Dave Zweifel's Plain Talk: Law ignored as lenders prey on elderly

Dave Zweifel  —  8/06/2008 5:49 am

Earlier this year I wrote about the phenomenon of the credit bottom feeders gaining access to Social Security and veterans' pension checks to collect high-interest loan payments from some of the most vulnerable among us.

Back in February, the Wall Street Journal reported how payday loan and other high-risk credit purveyors had begun targeting the elderly and disabled, offering them quick loans to cover unexpected expenses.

Up until recently, the quick loan sharks had steered away from these potential borrowers because it is illegal to garnish those government checks if the creditor defaults.

However, some banks began playing footsie with the quick lenders, some of whom notoriously collect up to 400 percent annual interest. The vast majority of pension checks are deposited directly into the recipient's bank account, theoretically making the money untouchable until the recipient writes a personal check. But some banks -- for a fee -- would first direct the money into the lenders' accounts, where they could siphon off their payments and fees, and then release the balance to the borrowers' accounts, in effect short-circuiting the direct deposit process.

The practice, it turns out, is far more prevalent than most people imagined.

After the Journal's story appeared, our own U.S. Sen. Herb Kohl and his colleagues Max Baucus of Montana and Claire McCaskill of Missouri asked the Social Security Administration to investigate. The SSA folks have now reported that the practice of tapping into the government checks not only exists, it's growing.

According to the report, two-thirds of America's 12 largest banks are violating federal law by garnishing accounts that contain government benefits. That includes Social Security, Supplemental Security Income and veterans' benefits.

"This report confirms how widespread this illegal practice has become," Kohl said in a statement. "We need our banking regulatory agencies to start enforcing the law. Until they do, it is not right to spend taxpayer money encouraging seniors to sign up for direct deposit, which only leaves them open to illegal freezes and garnishment."

Baucus pointed out that many seniors, veterans and the disabled are living from one benefit payment to the next.

"If payments that are sent directly to their banks are ganished, these recipients do not have enough money to live on, and that is why current law prohibits such garnishments," he added.

The Social Security Administration's investigation stated bluntly that the banks were ignoring the federal law.

"In most cases, the protected funds are taken not only by the creditor, but also by the bank through the collection of additional fees levied for processing the illegal garnishment." This, the SSA added, can include overdraft charges and insufficient fund charges that occur as the result of the garnishment.

It estimated that the 12 largest banks during a 12-month period beginning in September 2006 garnished more than a million dollars from accounts that contained only government benefits while an additional $29 million-plus was taken from accounts in which the government checks were commingled with other funds.

Additionally, the garnishments weren't only engineered by quickie loan outfits, but some by the banks themselves, which had granted loans to borrowers they obviously knew would have trouble repaying them.

We all know it's a cruel world out there these days, but how cruel is becoming an eye-opener.

What does it say about our society when the powerful and wealthy can ignore the law to prey on the very folks who need help the most?

Dave Zweifel is editor emeritus of The Capital Times.

Dave Zweifel  —  8/06/2008 5:49 am