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

The Washington Post logo The Washington Post 4/20/2020 Jeff Stein, Renae Merle
Steven Mnuchin wearing a suit and tie smiling at the camera: Treasury Secretary Steven Mnuchin speaks during the daily briefing on the novel coronavirus, COVID-19, in the Brady Briefing Room at the White House on April 2, 2020. © Mandel Ngan/Afp Via Getty Images Treasury Secretary Steven Mnuchin speaks during the daily briefing on the novel coronavirus, COVID-19, in the Brady Briefing Room at the White House on April 2, 2020.

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 spoke on the condition of anonymity to discuss agency process. 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. But 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 have also announced they would stop taking the money amid public criticism. USAA, which services veterans and military families, announced last week 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.

Related video: Debt collectors seize stimulus checks (provided by CBS News)

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The seizure of stimulus checks by private lenders threatens to further undermine the rocky roll-out of the $2 trillion coronavirus relief package, as 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.

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Millions of people stand to have their stimulus payments garnished under the current Treasury policy as 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 Treasury policy. Thousands of smaller banks and credit unions may still be doing so, and some debt collectors are trying to grab these 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.”

Some Treasury 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 not be redirected to certain garnishments.

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 because they cannot access their stimulus payments due to prior debt obligations. A mother of five living in a domestic abuse shelter sought legal help because she was unable to receive her check due to 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.”

Treasury 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 news Treasury legal counsel would review the matter, but expressed fear any 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 former Treasury 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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