High Interest Payday Lenders Trap Seniors, Veterans And The Disabled
In a Page One story in the Wall Street Journal on February 12, 2008, reporters Ellen Schultz and Theo Francis alerted us to one of the latest financial schemes targeting seniors, veterans, and the disabled. This is the latest twist for the fast growing payday loan industry – lenders who make high interest loans that are secured by the borrower’s future paychecks. The industry is now targeting recipients of monthly government benefits, including social security, disability, and veteran’s benefits.
Since federal laws bar the government from sending benefits directly to lenders, the lenders create relationships with banks that arrange for prospective borrowers to have their government benefits electronically deposited into an account. The banks then transfer funds to respective payday lenders who subtract the debt repayments, fees and interest before giving recipients the balance, which seniors often refer to as their “allowance.”
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With effective annual percentage rates as high as 400% or more, payday lenders can completely control a Social Security recipient’s finances. No statistics are publicly available on the proportion of payday loans that are backed by Social Security and other government benefits. An analysis of data from the U.S. Department of Housing and Urban Development revealed that payday lenders are located around government-subsidized housing for seniors as well as the disabled.
Critics of the payday loan industry note that fixed-income borrowers are reliable and lucrative because they cannot work to subsidize their incomes. As a result, they can rarely pay off their loans quickly enough to avoid fees and compounding of interest. In many instances, borrowers end up in a cycle of debt with several payday lenders to cover major expenses that they can ill afford. Social Security recipients are supposed to be protected: Federal law prohibits creditors from seizing Social Security payments to repay debts. When borrowers fail to comply with loan terms or fall behind on payments, however, they can lose their benefits and face lawsuits, harassment and even jail.
Recipients of government benefits were not always a market for payday lenders. The Federal Government’s mandate that recipients should receive benefits via electronic deposit prompted the surge in payday lending in the late 1990’s. Direct deposit enabled recipients to use future benefit deposits to a bank account as collateral for small short-term loans. The abuses by payday lenders can be difficult for the government to police. Although the Treasury Department is responsible for ensuring that Social Security payments reach beneficiaries, privacy rules prohibit the government from monitoring recipients' bank accounts without cause.
