Direct-deposit Social Security benefits need protection from payday lenders

Michelle Singletary
Thursday, July 29, 2010; A19

Over the years, I've met too many people who were stuck in a hellish payday-loan cycle, rolling one loan into another until the fees and the outstanding balance crushed them.

So I completely agree with the National Consumer Law Center, which recently launched a campaign to get the Treasury Department to prevent banks from being able to snatch money from people's direct-deposited Social Security benefit checks to settle payday loans.

Payday loans are small loans that a borrower promises to repay out of his or her next paycheck or benefits check, typically in two weeks. Although the fees can seem reasonable at first -- say, a charge of $15 to borrow $100 -- when annualized, they often amount to triple-digit interest rates or more. I saw a loan contract for one woman in which her rate was more than 1,800 percent. She kept rolling over the loan, piling on more fees, until the loans ate up much of her pay.

Payday lenders must tell you the finance charge and the annual interest rate (the cost of the credit) on a yearly basis. Borrowers are charged new fees each time the same loan is extended or rolled over.

The National Consumer Law Center is moving on this issue because the federal government -- in an effort to go green and save some green -- is switching millions of people who receive Social Security and other federal benefits from paper checks to electronic payments. In March, new enrollees for Social Security, Supplemental Security Income, veterans, railroad retirement and federal civil servant retirement benefits began receiving their money through electronic transfers. People who currently receive checks will be shifted to all-electronic payments beginning March 1, 2013.

Payday loans have long been and are still the domain of storefront lenders in mostly low-income neighborhoods. Bankers may use a different name for these short-term loans, but they're still payday loans.

The National Consumer Law Center, a nonprofit advocacy group working on behalf of low-income and other economically disadvantaged consumers, wants specific rules governing any payday loan tied to Social Security payments. The center lays out recommended regulations in its report "Runaway Bandwagon: How the Government's Push for Direct Deposit of Social Security Exposes Seniors to Predatory Bank Loans."

Okay, the report's title is too long -- but the message is concise. With 41 percent of unmarried Social Security beneficiaries relying on the program for 90 percent or more of their income, it is in the best interest of the federal government to ensure that recipients aren't ensnared in a cycle of debt tied to these monthly payments.

"The number of seniors eligible for the bank payday loans through bank accounts and prepaid debit cards will almost certainly increase within the next several years as the federal government increases the pressure to move all federal beneficiaries to direct deposit," the center's report concludes.

The center recommends that the Treasury Department require financial institutions to evaluate whether a borrower can afford a payday loan if the loan is backed by the person's Social Security check. The nonprofit also says the loans should carry annual percentage rates, including fees, of no more than 36 percent, have a term of at least 90 days or one month per $100 borrowed, and allow for repayment in installments.

The center says Treasury should also prohibit lenders from requiring borrowers to provide electronic access to a bank account to pay the loan. But if borrowers do allow lenders such entry, they should be permitted to cut off that access at any time.

"With these loans, banks profit from vulnerable and hard-pressed recipients of federal benefits, trapping them in a cycle of mounting debt and high borrowing costs," said Leah Plunkett, a lawyer with the National Consumer Law Center and author of its report. "In effect, these high-cost loans are used to hijack benefits federal law intends to provide for the basic needs of elderly and disabled citizens."

The Community Financial Services Association of America, a trade group representing payday lenders, says it agrees with efforts by consumer advocacy groups to prevent lenders from using Social Security payments to secure payday loans.

"Citizens receiving government benefits are among the most vulnerable members of society," said Lynn DeVault, board chair of the trade group .

The lenders that push payday loans say they are serving people in desperate need of a quick financial fix. To be sure, there are many consumers who use payday loans. But the government should protect seniors who could get trapped in a cycle of debt they can't escape.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

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