Lawyers in our firm are seeing a disturbing pattern where payday loan companies and other high-interest lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veterans’ benefits. Many payday lenders are engaging in a practice whereby the borrower essentially pledges his or her monthly benefit check as collateral for a loan. Social Security and other government benefits have long been protected by federal law from garnishment or assignment.
The payday lenders have circumvented this long-standing prohibition by forging cozy relationships with banks, who act as “authorized payment agents” for elderly or disabled borrowers. This allows for a borrower’s monthly benefit check to be direct deposited into a specially created bank account. When the bank receives the borrower’s monthly stipend from Social Security, the bank immediately transfers the funds to the payday lender. The lender then subtracts the borrower’s monthly loan payment, including hefty interest and fees, before handing over the remaining amount. It is not unusual for the remaining amount to be less than half the original amount of the borrower’s monthly check.
Social Security recipients have become targets of the $50 billion payday loan industry in the wake of legislation in the 1990s that required Social Security beneficiaries to receive their checks by electronic deposit (unless they opt out). The number of recipients with direct deposit increased from about 50% in the mid-1990s to more than 80% today. With direct deposit, a Social Security recipient’s monthly checks are now easily pledged as collateral for short term loans. In fact, data collected by the U.S. Department of Housing and Urban Development shows that payday lenders are now disproportionately clustered near government-subsidized housing for seniors and the disabled.
The AARP, a strong defender of consumer rights, has voiced concern about this practice, in which “check cashers, pawnshops, and rent-to-own outlets are permitted to become conduits of federal benefit payments.” The consumer advocacy group stated:
[W]e are very concerned that if non-financial “fringe banking” institutions are allowed to be authorized agents, recipients may be charged high fees whenever their payments are accessed. As many recipients are low-income consumers or are living on fixed incomes, this would jeopardize their financial well-being. Further, it is fundamentally unfair to expose recipients to payment agents that are not subject to federal consumer protection laws, and are not charged with acting in the recipient’s fiduciary interest.
Our firm is concerned that payday lenders’ easy access to needy borrowers’ monthly government benefits presents the potential for wide-spread exploitation of our society’s most vulnerable members. We are monitoring this situation very closely. If you need more information, please contact Archie Grubb at (800) 898-2034 or Archie.Grubb@BeasleyAllen.com to discuss predatory lending cases.
Source: Wall Street Journal