as soon as SSA found out about it, they
changed it back to the beneficiary's address.
So, I've got to tell you, if it does become illegal, yes,
we will, act on it, and refer it, but there is a lot of a gray
area here, up to and including the types of interest that are
charged for short periods of time, and everything else.
Mr. BRADY. So, it--in those cases that you described, once
they are aware of it, and they continue the practice, in
effect, it's illegal.
Mr. O'CARROLL. Yes.
Mr. BRADY. The basic question, are our current state and
Federal laws sufficient to protect beneficiaries against these
practices, your answer would be? Sounds like no.
Mr. O'CARROLL. I agree. At this point now, we are able to,
enforce the re-enrolling of an account, and then there are
other types of violations.
Because we are finding when the individuals themselves are
authorizing the other person to be a payee with them, that's
not illegal.
Mr. BRADY. Okay. So, at this point it's not an enforcement
issue. Is that correct?
Mr. O'CARROLL. Correct.
Mr. BRADY. It is we do not have the protections in place in
law, state or Federal, to protect these seniors.
Mr. O'CARROLL. Yes.
Mr. BRADY. Great. Thank you. I yield back, Mr. Pomeroy.
Mr. POMEROY. Mr. Levin.
Mr. LEVIN. Thank you, and welcome. Let me try, if I might,
to help get to the heart of this. Clearly, there are some
entities that abuse, and others that don't.
Number one, is there any doubt that there is Federal
jurisdiction over, for example, garnishment practices? They are
now, basically, in most cases under state law. Is there any
doubt that we have the power regarding these payments to
regulate the garnishment? Is there any doubt, legally,
Constitutionally?
Ms. SAUNDERS. Mr. Levin, in my mind, there is no doubt.
There is apparently considerable doubt among the agencies. So,
that is probably a question you need to ask them.
State law does unequivocally govern the method of attaching
a debtor's goods and money, and it also covers how that money
should be released, but----
Mr. LEVIN. I understand that. These are Federal funds.
Ms. SAUNDERS. In our opinion, as I have articulated in our
testimony, we think there is no doubt that, when there is a
dispute between Federal law and state law, the Federal law
trumps. It would be an inappropriate interpretation of state
law to say that because state law does not specify a mechanism
to ensure that Federal benefits which are exempt are protected,
that that state law then makes those benefits unexempt.
So, it's clear in the minds of the legal scholars at the
National Consumer Law Center, and a lot of law professors as
well, that the Federal law does clearly trump any inconsistent
state law.
The question is, how do we enforce that? We have proposed a
number of different ways, and I hope in the next panel you will
hear that some of those means might be accomplished in the near
future.
Mr. LEVIN. Quickly----
Ms. SAUNDERS. May I----
Mr. LEVIN. Yes, go ahead.
Ms. SAUNDERS. Mr. Brady asked the question of whether or
not the current master/sub-account arrangements were illegal,
and I would like to address that, if that's all right.
Mr. LEVIN. Go ahead.
Ms. SAUNDERS. When EFT-99 was passed in 1996, Congress very
specifically required Treasury to issue regulations to protect
recipients of Federal benefits who were--had to obtain bank
accounts to receive benefits electronically.
Treasury was well aware 10 years ago of the potential for
these problems. In fact, it issued an advanced notice of public
rule-making, asking the question exactly about which you all
are puzzled today, which is, ``Should Treasury issue a
regulation prohibiting relationships between banks and non-bank
financial services providers?''
Jean Ann Fox and I worked very, very hard to convince
Treasury that the answer is an unequivocal yes, and we filed
extensive comments, again, on behalf of dozens of state and
local legal services providers, showing exactly what language
Treasury could implement in their regulations that would have
prohibited--and still would prohibit--these kinds of problems.
They could still do that today, and that would be the end
of the problem for Social Security and Veterans, and other
Federal benefits.
Mr. LEVIN. That relates, really, to the second question I
was going to ask. I don't see how anybody can claim that we
don't have jurisdiction relating to garnishments, when they're
Federal-sourced funds. I don't understand the argument.
Quickly, in the time I have left--and it relates to what
you said, Ms. Saunders--quickly tell us what you think should
be done in addition to the garnishment issue. What should the
Federal Government be doing now? Just quickly.
I mean, literacy education well and good, but Mr.
Salisbury, I don't think you're here to say the basic answer is
to blame the consumer, right? You're not saying that. Okay. So,
I will start with you, Mr. Salisbury. What should be done?
Mr. SALISBURY. In this particular case, I think clarity
should be provided, vis-a-vis the types of regulations that
were just mentioned, where the congress--the government has the
ability to stop the practice, as a first item.
I think the second thing for the congress to consider is
with major efforts now underway to extend required bank
accounts and electronic funds transferred to the 40 million
unbanked, that many of the issues you're facing here on this
topic are going to extend to a much broader segment of the
population, as the equivalent of EFT-99 becomes generalized.
Mr. LEVIN. Ms. Fox? Quickly. The red light is on.
Ms. FOX. Mr. Levin, we think there are several solutions
that you all could back. One is to urge the Social Security
Administration to follow through on the docket in which they
asked for comments recently to stop the use of master/sub-
accounts to funnel exempt funds through a daisy chain of banks
and financial service providers, stripping out Federal money as
it goes, before it gets to the recipient. We think that could
be stopped.
Treasury could go back and finish the job under EFT-99, and
stop the use of financial intermediaries to provide access to
banks.
Congress could enact H.R. 2871, the Payday Loan Reform Act
that Representatives Gutierrez and Udall have introduced. That
would stop lending secured by post-dated checks, or required
electronic access to the bank account. Those are the
protections that Congress has already given to active duty
military and their families. They put payday loans off limits
for that group of customers. You could do the same thing for
exempt Federal recipients.
Also, we can promote Treasury's new direct debit card,
which is a pretty good product. It's being offered to unbanked
Social Security recipients. It will be rolled out across the
country by the end of the summer. You can use that card for
free. You're protected by Federal Deposit Insurance coverage,
you're protected by the Electronic Fund Transfer Act. You can't
overdraw it. You can't use it as a credit instrument. That will
help bring in folks who don't have access to a regular bank
account to have the safety of direct deposit without all of the
risks that go with these extra products.
Mr. LEVIN. My time is up. Maybe somebody else will let--you
have already, Ms. Saunders, given a partial answer. I am not
sure, Mr. O'Carroll, that you would want to at this point. Ms.
Smith, maybe someone else will give you a chance to answer
that. Thank you.
Mr. POMEROY. Thank you. Mr. Lewis of Kentucky.
Mr. LEWIS. Thank you, Mr. Chairman. Mr. O'Carroll, the
financial institutions, the banks, the--and the others who
receive these Social Security payments, they're all aware that
they cannot freeze the Social Security bank account. Aren't
they aware of that, that it's exempt, it's illegal for them to
do that?
Mr. O'CARROLL. Yes, Mr. Lewis. They are aware of it. Again,
as I said, we are still in the midst of doing our work taking a
look at the largest banks and what their policies and
procedures are on garnishment. We're going to have that report
out by the end of the week.
Yes, we are finding that they are aware of it. Where you
run into different issues is the intermingling of funds. That
is where, probably, the biggest thing with the banks is if
there are other funds in an account, other than, as an example,
the SSA check.
Mr. LEWIS. If there is some confusion, cannot the Social
Security Administration make it pretty clear to these financial
institutions that they cannot use a Social Security recipient's
funds for garnishment payments, period? If they do, that's an
illegal act? It's an illegal act against the Federal
Government?
So, it seems to me like a few enforcements to these
particular institutions that would break this Federal law of
exemption would probably set a good example for the rest of
them not to go down that road. Is that not fair?
Mr. O'CARROLL. Yes. Well, our feeling on it is yes, Social
Security should be doing more, in terms of educating the
financial institutions, letting them know more about it. Public
information on it, all of that is very good.
The other one, which was discussed earlier, is that they
should be working with Treasury Department, and having Treasury
Department informing the institutions also on it, to remind----
Mr. LEWIS. Right.
Mr. O'CARROLL.--them of this issue. You have to remember,
the law that we're talking about, the assignment and
garnishment, is a 1935 law.
Mr. LEWIS. Yes.
Mr. O'CARROLL. Technology sure has changed a lot in the
last 70 years.
Mr. LEWIS. Sure.
Mr. O'CARROLL. So, I think something to clarify that would
help, too.
Mr. LEWIS. Well, and I think it's not--you know, I don't
think we need more legislation. I think what we need from the
Agency is to make it perfectly clear to these financial
institutions what their requirements are. If they don't live up
to those requirements, then the enforcement should come along
and--again, I think a few put on the spot and reprimanded and
whatever, fined or whatever to make an example of them, would
probably start to make the others think about what they're
doing.
Mr. O'CARROLL. Yes, Sir.
Mr. LEWIS. Thank you.
Mr. POMEROY. Ms. Tubbs-Jones.
Ms. TUBBS-JONES. Thank you, Mr. Chairman. Good morning. I
want to jump all over the place, only because I only have five
or seven minutes.
First of all, I am a firm believer that financial literacy
is an important thing for all of us. The reason I think about
it is I am looking at USA Today, and yesterday it says how a
cup of coffee can set you back an extra $34. I have copies of
this for the Members of the Committee, if you want to pass them
down for me.
[The article is not provided]
An ATM card you have, and the bank allows you to make a $3
purchase of a cup of coffee, and if you don't have the money,
they charge you $34 on the piece. So it's not--it's at every
level that we have to figure out what we're going to do to
protect not only those who aren't traditionally in a banking
relationship, but all of us who are in a banking relationship.
The process--I should say for the record, since I am a
former judge, there was another editorial on the same page that
said fees are a deterrent, but that's not my piece this
morning, so I'm going to leave that one. You're welcome to go
read that one if you choose.
I have a question--I lost my place--for you, Mr. O'Carroll.
I am not a proponent of predatory lending, but I recognize that
in many inner city communities, the fee cashing services in
those communities were the only place that folks who live there
have to go, because financial institutions, in fact, deserted
many of the inner city communities across the board.
In your report you seem to lump into one category check
cashing facilities and payday lending facilities. Also in your
report, I note that in a footnote you say that, ``The SSA IG
did not confirm whether payday loans were among the financial
services offered by the non-bank FSPs.'' Are they or aren't
they?
Mr. O'CARROLL. We didn't interview the actual
beneficiaries, which is what that footnote is reflecting. We
didn't ask them, ``Did you sign up with this institution for a
payday loan?''
However, what we did do is we identified two of these
financial service providers, went to them and interviewed them,
and found out from them that, yes, they do payday loans, and
yes, that in many cases it is the beneficiaries that they are
taking the loans from.
In another case on sort of the global----
Ms. TUBBS-JONES. The beneficiaries that they're taking
their loans from, or----
Mr. O'CARROLL. No, this is the loan company.
Ms. TUBBS-JONES.--that they're lending to?
Mr. O'CARROLL. The lenders are saying that they do payday
loans----
Ms. TUBBS-JONES. Okay.
Mr. O'CARROLL.--to SSI recipients.
Ms. TUBBS-JONES. There is--I mean--go ahead, let me let you
answer.
Mr. O'CARROLL. Okay. Then the other part of it, on the
global part, when we started looking at banks, we did a survey
of five banks on this. One of the banks said that the vast
majority of their clients, or the vast majority of one of their
clients were for loans. So, that's why we also were of the
belief that payday loans are a major factor in this.
Ms. TUBBS-JONES. Okay. Again, having been a judge, I wish
we had had an opportunity to bring the institutions, and sit
them before us, and let them plead their case, one way or the
other, whether they're doing or not engaging in this process.
But I did get a note from some of the folks I know in the
payday lending institution that says that they do not use
master/sub-account arrangements to receive Social Security
benefits as security for a loan in conducting their payday
lending business. In fact, they say that state law prohibits
this practice, and restricts the acceptable collateral for a
payday advance to a personal check.
It also says the state laws also require repayment of a
loan by cash, personal check, or ACH authorization, not by a
third-party check.
We are struggling out here, trying to protect our Social
Security beneficiaries, and protect all of us. When somebody is
liable for some conduct, we ought to point it to them. When
they're not, we should not throw everything up against the wall
and let mud splash on the institution.
But I have done that, and--Ms. Fox seems to want to say
something, so come on, girlfriend, tell me what you want to
say.
Ms. FOX. I shed a little light on the mix of products here.
The master-sub-account arrangements are offered through
financial outlets that also do payday lending, they do check
cashing, they sell money orders, they do all kinds of financial
services.
Recipients who are getting their Social Security check
delivered through a master/sub-account are most likely
unbanked. That means they are not eligible to get a payday
loan. The banks and the intermediaries that are delivering
Social Security SSI checks that way have credit products of
their own that function like a payday loan. It's a cash
advance, it's a high fee that you----
Ms. TUBBS-JONES. I understand. So, it's not solely payday
lenders who have these type of predatory agreements, if we want
to call them that, it's financial institutions as well that
also have it.
Ms. FOX. Right.
Ms. TUBBS-JONES. That's what I'm talking about. It seems
like, today we want to--I have a 24-year-old son that sometimes
I want to use his terminology, because it works so much better.
Today we're dissing one group, next week we'll be dissing
another group, trying to throw them all together and not trying
to reach the final accomplishment that we want.
The basis of all of what I am saying to you is my goal is
not to be a spokesperson for payday lenders, financial
institutions, but be a spokesperson for the Social Security
recipients, and the people who don't have a voice.
Ms. FOX. Yes.
Ms. TUBBS-JONES. So, to all of you, come up with something
and recommend to us some policy that will allow us to do that,
and won't have a place where people can kind of glide and slide
by their responsibility.
I don't have any time to yield back, but I'm done, Mr.
Chairman.
Mr. POMEROY. Thank you, and I am very pleased Mr. Johnson,
fresh from the airport, is with us. Sam, please proceed.
Mr. JOHNSON. Yes, I didn't see anybody making loans out
there. They didn't give me one.
Mr. Salisbury, we know one of the important ways we can
protect seniors is through education. You noted in your
testimony financial literacy of the population is pretty low.
What specific recommendations would you offer to the Social
Security Administration, or other regulatory bodies and private
enterprises, such as AARP, regarding efforts to provide greater
education to bring about a higher level of financial literacy
in the country?
Mr. SALISBURY. Well, one, as I noted in my testimony, there
are some current multi-party experiments underway, funded by
the FINRA Investor Education Foundation that include AARP, the
State of Washington's education authority, and others, that are
going into senior's facilities and testing extensive education.
I think the second, vis-a-vis the Social Security
Administration per se, they are doing a lot, and have done a
lot in the last few months. They are doing a complete rework of
their website which will be issued soon that will make it far
more user friendly for beneficiaries, and they are coming out
with a number of new tools and calculators that allow
individuals to make better decisions about timing of Social
Security. So, I think they are taking steps.
I mentioned the Social Security statement, which goes to
active workers. That could be used even more effectively--more
changes have been made in it--but as an educational tool for
individuals.
Finally, I would note that what is striking about this
particular issue in the testimony of the inspector general is
that this particular vulnerable population is 98 percent
supplemental security income, and half of them with mental
disability issues. Quite clearly, that is a population where
financial literacy education cannot solve the problem, and it
underlines why it's so important for the Committee to be
dealing with this.
But I think, as an overall issue, there is much Social
Security is doing, more they can do, and much that is being
tested in the private sector with coalition efforts like that
undertaken and mentioned in my testimony.
Mr. JOHNSON. Thank you. You know, for all of you, rather
than relying on Federal regulators to agree on how Section 207
of the Social Security Act should be implemented, do any of you
think that Congress needs to pass amendments to help the
agencies, the various agencies, help the people?
Or is it okay out there if people just adhere to common
sense, really? Anybody. Ms. Saunders?
Ms. SAUNDERS. I think--we think the law is clear, that it's
up to the agencies to implement it.
Mr. JOHNSON. Which agency?
Ms. SAUNDERS. The Treasury, the Federal banking regulators,
and the Social Security Administration, and the other payment--
--
Mr. JOHNSON. We keep adding stuff to Social Security, and
they don't have the finances nor the people to keep adding
things on. I just told him that, and you know, we see it every
day. I know Mr. O'Carroll does, too.
But, perhaps you're right about the banking industry. Maybe
they've been a little lax.
Anybody else want to comment on that?
[No response.]
Mr. JOHNSON. Okay. You guys are backing off of the subject
here. Can't believe it.
How about Mr. Salisbury, returning to the issue of
financial education, is there any campaign or initiative that
you know of that would help, or any existing model that you
might recommend?
Mr. SALISBURY. Well, on the floor today I believe you will
be taking action, or proposing action, on National Save for
Retirement Week. Those types of efforts add broad-based public
education, encouraging employees to undertake education----
Mr. JOHNSON. Yes, that National Save for Retirement, I'm a
cosponsor of that.
Mr. SALISBURY [continuing]. Are important issues.
Mr. JOHNSON. People just don't want to save. You know, they
get down to the end of the line and there is not enough money
there.
Mr. SALISBURY. Well, I describe it in our Choose to Save
program as the equivalent of water drip torture is, as the
topic of this hearing underlines, and as some of the earlier
testimony, is the ability for one to get credit cards and to
have them flow into your mailbox, the opportunities to spend
and borrow, we are inundated--and people are inundated--with
those messages.
I think the key--and it's what your legislation on the
floor today would help do--what we try to do with our Choose to
Save program, other government programs, and private
initiatives is the effort to counter-balance some of that
messaging, and as I noted in my testimony, efforts to
essentially get individuals to be very, very critical
consumers, to more readily ask questions.
One which was found in the most recent FINRA work is simply
encouraging individuals, when they are getting advice from
somebody unsolicited, to check out whether or not that person
is properly registered, et cetera. There is much individuals
can do. There is much that the society needs to do.
Mr. JOHNSON. Thank you, Sir. Thank you, Mr. Chairman.
Mr. POMEROY. Thank you, Mr. Johnson. Mr. Davis.
Mr. DAVIS. Thank you, Mr. Chairman. Let me pick up just on
some of the observations that I have heard today from other
Members of the Committee.
I agree with Mr. Levin, that I don't think there is much of
a basis for an argument about the scope of Federal jurisdiction
in this area. I would argue that the congress has already
asserted its jurisdiction by declaring Social Security or SSI
funds exempt from collection proceedings. That has already
happened, and I think it's a fairly well established
proposition that if Congress has a power, it has the lesser
ability to enforce that power. That's the case in all manners
of--areas of the law.
That leads me to a second question. Following up on Ms.
Tubbs-Jones's observations, I don't know if the issue so much
is seniors depositing their Social Security accounts into
payday lending institutes or check cashing institutes, per se.
I think the issue is the fees they tend to charge.
So, question for the panel, if Congress has the authority
to declare off limits the collection of these accounts, and if
Congress has the lesser power to enforce that, the regulations
by the Social Security Administration, does Congress not have
the power to say, in effect, that we will permit Social
Security checks to be deposited into these institutions, but we
will have a particular fee schedule that we approve, and
anybody outside that schedule, we won't allow it to be
deposited into those accounts?
Ms. FOX. When EFT-99 was enacted, Treasury was told to
adopt regulations that would provide equivalent consumer
protections and access to accounts, so that folks who had been
unbanked, and who were becoming banked in order to get direct
deposit, would be protected.
These master/sub-account arrangements do not provide
consumer control over the bank account. I don't think that just
limiting the fees would provide a first class bank account for
a Federal benefit recipient.
Mr. DAVIS. Well, let me ask you, Mr. O'Carroll, do you
dispute that the Social Security Administration would have the
authority to, in effect, set up a scale and say that for these
Federal-sourced monies--SSI, Social Security benefits, because
they're Federally-sourced monies--we're going to set a
schedule, and any fees outside of that, we won't permit it to
be deposited into that account? Is that an authority that you
all have, in your opinion?
Mr. O'CARROLL. Mr. Davis, I would say yes, that they could
give that type of guidance or some guidelines on it.
The one thing we haven't talked about here, which is, I
think, a possible solution, and it goes along to what you were
saying there, is that the Treasury debit card is now coming
out. The debit card has set fees on it, in terms of that. You
get one withdrawal for free. There is a set fee on how much
it's going to be each time you take it out. You can use it for
purchases, you can use it to get cash back.
I think, in a lot of ways, it's a solution to what your
colleague was saying in terms of the last resort type of check
cashers. I think this new debit card, when it comes out, we're
proponents of it, and I think that would be a solution to a lot
of these issues.
Mr. DAVIS. Let me move on to another area, given the time
constraints we have. I'm not sure at all that I understand the
arguments about why the Commingling of funds is somehow an
obstacle to the banks carrying out the law regarding the
exemption of Social Security benefits. I mean, it's not
complicated. I mean, any bank I know of can tell you where the
money in the account comes from.
So, therefore, it's pretty simple. All you have to do is
evaluate what funds came from Social Security accounts, look at
the amount of the garnishment, or the judgment, deduct from it
the value of the Social Security funds, and what's left over
you can seize. If it leaves nothing, it leaves nothing. I don't
understand why there would be any obstacle to that. I can tell
that I think Ms. Fox and Ms. Saunders agree with that.
The final observation that I would make is that I suspect
that most people do not appreciate that the collection process
in virtually every state in this country only has a minimum
level of adversarial nature to it.
As a practical matter, any lawyers of a practice in small
claims court can tell you the overwhelming majority of cases
consists of one side showing up and the other side doesn't show
up. You issue an order, the bank enforces it, the bank tells
you they've enforced it. Then you have an opportunity to go in
to contest it. You know, whether we can possibly devise a
better system or not, I don't know.
But, as a practical matter, it wouldn't matter how much
information the consumer had. You could have 100 percent
education of seniors about their Social Security proceeds being
protected from garnishments, but it wouldn't matter, because,
as a practical matter, all they can do is go in after the fact,
and contest a judgment or a garnishment.
So, given that the collection process in this country is
tilted so overwhelmingly in favor of the creditor, or the
debtor, as opposed to the creditor, the person loaning the
money, instead of vice versa, it would seem to me that this has
to rest on the banks, and it has to rest on the Social Security
Administration, in effect, penalizing banks who allow funds to
be removed.
I mean, a bank, ultimately, is the keeper of your assets.
Most banks advertise that they do a better job than anybody in
the world of protecting your assets. So, if they're going to do
that, by definition certainly they have to enforce the laws
that exist.
Mr. POMEROY. Would the panel respond to the proposition? Do
you think the banks could and should do that? There is a
consensus across the panel
Let me ask you, when the banks are allowing complete
attachment and garnishment on these commingled funds, is it
almost inevitable that a string of fees will attach to the bank
from the Commingling? Does the bank have a compelling financial
interest in not breaking out the exempt funds?
I mean, in other words, have banks found a handsome little
profit in doing business in ways that basically do not protect
the funds, the Social Security funds, of their depositors?
Ms. SAUNDERS. Well, in our opinion, the answer must be yes,
because advocates on a state level have tried to resolve these
problems in state after state. Rather than the response from
the banks being, ``How can we deal with this so that exempt
funds are, in fact, protected,'' the response routinely in many
states has been, ``No, we don't want to have to look. We don't
want to have--it's not our job to protect exempt funds.''
In fact, in one state, in Virginia, the advocates, the
local legal aid attorneys, were successful in changing the law,
and the banks went and got the law changed back. So, our only
assumption can be from that that the banks have a financial
interest in retaining the current system, where exempt funds
are frozen, and fees are taken from those exempt funds.
I have, in the appendices to my testimony, several examples
where hundreds and hundreds of dollars were taken from exempt
funds, as a result of fees for overdraft, for garnishment, for
the administration, for the determination that the bank account
was exempt. All of these types of activities are accompanied by
fees from the banks, and charged as against exempt funds.
In fact, one point that I didn't illustrate in the
testimony is that banks claim in most situations that if there
is a state law limit on how much funds--how much of these--how
much these fees can be, that those state laws are pre-empted,
and that the banks can charge--so long as they're a national
bank or a Federal thrift, they can charge whatever they want.
Mr. POMEROY. All right. Any other comments for this panel?
We will move to the--yes, Ms. Stephanie Tubbs-Jones.
Ms. TUBBS-JONES. I just would seek unanimous consent to
have another article placed in the record. This is a Washington
Post article of Monday, June 23rd, called, ``The Color of
Credit,'' where it talks about the impact that race has, also,
or the fact that racism occurs within the credit community. I
would just like to have it submitted for the record.
Mr. POMEROY. Without objection, so ordered.
Ms. TUBBS-JONES. Thanks.
[The information follows:]
The Color Of Credit
By Charles Steele Jr.
MONDAY, JUNE 23, 2008
The subprime mortgage fiasco is sending tremors through Wall Street
and has brought the U.S. economy near (if not into) recession. For
African Americans and Latinos--the primary victims of the debacle--the
mortgage meltdown may widen the considerable gap in wealth that already
exists between whites and people of color. Even worse, some proposals
to fix the problem of limited access to credit may end up doing more
harm than good.
``We estimate the total loss of wealth for people of color to be
between $164 billion and $213 billion for subprime loans taken during
the past eight years. We believe this represents the greatest loss of
wealth for people of color in modern U.S. history,'' the Boston-based
organization United for a Fair Economy noted in its report
``Foreclosed: State of the Dream 2008.''
To understand how the damage goes far beyond these mortgages, one
has to understand the importance of owning a home. It is the
cornerstone of the American dream. For many, it is also the first step
to creating wealth. As with numerous aspects of American society, there
is a wealth gap in this country: According to the Census Bureau, the
median net worth of a household headed by a white adult in 2004, the
latest year for which data are available, was $118,300, compared with
just $11,800 for black-headed households.
The bureau also reported that three-fourths of white households
owned their homes in 2004, while less than half of black households
owned theirs. A variety of factors, some economic and some based on
racial discrimination, account for that ownership gap.
As a result of laws enacted to address housing discrimination, the
rate of African American homeownership rose from 42.3 percent in 1994
to 49.1 percent in 2004, the highest level in U.S. history. As great an
achievement as that is, a 49.1 percent rate is about where white U.S.
ownership stood in 1900.
Led by former housing and urban development secretary Alphonso
Jackson, the Bush administration made expanding homeownership a top
priority. In fact, some critics say the administration did so while
ignoring signs of an impending crisis in the subprime mortgage market.
Even at the rate African Americans were progressing before the
crisis, noted the United for a Fair Economy report, it would have taken
594 years for black median household net worth to equal that of whites.
Sadly, the declines in the housing market have only made things worse.
Yet some of the proposed reforms relating to credit may ultimately
be counterproductive. For example, the Federal Reserve is accepting
public comment until Aug. 4 on a rule that would prohibit certain fees
in connection with subprime credit card lending. While one might hope
that capping fees for subprime credit products would result in better
credit terms for borrowers, it is more likely that many issuers will
cut back on offerings or simply exit the market.
That's what happened with guaranteed student loans after Congress
engaged in price-fixing last year: The student lending market
evaporated. Justifiably panic-stricken parents, students and education
advocates forced Congress to hastily craft corrective legislation,
which President Bush signed into law last month.
Consider also the Credit Cardholders' Bill of Rights Act (HR 5244),
which would require that many consumers pay--upfront--all fees assessed
during the first year of a new account, before the card is even issued.
Because an ability to pay over time makes such cards affordable for
many consumers, this provision would effectively deny credit to
millions of those whose rights such reforms are meant to protect.
Our government should protect every consumer--regardless of race,
religion or credit score--from fraud and fly-by-night lenders.
Policymakers should also promote a consumer credit market that helps
people whose credit scores are less than stellar to bridge their way
back to prime.
Lack of access to credit for those with low credit scores, or no
credit whatsoever, is an important and growing problem. Credit scores,
traditionally used for mortgages and auto loans, are increasingly used
in determining eligibility for employment, auto insurance, apartment
rentals, utility connections, and opening and maintaining checking
accounts.
Like homeownership, credit is a cornerstone of wealth creation. The
FDIC recently stated that ``it is very difficult to build wealth
without access to credit.'' That's an extreme understatement. It is
almost impossible to build wealth in America without credit.
Dr. Martin Luther King Jr. often said that the cause of economic
justice is the cause of social justice. We must continue to work
together to achieve that timeless goal in lending and, more broadly, in
our nation's economic sector.
Charles Steele Jr. is president and chief executive of the Southern
Christian Leadership Conference.
Mr. POMEROY. Thank you very much. Excellent panel. We move
now to the second panel, the Federal agencies.
Good morning. We will remind the witnesses that your
written statements will be accepted in full. We ask that you
keep your presentation to 5 minutes. We remind the panel that
the green light before you will turn yellow, and then red when
the time is up.
Without further ado, let us start with Ms. LaCanfora,
assistant deputy commissioner of retirement and disability
policy, SSA.
STATEMENT OF MARIANNA LACANFORA, ASSISTANT DEPUTY COMMISSIONER
OF RETIREMENT AND DISABILITY POLICY, SOCIAL SECURITY
ADMINISTRATION
Ms. LACANFORA. Mr. Chairman and Members of the
Subcommittee, on behalf of Commissioner Astrue I thank you for
the opportunity to discuss protecting vulnerable Social
Security beneficiaries from predatory lending and other harmful
practices.
We recognize that Social Security often is an individual's
sole source of income, and we are committed to ensuring that
our beneficiaries have full use of their benefits. As a result,
we are working closely with the Department of Treasury and
support inter-agency action to strengthen protections for our
beneficiaries.
Section 207 of the Social Security Act protects
beneficiaries' payments from assignment, garnishment, and other
legal process. This Subcommittee has raised two specific
situations that implicate Section 207 predatory lending
practices, and third-party garnishment of bank accounts.
I would like to discuss our concerns with predatory lending
practices. Certain lenders circumvent our policies, causing
harm to beneficiaries. Let me explain how this happens.
Treasury rules require that Federal payments issued by
electronic funds transfer be deposited into a bank account only
in the beneficiary's name. However, Treasury made an exception
for individuals with investment accounts. In that situation,
Federal payments may be deposited directly into a master
investment account, and then credited to an individual's sub-
account.
We extended this master/sub-account rule to provide those
beneficiaries without traditional bank accounts convenient
choices for receiving benefits, including direct deposit. When
we extended the policy, we established strict conditions.
First, the master account must be at a regulated financial
institution. Second, there must be a sub-account in the
beneficiary's name, and the master account holder must maintain
individual sub-account records showing all activity. Finally,
the beneficiary must voluntarily agree to the arrangement, and
be able to terminate it. These requirements are intended to
protect beneficiaries and ensure that they, not their
creditors, maintain control of their funds.
In a February 28, 2008 article, the Wall Street Journal
described a situation in which a loan company repeatedly re-
enrolled a Social Security beneficiary in a master/sub-account
arrangement against the beneficiary's will. This egregious
action is a clear violation of our policy. In fact, we stopped
those unauthorized direct deposit re-enrollments before that
article was published.
While there have been only isolated instances of these
types of abuses reported to our employees, we intend to do
everything we can to safeguard the rights of our beneficiaries.
Shortly after the article was published, we notified the public
that we are reconsidering our master/sub-account policy, and we
asked for any comments by June 20th. We requested that public
input to better understand the scope of this practice, so that
our changes are fair and comprehensive. We will carefully
consider all comments we have received.
As we re-evaluate our policy, we will coordinate with
Treasury to ensure that any changes are consistent with their
rules. We will also make sure that beneficiaries are not
discouraged from using direct deposit, which is a safe and
convenient way to receive payment.
Now, let me turn to garnishment. Garnishing Social Security
benefits in a bank account conflicts with Section 207. We
recognize the need to enforce this provision. Oversight of
banks and other financial institutions rests with the banking
regulators, and we are committed to supporting them in their
efforts to enforce Section 207.
Despite Federal law, some State courts will issue orders
garnishing funds in an account containing Social Security
payments, and banks will often take action to comply.
Commissioner Astrue asked OMB to establish a coordinated inter-
agency effort to address these banking practices. Treasury has
stepped forward to coordinate this inter-agency effort to
clarify the rules concerning garnishment of bank accounts that
include Federally-protected benefits.
Treasury is well suited to coordinate this effort by
financial institution regulators and Federal benefit agencies
to clarify garnishment rules because it is both the paying
agent for the government, and the primary regulator of the
Federal electronic payment system. We have discussed
garnishment issues with Treasury staff, and we are working with
them on a solution to this complex issue.
Mr. Chairman, we at Social Security share your concerns
about protecting the financial well being of some of our
nation's most vulnerable beneficiaries. We can only resolve
these problems through a coordinated approach, and we will
continue to work with Treasury and the bank regulators to
protect beneficiaries.
Thank you for holding this important hearing, and I would
be happy to answer any questions.
[The prepared statement of Ms. LaCanfora follows:]
Prepared Statement of Ms. LaCanfora, Assistant Deputy Commissioner of
Retirement and Disability Policy, Social Security Administration
Mr. Chairman and Members of the Subcommittee, thank you for the
opportunity to discuss our concerns about protecting our vulnerable
Social Security beneficiaries from predatory lending and other harmful
financial institution practices. We recognize that, in many instances,
Social Security benefits are an individual's sole source of income and
support, and we are committed to doing all in our power to ensure that
our beneficiaries have full and appropriate use of their benefits. As a
result, we are working closely with the Department of Treasury and
support inter-agency action to strengthen the protections for our
beneficiaries. Section 207 of the Social Security Act protects
beneficiaries' rights to receive Social Security benefits directly and
to use them as they see fit, by prohibiting third parties from
attempting to seize the benefits through assignment, garnishment, and
other legal process. Section 207 of the Act provides that the ``right
of any person to any future payment under this title shall not be
transferable or assignable, at law or in equity, and none of the moneys
paid or payable or rights existing under this title shall be subject to
execution, levy, attachment, garnishment, or other legal process, or to
the operation of any bankruptcy or insolvency law.'' The language of
the statute is very clear; however, Section 207 does not provide us
with any means for enforcement and does not establish any penalties for
its violation. Unfortunately, abusive practices have occurred, to the
detriment of our beneficiaries.
This Committee has raised two specific situations that implicate
section 207--high-fee direct deposit arrangements with payday lenders
and check-cashing businesses and garnishment of beneficiary accounts.
Payday Loans/Assignment
In 1998, Treasury published rules that required that any Federal
payment made by electronic funds transfer be deposited only into a bank
account in the beneficiary's name. There were two exceptions: one was
for payments made to an authorized payment agent (e.g., a Social
Security beneficiary's representative payee); and the second was for an
investment account established through a registered securities broker
or dealer.
Consistent with Treasury's rules, we began to accept master/sub-
account arrangements so that beneficiaries' checks could be deposited
directly into their investment accounts. We expanded the availability
of master/sub-accounts as a convenience to our beneficiaries, most
notably members of religious orders who relied upon these arrangements
to honor their vows of poverty. By accepting these arrangements, we
intended to provide our beneficiaries with choices that were
appropriate and convenient for their situations. These arrangements
permitted individuals who did not have traditional bank accounts or who
chose alternative arrangements to take advantage of all of the benefits
of direct deposit, while still retaining control of their funds.
To prevent these master/sub-account arrangements from becoming
prohibited assignments of benefits, we established strict conditions
for allowing Social Security payments to be deposited into a master
account:
The master account must be at a bank, savings and
loan association, credit union, or thrift institution.
The beneficiary must have a sub-account in his name,
and the master account holder must maintain sub-account records
for each participant. The sub-account records must show all
money received and withdrawn and the balance remaining in each
sub-account. This information must be available to the
participant upon request.
The beneficiary must voluntarily agree to this
arrangement.
The beneficiary must be able to terminate the
arrangement.
These requirements on master/sub-accounts ensure that
beneficiaries--not creditors--maintained control of their funds.
While we expected that this policy would provide sufficient
protection for our beneficiaries, we have learned that some
institutions have undermined this policy. In a February 28, 2008,
article, The Wall Street Journal described a situation in which a loan
company repeatedly enrolled a Social Security beneficiary in a master/
sub-account arrangement against the beneficiary's will. While the
beneficiary had agreed originally to have his checks electronically
deposited into the lender's master account, the beneficiary sought to
cancel that arrangement. Unknown to the beneficiary, the loan company
resubmitted the information, directing that the beneficiary's check be
deposited, once again, in the master account. This egregious action is
obviously a clear violation of our policy.
When we learn about these violations, we cancel the direct deposit
order. In fact, we resolved the issue cited by The Wall Street Journal
article before the article was published. We also issued instructions
for our employees to remind them of the procedures for handling such
beneficiary complaints.
While we know of only isolated instances of these types of abuses
reported to our personnel, we intend to do everything we can to
safeguard the rights of our beneficiaries. Accordingly, on April 21,
2008, 2 months after The Wall Street Journal article was published, we
requested public input on the master/sub-account policy in a notice
published in the Federal Register.
Federal Register Notice
We have allowed master/sub-accounts for more than 10 years and are
concerned that changes to our policy may have unintended consequences
that could disrupt business practices that well serve our
beneficiaries. We want to better understand the scope of this practice
so that our changes will be comprehensive.
In the Federal Register notice, we asked for answers to questions
such as:
Have master/sub-account arrangements disadvantaged
any of our beneficiaries and, if so, in what way?
To what extent will the elimination of the master/
sub-account arrangement in our procedures create significant
costs and burdens on beneficiaries or organizations using this
account arrangement?
Consideration of Changes in Policy on Master/Sub-Accounts
The comment period on the Federal Register notice closed only one
business day ago. Although we need to change our policy, we must
carefully consider all comments before we determine the nature or
extent of the change. We want to ensure that we understand the possible
effects on our beneficiaries.
We also want to make sure that any changes to our policy do not
discourage beneficiaries from using direct deposit. We recognize that
direct deposit provides beneficiaries with a safe and convenient method
of receiving payment, and we fully support its use.
We believe expanded electronic payment service is an attractive
option for payment. Treasury has recently introduced Direct Express,
which makes banking services available at minimum cost to individuals
who may not otherwise have access to traditional bank accounts. Through
Direct Express, beneficiaries have their Social Security payments
credited to a prepaid debit card, and they can access their funds
without fees through services such as cash back with purchases and cash
from bank tellers. The card also provides other services at low fees
negotiated by Treasury. These electronic payment options can help
beneficiaries avoid some of the predatory practices we are discussing
today.
We recognize that there are problems with our current policy, and
we are eager to make the necessary improvements. As we consider policy
changes, we certainly will coordinate with Treasury to ensure that any
changes are consistent with its regulations and that Treasury can
enforce the provisions within the banking community.
Garnishment of Beneficiary Accounts
This Committee has also expressed its interest in examining how
garnishment of Social Security benefits may conflict with benefit
protections in the Social Security Act. As I noted before, Section 207
of the Social Security Act is clear that Social Security benefits may
not be garnished by a creditor other than the United States government.
We recognize the need to enforce this provision. Oversight of banks and
other financial institutions rests with the banking regulators and we
are committed to supporting them in their efforts to enforce Section
207. Despite Federal law, some State courts will issue orders
garnishing funds in an account containing Social Security payments, and
banks will take action to comply.
In order to address these issues, Commissioner Astrue asked OMB to
establish a coordinated interagency effort to address these banking
practices. He pointed out that the garnishment issue is complex, due in
part to the interplay between Federal and State laws. Because a number
of Federal agencies have responsibility in this area, we proposed this
interagency approach.
Treasury has stepped forward to coordinate an interagency effort to
clarify the rules concerning garnishment of bank accounts that include
federally protected benefits. Treasury is well suited to coordinate an
effort by financial institution regulators and federal benefit agencies
to clarify garnishment rules because it is both the paying agent for
the Government and the primary regulator of the Federal electronic
payment system. We have discussed garnishment issues with Treasury
staff and we are working with them on a solution to these complex
issues. In developing a solution to protect Social Security
beneficiaries, we would consider a joint regulation, if such an
approach is determined necessary.
Conclusion
Mr. Chairman and Members of the Subcommittee, we at Social Security
share your concerns about protecting the financial well being of some
of our nation's most vulnerable beneficiaries. We can only resolve the
problems under discussion at today's hearing, though, with a
coordinated approach amongst agencies. As a result, we are working
closely with the Department of Treasury and support inter-agency action
to strengthen the protections for our beneficiaries.'' Thank you for
the opportunity to express our concerns about these very important
issues. I would be happy to answer any questions.
Mr. POMEROY. Thank you.
Mr. Grippo.
STATEMENT OF GARY GRIPPO, DEPUTY ASSISTANT SECRETARY FOR FISCAL
OPERATIONS, U.S. DEPARTMENT OF THE TREASURY
Mr. GRIPPO. Mr. Chairman, Ranking Member Johnson, other
Members of the Subcommittee, thank you for inviting me here
today to discuss garnishment practices and their impact on
Federal beneficiaries who receive their benefit payments
electronically.
The Committee is to be commended for continuing to focus on
this issue, and I am hopeful that we will be able to implement
a solution that provides appropriate protections, as well as a
balancing of consumer, government, and business interests.
Treasury is willing to offer expertise and to assist
Federal benefit agencies in crafting a solution to this
problem, leveraging our role in regulating Federal payments,
and working closely with the banking industry.
Treasury strongly encourages and actively promotes
electronic payments as the safest, cheapest, and most
convenient way to deliver Federal benefits. We do recognize
that electronic payments may cause problems in certain cases.
Specifically, individuals who have bank accounts and are
subject to garnishment action may find direct deposit
unattractive. Financial institutions may freeze accounts that
receive Federal benefits as they perform due diligence,
complying with a myriad of state garnishment laws and court
orders.
An account may be temporarily frozen, even when the account
contains Federal benefits that are exempt from garnishment.
Thus, a Federal benefit recipient who receives direct deposit
may not be able to access lifeline funds because they have been
automatically routed into a frozen account.
Treasury believes that any solution to this problem,
whether operational, regulatory, or statutory, would ensure
that Federal benefit recipients have access to a certain amount
of funds that cannot be frozen while a garnishment order is
adjudicated by the courts, and while the final amounts of
exempt and non-exempt funds are determined. The model used to
establish the appropriate amount of funds excluded from an
account freeze would need to be developed based on an analysis
of benefit payment amounts, and the ability of financial
institutions to implement it without complex accounting and
research.
This type of solution seems essential to ensure that
benefit recipients have access to their statutorily-protected
funds while the details of a garnishment order are resolved.
Treasury is willing to coordinate a joint inter-agency
effort in establishing a regulatory solution to the problem,
based on our experience in managing Federal payments and
working with the banking industry. Treasury, the Social
Security Administration, and other Federal benefit agencies
must work together to develop specific guidance to financial
institutions on the actions they must take if there are
benefits in an account subject to a garnishment order. We have
discussed options with Social Security Administration staff,
and we look forward to collaborating with them, and the other
Federal benefit agencies.
As part of this inter-agency effort, Treasury is willing to
assist the Federal benefit agencies by serving as a central
point of contact on implementation, compliance, and general
administration of a rule, and then working with the appropriate
Federal banking regulators on enforcement.
We know that the impact of garnishment orders and account
freezes on recipients of Federal benefits is a public policy
issue that needs to be addressed, and we look forward to
working with the benefit agencies, consumer groups, the banking
regulators, and financial institutions, to come up with a
solution. I am pleased to address any questions on the matter.
[The prepared statement of Mr. Grippo follows:]
Prepared Statement of Gary Grippo, Deputy Assistant Secretary for
Fiscal Operations, U.S. Department of the Treasury
Washington--Chairman McNulty, Ranking Member Johnson, and other
Members of the Subcommittee, thank you for inviting me here today to
discuss garnishment practices and their impact on Federal Government
beneficiaries who receive their benefit payments electronically. The
Committee is to be commended for continuing to focus on this issue, and
I am hopeful that we will be able to achieve a solution based on sound
public policy that provides appropriate protections and a balancing of
consumer, government and business interests.
Treasury is willing to offer expertise and assist the federal
benefit agencies in crafting a solution to this problem, leveraging our
role in regulating Federal payments and working closely with the
banking industry. Today, I will provide background on our role as a
disburser of federal payments, our use of technology in disbursing
government benefits, and our perspective on potential solutions to the
garnishment issue.
Treasury's Role as a Central Disburser
One of Treasury's core functions is to develop policy for and to
operate the financial infrastructure of the Federal Government.
Treasury's Financial Management Service (FMS) provides central payment
services to federal program agencies. FMS disburses 85% of the Federal
Government's payments, including income tax refunds, Social Security
benefits, veterans benefits, and other federal payments to individuals
and businesses.
FMS disburses payments based on certified payment files received
from program agencies. In FY 2007, FMS disbursed 982 million payments,
of which 78% were issued electronically. Focusing specifically on
federal benefits payments, such as Social Security and veterans
benefits, or those categories of payments generally exempted by law
from garnishment, FMS disbursed almost 800 million payments, of which
approximately 81% were issued electronically. The largest federal
benefit programs are Social Security and Supplemental Security Income,
together comprising 71% of the payment volume. While the other federal
benefit programs--veterans benefits, railroad retirement, civil service
retirement, and black lung disability programs--represent a much
smaller payment volume, the issues their beneficiaries may face when
attempting to access lifeline benefits are the same. In our role as a
central disburser, we would strive to ensure that any potential
solution would work for all federal programs with exempt funds that are
protected by law from garnishment.
Strategic Vision: Electronic Treasury
Integrating and leveraging technology into our payment programs is
a long-standing strategic vision for the Department of the Treasury.
Treasury's strategic goal to effectively manage the government's
finances includes strategies for expanding all-electronic transactions
to ensure timely and accurate payments at the lowest possible costs.
Electronic payments provide real and meaningful savings not only to the
government and the taxpayer but also to the financial industry. For
Treasury, it costs approximately 98 cents to issue a check versus 10
cents to issue an electronic payment. When this 88 cents per item
savings is multiplied over the millions of federal payments issued
annually, and as recipients convert from checks to electronic payments,
the savings can become substantial.
On our path toward an all-electronic treasury, we have benefited
from statutes, such as the Debt Collection Improvement Act of 1996
(DCIA), that generally require federal payment recipients to receive
their payment electronically. As the regulation implementing the DCIA
was proposed and finalized, an appropriate public policy on electronic
payments was developed, with waivers and carve-outs to electronic
requirements so as to not impose an undue hardship on the payment
recipients. With the implementation of the DCIA, the rate at which
federal benefit payments were made by electronic payment increased from
56% in FY 1996 to 75% in FY 2000. However, since obtaining a 4-5%
annual growth rate in the late 1990s, we have leveled off to a 1-2%
growth rate, with some years seeing less than a 1% increase.
Treasury has also benefited from the broader acceptance of
electronic banking technology as we strive to increase the use of
electronic payments. In assessing our future, we recognize a changing
landscape, with rapidly increasing federal benefit payment volumes
resulting from baby-boomer retirements. One of our strategies to manage
future payment issuance costs is to actively market and promote
electronic payments, specifically direct deposit of benefit payments.
Promoting Electronic Payments
Federal benefit recipients may opt to receive their payment by
check or electronically. For those recipients choosing electronic
payments, Treasury offers two programs: Direct Deposit and the recently
launched Direct Express card.
Direct Deposit is a payment program for consumers who authorize the
deposit of payments automatically into a checking or savings account
via the Automated Clearing House (ACH) network. It is Treasury's
preferred payment method and is the best way for Americans to receive
their federal benefit payments. The advantages of direct deposit to the
government, banking system, and recipients are well documented. It is
safe, convenient, reliable, and eliminates the risk of lost or stolen
checks.
Ideally, individuals would sign-up for direct deposit when they
apply for their benefit payment. Treasury is working with the Social
Security Administration in encouraging more individuals who have a bank
account to opt for direct deposit when applying for their benefit.
Just this month, Treasury launched the Direct Express card. The
Direct Express card is a prepaid debit card offered to Social Security
and Supplemental Security Income check recipients who wish to receive
their benefits electronically. While specifically designed as a product
for unbanked federal beneficiaries, anyone receiving Social Security or
Supplemental Security Income benefits can sign up for the card.
Treasury has designated a financial agent to issue this nationally
available card for the payment of federal benefits. The features of the
card were formulated after a one-year pilot program and discussions
with consumer groups and other stakeholders. Most of the card services
are free. There is no cost to sign up for the card and there are no
monthly fees. While there are fees for a limited number of optional
transactions, it is possible to use the card for free, and while the
Direct Express card is currently available to only Social Security and
Supplemental Security Income benefit recipients, Treasury plans to add
other federal benefit programs at a later date.
Assisting Federal Benefit Agencies in Resolving the Garnishment Issue
Treasury strongly encourages and actively promotes electronic
payments, but we do recognize that electronic payments may cause
problems in certain instances. Specifically, individuals who have bank
accounts and are subject to garnishment actions may find direct deposit
unattractive. Financial institutions may freeze accounts that receive
federal benefits as they perform due diligence in complying with a
myriad of state laws and court orders. An account may be temporarily
frozen even when the account contains federal benefits which are exempt
from garnishment. Thus, a federal benefit recipient who receives direct
deposit may not be able to access lifeline funds because they have been
automatically routed in to a frozen account. If the recipient had
received their benefits by paper check, they could cash the check
without depositing it into the frozen account and have full access to
the funds.
Treasury believes that any solution to this problem, whether
operational, regulatory, or if necessary statutory, would ensure that
federal benefit recipients have access to a certain amount of funds
that cannot be frozen while the garnishment order is adjudicated by the
courts and financial institutions, and while the final amounts of
exempt and non-exempt funds are determined. The model used to establish
the appropriate amount of funds excluded from an account freeze would
need to be developed based on an analysis of benefit payment amounts
and the ability of financial institutions to implement it without
complex accounting or research. This type of solution seems essential
to ensure that benefit recipients have access to their statutorily
protected funds while the details of a garnishment order are resolved.
As referenced above, one operational solution to the problem that
we currently have in place is the Direct Express card. The card account
contains primarily Social Security benefit payments, which, under
federal law, are protected from garnishment by creditors other than the
United States government. This means that creditors do not have the
right to have these funds taken out of the account, none of which would
be frozen pending resolution of a garnishment order.
Treasury is willing to coordinate a joint inter-agency effort in
establishing a regulatory solution to the problem, based on our
expertise in managing federal payments and working with the banking
industry. Treasury, the Social Security Administration, and other
federal benefit agencies are working together to provide specific
guidance to financial institutions on actions they must take if there
are benefits in an account subject to a garnishment order. We have
discussed options with Social Security Administration staff and look
forward to collaborating with them and other federal benefit agencies.
Treasury can offer its expertise in the payments and banking systems to
help craft a government-wide policy solution. As part of this
interagency effort, Treasury is willing to assist the federal benefit
agencies by serving as central point-of-contact on implementation,
compliance, and general administration of a rule, and in working with
the appropriate federal banking regulators on enforcement.
We envision that through this interagency effort, we would provide
guidance to financial institutions on how to discern if there are
exempt funds in an account and what amount of funds should not be
frozen. For example, a regulation could provide a safe harbor to
financial institutions that follow the guidance and allow recipients
access to funds. Treasury is working closely with the Social Security
Administration and other federal benefit agencies on a number of
complex issues that would need to be addressed as we move toward a
solution. These issues include commingling of funds, account fees,
look-back periods, compliance costs, and enforcement. We believe
further discussion with stakeholders and a public comment period are
essential to fully address these issues.
Conclusion
The impact of garnishment orders on recipients of federal benefit
payments is a public policy issue that needs to be addressed. Progress
has been made over the last 18 months in evaluating the complexities of
this issue. Garnishment practices are also an impediment for Treasury
as we strive to further promote direct deposit and electronic payments.
Treasury is willing to use its expertise with Federal payments and
commercial banking practices to help develop and implement a solution.
We look forward to working with the federal benefit agencies, consumer
groups, banking regulators, financial institutions, and the Congress to
come to a consensus solution.
This concludes my formal statement. I am pleased to address any
questions you may have.
Mr. POMEROY. Thank you.
Mr. Fritts.
STATEMENT OF STEVEN D. FRITTS, ASSOCIATE DIRECTOR, RISK
MANAGEMENT POLICY AND EXAMINATION SUPPORT BRANCH, DIVISION OF
SUPERVISION AND CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE
CORPORATION
Mr. FRITTS. Thank you, Mr. Chairman, Ranking Member
Johnson, and Members of the Subcommittee. I appreciate the
opportunity to testify on behalf of the FDIC about issues
affecting Federal benefit recipients' access to protected
benefit payments.
First, I will discuss the FDIC's perspective on situations
where Federal benefit recipients may lose access to their funds
as a result of a garnishment order. Then I will discuss our
assessment of relationships between FDIC-supervised
institutions, and payment distribution firms: check cashers,
pawn shops, and payday lenders.
It is clear that Congress intended that Social Security and
other Federal benefits not be garnished, except in certain
specific circumstances. However, the garnishment process is
primarily controlled by state law. In that process, a state
garnishment order is served on a bank, requiring that funds in
a customer's account be frozen while that process sorts out who
is entitled to the money. In the meantime, beneficiaries may be
unable to pay their monthly bills, and can be subject to bank
fees for imposing the freeze, and penalties for overdrafts and
return checks.
The FDIC recognizes the important issues raised by the
interaction of state and Federal law with regard to
garnishment, and has been working to develop solutions that
address the legitimate interests of both benefit recipients and
their financial institutions.
Of major importance is providing a solution that addresses
the hardship faced by beneficiaries' whose accounts are frozen,
pending resolution of a garnishment order. While the FDIC
doesn't have the legal authority to resolve these issues by
itself, we have attempted to engage interested parties in
reaching a solution.
A potential solution could be similar to statutes currently
in effect in California and Connecticut. These laws enable
depository institutions to provide beneficiaries with access to
a pre-determined amount of money sufficient to pay for basic
necessities like food and rent, while the dispute is resolved.
We suggest that adoption of this approach on a nationwide basis
could bring clarity and simplicity to the legal processes. Such
an approach would allow beneficiaries access to vital funds, be
relatively easy for deposit institutions to comply with, and
would leave the state judicial system undisturbed.
Social Security Administration, the VA, and Treasury
Department could implement this approach by promulgating rules
under their current statutory authority. Alternatively,
Congress could amend Section 207 of the Social Security Act and
similar statutes to achieve the same outcome. However, it
appears that ample authority exists under current law to
address the issues surrounding garnishment through rule-making.
With regard to payday lending, the FDIC has long been
troubled by the impact on consumers of costly short-term
credit, such as payday lending, and has taken steps to limit
this activity by FDIC-supervised banks, and to encourage banks
to offer alternative forms of small dollar credit.
Reports have described situations where unbanked
individuals, including recipients of Federal benefits, have
authorized parties like payday lenders to deposit their funds
in a bank account that these firms exclusively control.
Consumers who receive their Federal benefit payments through
these processes may be subject to unnecessary fees that could
be avoided through simpler payment methods, such as the direct
deposit of their benefits into a personal account with the
beneficiary's own bank.
The FDIC has been actively reviewing these questionable
relationships and practices. At this time, it appears that a
small number of financial institutions supervised by the FDIC,
as well as other Federal and state banking regulators, are
involved in these arrangements. The FDIC intends to use its
supervisory and enforcement tools to ensure that consumer
protection and other banking laws are strictly adhered to.
While we continue to look at FDIC-supervised institutions'
role with respect to the benefit payment distribution
mechanism, which is usually a depository relationship, we also
support SSA's willingness to address these challenges from the
benefits distribution perspective. The FDIC supports the SSA's
recent notice of request for comments to address problems
surrounding the master/sub-accounts for the payment of
benefits.
Also, we believe that with the introduction of the Direct
Express Treasury debit card program, participating
beneficiaries can be provided a simple and user-friendly
vehicle to use and control their benefit funds, thus preventing
the redirection of benefits to potentially unscrupulous
entities.
In conclusion, the FDIC is committed to finding solutions
to these important issues, and looks forward to working with
the SSA, the U.S. Treasury Department, and other agencies, to
find solutions.
I would be happy to answer any questions that the Committee
might have.
[The prepared statement of Mr. Fritts follows:]
Prepared Statement of Steve Fritts, Associate Director, Risk Management
Policy and Examination Support Branch, Division of Supervision and
Consumer Protection, Federal Deposit Insurance Corporation
Chairman McNulty, Ranking Member Johnson, and Members of the
Subcommittee, I appreciate the opportunity to testify on behalf of the
Federal Deposit Insurance Corporation (FDIC) concerning issues related
to the garnishment of federally protected benefit payments. Federal
benefit payments are an important--and often the sole--source of income
for many Americans, including senior citizens, veterans and the
disabled. The FDIC is aware that actions that limit access to these
funds result in hardship and expense for benefit recipients. The FDIC
is committed to ensuring that recipients of federal benefits receive
the full protection of those benefits to which they are entitled.
The use of garnishment as a debt collection tool raises many issues
when it is applied to accounts containing federal benefit payments.
When financial institutions receive a garnishment or attachment order
against an individual, they customarily freeze that individual's
deposit accounts, often not knowing that the accounts might hold the
proceeds of benefit payments which generally are exempt by law from
garnishment. While the funds eventually are released, often through
protracted legal processes, the customer can suffer financially in the
meantime.
In my testimony, I will discuss the current legal protections
applicable to federal benefit payments and the interplay between
federal law and state civil procedures for garnishment and attachment
to satisfy unpaid debts. In addition, I will describe actions the FDIC
and the other federal banking agencies are taking to address the issues
surrounding garnishment, as well as recommendations for achieving a
comprehensive resolution of this issue. Finally, my testimony will
discuss additional practices related to the distribution of federal
benefit payments that we are closely examining because of their effect
on beneficiaries.
Background
While garnishment procedures vary from state to state, funds in an
account at a financial institution generally may not be seized without
a court order. After receipt of the court order, pursuant to the
requirements of state law, the financial institution must place a
``hold'' or ``freeze'' on the debtor's account. In many states,
financial institutions are potentially liable for any funds withdrawn
by a debtor from an account after a freeze or hold has been placed upon
it pursuant to a court garnishment order.
As a result of a freeze or hold being placed upon an account, the
debtor account holder typically is not able to withdraw money from the
account or draw checks upon it. State garnishment laws usually provide
that notice must be given to the debtor that an account has been frozen
or has had a hold placed upon it. Several jurisdictions require a
formal hearing at which time the debtor is given an opportunity to
explain why frozen funds should not be seized or garnished. It is at
this juncture that debtors typically raise the defense that the funds
that have been frozen are protected from garnishment by various
exemptions.
Under federal law, several types of federal benefit payments are
protected from garnishment or attachment by creditors. These include
Social Security benefits, Supplemental Security Income (SSI) benefits,
Veterans Affairs (VA) benefits, civil service retirement benefits,
military retirement annuities, and railroad retirement benefits.\1\
While each type of benefit is protected under its own respective
statute, these laws typically provide that the benefits are not subject
to execution, levy, attachment, garnishment, or other legal process.\2\
In addition, state laws often provide for certain types of funds to be
exempt from garnishment, such as private pension payments.
---------------------------------------------------------------------------
\1\ Some Federal laws protecting benefit payments from garnishment
orders include 42 U.S.C. 407(a); 42 U.S.C. 1383(d)(1); 38 U.S.C. 5301;
5 U.S.C. 8346(a); and 45 U.S.C. 231m(a).
\2\ For example, Section 207 of the Social Security Act provides
that, with certain exceptions, moneys paid or payable as Old-Age,
Survivors, and Disability Insurance (OASDI) benefits, are not ``subject
to execution, levy, attachment, garnishment, or other legal process.''
42 U.S.C. 407.
---------------------------------------------------------------------------
The interplay between state garnishment law and federal benefit
exemptions is complex and raises a number of legal and practical
issues. Court garnishment orders often tend to be broadly worded with
no reference to exemptions under either federal or state law. Moreover,
exemptions to garnishment may have their own exceptions. For example,
while Social Security benefits generally may not be garnished, they may
be garnished or attached pursuant to a valid court order to collect
debts related to alimony or child support. This makes it difficult to
determine whether funds in an account that otherwise would be exempt
from garnishment under federal law should still have a hold or freeze
placed upon them.
The intricate relationship between state and federal requirements
with respect to garnishment of federal benefit funds is made even more
problematic by state and federal case law that provides little guidance
on how to handle such issues. For example, a Second Circuit court
decision upholds New York's civil procedure law requiring a freeze on
all funds held in garnished accounts, including exempt federal
benefits, finding that the beneficiaries' due process rights were not
violated by this requirement because the statute provided beneficiaries
with notice and an opportunity to prove that the funds were exempt.\3\
This holding is being questioned in ongoing litigation in a New York
federal district court. In the litigation, the district court judge is
open to considering the claim that New York civil procedure violates
the beneficiaries' rights to due process by failing to treat a federal
exemption for benefit funds as a bar against placing a freeze or hold
against the funds, even if imposed pursuant to a state court
garnishment order, when the relevant funds were deposited
electronically.\4\
---------------------------------------------------------------------------
\3\ McCahey v. L.P. Investors, 774 F.2d 543, 550 (2d Cir. 1985).
\4\ Mayers v. New York Community Bancorp, Inc., 2006 WL 2013734 at
* 6-7 (E.D.N.Y. 2006) and 2005 WL 2105810 at * 11-14 (E.D.N.Y. 2005)
(decisions not reported in F.Supp.2d).
---------------------------------------------------------------------------
An additional complicating factor in the relationship between state
garnishment procedures and Social Security benefits is the Social
Security Administration's (SSA) interpretation of the garnishment
exemption. The SSA recommends to beneficiaries that ``[i]f a creditor
tries to garnish your social security check, inform them that, unless
one of the five exceptions apply, your benefits can not be garnished.''
\5\ In other words, the exemption provision is to be treated as a
defense to be raised by a beneficiary after a freeze or hold has been
placed on an account pursuant to a garnishment order, rather than a bar
against the imposition of the freeze or hold in the first place.
Veterans Affairs staff have stated that they have a similar
interpretation of their counterpart provision exempting VA benefits
from garnishment or attachment.
---------------------------------------------------------------------------
\5\ See, e.g., ``Direct Deposit: Frequently Asked Questions,''
Social Security Online, http://www.socialsecurity.gov/deposit/
DDFAQ898.htm.
---------------------------------------------------------------------------
In the face of this uncertainty, many financial institutions
conclude that the safest and most prudent course of action is to comply
with the requirements of state garnishment orders and to leave it to
the depositors to establish whether funds in their accounts are exempt
from garnishment under federal law--and wait for the state process and
courts to determine entitlement to the funds. This is especially true
in light of decisions where the recipient of a court order has been
held in contempt for not complying with the order even if it was
subsequently found invalid.
Issues
The application of state and federal law regarding garnishment
raises a number of issues for benefit recipients, banks and regulators.
Many benefit recipients are unaware of the exemption
State garnishment laws generally contemplate a process that places
the burden on benefit recipients to claim applicable exemptions.
However, under the framework set up by many state laws, benefit
recipients are often unaware of the exemptions available to them. The
court order may not make reference to any potential exemptions and the
benefit recipient may have limited access to legal advice. Too often,
benefit recipients do not understand their rights under the exemption
or their need to raise a defense during the garnishment process.
Clarification of these rights and responsibilities is clearly needed.
To effectively provide benefit recipients with an opportunity to
exercise their rights, information regarding possible exemptions should
be provided contemporaneously with the notification of the garnishment
order.
Current procedures provide inadequate protection for benefit recipients
Even if a benefit recipient is aware of available exemptions,
existing garnishment procedures often provide inadequate protection for
benefit recipients. State garnishment laws are generally designed to
rely on a process that provides beneficiaries with notice and an
opportunity to claim that some or all of their funds are exempt from a
garnishment order after it is issued and the beneficiaries' funds are
frozen by the recipient bank. However, beneficiaries can suffer
financial hardship that results from losing access to the exempt funds
during the garnishment process.
Freezing an account that may represent a beneficiary's principal,
if not exclusive, source of income can have severe consequences. The
recipient may be unable to perform essential financial functions, such
as paying rent or making a mortgage payment. In addition, account
holders may be subject to fees and penalties associated with the
freeze, such as fees for placing a freeze on the account, overdraft
fees, and penalties for returned items. These fees and penalties can be
substantial and can cause additional hardship. Even when the
garnishment is properly resolved, affected accounts may be
significantly depleted by fees and penalties.
Garnishment orders are often broad
Many state court orders are broad and encompass all funds. These
orders may specify that the financial institution is to freeze and then
hold all funds in the benefit recipient's account, even though the
state statute recognizes particular exemptions including federally
protected benefit funds. In short, when an institution receives a
garnishment or attachment order affecting deposit accounts, it faces
difficult choices that implicate both its customers' interests and its
own legal responsibilities. A bank faces a legal risk if it fails to
take action under state creditor laws and/or court issued garnishment
orders. Under some of these laws, a bank can be held liable for the
entire amount of a debt that a creditor is seeking to collect if the
bank fails to comply with a garnishment order.
The application of garnishment exemptions to commingled funds is
difficult
The accounts of many recipients of federal benefits do not solely
contain funds from federally protected sources such as Social Security
or VA benefits. Instead, such funds are mingled with funds from other,
non-exempt sources such as private employment. Commingled exempt and
non-exempt funds are essentially indistinguishable. It is difficult to
trace such funds in an account and to determine their source of
origination. Because of the difficulty in ascertaining whether funds in
a garnished account are entitled to the protection of a federal
exemption, it is often easiest for banks to freeze the entire account
and have the court apportion the funds in the account between those
that are exempt and those that are covered under the garnishment order.
FDIC Initiatives
The FDIC recognizes the important issues raised by the interaction
of state and federal law with regard to garnishment and the impact the
current situation has on recipients of federal benefits, such as social
security and SSI. The FDIC is committed to addressing this important
issue, and Chairman Bair and Vice Chairman Gruenberg have directed us
to work with the industry, consumer groups and our fellow regulators to
develop solutions. In August 2007, Chairman Bair proposed that the
Federal Financial Institutions Examination Council (FFIEC) Taskforce on
Supervision form a working group to address garnishment of exempt
public benefit payments. The FDIC played a leadership role in forming
an interagency working group which includes the banking agencies and
representatives from the Office of Management and Budget (OMB), SSA,
VA, and the Department of the Treasury.
The interagency working group considered the merits of a number of
policy options. Although the FDIC and other bank regulators currently
lack adequate legal authority to effectuate a comprehensive solution to
the issues raised by garnishment, we initially offered a proposed list
of practices for banks to use as guidelines when faced with processing
garnishment orders. The proposed guidance was published in the Federal
Register on September 28, 2007, and afforded a 60-day period for public
comment. After receiving 77 public comment letters, it was clear that
the best practices guidance would not provide a sufficient response to
the issue and that regulatory or legislative action was necessary to
address the concerns of both the financial institutions and consumers.
The proposed guidance, however, sensitized financial institutions to
the issues regarding garnishment and sought their more active
involvement in the resolution of the issues surrounding garnishment
orders.
At the beginning of this year, the banking agencies and the benefit
paying agencies met with representatives from the banking industry. The
bankers described detailed procedures used to process garnishment
orders, as well as complexities they encounter as a result of multiple
recordkeeping systems and varying state laws and civil procedures. The
agencies also met with consumer advocacy groups to discuss the impact
of garnishment orders on elderly and disabled consumers and their
perspective on possible solutions to the garnishment issues. At the
same time, the FDIC was taking steps to increase public awareness of
the exemptions from garnishment that are available to benefit
recipients under federal law.
Possible Solutions to Address Garnishment of Exempt Federal Benefits
The FDIC's goal in developing solutions to address many of the
significant issues raised by garnishment of federal benefits has been
to find approaches that will address the legitimate interests of both
benefit recipients and their financial institutions. After consulting
with the other agencies, consumer groups and the banking industry to
build a consensus on an optimal solution to address these issues, the
FDIC would suggest consideration of two alternatives.
SSA, VA and the Treasury Department have authority to promulgate
rules under their current statutory authority. As the agencies
responsible for implementation and interpretation of these benefit
programs, they are in the best position to address the garnishment
exemption issue. Rulemaking by these agencies on this issue would
provide bank regulators with legal authority to enforce such rules
under current enforcement authority.
The FDIC suggests that the potential solution could be similar to
statutes currently in effect in Connecticut and California.\6\ The
Connecticut law directs a bank that has received a garnishment order to
leave the lesser of $1,000 or the amount on deposit on the date the
garnishment is served if ``readily identifiable'' exempt funds have
been deposited by direct deposit into the account during the 30-day
period prior to service of the garnishment. Under the California law,
when a civil garnishment order is served on a California financial
institution, if the deposit account receives direct deposits of Social
Security benefits or other specified types of public benefits, the
account enjoys an automatic exemption, without the account owner having
to seek a stay of the order, subject to certain dollar limitations set
forth in the law:
---------------------------------------------------------------------------
\6\ See CONN. GEN. STAT. 52-367b (2007); CAL. CIV. PROC. 704.080
(2004).
$1,225 where one depositor is the designated payee of
a directly deposited public benefits payment other than Social
Security benefits payments.
$2,425 where one depositor is the designated payee of
directly deposited Social Security benefits payments.
$3,650 where two or more depositors are the
designated payees of directly deposited Social Security
benefits payments.
These approaches give the customer access to funds while the
dispute is resolved and provide a comparatively simple, clear rule for
banks that receive garnishment orders. The FDIC believes that such an
approach makes sense and should be applied nationwide to provide access
to vital funds for beneficiaries of exempt benefits. We also believe
that it is important that beneficiaries receive prompt notice with
clear information regarding their rights in getting their exempt funds
unfrozen as quickly as possible.
The issue of commingling of exempt and non-exempt funds similarly
could be addressed by a statutory provision mandating that certain
minimum amounts in such accounts could not be frozen, garnished, or
attached so that subsistence funds would remain available to account
holders while their legal rights are being resolved.
Another alternative would be for Congress to amend Section 207 of
the Social Security Act and similar statutes.\7\ However, it appears
that ample authority exists under current law to address the issues
surrounding garnishment through rulemaking.
---------------------------------------------------------------------------
\7\ Similar amendments could be made to the law regarding VA
benefits and other legally protected federal benefit payments.
---------------------------------------------------------------------------
The FDIC will continue to work with the benefit-paying agencies and
other federal agencies to improve the garnishment system to ensure the
fair treatment of beneficiaries through a structure that provides clear
guidance to financial institutions and state judiciary systems.
Payday lending issues
The FDIC has long been troubled by the impact on consumers of
costly short term credit, such as payday lending. Typically, these
loans are characterized by small-dollar, unsecured lending to borrowers
who are experiencing cash-flow difficulties and have few alternative
borrowing sources. The loans usually involve high fees relative to the
size of the loan and, when used frequently or for long periods, the
total costs to the borrower can rapidly exceed the amount borrowed.
Consumers using this product typically have bank accounts because
payday lenders generally require a post-dated check from the consumer
for the loan's repayment.
The FDIC has issued a series of guidance statements on this type of
lending. The most recent guidance, issued in 2005, discourages
institutions from repeatedly renewing short-term, high-cost loans,
instead encouraging institutions to offer customers alternative longer-
term credit products that more appropriately suit the customers' needs.
FDIC guidance had the effect of essentially stopping FDIC-supervised
institutions from making high-cost payday loans.
Further, in March of this year, the FDIC launched a two-year small-
dollar loan pilot program to identify effective and replicable business
practices to help banks incorporate affordable small-dollar loans into
their other mainstream banking services. Lending in this program
follows in large measure the Guidelines on Affordable Small-Dollar
Loans issued in June, 2007. These guidelines provide a means to enable
insured institutions to better serve an underserved and potentially
profitable market while helping consumers avoid, or transition away
from, reliance on higher-cost payday type loans.
The movement to electronic funds transfer and direct deposit of
benefit payments in many ways has been a favorable development. It can
provide added convenience and security for benefit recipients over the
traditional payment of benefits by check. However, it can also enable
payday lenders, check cashers and pawn shops to profit from consumers
who lack traditional banking relationships (such as a checking account
in the usual payday lending relationship) and provide a means to
control beneficiaries' flow of funds. In order to electronically
transfer benefit funds, a bank routing number is required. As such, a
cottage industry has grown up around electronic benefit payments that
allow payment distribution firms to use the banking system to capture
control of consumers' benefits.
Reports have described situations where unbanked individuals,
including recipients of federal benefits, have completed Standard Form
1199A (``Direct Deposit Sign-up Form'') that authorizes payment
distribution firms, check cashers, pawn shops and payday lenders to
deposit their funds in a bank account that these firms exclusively
control. These relationships are often created by a complex web of
financial participants, including ultimately the depository institution
where the funds are held. Consumers who receive their federal benefits
payments through these processes may also be subject to unnecessary
fees that could be avoided through simpler payment methods, such as the
direct deposit of their benefits into a personal account with the
beneficiary's own bank.
The FDIC is very concerned about bank involvement and has been
actively reviewing these relationships and practices. At this time, it
appears that a limited number of financial institutions supervised by
the FDIC, as well as other federal and state banking regulators, are
involved in these arrangements. We are currently investigating to
determine the extent and type of the relationships between FDIC-
supervised financial institutions and payment distribution firms, check
cashers, pawn shops, and payday lenders. These relationships raise a
number of issues, including appropriate disclosures to consumers, the
ability of consumers to maintain control over their funds, compliance
with various federal and state consumer protection standards by
financial institutions and whether the accounts are properly structured
to qualify for deposit insurance protection. If warranted, the FDIC
intends to use our supervisory and enforcement tools to ensure the
protection of consumers.
While we continue to look at FDIC-supervised institutions' roles
with respect to the benefit payment distribution mechanism, which is
usually a depository relationship, we also support the SSA's
willingness to address the challenges from the benefits distribution
perspective. Recently, the SSA issued a Notice of Request for Comments
on the use of master/sub accounts for the payment of benefits. In the
Notice, the SSA indicated that it anticipates changing its current
procedure in light of concerns about how high interest lenders are
using this account procedure. With the information being gathered from
the Notice and from our own review, the FDIC stands ready to provide
any assistance to SSA that it might request and to implement any
restrictions on these accounts that SSA might establish.
Also, we believe that with the introduction of the Direct Express
Treasury debit card program, participating beneficiaries will maintain
control of their benefit funds, thus, preventing the redirection of
benefits to potentially unscrupulous entities.
Conclusion
Congress intended that Social Security and other federal benefits
not be subject to garnishment, except in certain specific cases.
However, it is the freezing of funds that causes significant harm to
recipients of federal benefits programs. Moreover, the garnishment
process is primarily controlled by state law. As currently implemented,
this process causes hardship for beneficiaries who lose access to their
primary source of funds while they wait for a legal determination of
their rights, and who are assessed fees even if they demonstrate that
their funds should be protected. Regardless of the outcome of the
garnishment proceeding, these account holders suffer financial harm.
The FDIC is committed to helping solve the garnishment issue. We
have engaged consumer groups, the banking industry, and other
interested federal agencies in trying to achieve a workable solution.
The concerns about garnishment can undercut the attractiveness of an
insured bank as a place for people to utilize financial services, such
as checking, savings and direct deposit. The resolution of this issue
is important to the achievement of our broader efforts to encourage
consumers to be economically empowered through the banking system.
The FDIC also is very concerned about bank involvement in practices
that facilitate high cost activities, such as payday lending. We are
particularly reviewing how these practices can transfer control of a
consumer's benefits to a third party. If warranted, the FDIC intends to
use our supervisory and enforcement tools to ensure the protection of
consumers.
The FDIC will work with Congress and our colleagues at other
agencies to find a solution that truly addresses these issues. This
concludes my testimony. I would be happy to answer any questions that
the Committee might have.
Mr. POMEROY. It seems to me that we have got three
agencies, each saying this is a problem, we are committed to
working on it, and yet nothing has been done. I would just
throw out for the three of you, when is your evaluation of how
quickly Congress can expect some regulatory action?
First of all, I guess, Mr. Fritts, you have indicated it
would be your view at FDIC on--believes it has ample authority,
working with other relevant agencies under existing statutory
law, that these matters, the concerns raised in this hearing,
could be addressed through a regulatory function of the
executive branch. Is that your view?
Mr. FRITTS. Yes. We believe that the SSA has the authority
to implement a regulation based on the Social Security Act that
could provide a clear-cut, practical solution to the
garnishment issue.
Mr. POMEROY. Well, in the interest of trying to provoke a
fight, let me just ask SSA to respond to that.
Ms. LACANFORA. We fully support resolving this problem as
expeditiously as possible.
We do not have the ability to create banking policy. The
role of the Social Security Administration is to adjudicate
claims for benefits. It is our statute, that's true, and we
could promulgate regulations under that statute, and we have,
and we did that in 1980, as it relates to our role,
administering the statute.
If we were to promulgate regulations on our own, we would
simply restate what is already in the statute. As Ms. Saunders
said, the statute is very clear.
So, I think we're on the right track working closely with
Treasury on a joint solution. Neither Agency can resolve the
problem alone, and it has taken us some time to come to
consensus on that, and I think we've reached that point. We
fully support the effort here, and we're willing to do whatever
we can, under our authority, to promulgate regulations and
solve the problem.
Mr. POMEROY. I just observe I think it's really incredibly
lame of FDIC to suggest that SSA's evaluation of the statutory
bars laid out in their Q&A that used to be on their webpage was
somehow instructive for interpretation in Federal law by FDIC.
I mean, a ban is a ban.
To me, it that point becomes a banking issue, relative to
whether Federal law is being adhered to or not. I don't see--I
mean, I am amazed that the general counsel's office of FDIC
found that they had to somehow wait and have SSA tell them
whether this was a bar, or could be used as an affirmative
defense, or be somehow instructive in that way.
Mr. FRITTS. Well, I believe it has been SSA's position for
a long time that it is an affirmative defense.
Mr. POMEROY. Is that SSA's position, or do you believe it's
a bar?
Ms. LACANFORA. The statute is clearly both a bar and a
defense against garnishment.
Mr. POMEROY. Okay, that one is laid to rest. Let there be
no doubt at FDIC, SSA says it's a bar, right? Any question
about that?
Mr. FRITTS. No, Sir.
Mr. POMEROY. Right. I mean, so if it's a bar, then what has
been the reason for all the delay at FDIC when the Chairman of
the Financial Services Committee writes in June of 2007 a
series of questions on these issues, that we still don't have
action within FDIC?
Mr. FRITTS. One thing I think is important to understand is
that, ultimately, the creditors do not get the funds from the
borrowers and the deposit account holders.
As the state legal process plays out, the money is not
ultimately garnished. The problem is, in the intersection of
the state law and the Federal law, you have the state legal
process that you have to go through, and the banks are required
to freeze that money by the orders of the state courts until
such time as that process plays out.
That's why the FDIC has, for over a year, taken a
leadership role. We started a group, inviting the SSA, the VA,
and others suggested a solution that was workable. We also
engaged the consumer groups, and the banking industry.
We believe we have found a solution to this process. When
you specify that a certain amount of money would be available
to the account holder, you provide clarity and simplicity. You
don't have to worry about the exceptions, to a great degree,
that are within the law. You don't have to concern yourself
about the commingled funds that are in the account, which make
it very difficult to determine what funds are exempt and what
aren't. You have a simple methodology that allows for the
protection of those beneficiaries' funds in a way that allows
access to a portion of the funds while the legal process still
plays out.
Mr. POMEROY. There is some dispute, I guess, in what the
Committee has heard this morning, relative to whether or not
deposits made on Social Security funds are easily and quickly
identifiable. I know some banks have--I believe the inspector
general said they would be electronically identifiable, very
easily identifiable by the financial institutions.
But in any event, what has been the receptivity of your
proposal of going with, like, a California or Connecticut
approach?
Mr. FRITTS. Well, I can just say--and I don't want to speak
for any other folks that aren't here at the table--but as you
heard in the previous testimony of the various consumer
interests, they are supportive of that as one solution.
I have discussed this with the banking trade associations,
at least the major one, and they are supportive.
Mr. POMEROY. It just doesn't seem like this is very far
along. I mean, it seems that it's been a growing problem. There
have been hearings, letters, articles, and it seems to me as
though we're still at a pretty formative stage, in terms of a
definitive response. Mr. Grippo, can you address those
concerns?
Mr. GRIPPO. Sure, sure, let me comment on that. I would
like to say a few things.
First, I think the primary reason why no action has been
taken to date is some of what you have heard, that there is a
division of authority here. We have bank regulators that would
enforce certain rules, we have the Treasury that regulates
Federal payments, we have SSA with the anti-garnishment statute
itself. I think all three parties need to work together on a
solution.
In fact, that would be the main message I would deliver
here today, that we have basically come to an agreement that
all parties need to work together to issue appropriate guidance
here. I think----
Mr. POMEROY. What I see, Mr. Grippo, is that in August of
2007 Commissioner Astrue asked OMB to have a multi-agency
process. I know FDIC, I think, has asked for one. Is something
underway with a likely decision point, where we're going to
have an administrative response on a multi-agency basis?
Mr. GRIPPO. Yes. We have agreement with the Social Security
Administration to work on this. I think over the last----
Mr. POMEROY. When can we expect something?
Mr. GRIPPO. Well, I don't know when we could expect a
specific rule or policy----
Mr. POMEROY. Has this inter-agency process effectively
begun yet?
Mr. GRIPPO. I think it has, and I can outline, at a high
level, the solution that we at Treasury think needs to be
implemented.
Specifically to this problem of illegal garnishment of
accounts, something needs to be done--and I think this can be
done either through a regulation or through policy guidance--
that goes to the financial institution practice of freezing
accounts. We need to ensure that financial institutions do not
freeze all of the money in an account, and make some of it
available to the beneficiaries.
We need a means of explaining to the financial institution
how they should measure the amount of funds they should not
freeze, which goes to the question of whether exempt funds can
be identified, and I think there are some straightforward rules
and guidance we can give the banks to identify those funds.
We need guidance to banks that allows them to know that
they will have a safe harbor, which is to say if they do not
freeze the account, and they allow withdrawals to the account,
that they would not be held in contempt of a state court, or
they would not be liable for the withdrawal of the account. So,
that needs to be part of the solution.
I think we need a solution that covers all types of Federal
benefits. These anti-garnishment statutes exist throughout the
code. It's not just with Social Security benefits, but VA
benefits, civil service retirement benefits. So, I think part
of the solution needs to be to tell banks what they need to do
in all those cases.
So, those four or five things I've outlined, I think, are
what this inter-agency group is focusing on, and what we want
to give force and effect to.
Mr. POMEROY. I think that sounds responsible, sounds like a
good start. Is--end of summer we see a proposed rule?
Mr. GRIPPO. I would hate to give a sp ecific date. I can
tell you we have agreement to do this, and we have----
Mr. POMEROY. Wait. Our oversight function, really, is only
meaningful provided when we get specifics. I mean, discussions
out there, people are thinking about, and we're agreeing to
move forward doesn't provide, at the end of the day, anything,
in terms of a response.
We want the rule, we want the proposed rule, so we can go
through the administrative promulgation process, and be done.
Mr. GRIPPO. We understand that, and we are ready to begin
work on that immediately, along the lines of what I have just
outlined.
I can't give a specific date. We do need to talk to several
of the other benefit agencies. We need to involve financial
institutions, we need to involve the banking associations,
which are not getting a voice here today. So, that coordination
process prevents me from giving a specific date for a proposed
rule, or for specific policy guidance, but----
Mr. POMEROY. I'm not the Chairman, I'm just filling in for
one. I would ask that--I would suggest to the Chairman, if he
wants to have--if we have payday lenders and banks that are
freezing all these accounts, they want to have their day, I
would be more than happy to hear from them and ask them a
question or two.
We will be leaving in--for August recess, coming back in
September. I would also suggest to the Chairman I think we need
to take a look at some proposed rules that are out there, or
have you back to tell us how we're coming on getting those
proposed rules written. I really think that time is of the
essence, we've got to move.
That would conclude my questions. Ranking Member?
Mr. JOHNSON. Thank you. I never have seen an agency having
some hesitation about writing rules before, have you?
Ms. LaCanfora, can you put some numbers in the pot for us?
For those watching the hearing, and who may be reading, about
how many payments does SSA send out each year?
Ms. LACANFORA. Social Security distributes about 55 million
payments to beneficiaries each month. That's about 650 million
payments a year, and the outlays on that reach about $650
billion a year.
Mr. JOHNSON. How many complaints related to non-bank
financial service providers have you gotten each year?
Ms. LACANFORA. Well, there are two different issues here.
First, the master/sub-accounts, and then the garnishment issue.
On master/sub-accounts, we don't track at a local level the
number of complaints that we have gotten. We have had a handful
of isolated incidents, or isolated complaints, over the 10-year
period that we have allowed master/sub-accounts to be in
existence, and we have resolved those promptly.
Mr. JOHNSON. When you say isolated, what do you mean?
Ms. LACANFORA. A handful. A handful of----
Mr. JOHNSON. Okay.
Ms. LACANFORA [continuing]. Unrelated instances.
Mr. JOHNSON. Go ahead, thank you.
Ms. LACANFORA. With respect to garnishment, we don't know
of any complaints that we have received related to the freezing
or garnishing of bank accounts. That doesn't necessarily mean
that that's any indicator of the scope of the problem, since we
would not be the traditional place that a beneficiary would
come to make such a complaint.
Mr. JOHNSON. Where would they put the complaint?
Ms. LACANFORA. They might complain to the financial
institution.
Mr. JOHNSON. Oh, okay. Yes, well, I would think they would
come to you, too. How many complaints are related to frozen
accounts each year, do you know?
Ms. LACANFORA. We don't have any record of any complaints
coming to Social Security about frozen accounts. Again, I don't
think we would be the first place that a beneficiary might go
for that.
Mr. JOHNSON. Where would he go, you think?
Ms. LACANFORA. They might also go, as Ms. Saunders said, I
think, to legal services in their local community.
Mr. JOHNSON. What is the process and outcome for responding
to complaints from Social Security?
Ms. LACANFORA. In the instances where someone has reported
to us that there has been an unauthorized re-enrollment by a
lender of the individual's direct deposit, we would work with
that individual, and we either issue a letter--or, in some
cases, we contact the lender directly--to make sure that
they're aware that that is contrary to our policy. In all
instances, the practice has stopped.
We also have the ability to actually block use of the
routing number for that financial institution. We have not had
to resort to that as of yet.
Mr. JOHNSON. When an account is used properly, do they--do
you think that provides an advantage to the beneficiary?
Ms. LACANFORA. There is certainly an appeal for many
beneficiaries in using a master/sub-account, primarily because
these are individuals who often don't have access to
traditional banking services. So, in that respect, yes.
Mr. JOHNSON. Okay, thank you. Mr. Chairman, I am going to
terminate now, because of the floor activity, and turn it back
to you.
Mr. POMEROY. Thank you, Mr. Johnson.
Mr. JOHNSON. Thank you very much.
Mr. POMEROY. I am going to yield the Chair to Ms. Tubbs-
Jones, and I will also be keeping an eye on that vote.
Ms. TUBBS-JONES [presiding]. This is the only way I get to
be in charge of this Committee. Everybody is going to run and
vote on a Medicare bill and I'm going to stay here and ask my
questions. I'm in charge, I love it.
But let me say this. Ms. LaCanfora, how long have you been
with your agency?
Ms. LACANFORA. Twelve years.
Ms. TUBBS-JONES. Twelve years. How long have you been in
the role that you're in right now?
Ms. LACANFORA. Almost one year.
Ms. TUBBS-JONES. Almost--I find it almost incredible that
you could sit here and say to me that you have had only a
handful of complaints, and that garnishment is not an issue.
Maybe it just doesn't come to your desk. Who else would be--
have oversight on this issue?
Ms. LACANFORA. Let me clarify. I, in no way, intend to
diminish the impact of garnishment on a beneficiary. We
acknowledge that it's a very serious problem. The fact that we,
at SSA don't know of any complaints, doesn't mean that it's not
a very significant problem. We simply don't have a way of
tracking these accounts at the local level.
But as I said, I would think that perhaps the banking
industry would know of the complaints, because they would be
the first line of defense against a complaint. Then,
secondarily, the legal service advocates in the local community
would know.
Ms. TUBBS-JONES. You know, I think this is the most
preposterous thing, that the people of America, the Social
Security folks, recipients, are sitting here saying, ``Who is
on first?'' Now, whose job is it? Whose responsibility? Do we
need to issue--not issue, pass a law that requires each of
these agencies to sit at the table and understand the impact of
your decision-making?
All of you understood that when we decided to go to direct
deposit, it was going to present a problem for those who were
unbanked. Somehow, we decided, ``Well, we will wait to see what
the problem is, before we implement a process to assist these
folks.''
I am a former municipal court judge, a formal general
jurisdiction judge, and I can remember sitting in my court room
and people coming in, complaining. ``They're garnishing me.
This is my Social Security check. They're not supposed to be
able to do this.'' We blame the state law, we blame everybody.
Somebody has got to take ownership of this issue, on behalf of
the people that we all represent.
We can't keep--you know, the thing about being on this
Committee, which I love, is how we sit and say, ``Well, we're
talking, we're going to''--''I'm going to get you an answer
immediately, Congresswoman.'' I'm waiting, and waiting, and
waiting, and I haven't gotten an answer. All I want to say is,
``Fix it.''
Fix it, fix it. Stop talking about what we might be able to
do, what we may be able to do. Maybe I can say--require you to
meet at 12:00 tomorrow and come up with a response by 30 days
later. You own it--and I keep saying you, but we own it. I own
it, you own it, your agencies own it, the banks own it. The
banks are making beau coup dollars on all kinds of things.
Where is that Article I had? Hold on real quick. In this
article--and this is a little bit different than the issue
we're talking about. It says--the one that I submitted for the
record, called, ``How a Cup of Coffee Can Set you Back an Extra
$34,'' I'm just giving you an example.
It said that, ``This year, Bank of America and Washington
Mutual hiked their overdraft fees, and raised from five to
seven the maximum number of times a customer could be dinged.
While many banks say they give customers the right to opt out,
the Federal Reserve Board is concerned that the disclosures are
inadequate.''
Well, in one of the articles it literally told how much
money you could receive, and the banks didn't want to get rid
of this process, because it was a huge bang for the amount of
money that they got in this process.
So, we must find some way to fix the problem, and I must go
vote on this Medicare bill. We are recessing until my Chairman
gets back.
[Recess.]
Mr. POMEROY [presiding]. All right, I very much thank you
for staying.
All right, I really didn't get to pursue in my earlier
inquiry this business of master account. I would like SSA to
discuss what the--I understand the commissioner is concerned
about the information that was revealed in the Wall Street
Journal article, and has initiated action. I am wondering where
that's at.
Ms. LACANFORA. We put a Federal Register notice out in
April, and the comment period for that Federal Register notice
closed last Friday--that's June 20th. We received numerous
comments, and we're in the process of reviewing them now.
We are very much open to modifying or potentially
eliminating SSA's use of the master/sub-account policy. That
is, of course, an industry-wide process that is not specific to
SSA benefits. We do allow them, under our policy. So, as we
look forward and review the comments, we will be looking to
modify it in a way that protects beneficiaries more fully.
Mr. POMEROY. Can you give us--can you expand on that?
Ms. LACANFORA. Well, one option would be to eliminate the
use of master/sub-accounts completely. Now, that's an industry
practice, so it's far broader than just Social Security
deposits. For purposes of Social Security deposits, we could
cease the use of the master/sub-account process completely.
Another option would be to keep the process in place for
certain beneficiaries, where it might be useful and beneficial
to them. For example, we talked earlier about individuals who
have taken a vow of poverty, and for them it might be something
that we want to modify or keep in place. So, there are various
options, and we're going to work through the comments as
quickly as we can to come up with what the policy should be.
Mr. POMEROY. Could you identify, for example, the master/
sub-account where there is usurious interest rates and--
essentially, could you narrowly tailor your prohibition to the
payday lender crowd, and get at it that way?
Ms. LACANFORA. That would be quite difficult to do
something like that, we would certainly need to work with
Treasury and the bank regulators since we at Social Security
don't have the authority to regulate the banking industry in
that way.
Mr. POMEROY. But----
Ms. LACANFORA. Yes?
Mr. POMEROY. It really wouldn't be. They would be
ineligible for master/sub-account arrangements. I mean, you do
have jurisdiction over the master/sub-account.
Ms. LACANFORA. We have jurisdiction over whether we permit
the use of a master/sub-account, yes.
Mr. POMEROY. Can you then, therefore, draw distinctions on
which master/sub-accounts you permit, or specifically, which
master/sub-accounts you don't permit?
Ms. LACANFORA. That is a possibility that we could
consider, yes.
Mr. POMEROY. I would encourage you to do that. It would
seem to me that might be the quickest way you could respond to
it. I appreciate and share the commissioner's concern, relative
to this particular universe.
Ms. LACANFORA. Okay.
Mr. POMEROY. Mr. Lewis, glad you came back. Do you have
other questions?
Mr. LEWIS. Just one more question.
Mr. POMEROY. Please.
Mr. LEWIS. Thank you, Mr. Chairman. You know, I don't have
a problem with people having a choice, making personal
decisions about their money. I want to go back to the fact that
those financial institutions, if they're held accountable for
their actions, if they're held accountable for going forward
with garnishment of SSI payments, then they need to be dealt
with, and they need to be dealt with in a severe way, because
that's the law.
I want to go back to Mr. Fritts. You know, the FDIC
regulates the banks. The law is pretty clear, that SSI payments
are exempt from garnishment. I understand what you're saying
about setting aside a certain amount of money, but the money
that should be set aside is the money that has been exempt,
period. You don't have to set aside a certain amount for a
house payment, or whatever. The money that is set aside that
cannot be used for garnishment purposes would be just simple,
it's the SSI payments. So, that shouldn't be a problem.
On the fact whether you can regulate or not, I think that--
this is Federal law. I think Mr. Johnson alluded to the fact
that he is--you know, it's kind of rare when Federal regulatory
agencies have a problem with regulating. I mean, that seems
sometimes to be a problem around here, Mr. Chairman, that we
pass legislation and then the regulators write the regulations
on it, and sometimes they miss the intent. I don't see how you
can miss the intent of the exemption of SSI payments from
garnishment.
So, the only thing I think that maybe we might be
responsible for here would be setting aside state law that
would hold banks in contempt, the courts holding banks in
contempt of not following through on freezing those accounts.
That would be the only thing that possibly I could see. I don't
see why the FDIC cannot regulate the banking industry on a
Federal law that says those accounts are exempt from
garnishment. I just--I don't see that.
So, Mr. Fritts, maybe you can explain that to me.
Mr. FRITTS. Sir, it's clearly a problem, no question about
that. I want to make clear what the problem is. The problem is
the freezing of the accounts, more than it is the garnishment.
It's the state court system that controls the garnishment
process.
The bank is the keeper of the funds in the account. Most of
the accounts of beneficiary recipients include the exempt funds
and other funds that customers get from whatever source. The
bank is just the intermediary that keeps that person's account.
When they get a duly executed order from a state court that
tells them to freeze an account, sometimes they can see that
there is only exempt funds in there. They may be able to say,
``Look, it's clear, it's only exempt funds,'' and many banks do
that. In other cases, it's not exempt.
Here is the other complicating issue. In many cases, there
are exceptions. There are, I believe, five exceptions to the
defense.
Mr. LEWIS. Those are pretty specific.
Mr. FRITTS. Yes, they are specific, but the banks can't
make the determination about whether they are or not. That's
the state court system that makes that judgment.
What we have tried to figure out is a way, a process, that
allows simplicity and clarity and in a way that makes sure that
the customers have access to their funds, as the state judicial
process plays out. That's what we're focusing on.
Mr. LEWIS. Well, again, I think probably the only thing
that we can do, legislatively, would be to exempt those
financial institutions from those threats from the state.
But, I mean, I think the law is pretty clear that SSI
payments are exempt, and banks should understand that, and
financial institutions should understand that. If they don't
abide by that, then there should be a rule, a regulation that
sanctions them for that miscarriage of the law.
Mr. FRITTS. We agree, there needs to be a regulation. It
needs to be clear. We will enforce it.
Mr. LEWIS. Okay, thank you. That's all I have.
Mr. POMEROY. I think this hearing has demonstrated
bipartisan concern on this issue. There really has been no
distinction, one side of the dais versus the other, in terms of
concern.
I would ask that the majority and minority staff of this
Subcommittee convene conference calls with the agencies on a
monthly basis, going forward. When we're back after Labor Day,
we will see where we're at, whether or not further discussion
in a hearing format would be useful. Or, hopefully, we will
just be well down the track on a resolution that has brought
consensus.
So, I thank you very much for the information you brought
us today, and look forward to seeing your work product, going
from here. Thank you very much. Hearing adjourned.
[Whereupon, at 12:56 p.m., the hearing was adjourned.]
[Submission for the record follows:]
The Community Financial Services Association of America, statement
The Community Financial Services Association of America (CFSA)
submits this statement for the record to address the issue of use of
master/sub accounts by payday lenders which was considered by the
subcommittee at a hearing on June 24, 2008. The CFSA comprises more
than 150 member companies that represent over half of the estimated
22,000 payday advance locations nationwide. CFSA promotes state and
federal laws that balance consumer choice with consumer protections,
and it enhances consumer protections provided by existing laws by
requiring its members to comply with a set of responsible lending and
collection practices called the CFSA Best Practices.
Payday lenders do not use master/sub account arrangements to
receive social security benefits as security for the loan in conducting
their payday lending business. Payday lending is regulated by the
states, is a specific type of lending authorized under state law, and
is governed by very stringent laws and regulations which do not permit
establishing master/sub account arrangements as described in the
February 12, 2008 Wall Street Journal article or the Social Security
Administration's recent request for data on this issue.
The term ``payday lender'' has been used by many organizations to
describe a wide variety of lending activities and check-cashing
activities that are not payday lending. In fact, one of the problems
with the Wall Street Journal article is that it used the term ``payday
lenders'' to describe lenders who are not licensed as payday lenders.
Even the data request from the Social Security Administration on
master/sub account arrangements describes the issue in the context of
``payday lenders who solicit social security beneficiaries to take out
high-interest loans.'' ``Payday loan'' and ``payday lender'' are terms
of art which are defined in state law. A payday loan is generally
understood to mean a small-denomination, single-installment loan that
matures on the borrower's next payday and is paid by the borrower's
cash, personal check, or automated clearinghouse authorization. As we
understand the activity, the master/sub account arrangement is a
practice in which a social security recipient authorizes a third party
to receive the recipient's social security benefits check under a
master account with individual sub accounts in the recipient's name. In
its request for data, the Social Security Administration states,
``Based on the loan agreement between the beneficiary and the loan
company, we may authorize the deposit of benefits directly into the
loan company's master account. The loan company then deducts the loan
principal, fees, and interest before depositing the remaining benefits
into the beneficiary's sub account.'' This scenario cannot happen with
a payday loan under state law. State payday loan statutes
comprehensively regulate payday lenders and control, among other
things, the type of collateral that a lender may accept as security for
a payday advance. Generally, these statutes permit a borrower to pay a
payday advance only with cash, personal check, or ACH authorization. A
third-party check is not acceptable.
Payday lenders sometimes obtain a recipient's authorization to
repay a payday loan with a single (i.e., one-time only) electronic
debit. In such cases, the recipient signs a loan agreement in which the
recipient gives the lender written authorization to electronically
debit, on the loan's maturity date, the same recipient-owned bank
account into which social security benefits may be deposited. ACH
authorizations are utilized by depository institutions and other
lenders for repayment of all types of loans and other obligations. Any
effort to prohibit a lender or depository institution from
electronically debiting a recipient's bank account into which social
security benefits may be deposited would have a paralyzing effect on
tens of thousands of financial intermediaries that currently engage in
electronic commerce with social security recipients. A borrower who
authorizes electronic debits from his or her bank account has many
protections under federal law, such as being able to revoke an ACH
authorization at any time. In addition, federal law also prohibits a
lender from requiring a borrower to deposit social security benefits
into a particular bank account. Under the EFTA and Regulation E, a
person may not condition a recipient's receipt of social security
benefits on the recipient's agreement to establish an account with a
particular financial institution. Also, under EFTA and Regulation E, a
lender may not condition its extension of credit on a borrower's
agreement to pay the obligation with recurring electronic debits. In
summary, banking and payments laws already provide comprehensive
protections to any social security recipient who chooses to
electronically repay a loan from the same recipient-owned bank account
that also receives social security benefits.
Since the emphasis of this hearing is on seniors who receive social
security benefits and who might also take out a loan, it may be helpful
to the subcommittee members to have a description of typical payday
advance customers. Customers of payday lenders come at all income
levels. The majority are generally middle-income individuals.
Payday advance customers are generally younger individuals. Two
thirds of payday advance lenders are under 45 years of age, and 36.4
percent (36.4%) are under 35 years of age. One in 10 payday advance
customers is aged 55 or older. Only 5 percent (5%) or less are 65 years
old or older.
One of the underwriting criteria to obtain a payday loan is that
customers must have proof of an active checking account with a bank or
credit union. This requirement of having an active checking account
reduces the number of low-income consumers who are potential customers.
More than half (58%) of customers have attended college, and 1 in 5
(22%) has a bachelor's degree or above.
To summarize, payday advance customers are generally middle-income,
young-to-middle aged, banked, educated, homeowners, and have at least
one other option for credit than a payday advance.
As referred to earlier in this statement, the Social Security
Administration has requested data on use of master/sub accounts by
``payday lenders.'' CFSA has filed comments with the Social Security
Administration. A copy of those comments is attached.
In conclusion, payday lenders do not use master/sub account
arrangements to obtain social security benefits as security for payday
loans. To engage in such arrangements would violate state law and would
violate the Best Practices maintained by the CFSA with which its
members must comply. CFSA feels that while use of master/sub accounts
is not a permitted practice under state law, it is a practice, in any
event, that should not be engaged in by payday lenders.
CFSA feels compelled to respond to some of the specific comments
made at the hearing about the payday advance industry. Rep. Pomeroy,
who chaired the hearing, noted that: ``The hearing is not intended to
foster debate over the general advantages or disadvantages of payday or
`advance payment' loans. Instead, we are looking to learn how to better
protect Social Security beneficiaries from being steered into high-cost
direct deposit arrangements by check-cashing and short-term loan
operations.''
Nonetheless, some of the witnesses' testimony focused heavily on
attacking payday lending generally. Therefore, while we do not believe
that it is appropriate given the Subcommittee's stated intention to
submit a full rebuttal in this statement, CFSA does feel that it is
important to make three basic points in response to these attacks:
1. Critics of the industry have called for capping payday
advance rates at 36% APR.
This would mean that a lender could only charge a fee of $1.38 per
$100.00 borrowed, or $4.14 for a typical $300 two-week payday loan.
Operating costs alone--for rent, salaries, etc.--are many times
this $1.38 per $100.00 figure, even without including loan losses and a
modest profit.
Lenders simply cannot make these short-term small loans for such a
small fee, and would have to stop making payday advance loans as has
occurred with respect to military personnel when such a limit was
imposed.
2. We strongly believe that seniors and other benefit
recipients should have the option of choosing a payday advance
if they determine it is most appropriate for them.
As noted elsewhere in this statement, only a small percentage of
payday advance customers are seniors or benefit recipients. Payday
lenders do not target senior citizens and other benefit recipients and
do not and cannot by law utilize master/sub account direct deposit
arrangements or wage assignments.
Some benefit recipients naturally do have periodic needs for short-
term, low-dollar loans. Often, they select a payday advance because
they find it to be the best, less costly, available credit alternative.
Using an ``apples to apples'' APR comparison, payday advances often
prove to be the better borrower option. Consider these typical rate
examples for several basic short-term credit alternatives when
expressed as an APR as opposed to fees: a $100.00 payday advance with
$15.00 fee is 391% APR; a $100.00 bounced check with $54.87 NSF/
merchant fee is 1431% APR; a $100.00 credit card balance with $37.00
late fee is 965% APR; a $100.00 utility bill with $46.16 late/reconnect
fees is 1203% APR; and a $29.00 overdraft-protection fee on $100.00 is
755%.
3. Critics' central focus on high annual percentage rates
(``APR'') for payday loans is most inappropriate.
The typical two-week payday advance of $300.00 has a fee of only
$15.00 per $100.00, which translated to 15% of the amount borrowed.
Yet, when this is expressed in APR terms, this becomes 390%, a very
misleading figure that causes many people to mistakenly think that an
actual 390% interest rate is being imposed for the two-week period.
The 390% APR for a payday advance arises from the fact that the
calculation rules of Regulation Z require that one make a totally
unrealistic assumption that the $15.00 fee for a two-week loan will be
charged every two weeks for an entire year ($15.00/15% 26
two-week periods = $390.00/390% APR), even though this is not the case.
In fact, not only do payday lenders not allow such repeated loan
rollovers, but state laws generally prohibit them entirely, or in some
cases allow only one or two.
Thus, this misleading APR calculation results in confusion and
misunderstanding, and industry critics tend to exploit this to advance
their political and policy agendas.
It should also be recognized that further confusion arises because
APR calculation requirements are not the same for all lenders. Payday
lenders, for example, must count all interest and fees, but others,
such as credit unions, do not have to include various service or
administrative fees in the calculation. This leads to ``apples to
oranges'' APR comparisons. However, when all interest and fees are
included when calculating the APR, one finds that many forms of short-
term credit are more costly than payday loans, as shown by the chart
above.
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