On March 1, 2011, the Federal Government began requiring new federal benefit recipients to collect their monthly benefit via direct deposit. Recipients whose benefits started before that date will be able to continue getting paper checks until May 1, 2013. Beneficiaries without bank accounts will be paid using the Treasury Department's Direct Express Debit MasterCard program. Currently, there are 2.1 million Social Security and 1.8 million Supplemental Security Income recipients that still receive paper checks. The Treasury Department contends that converting benefit payments to direct deposit will make it easier and faster for consumers to get paid and will save taxpayers money, which Treasury estimates at $303 million over the first five years and about $120 million each subsequent year. However, absent significant changes to regulations, this new rule is likely to inflict more financial harm on low-income seniors and other benefits recipients.
In 2010, the Treasury Department, along with several other federal agencies, proposed a well-considered and thorough rule requiring banks to protect direct-deposited federal benefits from seizure to satisfy garnishment orders by judgment creditors. While this proposal will strengthen prohibitions against garnishment of benefits from third party creditors, banks asserted that the prohibitions do not apply when the bank is the creditor. As a result, certain banking practices, such as bank payday loans, expose Social Security and other beneficiaries to the same dangers from seized benefits that result from attachment and garnishment.
Payday loans are small loans that a borrower promises to repay out of his or her next paycheck or benefits check, typically in two weeks. Although the fees can seem reasonable at first, when annualized, they often amount to triple-digit interest rates or more. Other banking products that have the potential to expose beneficiaries to high fees include overdraft protection plans, high-cost, short-term loans (similar to payday loan programs), and the expansion of bank payday loans to holders of prepaid debit cards.
Moreover, a proposed Treasury rule would limit waiver of the direct deposit requirement to rare circumstances. Waivers will only be available to beneficiaries who are age 90 or older, mentally impaired, or residing in very remote areas. Currently, a recipient can get a waiver of the direct deposit requirement when the individual determines that payment by electronic funds transfer would impose a hardship due to a physical or mental disability or a geographic, language, or literacy barrier, or would impose a financial hardship.
As the Treasury Department moves forward with its plan to require electronic payments to all federal benefit recipients by 2013, more seniors and vulnerable benefits recipients will become the targets for payday loans. With one in three Social Security beneficiaries relying on the program for 90 percent or more of their income, new protections are needed to ensure recipients are not ensnared in a cycle of mounting debt and high-borrowing costs tied to these monthly payments.
Government Relations and Policy, August 2011