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Payday Lenders Flout Law on Seizing Gov’t. Benefits, Newspaper Says

Posted Feb 12, 2008 7:03 PM CDT
By Martha Neil

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Under federal law, creditors aren't supposed to be able to seize social security payments, or disability or veterans benefits to pay a debt, and the government won't send their checks directly to creditors.

But at least some payday lenders have found a way around those prohibitions, and are now targeting elderly and disabled persons, reports the Wall Street Journal in a front-page story today about their collection practices. Their basic methodology: helping the debtor set up a direct-deposit bank account into which government benefits checks are routed. Once received, the money is then rapidly re-routed to the payday lender.

The article tells a hair-raising tale of payday loan agreements signed by illiterate, incompetent and financially desperate individuals, leading to astronomical interest charges and, in the case of one woman profiled in the story, a default judgment and her arrest. Meanwhile, debtors are unable to pay basic bills because of the payday loans, and can lose utility service and even their homes because of what amounts to garnishment of their government benefits by payday lenders, even though that isn't technically how the debt is collected.

"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," the newspaper recounts. "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."

Industry representatives, however, contend that payday lenders provide a useful service. "This industry provides convenient access to small amounts of money," says Tommy Moore, executive vice president of the Community Financial Services Association of America. "It certainly wouldn't be right for the business to discriminate against them for whatever the source of their income is."

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