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Amid bipartisan criticism, Treasury Dept. attorneys review bank seizures of $1,200 stimulus checks

Some of the payments have been taken by debt collectors. Advocates say low-income families need the money for food.

April 20, 2020 at 2:57 p.m. EDT
Treasury Secretary Steven Mnuchin speaks during the daily White House coronavirus briefing on April 2. (Mandel Ngan/AFP/Getty Images)

The Treasury Department is reviewing whether it has the legal authority to prevent banks and private debt collectors from seizing $1,200 government stimulus payments, according to a person familiar with the internal deliberations, as blowback builds over private lenders clawing back parts of the emergency financial relief package.

The review is being conducted by legal counsel at the Treasury Department, said the person, who declined to speak on record because the matter had not been finalized. It was unclear when a determination about the payments would be made.

Earlier this month, the Trump administration began directly depositing stimulus checks in the bank accounts of 80 million Americans to help them survive the economic downturn caused by the coronavirus. Reports quickly surfaced that some of these payments were being redirected to banks and private debt collectors from people who have overdraft fees, delinquent loans or other debt obligations.

These garnishments have sparked a bipartisan backlash in Congress, with lawmakers arguing the money should be walled off from collection by banks and private debt collectors. Several large banks announced they would stop taking the money amid public criticism. USAA, which services veterans and military families, announced last week that it would return the stimulus funds and change its policy after the American Prospect reported the bank took $3,400 in payments from the family of a disabled veteran to offset an existing debt.

The seizure of stimulus checks by private lenders threatens to further undermine the rocky rollout of the $2 trillion coronavirus relief package. A number of obstacles have surfaced blocking Americans from swift access to the direct payments, a massive increase in unemployment benefits and emergency loans through the Small Business Administration. The Trump administration has defended its implementation of the law, saying it sent out 80 million checks within three weeks with an error rate of under 1 percent and has successfully disbursed hundreds of billions in small-business aid.

Glitches prevent $1,200 stimulus checks from reaching millions of Americans

Millions of people stand to have their stimulus payments garnished under the current Treasury Department policy. Nearly a third of Americans have a debt in collection, although the exact number affected is unclear, according to Lauren Saunders, associate director of the National Consumer Law Center, a nonpartisan advocacy group.

Several of the largest banks, such as Bank of America and Wells Fargo, have said they will not collect these payments regardless of the Treasury Department policy. Thousands of smaller banks and credit unions may still be doing so, and some debt collectors are trying to grab the payments.

“Congress authorized these payments because people have lost their jobs and are desperate for money for food. The money needs to go to food, not the debt collectors or back bank fees,” Saunders said. “I hope Treasury reverses itself immediately, because every day that goes by that people can’t access their money they are wondering how they are going to eat.”

Post economics reporter Heather Long explained how certain groups of people are ineligible for the government stimulus relief payments. (Video: The Washington Post)

Some Treasury Department officials have privately told outside advisers that Congress would have to pass new legislation to give them the authority to ensure the payments are not garnished, according to two people familiar with the conversations. The people spoke on the condition of anonymity to discuss private conversations.

A joint letter signed by the American Bankers Association, the Consumer Bankers Association and the Financial Services Forum urged Congress to revise the Cares Act to ensure the stimulus checks are not redirected to “court ordered garnishment to pay creditors.”

The issue has surfaced across the country, complicating the process of disbursing badly needed aid. Alex Kornya, litigation director of Iowa Legal Aid, said dozens of people have called a hotline for help, unable to access their stimulus payments because of prior debt obligations. A mother of five living in a domestic-abuse shelter sought legal help after discovering she was unable to receive her check because of a frozen account. Because court services have been reduced, her initial hearing date was not scheduled until June.

“We have been appalled by what’s happening,” Kornya said. “Unless someone like us is putting up a fuss, this money is getting tied up.”

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Collections agencies are working with consumers affected by the coronavirus, deferring or reducing their payments, said Richard J. Perr, a co-managing partner at Kaufman Dolowich Voluck, which represents debt collectors. Debt collectors are receiving an unprecedented number of inbound calls and working closely with affected consumers, according to ACA International, a large debt-collection industry group.

“This concept that there are collection agencies lurking around banks to get this money is just not accurate. It’s not practical, either,” Perr said. “The goal here is to help everyone. Nobody is sitting around to get peoples’ checks."

The Treasury Department was warned weeks ago about the potential danger of letting the payments be siphoned off. On April 9, Sens. Sherrod Brown (D-Ohio) and Josh Hawley (R-Mo.) sent a joint letter to Mnuchin urging him to prevent the funds from going to private collectors settling prior debts.

Some critics welcomed the news that the Treasury Department’s legal counsel would review the matter but expressed fear that action could come too late, given that tens of millions of stimulus payments have already gone out the door.

“Let’s hope it isn’t too late,” said Sarah Bloom Raskin, a department official in the Obama administration. “The question now is whether Treasury can implement in time to provide real assistance to households waiting for their checks and needing those checks to not be hijacked by debt collectors or overdraft fees.”

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