Testimony of Marianna LaCanfora
Assistant Deputy Commissioner
Office of Retirement and Disability Policy
Social Security Administration before the
House Ways and Means Committee
Social Security Subcommittee

June 24, 2008



Mr. Chairman and Members of the Subcommittee, thank you for the opportunity to discuss our concerns about protecting our vulnerable Social Security beneficiaries from predatory lending and other harmful financial institution practices.   We recognize that, in many instances, Social Security benefits are an individual's sole source of income and support, and we are committed to doing all in our power to ensure that our beneficiaries have full and appropriate use of their benefits .  As a result, we are working closely with the Department of Treasury and support inter-agency action to strengthen the protections for our beneficiaries.  Section 207 of the Social Security Act protects beneficiaries' rights to receive Social Security benefits directly and to use them as they see fit, by prohibiting third parties from attempting to seize the benefits through assignment, garnishment, and other legal process. Section 207 of the Act provides that the “right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”  The language of the statute is very clear; however, section 207 does not provide us with any means for enforcement and does not establish any penalties for its violation.  Unfortunately, abusive practices have occurred, to the detriment of our beneficiaries.  

This Committee has raised two specific situations that implicate section 207 – high-fee direct deposit arrangements with payday lenders and check-cashing businesses and garnishment of beneficiary accounts.

Payday Loans/Assignment

In 1998, Treasury published rules that required that any Federal payment made by electronic funds transfer be deposited only into a bank account in the beneficiary's name.  There were two exceptions: one was for payments made to an authorized payment agent (e.g., a Social Security beneficiary's representative payee); and the second was for an investment account established through a registered securities broker or dealer. 

Consistent with Treasury's rules, we began to accept master/sub-account arrangements so that beneficiaries' checks could be deposited directly into their investment accounts.  We expanded the availability of master/sub-accounts as a convenience to our beneficiaries, most notably members of religious orders who relied upon these arrangements to honor their vows of poverty.  By accepting these arrangements, we intended to provide our beneficiaries with choices that were appropriate and convenient for their situations.  These arrangements permitted individuals who did not have traditional bank accounts or who chose alternative arrangements to take advantage of all of the benefits of direct deposit, while still retaining control of their funds.  

To prevent these master/sub-account arrangements from becoming prohibited assignments of benefits, we established strict conditions for allowing Social Security payments to be deposited into a master account:

•  The master account must be at a bank, savings and loan association, credit union, or thrift institution.

•  The beneficiary must have a sub-account in his name, and the master account holder must maintain sub-account records for each participant. The sub-account records must show all money received and withdrawn and the balance remaining in each sub-account. This information must be available to the participant upon request.

•  The beneficiary must voluntarily agree to this arrangement.

•  The beneficiary must be able to terminate the arrangement.

These requirements on master/sub-accounts ensure that beneficiaries – not creditors – maintained control of their funds.

While we expected that this policy would provide sufficient protection for our beneficiaries, we have learned that some institutions have undermined this policy.  I n a February 28, 2008, article, The Wall Street Journal described a situation in which a loan company repeatedly enrolled a Social Security beneficiary in a master/sub-account arrangement against the beneficiary's will.   While the beneficiary had agreed originally to have his checks electronically deposited into the lender's master account, the beneficiary sought to cancel that arrangement.  Unknown to the beneficiary, the loan company resubmitted the information, directing that the beneficiary's check be deposited, once again, in the master account.  This egregious action is obviously a clear violation of our policy.

When we learn about these violations, we cancel the direct deposit order. In fact, we resolved the issue cited by The Wall Street Journ a l article before the article was published. We also issued instructions for our employees to remind them of the procedures for handling such beneficiary complaints.  

While we know of only isolated instances of these types of abuses reported to our personnel, we intend to do everything we can to safeguard the rights of our beneficiaries.  Accordingly, on April 21, 2008, 2 months after The Wall Street Journal article was published, we requested public input on the master/sub-account policy in a notice published in the Federal Register

Federal Register Notice

We have allowed master/sub-accounts for more than 10 years and are concerned that changes to our policy may have unintended consequences that could disrupt business practices that well serve our beneficiaries.   We want to better understand the scope of this practice so that our changes will be comprehensive.

In the Federal Register notice , we asked for answers to questions such as:  

    • Have master/sub-account arrangements disadvantaged any of our beneficiaries and, if so, in what way?
    • To what extent will the elimination of the master/sub-account arrangement in our procedures create significant costs and burdens on beneficiaries or organizations using this account arrangement?  

Consideration of Changes in Policy on Master/Sub-Accounts   

The comment period on the Federal Register notice closed only one business day ago.  Although we need to change our policy, we must carefully consider all comments before we determine the nature or extent of the change.  We want to ensure that we understand the possible effects on our beneficiaries.  

We also want to make sure that any changes to our policy do not discourage beneficiaries from using direct deposit.  We recognize that direct deposit provides beneficiaries with a safe and convenient method of receiving payment, and we fully support its use.

We believe expanded electronic payment service is an attractive option for payment.  Treasury has recently introd uced Direct Express, which makes banking services available at minimum cost to individuals who may not otherwise have access to traditional bank accounts.  Through Direct Express, beneficiaries have their Social Security payments credited to a prepaid debit card, and they can access their funds without fees through services such as cash back with purchases and cash from bank tellers.  The card also provides other services at low fees negotiated by Treasury.  These electronic payment options can help beneficiaries avoid some of the predatory practices we are discussing today.

We recognize that there are problems with our current policy, and we are eager to make the necessary improvements.  As we consider policy changes, we certainly will coordinate with Treasury to ensure that any changes are consistent with its regulations and that Treasury can enforce the provisions within the banking community.  

Garnishment of Beneficiary Accounts  

This Committee has also expressed its interest in examining how garnishment of Social Security benefits may conflict with benefit protections in the Social Security Act.  As I noted before, section 207 of the Social Security Act is clear that Social Security benefits may not be garnished by a creditor other than the United States government.  We recognize the need to enforce this provision.  Oversight of banks and other financial institutions rests with the banking regulators and we are committed to supporting them in their efforts to enforce section 207. Despite Federal law, some State courts will issue orders garnishing funds in an account containing Social Security payments, and banks will take action to comply.  

In order to address these issues, Commissioner Astrue asked OMB to establish a coordinated interagency effort to address these banking practices.  He pointed out that the garnishment issue is complex, due in part to the interplay between Federal and State laws.  Because a number of Federal agencies have responsibility in this area, we proposed this interagency approach.

Treasury has stepped forward to coordinate an interagency effort to clarify the rules concerning garnishment of bank accounts that include federally protected benefits. Treasury is well suited to coordinate an effort by financial institution regulators and federal benefit agencies to clarify garnishment rules because it is both the paying agent for the Government and the primary regulator of the Federal electronic payment system.  We have discussed garnishment issues with Treasury staff and we are working with them on a solution to these complex issues.  In developing a solution to protect Social Security beneficiaries, we would consider a joint regulation, if such an approach is determined necessary.  


Mr. Chairman and Members of the Subcommittee, we at Social Security share your concerns about protecting the financial well being of some of our nation's most vulnerable beneficiaries.  We can only resolve the problems under discussion at today's hearing, though, with a coordinated approach amongst agencies.   As a result, we are working closely with the Department of Treasury and support inter-agency action to strengthen the protections for our beneficiaries." Thank you for the opportunity to express our concerns about these very important issues.   I would be happy to answer any questions.