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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, which pitch loans with effective annual interest as high as 400 percent, 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 country 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 that the agency isn't responsible for benefits once paid out and that beneficiaries who run into problems should consult an attorney.

Predatory or convenient?

Many payday lenders are clustered around government-subsidized housing for seniors and the disabled, according to an analysis of data from the U.S. Department of Housing and Urban Development. 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.)

Lenders say they provide a useful service.

"This industry provides convenient access to small amounts of money," said Tommy Moore, executive vice president of the Community Financial Services Association of America, which says it represents about 60 percent of payday loan stores. "It certainly wouldn't be right for the business to discriminate against them for whatever the source of their income is."

But some industry critics say fixed-income borrowers are lucrative. Often elderly or disabled, they typically depend on small fixed incomes and are rarely able to pay off their loans quickly.

"It's not like they can work more hours," says David Rothstein, an analyst at Policy Matters Ohio, an economic research group in Cleveland. "They're trapped."

Harrod was a manager of a Check 'n Go store across the street from Fort Lincoln Senior Citizen's Village, a subsidized-housing complex for the elderly and disabled in Washington, D.C. Harrod says he was encouraged by his supervisors to recruit the elderly, and did so by often eating his lunch on nearby benches to strike up conversations with the complex's residents. There are at least four payday lenders within a mile and a half of Fort Lincoln, Graves' analysis shows.

Harrod quit in August, concerned that the company exploited its customers and targeted vulnerable groups, and began working with groups seeking limits on payday lending.

Yancy Deering of Check 'n Go, a unit of CNG Holdings Inc., which has more than 1,300 stores nationwide, said the company doesn't target the elderly, but doesn't track what proportion of customers depend on government benefits.

Direct deposit made difference

Social Security recipients weren't always a natural market for payday lenders, which typically require borrowers to have a bank account and a regular source of income. For years, a large percentage of government beneficiaries lacked traditional bank accounts, choosing to just cash their checks instead.

But by the late 1990s, the federal government began requiring Social Security beneficiaries to receive their benefits by electronic deposit to a bank account, unless they opt out.

The number of recipients with direct deposit has soared to more than 80 percent, up from 56 percent in 1996, and the government is trying to get the holdouts to participate.

No regulatory agency tracks how much Social Security money is going to lenders as repayment for payday loans.

A 2006 study by the Consumer Federation of America found that one-fifth of those without conventional bank accounts are receiving their government benefit checks through nonbanks, including payday lenders that also operate as check-cashing stores.

Payday lenders cash in

With direct deposit, Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans. The industry mushroomed in the 1990s and continues to prosper.

Analysts estimate that payday loan volume has climbed to about $48-billion a year from about $13.8-billion in 1999. Most payday lenders are small and private.

The biggest public company is Advance America Cash Advance Centers of Spartanburg, S.C., with 2,900 stores in three dozen states and reported earnings of $42.9-million in the first nine months of 2007.

Wall Street Journal