Banks join calls to shield stimulus checks from debt collection
WASHINGTON — A growing chorus of voices is calling on Congress to protect the stimulus checks being sent to Americans across the nation this week from debt collection.
A consensus has emerged that the recent $2 trillion package for easing economic fallout from the coronavirus allows banks to use a consumer's piece of the stimulus to fulfill garnishment orders to pay creditors for outstanding debts.
The issue has put banks in a bind. To avoid diverting customers' stimulus money, they would need to suspend collection of overdraft fees, for example, and in many cases banks are obligated to fulfill court-required garnishment orders. Yet the industry has been widely focused on efforts to help consumers weather effects of the pandemic. Some large banks have already suspended collecting on negative checking balances to avoid garnishing stimulus checks.
And the industry is urging lawmakers to exempt stimulus payments — typically $1,200 per individual — from garnishment, siding with consumers advocates and several members of the House and Senate.
“We believe it is imperative that Congress make it clear that these payments are treated as benefits subject to the federal exemption from garnishment,” the American Bankers Association, Bank Policy Institute, Consumer Bankers Association and Financial Services Forum wrote in a joint letter to congressional leaders.
The stimulus package — known as the Coronavirus Aid, Relief, and Economic Security Act — exempted the direct relief payments from certain garnishment orders, such as debts owed to state and federal agencies. But the exemption did not cover orders to pay private creditors.
“As a result, banks are obligated to treat [stimulus checks] accordingly, which will impose a significant burden for some families facing unprecedented circumstances,” the trade groups wrote. They added that the Treasury Department should make such payments available through direct deposit, which allows for the funds to be coded as exempt from garnishment.
Wells Fargo and Citigroup said this week they will not collect on negative balances for a month to ensure that customers can receive the full stimulus amount deposited into their accounts. Wells also announced that noncustomers can cash stimulus checks in their branches for no fee.
Reports about banks’ ability to deduct outstanding debt from customers' stimulus money swirled in days after publication of a story in American Prospect magazine. It included audio of a Treasury official telling banks in a webinar that “nothing in the law” would legally prevent them from using stimulus funds to cover overdraft fees and other debts owed by customers.
But some analysts say that even if banks have the legal authority to do so, skimming off the top of emergency federal benefits would likely constitute a third rail for many depository institutions.
“The upside of doing it would be so, so small,” said Rolland Johannsen, a senior associate at Capital Performance Group. “You’re talking about what’s going to be a $1,200 payment for most people. So what if someone has a $60 overdraft fee? There’s very little economic upside, and the reputational downside is considerable.”
The bank trade group letter joined calls by consumer advocates, including the Center for Responsible Lending and the National Consumer Law Center, that have demanded the stimulus checks be more broadly protected from garnishment.
“Everybody knows from historic experience that when debt collectors know money is coming in, like tax refunds, they come rushing in,” said Lauren Saunders, associate director at the law center. “This is a chronic problem.”
Nonbank debt collectors may consitute a broader threat to customers receiving their full stimulus money, analysts say. If a court has ordered someone’s wages or assets to be garnished, debt collectors could have full access to stimulus funds once they have been deposited in a bank account.
“Millions of people in this country have debt garnishment orders against them,” Saunders said. “Banks are caught in the middle here, and they have to comply with court orders.”
Many federal benefits, such as Social Security payments and veterans benefits, have been exempt from debt collection by third parties since a 2011 rulemaking from the Treasury Department tied to the Dodd-Frank Act. But with no explicit provision in the CARES Act to provide the stimulus checks with similar protections, the Treasury Department has made no public indication that it will do so.
“Under the CARES Act, Treasury has the broad authority to issue rules around the stimulus,” said Lisa Stifler, director of state policy at the Center for Responsible Lending. “They haven’t done so on this, and we don’t know why.”
The Treasury Department did not respond to a request for comment for this story.
Johannsen said there is a difference between banks being ordered by a court to transfer funds to a third-party debt collector and their using stimulus money to cover an overdraft.
“What you have to do is separate from what banks have control over, in terms of decisions they can make about their own actions, versus what they're obligated to do as a result of legal responsibilities,” he said. “Debt collectors can’t just take the money out of someone’s bank account unless they have a court-approved debt garnishment order. So if a bank is served that order, they don’t have a choice. But what they do have a choice over, if someone has an overdue loan payment or outstanding overdraft fee, is whether or not to use the stimulus funds to offset it."
He added that banks have generally been sympathetic to consumers’ financial struggles during the pandemic crisis.
"Banks need to think about what they’re in control of — whether your collection group is going to stand down, be more circumspect, how you’re making calls and other kinds of collection activities,” Johannsen said. “Most banks have adopted an attitude of tolerance. If people are asking for extensions or leeways, in most cases I’m aware of, they’re being very tolerant. But we’ll see how long that can last."
Lawmakers have called on banks to publicly state that they will not seize a customer’s stimulus funds for the payment of debts.
“We ask that your member banks do the right thing — for their customers, our country, and our economy — and publicly commit that they will not offset their customers’ stimulus payments to pay for any fees, charges, or allegedly past due debts,” wrote Sens. Elizabeth Warren, D-Mass., and Sherrod Brown, D-Ohio, the top Democrat on the Senate Banking Committee, in a letter Wednesday to six financial services trade groups.
Last week, Brown along with Sen. Josh Hawley, D-Mo., sent a letter to Treasury Secretary Steven Mnuchin urging him to take action to protect individuals’ funds from private debt collectors. “If Treasury fails to take action, the CARES Act direct payments are at risk of being seized by debt collectors,” they wrote. “That is not what Congress intended.”
Even without explicit federal protections, several states have taken actions to either halt debt collection or protect stimulus payments from debt collectors.
In Massachusetts, the state’s attorney general issued guidance on Monday telling local debt collectors that CARES Act payments were “off-limits.” In Ohio, the attorney general warned collectors not to touch stimulus funds, citing existing state law that generally protects federal benefits from being garnished by debt collectors, even those not explicitly protected under federal law.
And in a letter on Monday, 25 state AGs, including from New York, California, Illinois, Ohio, New Mexico, Virginia and Minnesota, urged Treasury to take stronger action.
“During this public health and economic crisis, the States do not believe that the billions of dollars appropriated by Congress to help keep hard-working Americans afloat should be subject to garnishment,” the attorneys general wrote.
But advocates say an uneven patchwork of state and local action to halt debt collection will still leave many low-income Americans in the lurch.
“More than anyone else, the people facing debt garnishment are likely to have lost their jobs, been furloughed, or had hours reduced and are struggling to make ends meet right now,” said the CRL’s Stifler. “When these funds meant to help them are taken by creditors or collectors putting themselves at the front of the line, that is going to prevent folks from being able to keep going.”