Social insecurity: High-interest lenders tapping elderly, disabled

DOTHAN, Ala. — One recent morning, dozens of elderly and disabled people, some propped on walkers and canes, gathered at Small Loans Inc. Many had borrowed money from Small Loans and turned over their Social Security benefits to pay back the high-interest lender. Now they were waiting for their "allowance" — their monthly check, minus Small Loans' cut.

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 veterans benefits.

"These people always get paid, rain or shine," says William Harrod, a former manager of payday loan stores in suburban Virginia and Washington, D.C. Government beneficiaries "will always have money, every 30 days."

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, who pitch loans with effective annual interest as high as 400 percent or more, can gain almost total control over Social Security recipients' finances.

There are no publicly available statistics on the proportion of payday loans that are backed by Social Security and other government benefits. But dozens of legal-aid lawyers, senior service groups and credit counselors across the nation say they are seeing more and more clients on Social Security struggling with multiple payday loans.

The Treasury Department, charged with ensuring that Social Security payments reach beneficiaries, says privacy rules forbid it from monitoring recipients' bank accounts without cause. Social Security Administration officials say the agency isn't responsible for benefits once paid out and that beneficiaries who run into problems should consult an attorney.

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 research was done by Steven Graves, a geographer at California State University at Northridge, at The Wall Street Journal's request. His previous work was cited by the Department of Defense in its effort to cap the amounts lenders can charge military personnel.