According to Matt Kadlec, a credit counselor at the Financial Information & Service Center in Menasha, Wisconsin, borrowers face garnishment after missing multiple payments. "Typically, we'd wait for three months before we went to court," says Kadlec, who once worked for the Indiana-based payday lender Cash Tyme. "The only way we would even go to the courthouse was if we knew that the person still had some type of income."
In May 2011 the Treasury Department introduced a new regulation that identifies exempt deposits, including Social Security benefits, when they appear on a bank employee's computer screen, telling the bank that these funds cannot be garnished. "Before, the bank would typically say, 'It's not up to us to decide whether funds are exempt.' Then they'd get a garnishment request and freeze your account," says Jay Speer, executive director of the Richmond-based Virginia Poverty Law Center. "You'd have to go to court to prove they were exempt. Meanwhile, your account is frozen and you can't withdraw money to buy food. Now the garnishment is prevented without having to go to court. It's making the banks do what they should have been doing all along."
While the regulation should make it harder for storefront lenders to garnish borrowers' benefits, banks that make payday-style loans wouldn't have the same difficulty. Five banks — Wells Fargo, U.S. Bank, Fifth Third Bank, Regions Financial and Guaranty Bank — are now making payday-style loans to account holders who have benefits deposited directly into their accounts. None of these credit products is called a payday loan — or loan, period; most are branded with the words like advance, such as Wells Fargo's Direct Deposit Advance, which Wells Fargo spokeswoman Richele Messick calls "a creative way for customers to have advance access to their next deposit." But the terms of this kind of credit are nearly identical to the loans offered at storefront operations, including triple-digit interest rates and two-week "payday" maturities due on the next direct deposit.
To get these loans, customers need a regular direct deposit to their checking accounts, and Social Security benefits qualify for this. Social Security began offering direct deposit in 1996, and most beneficiaries have made the transition; by March 2013 the last paper Social Security check should be in the mail. That convenience has an unintended consequence: Direct deposit can let banks grab benefits to pay off bank debts, including payday-style loans that the banks made.
"This [new Treasury regulation] doesn't solve the problem of bank payday lenders' getting first access to your money," says Julie Nepveu, senior attorney at AARP Foundation. AARP has supported the efforts of several states to tighten regulations to protect recipients of Social Security against garnishment. "We and other consumer advocates think this kind of arrangement with your bank leads to an unlawful assignment of your Social Security benefits."
It's this kind of exploitation that the CFPB was created to address. But while the CFPB has authority over storefront and Internet lenders and has begun examination procedures, it has no authority to cap interest rates. CFPB spokeswoman Michelle Person would not comment on the issue of rates or payday-loan regulation. "We are in the information-gathering stage of our work," she says, "and we cannot prejudge this issue."
For Mary Love, escape from the debt trap wouldn't come for several years. In 2005 she saw a billboard advertising the debt-relief referral services of the Red Cross, which put her in touch with the Consumer Credit Counseling Service. That led to a payoff plan; she finally emerged from the debt in 2007. The total payoff, she believes, was "way into the thousands." Years later, she doesn't think she's fully recovered.
"This is not how you get out of debt," she says. "This is how you get into it."
John Sandman writes from Brooklyn. This article was reported in partnership with The Investigative Fund at The Nation Institute.