Direct Deposit Push Exposes Social Security Recipients to Bank Payday Loans

/PRNewswire/ -- The federal government's push to require all recipients of Social Security and other benefits to receive payments by direct deposit will expose many seniors to predatory payday loans made by banks.

That's the conclusion of "Runaway Bandwagon: How the Federal Government's Push for Direct Deposit of Social Security Benefits Has Exposed Seniors to Predatory Bank Loans," a new report issued by the National Consumer Law Center.

"Treasury must stop banks from making these high-cost, short-term loans to Social Security recipients," said Margot Saunders, an attorney with NCLC and an author of the report. "These loans are only made because they are fully secured by a borrower's next direct deposit of federal funds."

"While federal law protects Social Security and other benefits from seizure by creditors, banks regularly take those benefits as repayment for what are essentially payday loans that they have made without even assessing borrowers' ability to afford those loans," Saunders added.

"Runaway Bandwagon" spotlights account advance loan products - some with Annual Percentage Rates as high as 1,800% - that some banks offer to customers with checking accounts or prepaid debit cards. Banks help themselves to funds from customers' accounts to repay loan principal and fees, so that these loans closely resemble both fee-based overdraft programs and payday loans.

"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, an attorney with NCLC and an author of the 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."

More seniors and vulnerable benefits recipients will become the targets for such loans as the Treasury Department moves forward with its plan to require electronic payments to all federal benefit recipients by 2013. New protections are needed to prevent the victimization of seniors and other vulnerable consumers and preserve income from Social Security and other social insurance programs that many seniors depend upon for survival.

Treasury must ensure that when accounts used for benefit deposits are used to secure loans, those loans are made only after an evaluation of the borrower's ability to afford repayment, carry APRs including fees of no more than 36%, have a term of at least 90 days or one month per $100 borrowed and allow repayment in multiple installments. Treasury must also prohibit banks and other lenders from requiring borrowers to provide as security electronic access to a bank account. Borrowers who do allow lenders such access must be permitted to end that access at any time and at no cost.

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Fed Fixes for Overdraft Fall Short, Strong Reform Crucial, CRL Tells Congress

/PRNewswire/ -- Congressional proposals to rein in abusive overdraft practices are long overdue, Center for Responsible Lending executive Eric Halperin told the House Financial Services Committee today.

Halperin, who is director of CRL's Washington office, gave full support to legislation aimed at reforming bank overdraft programs, which cost consumers $23.7 billion last year and are among the most predatory lending products on the market.

"Charging people a $35 fee for a small, debit card transaction is unacceptable," said Halperin, director of CRL's Washington office. "It doesn't save them bounced check fees, it simply skims money from their account and puts them in a bind."

Overdraft fees shot up 35 percent from 2006 to 2008. Banks and credit unions drive up the fees through unfair and costly practices such as automatically approving a debit card transaction even if it overdraws an account and then charging a fee that is often higher than the shortfall itself. Also, instead of recording transactions in the order they are made, financial institutions typically reorder them to increase the number of overdraft fees a customer incurs.

Federal bank regulators, including the OCC and the Federal Reserve Board, have recognized the abusive nature of these practices for years but failed to use their oversight authority to rein them in. The FRB finally is weighing a rule that would take a small step forward, but the Overdraft Protection Act of 2009, (H.R. 3904), under consideration in the House, and similar legislation in the Senate would offer real, substantive reform.

Both bills would give consumers an informed choice on whether they want to pay for high-cost overdraft coverage. They would also limit the number of fees a bank could charge each month and year, and they would require that fees be reasonable and bear some relationship to a bank or credit union's cost of covering a shortfall. And both bills would ban the widespread practice of triggering avoidable overdraft fees by re-ordering customer transactions to maximize overdrafts.

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