HEARING ON PROTECTING SOCIAL SECURITY BENEFICIARIES FROM PREDATORY LENDING AND OTHER HARMFUL FINANCIAL INSTITUTION PRACTICES
SUBCOMMITTEE ON SOCIAL SECURITY
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
Tuesday, June 24, 2008
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
FORTNEY PETE STARK, California
JIM MCCRERY, Louisiana
Janice Mays,Chief Counsel and Staff Director
SUBCOMMITTEE ON SOCIAL SECURITY
SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also, published in electronic form.The printed hearing record remains the official version.Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.
C O N T E N T S
Nancy Smith, Vice-Chair, AARP National Policy Council
The Honorable Patrick P. O’Carroll, Jr., Inspector General, Social Security Administration
Margot Saunders, of Counsel, National Consumer Law Center
Jean Ann Fox, Director of Consumer Protection, Consumer Federation of America
Dallas L. Salisbury, President and Chief Executive Officer, Employee Benefit Research Institute
Marianna LaCanfora, Assistant Deputy Commissioner of Retirement and Disability Policy, Social Security Administration
Gary Grippo, Deputy Assistant Secretary for Fiscal Operations, U.S. Department of the Treasury
Steve Fritts, Associate Director, Risk Management Policy and Examination Support Branch, Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation
SUBMISSIONS FOR THE RECORD
HEARING ON 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,
The Subcommittee met, pursuant to notice, at 10:00 a.m., in room B-318, Rayburn House Office Building, Hon. Earl Pomeroy presiding.
[The advisory of the hearing follows:]
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 income 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.
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 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, Vice-Chair 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 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.
[The statement of Nancy Smith follows:]
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.
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 Hon. O’Carroll, Jr. follows:]
Mr. POMEROY. Thank you, Mr. O’Carroll.
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 low-income 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 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 low-income 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.
Mr. POMEROY. Thank you.
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, 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. Recipients 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/sub-accounts 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.
Mr. POMEROY. Thank you very much.
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.
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.
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.
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?
Mr. POMEROY. Without objection, so ordered.
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 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.
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 –
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.
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 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 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 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 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.
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 –
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 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?
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?
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.–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 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. Tubbs-Jones’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 Federally-sourced 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 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 current 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.
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 beneficiaries 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 re-enrollments 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 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:]
Mr. POMEROY. Thank you.
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 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.
Mr. POMEROY. Thank you.
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 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 FDIC-supervised 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, the U.S. Treasury Department, and other agencies, to find solutions.
I would happy to answer any questions that the Committee might have.
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.
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.
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 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 specific 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 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.–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. Tubbs-Jones, 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.
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 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.
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/sub-account 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.
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.
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.]
[Submissions for the record follow]