[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



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




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                          Washington, DC 20402-0001













                      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 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``110th Congress'' from the menu entitled, ``Committee Hearings'' 
(http://waysandmeans.house.gov/Hearings.asp?congress=18). Select the 
hearing for which you would like to submit, and click on the link 
entitled, ``Click here to provide a submission for the record.'' Follow 
the online instructions, completing all informational forms and 
clicking ``submit'' on the final page. ATTACH your submission as a Word 
or WordPerfect document, in compliance with the formatting requirements 
listed below, by close of business Tuesday, July 8, 2008. Finally, 
please note that due to the change in House mail policy, the U.S. 
Capitol Police will refuse sealed-package deliveries to all House 
Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \3\ Social Security Act, at 42 U.S.C. Sec. 407(a).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \4\ Debt Collection Improvement Act of 1996, called ``EFT'99.''
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \9\ River City Bank account summary, dated March 9, 2006 for client 
of Philadelphia Community Legal Services, on file with CFA.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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$$$ Direct agreement states: 
        ``I further authorize the Bank to pay all of the fees and 
        charges due to the EFD upon receipt by the Bank of the Direct 
        Deposit.'' \12\ The bank's Cash Advance Program makes loans of 
        $200 to recipients that are repaid in full out of the next 
        deposit of exempt funds. The bank charges a $10 fee and permits 
        the EFD to also collect $10 for a one-month $180 loan.\13\
---------------------------------------------------------------------------
    \12\ River City Bank Dollar$$$ 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.
---------------------------------------------------------------------------
          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.)
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \15\ 31 U.S.C. Sec. 3332(i)
    \16\ 31 CFR 208.6, 210.5.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \17\ 63 Fed. Reg. 64823 (Nov. 23, 1998).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.)
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \25\ Dotty Clayton, Navy Marine Corp Relief Society, electronic 
communication to CFA, June 17, 2008.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \29\ http://www.ccrbt.com/card_fazs.aspx, last visited June 11, 
2008.
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \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.)
---------------------------------------------------------------------------
    \31\ ACE CheckDirect Deposit Account Application and Agreement, 
acquired 2008, on file with CFA.
---------------------------------------------------------------------------
    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.)
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \37\ http://www.dollars-direct.com/visited May 2, 2006.
---------------------------------------------------------------------------
    River City Bank Dollar$$$Direct delivers exempt funds by either a 
cashiers check or a debit card. The direct deposit agreement permits 
the bank to deduct fees for both River City Bank and the Electronic 
Funds Distributor (EFD) before exempt funds are made available to the 
recipient.\38\ Once the funds have been transferred from the bank to 
the check casher or other outlet, the bank takes no responsibility for 
failure of their partner to correctly deliver the check to the 
payee.\39\
---------------------------------------------------------------------------
    \38\ ``Fees and Charges: I authorize the Bank to deduct from the 
proceeds of my monthly or other periodic disbursement, all fees and 
charges related thereto as described in the Dollar$$$
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.''
---------------------------------------------------------------------------
    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$$$Direct account disclosures 
and fee schedule. I further authorize the Bank to pay all of the fees 
and charges due to the EFD upon receipt by the Bank of the Direct 
Deposit.\40\
---------------------------------------------------------------------------
    \40\ River City Bank Dollar$$$Direct Application, Authorization, 
Certification, Agreement. On file with CFA.
---------------------------------------------------------------------------
    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$$$Direct's debit card comes with an overdraft ``privilege'' 
of up to $250 over the account balance,\42\ enabling recipients to 
borrow from the bank by overdrawing the account. A River City Bank web 
page cached by Google from February 9, 2006 explains its cash advance 
program to check cashers and other outlets as a loan product.
---------------------------------------------------------------------------
    \41\ http://www.debitcardone.com/terms.html, June 16, 2008. Fee 
schedule dated 09/03. A version provided by Community Legal Services in 
Philadelphia, dated 04/07, did not list the Overdraft Privilege Fee, 
but included a $10 Cash Advance Fee. On file with CFA.
    \42\ http://www.debitcardone.com/features.html, visited June 16, 
2008.
---------------------------------------------------------------------------
    Welcome to the Cash Advance Program page. Here you will find 
information about how direct deposit customers can get Cash Advances on 
any benefit or payment including SSA, SSI and VA as well as Payroll and 
Welfare.
    What is CAP?
    The Cash Advance Program or CAP is a program within the 
Dollar$$$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.)
---------------------------------------------------------------------------
    \43\ River City Bank--Dollars Direct page, retrieved by Google on 
Feb. 9, 2006. On file with CFA.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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$$ 2004 program was 
described as follows: ``QuickAccess allows your customer's funds to be 
directly deposited into a trust account, and you are authorized to 
print a check made payable to the recipient at your location for the 
amount of the benefits, less any applicable QuickAccess fees.'' \46\
---------------------------------------------------------------------------
    \45\ QuickAcce$$ 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.
---------------------------------------------------------------------------
    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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