WASHINGTON, D.C. - The Subcommittee on Social Security held a hearing today examining whether Social Security and low-income Supplemental Security Income (SSI) beneficiaries are being harmed by debt collection and other financial practices, and whether federal law that is intended to protect those living on fixed incomes is being sufficiently enforced.
The hearing revealed that a lack of enforcement of longstanding protections in the Social Security Act is allowing creditors, banks, and non-bank financial service providers access to benefits that are intended to provide basic income for food, clothing and shelter.
The Subcommittee examined practices surrounding freezing and garnishment of beneficiary funds that are exempt from garnishment; high-fee direct-deposit arrangements; and high-interest lending to Social Security beneficiaries. The hearing revealed the following problems:
A troubling increase in the number of victims:
Legal aid attorneys have seen an increase in the number of clients depending on Social Security and SSI who have become victims of these practices. Margot Saunders, of the National Consumer Law Center, testified that “the number of judgments against these impoverished recipients of federal benefits has escalated dramatically in recent years." Her statement included dozens of case histories of actual victims of prohibited debt-collection practices, who must find legal help and then go to court to prove that federal law exempts their benefits from being seized to pay private debts. She estimated that there are “over 1 million recipients of Social Security and other exempt federal benefits who have their funds illegally frozen by banks." Beneficiaries are often unaware that their funds are frozen, and continue making payments from their accounts, only to have those payments denied by their banks. This can pose extreme financial hardship to beneficiaries. In addition, banks also collect substantial non-sufficient fund charges, and additional fees for freezing and garnishing the accounts.
Need for a stronger federal response to protect beneficiaries:
Members of both parties were concerned about the lack of compliance with federal law, and urged the Treasury Department, the Social Security Administration (SSA) and bank regulating agencies to step up their efforts to protect Social Security benefits. Marianna LaCanfora of SSA testified that there was no ambiguity in federal law, emphasizing “the language of the statute is very clear" that benefit payments are exempt from garnishment. She said SSA is working with Treasury and other federal agencies, and “would consider a joint regulation" if needed.
Treasury Department witness Gary Grippo said that “Treasury, the Social Security Administration, and other federal benefit agencies are working together to provide specific guidance to financial institutions" regarding garnishment of benefits.
Congressman Earl Pomeroy, who presided over the hearing, cited a lengthy list of public calls for action to better protect beneficiaries. He noted that despite the general consensus that these problems must be addressed “it seems that the federal agencies responsible for protecting beneficiaries have been on a long, slow road to nowhere." He called for monthly updates on agencies’ progress in addressing these concerns.
Beneficiaries can lose control of their funds:
The Subcommittee also heard from SSA`s Inspector General (IG), who investigated whether electronic deposits of benefits were being made to bank accounts that were controlled by check-cashing stores and high-fee lenders. The IG’s investigation found that check-cashing stores had opened direct deposit accounts at five banks for over 63,000 SSI beneficiaries. Some of these check-cashers also offered high-cost, short-term loans. The accounts were not controlled by the beneficiary, but instead by the check-cashing stores.
A witness testifying on behalf of the Federal Deposit Insurance Corporation (FDIC), Steve Fritts, acknowledged this downside of direct deposit, noting that "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." For years, FDIC has been leading the effort to encourage banks to make consumer credit available to small borrowers as an alternative to high-cost lenders. The agency has also been leading other bank regulating agencies in addressing the garnishment problem.
Jean Ann Fox, of the Consumer Federation of America, testified that a 2006 survey on check-cashing practices found that “for a $1002 Social Security check, a recipient pays $24.45 a month or almost $300 a year just to turn the check into cash." Costs can be even higher for direct deposit of benefits routed through a non-bank financial outlet, because the direct-deposit bank and the check-casher both charge additional fees. For instance, she testified that an account at River City Bank opened by a check-cashing store would incur a charge of $9.95 per deposit, plus $2.95 for the check-casher to print the check, then an additional fee to cash the check, which is typically 2.44 percent of the face value of the check.
SSA testified that the agency is reexamining its policies that allow such high-cost accounts to be used for electronic direct deposits, in order to preserve a beneficiary’s control over their benefits. Subcommittee Members and consumer groups applauded this step.
