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The situation highlights many Americans’ travails with the consumer banking system.
This week, the $1,200 CARES Act payments Congress approved in response to the coronavirus crisis will begin to appear in Americans’ bank accounts. The funds will be wired to eligible recipients who previously authorized the IRS to post their refunds (or Social Security payments) through direct deposit. This will speed relief far more quickly than having the IRS mail a check, which could take up to five months.
But the money may not make it into the hands of those who need it to pay bills, buy food, or just survive amid mass unemployment and widespread suffering. Individuals might first have to fend off their own bank, which has just been given the power to seize the $1,200 payment and use it to pay off outstanding debt.
Congress did not exempt CARES Act payments from private debt collection, and the Treasury Department has been reluctant to exempt them through its rulemaking authority. This means that individuals could see their payments transferred from their hands into the hands of their creditors, potentially leaving them with nothing.
Banks would be first in line to grab the payments to offset a delinquent loan or past-due fees. Even if the individual thinks their account with that bank is closed, if the payments post there, the bank could conceivably use them to cover old debts.
The Treasury Department effectively blessed this activity on a webinar with banking officials last week. In audio obtained by the Prospect, Ronda Kent, chief disbursing officer with Treasury’s Bureau of the Fiscal Service, can be heard explaining that banks had posed questions to her about “whether these payments could be subject to collection from the bank to which the money is deposited, if the payee owes an outstanding loan or other payments to the bank.” She responded—twice—that “there’s nothing in the law that precludes that action,” while counseling that the banks’ compliance officers should consult with their legal offices about what policies their banks will implement. “You will want to know for your bank what your bank has decided to do,” Kent said.
An official at a financial institution who was on the call and wishes to remain anonymous said that Kent’s comments, translated from regulator-ese, mean: “We don’t want to say anything explicitly and are telling you to make a business decision.” In other words, the statement was a green light for banks to take advantage of the coronavirus crisis to collect prior debt.
“At a time when people are desperate to buy food, the idea that anybody would grab [the $1,200 payments], let alone the banks they trust with their money, is appalling,” said Lauren Saunders, associate director with the National Consumer Law Center.
WITH THE CLEAR INTENT that CARES Act payments go to meet people’s immediate economic needs, Congress exempted them from debt collection if the debt is owed to federal or state agencies, unless the debt involves a child support payment. But Congress did not extend this exemption to private debt collection. The payments are defined as tax credits and not federal benefits, making them subject to “garnishment,” in which a debt collector that wins a judgment in court can seize anything of value held by the debtor.
If the payments were deemed federal benefits, like Social Security, disability, and veterans benefits, they would be exempted from private debt collection. “This makes complete sense because we don’t want people to die because they have a late loan payment,” said the official at the financial institution.
Congress did give Treasury the authority under Section 2201(h) of the CARES Act to write rules exempting the payments from private debt collectors. Sens. Sherrod Brown (D-OH), Ron Wyden (D-OR), and Elizabeth Warren (D-MA) wrote to Treasury Secretary Steven Mnuchin on April 3, urging him to write rules to that effect. Brown later teamed up with Republican Josh Hawley (R-MO) to ask for the same thing.
On Monday, 25 state attorneys general (23 Democrats and two Republicans) also asked for Treasury to issue regulations to protect CARES Act payments from garnishment. Numerous consumer advocates have sought this clarification as well. “[Treasury] has the ability to say that these payments are exempt, and they’re not doing so,” said Lisa Stifler, who leads debt collection work at the Center for Responsible Lending.
Under this scenario, the bank could use the $1,200 payment to offset the $1,000 in overdraft charges, even if the individual thought the account was closed.
Treasury official Ronda Kent addressed this on the webinar, saying, “We do understand that concerns have been raised about this legal requirement, but it is a legal requirement at this time,” without noting that it is a legal requirement the Treasury Department can suspend. But no public official has yet brought up how banks, not just private debt collectors, can seize the CARES Act payments as well. Sens. Brown and Hawley did not respond to questions about the potential for banks to grab payments.
Legally speaking, banks have the right to “offset” any deposits to pay off delinquent loans, overdraft fees, or other charges. Banks have more immediate access to the coronavirus checks by virtue of having them deposited into accounts at their institutions. They’re also in front of the line for repayment of debts ahead of other private debt collectors.
The delinquencies in question could be “charged off,” an accounting term meaning that the bank designates the debts unpayable. But if money pops up that can be applied to the debts, the bank can take those proceeds. The bank can’t appropriate the checks for credit card charges, but it can for other consumer loans and fees.
The official of the financial institution sketched out a plausible scenario involving a “zombie” account, which an individual no longer uses but which can accept deposits. “If you have direct deposit on file with the IRS, the payment is going to that institution even if the account is closed,” the source explained. In the event of an actual closed account, the institution would send the payment back. But if the account is technically “open” while lacking any funds, banks could accept the payment.
“There are hundreds of thousands of people out there who use overdraft services all the time,” the source continued. “We allow it up to $1,000. Because of the fees involved, the people can't keep up and inevitably they abandon it, taking the loss and the hit to their credit. I can’t tell you how many accounts we have charged off with $1,000 in them. With those accounts, if that was where you had direct deposit, the stimulus payment will still post to them.”
Under this scenario, the bank could use the $1,200 payment to offset the $1,000 in overdraft charges, even if the individual thought the account was closed. “It’s outrageous, especially since people are forced by the way the program is set up to have the payments go through a financial institution not of their own choosing,” the financial official said.
Some cities and states have backed off government debt collections, and Ohio Attorney General David Yost announced Monday that CARES Act payments could not be taken by private debt collectors. But it’s unclear whether that will apply to banks offsetting funds delivered into their lap.
As Treasury indicated, banks must make their own decisions whether to seize CARES Act payments. The Prospect reached out to five leading banks—Wells Fargo, JPMorgan Chase, Bank of America, Citibank, and U.S. Bank—asking if they planned to use the payments to offset delinquent debts. Only JPMorgan Chase provided an answer: While they would normally use incoming funds to offset a negative balance on a charged-off account, for these payments it will return the money to the government. “The U.S. Treasury can then determine the address to mail the full stimulus amount and ensure the former customer gets the full benefit,” spokeswoman Anne Pace said. She clarified that this would only be in the circumstance of a charged-off account, leaving open the possibility of using a directly deposited payment to offset loans.
None of the other four banks would commit to this process, to say nothing of the thousands of banks and credit unions across the country. Treasury’s Bureau of the Fiscal Service also did not respond to a request for comment.
The situation highlights many Americans’ travails with the consumer banking system. According to the Federal Deposit Insurance Corporation, 8.4 million households in the U.S. have no bank account, but another 24.2 million are “underbanked,” meaning that they frequently operate outside traditional banks. This only partially takes into account people who let their bank accounts lapse, abandon overdrawn accounts, or switch banks without informing the IRS. All of them could struggle to retrieve CARES Act payments, and banks could commandeer the funds to offset debts.
Financially stressed individuals must navigate other hazards. “Payday lenders in many states have access to bank accounts and can seize that money as well,” says Lisa Stifler. Other high-cost lenders could prey on those without direct deposit set up, who are waiting for mailed checks. “Worried About Coronavirus? How Title Loans Could Bring Relief,” reads one headline from a payday lender in Texas, implicitly connecting the financial stress from the pandemic and their potentially predatory products.
Another pitfall involves “refund anticipation checks,” a way that many people finance tax preparation. As Vijay Raghavan, an incoming faculty member at Brooklyn Law School, explains it, tax preparers set up temporary bank accounts with affiliates to take in refunds, and then distribute to the recipient later, minus preparation fees. This is how 21 million tax returns were financed in 2018 (about 15 percent of the total).
The temporary bank accounts used to facilitate these transactions are either closed or in a lifeless state. The payments can only go into a taxpayer-authorized account; tax preparers could be asked to disburse the funds, but there’s no guarantee. An unscrupulous tax preparer could even siphon them out for themselves.
Ultimately, while the system for distributing CARES Act payments may be the quickest available, it comes at a cost. It forces the payments to route through complex chains and rapacious private actors with their eyes on people’s money. The solution would be to give everyone an account at the Federal Reserve, a proposal offered as part of the Great Democracy Initiative in 2018. A Fed Account could be credited instantly with economic recovery payments, free of the hurdles of the private system. As Raghavan notes: “It would be great if we had some sort of public banking system.”
UPDATE: After publication, the section regarding JPMorgan Chase's response has been slightly clarified.
