EDITOR'S NOTE: Months after this article was written, the 9th Circuit Court of Appeals withdrew its opinion and issued a new decision. For information about the reversal, go to our Court Watch section.|
Offsets Against Social Security Payments
by Mary Beth Guard, BOL Guru
If you've been in banking for long, you are no doubt familiar with provisions of federal law which state that Social Security benefits and SSI benefits are not subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. What you may not have known, however, is that the same prohibition extends to self-help remedies, including the right of offset. A decision by the U.S. Court of Appeals for the 9th Circuit handed down March 14, 2002 makes that abundantly clear.
In the case, the plaintiffs were recipients of Social Security and/or SSI benefits and deposit account customers of Washington Mutual Bank, Inc. While the exact terms varied (since some of the plaintiffs had established accounts with the bank's predecessors-in-interest), the deposit agreements each included
The customers overdrew their accounts. Subsequently, their deposits of Social Security and/or SSI benefits were received. The bank utilized those funds to cover the overdrafts and overdraft fees. The customers sued, alleging the bank's practice of using the directly deposited Social Security and SSI benefits to set off overdrafts and overdraft fees was prohibited by 42 USC Sections 407(a) and 1383(d)(1). Plaintiffs also asserted several state law claims. Although the district court granted the bank's motion for summary judgment, the 9th circuit reversed.
- provisions regarding overdrafts which explained that if the account holder did not have sufficient funds to pay a check, the bank could elect to pay the check, which would create an overdraft on the account, and impose an overdraft fee.
- a promise to immediately pay the overdraft amount to the bank.
The 9th Circuit held that Washington Mutual's practice of using directly deposited Social Security and SSI benefits to offset overdrafts and overdraft charges runs afoul of 42 USC Sections 407(a) and 1383(d)(1) because there was no "knowing, affirmative and unequivocal" consent by the plaintiffs to such practice.
The bank pointed out that Social Security and SSI recipients routinely use benefits payments to pay a host of other creditors, from grocers to landlords, without those credits ever giving explicit notices that the benefits are exempt from legal process or without obtaining the beneficiary's explicit consent. The difference, however, according to the Court is that in those instances the benefits recipient is clearly exercising control over the benefits and directing the payment to the creditors, whereas in the banking situation, the direction to apply the deposit to the existing overdraft is only implied and the bank actually takes control of its debt directly, rather than making the full benefit available to the beneficiary to dole out as the beneficiary sees fit.
"Once funds are in an account . . . a beneficiary can direct how those funds should be used. . . But the alleged 'direction' of funds here is simply too generic, vague and implicit, whereas [the Crawford case] teaches it must be 'knowing, affirmative and unequivocal.'"
So, the challenge now is to determine how, from an operational standpoint, you can avoid inadvertent violations of these statutes. What will your policy be on extending overdraft privileges to customers whose account funds derive solely or primarily from Social Security or SSI benefits? Do you have a way (and should you do so, even if you do have a way) to code these accounts for special treatment?
Lopez v. Washington Mutual Bank, Inc.
First published on BankersOnline.com 3/15/02