Millions of Americans have already received their economic relief payment from the government, and millions more will be receiving it in the coming weeks, in an effort to stave off severe financial woes amid the coronavirus pandemic.
But whether these checks provide much-needed relief will depend, at least in part, upon actions taken by financial institutions.
When money is deposited into checking accounts, banks determine how much of that money is immediately available to the consumers to spend. Banks generally operate under the premise that if the customer owes them money — like having overdrafted an account, for example — the bank will first reclaim that money off the top, along with any fees due to the overdraft.
Similarly, to the extent that there are past-due payments on a loan, banks can claim that payment, along with any late fees, before making relief funds available to the consumer. Further, some banks have structured loans as “deposit advances” so that payments become due and are automatically clawed-back whenever money is deposited.
Even having a more conventional loan with regularly scheduled payments, as soon as the payment comes due, banks may be able to put themselves first in line to quickly grab money from consumers’ accounts. Indeed, with modern technology creditors who do not even have a banking relationship with their customers may still be able to monitor banking accounts in real time and fuel a race to get repaid as relief-check deposits arrive.
Through the coronavirus aid bill, Congress protected these relief checks from claims for debts owed to the federal or state governments, and some states have provided protection from garnishment or attachment as well.
However, Congress did not shield the money from private claims. And it is unclear whether state actions apply to self-help measures by banks. Indeed, Treasury officials have reportedly advised banks to make “business decisions” about whether to skim money from the recovery rebates to repay loans and fees. Absent government action, many consumers will be affected by these business decisions that will determine how much damage the coronavirus does to their financial health.
Even before the coronavirus national emergency, a sizable portion of Americans were financially vulnerable and an even larger group were barely coping financially. For example, research conducted by the Financial Health Network found that 27% of adults had already skipped needed medical care because they could not afford it, and 34% were unable to pay their bills on time in a 12-month span from 2018 to 2019.
An even larger group, at 48% of the adult population, reported lacking sufficient liquid savings to cover three months of living expenses. Many of these Americans will need every dollar of their recovery rebates to meet their basic needs.
Financial institutions concerned with their…