James Cain, a terminally ill Florida veteran, got his first Social Security disability payment last month. Before he could withdraw any of it to pay for his medicine or mortgage, his bank took it out of his account.
His wife’s Social Security check went in the same day. The bank took most of that, too. It withdrew the money to make payments to itself on a car loan the bank had made to the Cains.
Federal law says Social Security can’t be taken to repay debts. So how can banks do it?
They don’t use the technique of debt collectors, which is to file garnishment orders on bank accounts — orders that succeed because by and large no one is enforcing the exemption.
Banks have a different rationale. They say the federal ban on taking Social Security benefits to repay debts doesn’t apply to them. The reason: They aren’t really collecting debts.
They cite the doctrine of “set-off,” which says banks can collect money that customers owe them by taking it out of customers’ accounts. All agree this traditional practice makes sense for routine fees like monthly account charges. But banks apply it broadly, to other money customers owe them. Banks argue that when they take cash out of a customer’s account — including cash from a Social Security check — they aren’t really collecting a debt, just “setting off” what’s owed them.
The Cains, of Palm Coast, Fla., took out a $31,000 loan from a SunTrust bank to buy a Ford Expedition in 2005. But last summer, Mr. Cain was diagnosed with bladder cancer and soon was unable to work. His wife, Elna, tried to find someone to take over the $690 monthly payments but couldn’t, so she surrendered the SUV to the bank this January. After selling it at auction for $16,000, the bank told the Cains they owed it a balance of $15,703, which included late charges, repossession expenses and interest.
Mrs. Cain, 63, says she told the bank her husband’s cancer had spread and he was confined to a wheelchair. They lost their health coverage when he had to quit working. A Vietnam vet, Mr. Cain has applied for veteran’s benefits, but isn’t yet receiving them.
He also applied for Social Security disability. On March 14, both his first disability check, $1,343, and Mrs. Cain’s $1,161 regular Social Security hit their SunTrust account through direct deposit.
The same day, SunTrust took $1,924 out of their account. The next week, the Cains got a letter from SunTrust Recovery Department, dated March 15, thanking them for their payment.
Besides Social Security, the Cains’ account received money from Mrs. Cain’s pension from the American Red Cross. In Florida, that is also exempt from collection to repay a debt.
The Cains contend they had never given SunTrust permission to debit their account. SunTrust Banks Inc. pointed to its deposit agreements, which say that the bank can use money in customers’ accounts to offset debts to the bank.
Asked whether the bank believes its set-off right makes it legal to seize exempt funds such as Social Security, the bank said in a statement: “We cannot publicly disclose the specifics of individual client relationships. However, in cases when we offset accounts for delinquent loans, we as a matter of policy exclude exempt funds and provide proper notice to the customer.”
Mark Budnitz, a Georgia State College of Law professor and co-author of “Consumer Banking and Payment Law,” said, “It’s an abuse of the right of set-off to use it to take money from Social Security funds. . . . Banks are flouting federal policy.”
A case before the California Supreme Court is testing the issue. The court has agreed to review a suit alleging that Bank of America Corp. seeks to profit from Social Security recipients by charging high fees and taking them from the recipients’ accounts.
The suit cites a case where the bank charged a Santa Cruz man five overdraft fees in one day, totaling $160, based on debit-card purchases that totaled $11. It took this out of an account funded by Social Security disability benefit checks for the man, the victim of a disabling head injury.
The fees are steep because of a newer type of overdraft protection common with direct-deposit accounts set up to receive Social Security. Instead of a line of credit, which preferred customers get, this newer type creates a short-term loan to the account holder every time he or she writes a check or makes an ATM withdrawal from an account with insufficient funds.
Each such loan carries a fee, typically $25 to $30, instead of interest. And instead of giving the customer time to repay, the bank repays itself out of the account as soon as the customer puts some more money in it.
If that money happens to be Social Security, the bank takes the Social Security. Again, its rationale is that this just a set-off, not the (unlawful) collection of a debt out of Social Security benefits.
Because the bank usually gets its money back with days or even hours, and gets its fee no matter how small the overdraft loan, consumer advocates calculate that the fees on these overdraft loans equate to an annual interest rate of 600% to 1,000% or more.
Banks say it isn’t valid to try to translate a flat-fee arrangement into an interest rate. They add that the overdraft protection gives customers flexibility and shields them from the embarrassment of denied transactions.
Documents filed in the suit against Bank of America show that in California from 1994 to 2004, the bank collected $284 million in overdraft-related fees out of 1.1 million accounts that received Social Security direct deposits.
One issue in the suit is whether banks may take Social Security money this way. A lower state court said this was illegal under state law. A state appeals court, while agreeing the practice could cause serious financial distress for benefit recipients, said the lower court was wrong to call it illegal. The appeals court cited banks’ arguments that curbing the practice would discourage banks from providing direct-deposit Social Security accounts at all.
The case was brought on behalf of all retired and disabled Social Security recipients in California. Bank of America says it isn’t collecting debts, but is balancing accounts out of new deposits.
Walter Dellinger, counsel for Bank of America at O’Melveny & Myers, said that under California law, fees aren’t considered debts. He said that if banks couldn’t assess fees, they wouldn’t be able to offer overdraft protection.
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