U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

89–562 2016

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 

( 


joloto on DSKB35BYQ1 with HEARING
ii 

COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

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 

EARL POMEROY, North Dakota 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

STEPHANIE TUBBS-JONES, Ohio 

SAM JOHNSON, Texas 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 


joloto on DSKB35BYQ1 with HEARING
iii 

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 


joloto on DSKB35BYQ1 with HEARING

joloto on DSKB35BYQ1 with HEARING
(1) 

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:] 


joloto on DSKB35BYQ1 with HEARING
2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON SOCIAL SECURITY 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–39439 

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 reVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
3 

vealed 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. 


joloto on DSKB35BYQ1 with HEARING
4 

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. 

f 

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 inVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
5 

come 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. 


joloto on DSKB35BYQ1 with HEARING
6 

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 


joloto on DSKB35BYQ1 with HEARING
7 

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, ViceChair 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 


joloto on DSKB35BYQ1 with HEARING
8 

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:] 


joloto on DSKB35BYQ1 with HEARING
9 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.001
10 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.002
11 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.003
12 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.004
13 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.005
14 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.006
15 

f 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.007
16 

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. 


joloto on DSKB35BYQ1 with HEARING
17 

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 requireVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
18 

ment. 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 thirdparty 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 nonbank 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 nonbank FSPs. Once received, the financial institutions made the funds available to the 


joloto on DSKB35BYQ1 with HEARING
19 

non-bank FSPs for disbursement to the recipients. Before disbursement, the nonbank 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 nonbank 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 manVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
20 

agement 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. 

f 

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 lowincome 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 


joloto on DSKB35BYQ1 with HEARING
21 

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 lowincome 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:] 


joloto on DSKB35BYQ1 with HEARING
22 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.008
23 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.009
24 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.010
25 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.011
26 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.012
27 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.013
28 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.014
29 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.015
30 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.016
31 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.017
32 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.018
33 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.019
34 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.020
35 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.021
36 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.022
37 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.023
38 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.024
39 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.025
40 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.026
41 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.027
42 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.028
43 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.029
44 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.030
45 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.031
46 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.032
47 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.033
48 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.034
49 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.035
50 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.036
51 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.037
52 

f 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.038
53 

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, 


joloto on DSKB35BYQ1 with HEARING
54 

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. Recipi- ents 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/subaccounts 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 FedVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
55 

1The 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. 2The 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. 3Social Security Act, at 42 U.S.C. § 407(a). 

4Debt Collection Improvement Act of 1996, called ‘‘EFT’99.’’ 

5 Ellen Schultz and Theo Francis, ‘‘Social Insecurity: High Interest Lenders Tap Elderly, Disabled,’’ Wall Street Journal, February 12, 2008, A1. 

eration 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. 

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. 

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. 

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. 

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 proVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00059 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
56 

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. 7Patricia J. Cirillo, Cypress Research Group, ‘‘Survey of Key FiSCA Member Organizations 

on Transaction Volumes,’’ Attachment 1, October 2007, slide 20. 

tect 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. 

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

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 


joloto on DSKB35BYQ1 with HEARING
57 

8SSA, 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. 9 River City Bank account summary, dated March 9, 2006 for client of Philadelphia Community Legal Services, on file with CFA. 10https://www.ccrbt.com/check_products.aspx, ‘‘Benefits to Check Casher.’’ 11 ACE CheckDirect Deposit Account Application and Agreement, acquired 2008, on file with 

CFA. 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. 14https://www.weballotments.com/fedsys.asp, visited June 12, 2008. 

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

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

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

• 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

• 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.) 

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 acVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
58 

15 31 U.S.C. § 3332(i) 16 31 CFR 208.6, 210.5. 17 63 Fed. Reg. 64823 (Nov. 23, 1998). 18Dennis 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. 

count 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. 

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. 

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 


joloto on DSKB35BYQ1 with HEARING
59 

Table 54 noted that 9.1 percent of respondents were retired, the largest occupation listed besides 

‘‘other.’’ 21http://www.cashnetusa.com/secure/contract/contract, July 30, 2007. 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. 

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. 

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.) 

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


joloto on DSKB35BYQ1 with HEARING
60 

23Donald 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. 25Dotty Clayton, Navy Marine Corp Relief Society, electronic communication to CFA, June 17, 

2008. 26 ‘‘Payday Loan Reform Act of 2007,’’ HR 2871 

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

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

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

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. 


joloto on DSKB35BYQ1 with HEARING
61 

27https://www.ccrbt.com/check_faqs.aspx, last visited February 14, 2008. 28https://www.ccrbt.com/check_products.aspx, last visited February 14, 2008. 29http://www.ccrbt.com/card_fazs.aspx, last visited June 11, 2008. 30https://www.ccrbt.com/check_products.aspx, ‘‘Benefits to Check Casher’’ 31 ACE CheckDirect Deposit Account Application and Agreement, acquired 2008, on file with 

CFA. 32http://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. 

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

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

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: 

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.) 

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.) 

RB&T Currency Connection Debit Card Program also provides an optional ‘‘Overdraft Protection’’ Feature which turns the direct deposit delivery card into a credit 


joloto on DSKB35BYQ1 with HEARING
62 

34http://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. 36 Id. 37http://www.dollars-direct.com/visited May 2, 2006. 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.’’ 40 River City Bank Dollar$$$Direct Application, Authorization, Certification, Agreement. On 

file with CFA. 

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. 

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

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

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

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


joloto on DSKB35BYQ1 with HEARING
63 

41http://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. 42http://www.debitcardone.com/features.html, visited June 16, 2008. 43 River City Bank—Dollars Direct page, retrieved by Google on Feb. 9, 2006. On file with 

CFA. 44 River City Bank—Dollars Direct Agreement, Cash Advance Product, 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. 

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.) 

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

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 


joloto on DSKB35BYQ1 with HEARING
64 

45QuickAcce$$ ad, Checklist, Vol. 10 No. 3, 2007, p. 62. 46Petz Enterprises Newsletter 2005 ‘‘What’s Better than Money in the Bank?’’ available at 

www.petzent.com. 47http://www.petzent.com/quickaccess/pricing.asp, last visited May 22, 2008. 48http://www.first-citizens.com/allot.asp?IF’fedben.asp&FTR’altfooter.asp, last visited May 22, 

2008. 49https://www.weballotments.com/fedsys.asp, visited June 12, 2008. 50Telephone communications with social worker 

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

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. 

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

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

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 


joloto on DSKB35BYQ1 with HEARING
65 

51Loan Disclosure and Promissory Note, True Financial Services, LP, on file with CFA 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. 53 Electronic communication, Sarah Mattson, New Hampshire Legal Assistance, received by 

CFA June 2, 2008. 54 Electronic communication from H.C. Klein, on posting at www.StopPaydayPredators.org 

Feb. 24, 2008. 55See State Information, www.paydayloaninfo.org Click on Colorado on the map for details. 

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

• 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

• 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

• 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

• 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 


joloto on DSKB35BYQ1 with HEARING
66 

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. 57 Complaint, Kelvin White, Cynthia Wimberly, and Nehemiah Bailey vs. Advance America 

Servicing, et al, Circuit Court of Ouachita County, Arkansas, May 31, 2007. 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. 

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

• 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

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 Loan58

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 

f 

Mr. POMEROY. Thank you very much. 


joloto on DSKB35BYQ1 with HEARING
67 

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. 


joloto on DSKB35BYQ1 with HEARING
68 

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.’’ 


joloto on DSKB35BYQ1 with HEARING
69 

When these factors are taken into consideration against the substantial documentation of low financial literacy among all age groups, it makes bad decisionmaking 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 SeVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00073 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
70 

curity 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: 

§ Financial Literacy Public-Private Partnership (FLPPP) http://www.dfi.wa.gov/ 

flppp/seniors.htm 

§ Financial Literacy for Older Adults http://www.albany.edu/aging/fl/resources/ 

pres-financialliteracy.pdf 

§ 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 


joloto on DSKB35BYQ1 with HEARINGInsert 89562A.039
71 

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. 

§ Interviews of con-artist criminals reveal that they do not like to be questioned. 

§ Call center research found that providing fraud targets with questions they 

could ask produced the largest reduction in victimization rates. 

§ 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 

f 

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 


joloto on DSKB35BYQ1 with HEARING
72 

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. 


joloto on DSKB35BYQ1 with HEARING
73 

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—— 


joloto on DSKB35BYQ1 with HEARING
74 

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. 


joloto on DSKB35BYQ1 with HEARING
75 

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 


joloto on DSKB35BYQ1 with HEARING
76 

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 


joloto on DSKB35BYQ1 with HEARING
77 

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 


joloto on DSKB35BYQ1 with HEARING
78 

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—— 


joloto on DSKB35BYQ1 with HEARING
79 

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 


joloto on DSKB35BYQ1 with HEARING
80 

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? 


joloto on DSKB35BYQ1 with HEARING
81 

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 


joloto on DSKB35BYQ1 with HEARING
82 

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. TubbsJones’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 Federallysourced 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 


joloto on DSKB35BYQ1 with HEARING
83 

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 curVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
84 

rent 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:] 

f 

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. 


joloto on DSKB35BYQ1 with HEARING
85 

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 panicstricken 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. 

f 

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 beneVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00089 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
86 

ficiaries 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 reenrollments 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 


joloto on DSKB35BYQ1 with HEARING
87 

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 


joloto on DSKB35BYQ1 with HEARING
88 

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 


joloto on DSKB35BYQ1 with HEARING
89 

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. 

f 

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 


joloto on DSKB35BYQ1 with HEARING
90 

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:] 


joloto on DSKB35BYQ1 with HEARING
91 

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. 


joloto on DSKB35BYQ1 with HEARING
92 

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 interVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00096 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
93 

agency 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. 

f 

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 


joloto on DSKB35BYQ1 with HEARING
94 

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 FDICsupervised 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, 


joloto on DSKB35BYQ1 with HEARING
95 

1Some 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). 2For 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 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. 


joloto on DSKB35BYQ1 with HEARING
96 

3McCahey v. L.P. Investors, 774 F.2d 543, 550 (2d Cir. 1985). 4Mayers 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). 5See, e.g., ‘‘Direct Deposit: Frequently Asked Questions,’’ Social Security Online, http:// 

www.socialsecurity.gov/deposit/DDFAQ898.htm. 

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

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. 

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 garnishVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00100 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
97 

ment 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 perVerDate Sep 11 2014 11:54 Jun 29, 2016 Jkt 089562 PO 00000 Frm 00101 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\89562.XXX 89562

joloto on DSKB35BYQ1 with HEARING
98 

6See CONN. GEN. STAT. 52–367b (2007); CAL. CIV. PROC. 704.080 (2004). 7Similar amendments could be made to the law regarding VA benefits and other legally protected federal benefit payments. 

spective 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: 

• $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. 

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 smalldollar, 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. 


joloto on DSKB35BYQ1 with HEARING
99 

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 highercost 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 FDICsupervised 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 


joloto on DSKB35BYQ1 with HEARING
100 

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. 

f 

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. 


joloto on DSKB35BYQ1 with HEARING
101 

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. 


joloto on DSKB35BYQ1 with HEARING
102 

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 


joloto on DSKB35BYQ1 with HEARING
103 

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 


joloto on DSKB35BYQ1 with HEARING
104 

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. TubbsJones, 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. 


joloto on DSKB35BYQ1 with HEARING
105 

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 


joloto on DSKB35BYQ1 with HEARING
106 

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/subaccount 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. 


joloto on DSKB35BYQ1 with HEARING
107 

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. 


joloto on DSKB35BYQ1 with HEARING
108 

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:] 


joloto on DSKB35BYQ1 with HEARING
109 

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 


joloto on DSKB35BYQ1 with HEARING
110 

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-tomiddle 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. 


joloto on DSKB35BYQ1 with HEARING
111 

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. 

Æ 


joloto on DSKB35BYQ1 with HEARING