DOTHAN, Ala. One recent morning, dozens of elderly and disabled people, some propped on walkers and canes, gathered at Small Loans Inc. Many had borrowed money from Small Loans and turned over their Social Security benefits to pay back the high-interest lender. Now they were waiting for their “allowance” their monthly check, minus Small Loans’ cut.
The crowd represents the newest twist for a fast-growing industry lenders that make high-interest loans, often called “payday” loans, that are secured by upcoming paychecks. Such lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veterans benefits.
“These people always get paid, rain or shine,” says William Harrod, a former manager of payday loan stores in suburban Virginia and Washington, D.C. Government beneficiaries “will always have money, every 30 days.”
The law bars the government from sending a recipient’s benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.
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As a result, these lenders, who pitch loans with effective annual interest as high as 400 percent or more, can gain almost total control over Social Security recipients’ finances.
There are no publicly available statistics on the proportion of payday loans that are backed by Social Security and other government benefits. But dozens of legal-aid lawyers, senior service groups and credit counselors across the nation say they are seeing more and more clients on Social Security struggling with multiple payday loans.
The Treasury Department, charged with ensuring that Social Security payments reach beneficiaries, says privacy rules forbid it from monitoring recipients’ bank accounts without cause. Social Security Administration officials say the agency isn’t responsible for benefits once paid out and that beneficiaries who run into problems should consult an attorney.
An analysis of data from the U.S. Department of Housing and Urban Development shows many payday lenders are clustered around government-subsidized housing for seniors and the disabled. The research was done by Steven Graves, a geographer at California State University at Northridge, at The Wall Street Journal’s request. His previous work was cited by the Department of Defense in its effort to cap the amounts lenders can charge military personnel.
Lenders say they provide a useful service. “This industry provides convenient access to small amounts of money,” said Tommy Moore, executive vice president of the Community Financial Services Association of America, which says it represents about 60 percent of payday loan stores. “It certainly wouldn’t be right for the business to discriminate against them for whatever the source of their income is.”
But some industry critics say fixed-income borrowers are not only more reliable, they are also more lucrative. Often elderly or disabled, they are typically dependent on smaller fixed incomes and are rarely able to pay off their loans quickly.
“It’s not like they can work more hours,” says David Rothstein, an analyst at Policy Matters Ohio, an economic research group in Cleveland. “They’re trapped.”
Social Security recipients weren’t always a natural market for payday lenders, which typically require borrowers to have a bank account and a regular source of income. For years, a large percentage of government beneficiaries lacked traditional bank accounts, choosing to just cash their checks instead.
But by the late 1990s, the federal government began requiring that Social Security beneficiaries receive their benefits by electronic deposit to a bank account, unless they opt out. The number of recipients with direct deposit soared to more than 80 percent today, up from 56 percent in 1996. Citing taxpayer savings and greater security and convenience for recipients, the government is making a fresh push to get the remaining holdouts to participate.
With direct deposit, Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans.
Oliver Hummel, a Billings, Mont., resident with schizophrenia, lived on the $1,013 a month in Social Security disability benefits he received by direct deposit to his bank account. Early last year, after his car broke down and his 13-year-old terrier racked up a big vet bill, Hummel borrowed $200 from a local lender.
Like many payday borrowers, Hummel realized he couldn’t pay off the loan when it was due so he went to another “payday” lender. Lenders rarely ask about other loans and debt, and borrowers often take out multiple loans in an effort to avoid defaulting. By February, Hummel had eight loans from eight lenders, at effective annual interest rates that ranged from 180 percent to 406 percent.
The industry mushroomed in the 1990s and continues to prosper. Analysts estimate that payday loan volume has climbed to about $48 billion a year from about $13.8 billion in 1999. Most payday lenders are small and privately held. The biggest publicly traded company is Advance America Cash Advance Centers Inc., based in Spartanburg, S.C., with 2,900 stores in three dozen states and reported earnings of $42.9 million in the first nine months of 2007.
No regulatory agency tracks how much Social Security money is going to lenders as repayment for payday loans. A 2006 study by the Consumer Federation of America found that one-fifth of those without conventional bank accounts are receiving their government benefit checks through nonbanks, including payday lenders that also operate as check-cashing stores.
Although federal law says creditors can’t seize Social Security, disability and veteran’s benefits to pay a debt, enforcement of the law is scant, and many Social Security recipients are unaware of their legal rights. Lenders and their debt collectors routinely sue Social Security recipients who fall behind in their payments and threaten them with criminal prosecution, senior advocates say. Debtors must go to court to prove their case.
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