Friday, March 15, 2002
Banks Cannot Charge Overdraft Fees Against Automatic Social Security Deposits, Ninth Circuit Rules
By ROBERT GREENE, Staff Writer
Banks may not use customers’ directly deposited Social Security and SSI benefits to cover overdrafts or pay overdraft fees, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
Federal laws giving special protection to Social Security benefits bar what is in essence an unsolicited loan from Washington Mutual Bank to its customers who have their monthly benefit checks deposited automatically into their accounts, the court ruled.
Account holders who write checks for more money than they have in their accounts typically either have the checks returned unpaid, and have to pay hefty fees to the bank and often to the person or company awaiting payment as well; or, with overdraft protection, have the bank pay the amount of the check and later reimburse the bank with the next deposit. That deposit might come automatically, if the customer has a direct deposit agreement for paychecks or most other payments.
But if the direct deposit is a Social Security or Supplemental Security Income check, Judge Michael Daly Hawkins wrote for the three-judge panel, the bank can’t touch it because of statutes that bar transfer or assignment of such benefits.
The federal exemption statute for Social Security benefits, 42 U.S.C. Sec. 407(a), reads:
“The right of any person to any future payment under this subchapter shall not be transferable to assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”
The term “other legal process” has been given an expansive reading in case law, Hawkins said, and takes in Washington Mutual’s offset program, through which the bank reserves to itself the right to decide whether to reject a check that would overdraw the account or to pay it and reimburse itself from the next direct deposit.
“By paying the plaintiffs’ checks when there were insufficient funds in the accounts, the bank essentially extended a loan to the plaintiffs and became a creditor,” Hawkins said. “Washington Mutual then used the self-help remedy of setoff to recoup the plaintiffs’ debt to the bank and enforce the contractual account holder agreement, in which plaintiffs agreed to promptly repay any overdraft.”
But he added that the plaintiff’s “agreement” was not true consent under the tougher standards for Social Security and SSI benefits, which require express notice that the benefits are exempt from legal process or otherwise require explicit permission from the bank customer each time Social Security deposits are used to satisfy bank debts.
Unlike banks, creditors such as landlords and grocery stores can be paid with Social Security benefits without giving such notice or gaining such permission.
“In such instances, however, the Social Security beneficiary is clearly exercising control over the benefits and directing the payment to such creditors,” Hawkins said. “In the banking situation, the direction to apply the deposit to the existing overdraft is only implied and the bank actually takes control of the debt directly, rather than making the full benefit available to the beneficiary to delve out as he sees fit.”
The ruling vacated a summary judgment for the bank and remanded to the District Court in San Francisco.
Senior Judge John T. Noonan authored a separate concurring opinion.
“Recipients of Social Security who depend on their checks for necessities are protected,” Noonan wrote. “Who could dissent? Nonetheless, this fidelity to the law produces a result that is not happy.”
He explained that the ruling will make overdraft protection “virtually impossible” for Social Security recipients, since banks may now not provide such protection and the depositors may abandon direct deposit.
The real winner in this case, Noonan said, are the plaintiffs’ attorneys—the Western Center on Law and Poverty—because the plaintiffs asked for attorneys’ fees.
The case is Lopez v. Washington Mutual Bank, Inc., 01-15303.
Copyright 2002, Metropolitan News Company