Weigh In on Pending Proposal to End Garnishment of Benefits

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If you think America is a nation of laws, remember that some people think laws exist merely to be circumvented.

One example that has remained below the radar is creditors seizing Social Security and other public benefits which by law are beyond their reach. The peculiar, and permitted abuse is that banks are not required to check if funds in a customer’s account are, say, only from those sources (and for some consumers, their only deposits are wire transfers marked “SSI” or “SSA”).

Banks contend that they must execute garnishment orders. Not surprising, since that service is very lucrative to them.

Moreover, the situation has gotten worse as more lenders have targeted recipients of benefits payments. A 2008 Wall Street Journal article discussed how payday lenders not only focused on Social Security payment recipients but made illegal arrangements with banks to have funds transferred from accounts receiving only government benefit deposits to the loan companies:

One recent morning, dozens of elderly and disabled people, some propped on walkers and canes, gathered at Small Loans Inc….The crowd represents the newest twist for a fast-growing industry — lenders that make high-interest loans, often called “payday” loans, that are secured by upcoming paychecks. Such lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veteran’s benefits…

The law bars the government from sending a recipient’s benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.

As a result, these lenders, which pitch loans with effective annual interest as high as 400% or more, can gain almost total control over Social Security recipients’ finances….

An analysis of data from the U.S. Department of Housing and Urban Development shows many payday lenders are clustered around government-subsidized housing for seniors and the disabled…

The FDIC, Treasury, Office of the Comptroller of the Currency and other agencies have put forward a proposal to end these abuses. Since all the suggested fixes, such as providing notice to customers of their rights and when a garnishment order arrives, notifying collection agencies that an account contains exempt funds, waiving certain fees while the account is frozen, will all lower financial firm profits on accounts that are probably not very profitable to begin with, the banking industry is sure to object vociferously.

Please weigh in on this proposal. The text is here, and includes instructions on how to submit comments.

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  1. psychohistorian

    Ok, I went and read the proposal. I came away thinking that this is the wrong approach to the problem. Since it only “encourages” the banks to treat their clients respectfully what are the chances this individual proposal will change the moral and ethical underpinnings of our social/economic/governmental system.

    My approach would be to split the social utility kind of banking from commercial, speculative, etc. The social utility banking system would be required (not encouraged) to structure itself to provide the most public service which would include policies covering garnishment situations. My approach also says that government/social services are good and necessary for an ongoing segment of the population that need financial education and potentially ongoing counseling. I don’t buy the boogeyman argument that we can’t effectively provide a social safety net without creating a parasitic lower class.

    On the other hand, the rich have been parasitic for quite a while so maybe it is time to give welfare queens a chance.

    1. Doug Terpstra

      At one time, we had a kind of dynamic, wealth-creating symbiosis in America, when the dream was alive and other nations admired us, but those days are gone. We’ve degenerated to a practice of parasitic ‘capitalism’, which unlike most successful parasitism, kills the host and then devolves toward cannibalism.

      Although I haven’t yet seen the movie “Daybreakers”, I imagine it follows a similar theme, wherein the vampires learn better herd husbandry. Baa-aa-aa!?

    2. Jerry

      I have a 22 year old son who has autism. He works as many hours as he is able to find from employers…4 hours per week. He is proud of his jobs, works hard, and never misses. He receives SSI for his disability. Every dollar he earns is subtracted from his SSI payment….I believe he deserves the respect everyone deserves….including you.

  2. Expat

    Let’s face it. If the banks and our elected officials thought it were more profitable and that they could get away with it, they would garnish all sources of income, seize all belonging, kill the debtor, and process his body parts for various industrial and consumption uses.

    These are the same people we are asking to change and regulate this behaviour. What example from the past thirty years can lead anyone to believe this will happen?

    We live in strange world, but one we created. We feed our children on Horatio Alger and our American cultural myths of fairness, honesty and hard work. We tune ourselves to Madison Avenue and consume with an unequenchable thirst. We idolize the wealthy and let them run rampant over our resources and lives. We elect and re-elect liars and thieves because they belong to our party.

    I can’t stir up sympathy for anyone anymore.

  3. Brick

    So on the one hand we have a law which says garnishment orders can not be applied to benefits and another law which says banks must comply with garnishment orders on accounts which contain non benefit derived funds. So if you earn 1 penny of interest your account with your benefits in can be frozen under a garnishment order. The best that the FDIC can come up with is an encouragment to financial institutions.
    Time for Elizabeth Warren’s customer protection reforms I think. What is wrong with changing the law so that the garnishment order can only be applied to the part of the funds which is not benefit derived. Perhaps the law should be changed so that at least 800 dollars must remain unfrozen. That way the payday lenders will probably all disappears anyway.

  4. debra

    I’m shocked. This is carpetbagger behavior.
    I do not have enough expertise to propose any solution in this area. Not competent.
    But it seems logical to think that in an increasingly predatory society the elderly will be targeted more and more…

  5. CJ Clemens

    I think this practice is obscene. It’s like the usury laws being ignored by moving to states that have none. If a bank does business in more than one state it must follow Federal regs. Like: no garnishment of pension, social security etc.and no interest above 18%. The banks get away with murder and we bail them out on top of all this!! Sickening.

  6. ben

    The banks don’t want to be bothered figuring out whether to apply a garnishment. They just apply it.

    A few years ago, I barely prevented several tens of thousands of dollars from being extracted from my corporate business account. The bank received an out-of-state child support order for someone whose social security number was the same as the corporation’s EIN. (Not supposed to happen, but it did.) The money was out of my account already when I was lucky enough to open myself the envelope with the transfer slip – I ran to the bank and managed to stop the money before it left the main office.

    The bank told me that the law requires them to honor state child support orders without questioning them. I was later told by a lawyer who works on these issues that they don’t have to honor the order if it is “defective on its face.” Something you could pretty clearly say about a paper that says a corporation fathered a baby – even if the mismatch between the alleged father’s name and the business name weren’t enough.

  7. Paul Tioxon

    It seems the advent of electronic banking allows currency to be little more than the debits and credits of a software program. This being the case, the Federal Government should relegate this to itself. The US Postal System Offices, could serve as the brick and mortar outlets for a web based currency and payment system. Access to this system would be denied only allowing the individual with appropriate property rights, not court ordered liens etc. Electronic currency, like its specie counterpart, should belong to the sovereign state that issues it, not to whoever has a cell phone and software payment system. We are witnessing the balkanizing of currency, with newly competing payment systems accepted by some, and not others. Having a national sovereign electronic payment systems available to all, and inviolate from creditors, would allow the movement into 21st century commerce expansion, as opposed to a neo-peonage system.

    1. ArmchairRevolutionary

      Quite simply the government will implement no such thing as it will take profits from bankers.

      I have been thinking about creating a bank: same as any other bank from a corporate perspective, but one that would guarantee to its customers that it would not participate in any of these games, unless forced to by court order. The “move your money” movement has a problem: where do you move your money to? Just because a bank is local does not mean that it will not engage in the same kind of shenanigans.

  8. Mickey Marzick in Akron, Ohio

    As for specific resolution of such practices, federal regulation banning garnishment should supersede state law. It would seem simple enough. But the more likely scenario is that each of the 50 states will address this issue with the result that a hodgepodge of regulations will persist, thereby enabling these predators to exploit every available loophole and gray area not specifically banned by such legislation. Federalism in action… aka LOOTING. Ohio had a referendum on this issue that passed in 2008 [Issue #5] and banned some of the more egregious practices foisted on the public. But the practice itself was not banned.

    On a more general level, this practice is just one more example of the predatory, parasitic nature of the financialization of the economy. Inasmuch as the real economy has been hollowed out and offshored, the only asset that remains is the population at large. Just one more form of looting as most “financial services” are nothing more than “rents” charged for transactions that add nothing of value to the economy. In the ancient regime it was known as “tax farming” and was much hated. Of course, in its present guise the technopeasantry bleats plaintively in the hope that their duly elected respresentatives will deliver them from such bank farming. The difference between then and now is that the peasantry revolted and put an end to “tax farming”. Today the technopeasantry has come to expect such anal plowing as routine business practice consistent with caveat emptor. Its acquiescence to such behavior testifies to the ascendance of market totalitarianism. For in their hearts and minds they “know” they are the freest human beings to have ever walked this planet. And so long as they remain in this idyllic “state of nature” there is little hope of change.

    Yves should be commended again for her perseverance in continuing to find more nails to put into this coffin, striking blow after blow against the empire in what must seem, at times, a futile effort to find some light at the end of the tunnel. Trouble is, the only light coming from this tunnel is the RBTA – Right-wing Bullet Train to Auschwitz. The analogy to Auschwitz is probably overdrawn since overt oppression would not be required in a regime where market totalitarianism prevailed. Perhaps anonymity would be better… as atomized individuals could be easily anonymitized into oblivion in such a society. Consider it a more “advanced” form of “nacht und nebel”. After all, we’re talking about progress…the advance of civilization. No need to exterminate just somatize the populace with consumer debt and access to payday loan services when money is tight. Their escape from freedom into debt on the other road to serfdom won’t even be noticed until… until… it’s TOO LATE!

    Let’s hope for a train wreck! My pessimism has unfortunately gotten the better of me today for which I apologize. Sometimes…

  9. Stelios Theoharidis

    Predatory behavior is not only related to payday lending, it also includes rent to own locations, forward ‘loans’ on earned income tax credits through tax preparation services, and some automobile lending.

    In addition to reducing predatory lending practices targeting the poor and elderly there need to be a few other concerted efforts. The most important of these is the expansion of traditional forms of lending to these underserved communities. I think these predatory institutions show by their growth that there is no lack of money in poor areas. These predatory practices would not exist if there was sufficient financial infrastructure in these communities. Some other important steps would probably include consumer finance education.

    I would probably put efforts into supporting community based credit unions and other community development finance institutions for this purpose. Their interest rates and service fees are typically lower and they are less likely to play around with risky financial innovation.

  10. Seal

    I mailed the following anthrax free – ipso facto – postcards to;

    Dear Counselor Emanuel,

    Dear Political Advisor Axelrod,

    RE: Proposed Guidance on Garnishment of Exempt Federal Benefit Funds

    Y’all in the WH better make sure no garnishment orders from financial weasels who have received boatloads of “bailout” money EVER hits my account. I am ex-military.


  11. curlydan

    This seems similar to Refund Anticipation Loans (RALs) in the tax industry. The filer secures a loan from a bank with the collateral being the IRS refund. The bank then makes sure the client has no debt from the IRS (the IRS debt indicator…a huge boon to the banks), waits for the e-file to be accepted, then gives the loan, setting up a temporary bank account in the person’s name, then giving the loan in 1-2 days instead of the 8-14 days it would have taken otherwise to get the money direct deposited.

    It was demonstrated in the mid-90s that without the debt indicator (the IRS took it away), these loans would fall by half.

  12. Fifi

    Bah, too complicated. Make it a federal crime for a depository institution to enforce such garnishment.

    Bankers only fear jails and very, very stiff fines.

  13. Sy Krass

    Obvioulsy enforcement of usury laws is the way to go. 400% interest,you gotta be kidding me.

  14. Vijay

    ..”One recent morning, dozens of elderly and disabled people, some propped on walkers and canes, gathered at Small Loans Inc….The crowd represents the newest twist for a fast-growing industry —….”

    And pray why are the said elderly etc “borrowing” the money if they doné expect to repay?
    Frankly if their only source of cashflow is off limits to lenders how will they ever be able to borrow if absolutely needed?

    On the whole execess & reckless borrowing got the economy here…
    The old ways of dealing with debt & default does not seem so bad after all transport defaulters to Australia, Fiji etc- at least it impacts the defaulters more that spread the pain.

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