Can CUs garnish IRS stimulus payments? ‘Some clarity would be nice.’
The latest round of coronavirus-relief legislation could provide credit unions with clarity on how to handle a sensitive element related to the $1,200 stimulus payments taxpayers have received from the government.
The Coronavirus Aid, Relief, and Economic Security Act did not specifically block those funds from garnishment for debt collection. Bank and consumer advocates have called on Congress to protect those payments from garnishment, but credit union groups did not weigh in on the issue. Its successor, the HEROES Act, which the House passed last Friday but is still far from being signed into law, could set limitations on whether collectors can touch those payments.
“Congress passed the CARES Act without explicitly designating the stimulus payments as exempt from garnishment and thus Congress is in a unique position to uniformly clarify if the payments are intended to be exempt as a matter of federal law,” said Brian Knight, executive vice president and general counsel at the National Association of State Credit Union Supervisors. “Such clarity would permit credit unions and other depository institutions to operate in a consistent manner across the country.”
The latest legislation amends the CARES Act by specifying that stimulus checks are not subject to “transfer, assignment, execution, levy, attachment, garnishment or other legal process, or the operation of any bankruptcy or insolvency law.”
But some credit union groups took issue with those limitations and other loan forbearance provisions, citing safety and soundness risks to lenders. The bill halts debt collection activities until 120 days after the pandemic ends, along with allowing automatic forbearance on delinquent mortgages, and extends the forbearance on federal student loans through September 2021. The new legislation also requires the Treasury Department to make monthly payments on borrowers’ privately held student loans – capped at $10,000 per person – until September 2021.
“However well intentioned, it presents both a moral hazard and significant safety and soundness issues when the government tells creditors that they may not collect on debts,” said Ryan Donovan, chief advocacy officer at the Credit Union National Association.
There are also concerns that broader rules limiting debt collection could harm credit unions with meager reserves for loan losses – particularly smaller institutions.
In an earlier interview before the text of the HEROES Act was released, Donovan suggested that if Congress did not want stimulus payments garnished, lawmakers would have “use[d] the mechanisms that exist to prevent that from happening.”
The industry hasn’t been wholly silent on the issue of garnishments. Todd Harper, a member of the National Credit Union Administration board, urged Congress to protect those payments in a letter to lawmakers earlier this month.
“I don’t know if [Congress] need to enact legislation, but I think they need to be clear on what they intend for the financial institutions to do with the money when they get it because you always have a concern that whatever decision you make – how will the regulators react to it when they come in?” said Jim Spradlin, CEO of Park Community Credit Union in Louisville, Ky. “So some clarity would be nice.”
There’s also debate about whether these payments can be garnished at all.
Mark Neeb, CEO of ACA International, formerly known as the American Collectors Association, suggested the term bank levy was more appropriate than garnishment, claiming stimulus checks could not be garnished. A bank levy is a legal action allowing creditors to remove funds from a borrower’s checking account. Garnishment typically refers to wages, Neeb said, in which a court orders a portion of a person’s income to be taken from a paycheck in order to resolve outstanding debts. The two differ primarily based on frequency; garnishments recur until the entire debt is satisfied while a bank levy is generally a one-time event.
Debt collectors occasionally file a bank levy against funds that may be in someone’s checking account, he explained, adding that lawmakers are considering protections against this practice during the pandemic. He added, protections against wage garnishments would be unnecessary as stimulus checks are not wages.
“The whole world seems to be using those terms interchangeably,” Neeb said.
Semantics aside, it’s unclear how many of these measures will make it into law. The bill passed in the Democratic-led House but significant changes are likely should the Republican-controlled Senate take it up, and that chamber is also expected to put forward separate coronavirus-relief legislation in the coming weeks.
“The consensus seems to be that although the House passed it, it won’t make it out of the Senate,” Spradlin said. “Since it appears to have a low probability of actually passing, we just haven’t taken the time to study it.”