Even if you are rejected by Social Security, you can apply for benefits again and again, which is what both lawsuits claim insurers are taking advantage of to avoid paying benefits. The suits cite the federal False Claims Act and contend "that the insurers were knowingly committing fraud."

The insurers have claimed this is just business as usual and it's their policy to require everyone to apply—a Cigna spokesperson disingenuously says, "Our goal is to ensure that each member receives all of the benefits to which he or she is entitled." But a former Gigna employee who's now a plaintiff in one of the suits says insurers abuse the practice by routing everyone to Social Security even when it's obvious they'll never qualify.

Forcing people who are injured to apply for Social Security before paying their claims appears to bolster insurers' profits in several ways. If claimants refuse to apply, the insurers can simply stop paying their benefits, said Dawn Barrett, an employee of the Cigna Corporation, who grew frustrated sending people to Social Security and who is now a plaintiff in one of the lawsuits. More typically, she said, people apply for Social Security when an insurer tells them to. That allows the insurer to reduce its claim reserves, money that is kept in conservative investments for benefit payments. And in the insurance industry, smaller reserves mean bigger profits.

"Insurers Faulted as Overloading Social Security" [New York Times]

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% or more, can gain almost total control over Social Security recipients' finances.

One former payday lender employee says he was tasked with recruiting the elderly to come in for loans:

Mr. 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. Mr. 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. According to Mr. Graves's analysis, there are at least four payday lenders within a mile-and-a-half of Fort Lincoln.

Like many payday borrowers, Mr. Hummel realized he couldn't pay off the loan when it was due so he went to another "payday" lender. Lenders rarely ask about other loans and debt, and borrowers often take out multiple loans in an effort to avoid defaulting. By February, Mr. Hummel had eight loans from eight lenders, at effective annual interest rates that ranged from 180% to 406%.

There should be a lender's prison, perhaps.

(Thanks to Diana!)

"High-Interest Lenders Tap Elderly, Disabled" [Wall Street Journal]
(Photo: Getty)