Payment deferrals were a lifeline for millions of people during Covid. What happens when these end?
But as more people are vaccinated and the country sees a return to normal life on the horizon, payments of trillions of dollars of these debts could resume soon, even if debtors remain out of work or in financial difficulty due to the economic crisis brought on by the ‘epidemic.
Experts in consumer finance and regulation, as well as Democratic lawmakers, warn that the coming debt crisis will be catastrophic for many people and could be a huge boon to predatory financial institutions like debt agents. collection and payday lenders – industries regulated by the Consumer Financial Protection Bureau, or CFPB, that President Joe Biden is trying to rebuild after being emptied under former President Donald Trump.
“As the pandemic draws to a close, there is a lot of debt distress: deferred rent, deferred mortgages, deferred student loans. We are basically living in suspended animation until the pandemic is over, ”said Howell Jackson, professor at Harvard Law School, an expert. on financial regulation and consumer protection who was a guest researcher at the CFPB from 2013 to 2015.
“And at some point there will be an extraordinary number of people who are very vulnerable to debt, and we will have big debt collection problems,” he said. “We have already seen problems during the pandemic with payday lenders. “
Last month, Biden extended both the foreclosure moratorium for homeowners and a program that allows homeowners to suspend mortgage payments until the end of June. Earlier, in one of his first steps as president, Biden had extended the ability for borrowers to suspend their federal student loan payments through end of September, affecting around 40 million borrowers.
Many utility companies also voluntarily allowed consumers to suspend payments on electricity and gas bills during the economic crisis.
Consumer advocates have praised these measures, as well as measures under the American rescue plan which provides direct financial assistance to these people. But for many, the relief and deferrals are not enough, and even if Biden extends the windows further to not make payments, those will eventually close as well. And when they do, Jackson and others have warned that the total amount to be recovered could be staggering.
“Those forbearance periods will eventually end. And when they do, there could be millions of families unable to start paying mortgages, car payments, credit cards, student loans again, who could be at risk. losing their homes, their cars, having their wages and bank accounts garnished, who will struggle to put food on the table and take care of their families, ”said David Silberman, who was associate director of research , markets and regulations of the CFPB since its creation until February 2020.
In fact, at the end of February, almost a year after the start of the pandemic, 1 in 5 tenants were behind on payments, and more than 10 million homeowners were behind on mortgage payments.
More, an “avalanche” of student loan borrowers could soon default on their loans after the deferral period for those payments closes, Rohit Chopra, Biden’s candidate for head of the CFPB, warned lawmakers during his confirmation hearing this month.
Across industries, people of color face greater economic distress and will bear the brunt of the next wave of defaults.
According to the latest Household census survey, 18% of Hispanic borrowers, 17% of black borrowers, 18% of Asian borrowers, and 7.3% of white borrowers were not up to date with their mortgage payments. According to The data, 33 percent of black renters were behind on their rent payments, along with 20 percent of Hispanic renters, 16 percent of Asian renters, and 13 percent of white renters.
Student borrowers of color, meanwhile, are more likely to have taken on larger loans and face a salary cap when they finally enter the workforce – what Chopra called a “double whammy.” “during his confirmation hearing.
As payments become due later this year, cash-strapped employees will likely have to rely on payday lenders, experts warned, while unemployed and underpaid people could face the wrath of aggressive debt collectors.
Democratic experts and lawmakers, including Senator Elizabeth Warren, D-Mass., Who helped set up the agency during the Obama administration, have repeatedly stated that the CFPB is uniquely equipped to help struggling borrowers cope with these results. But that’s only if Biden is able to rebuild the agency to give it some bite.
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“All of this explains why we need to make sure this agency is up and running and going back to how it was before.” [under Obama] as quickly as possible, ”Ohio Senate Banking Committee Chairman Sherrod Brown said in an interview.
The agency could help strengthen the regulation of the payday lending industry – many of which were canceled during the Trump era –And he could resume the strict enforcement of aggressive debt collection practices, which were not frequently applied under Trump.
While the agency cannot prevent debt collection or payday loans, it can significantly reduce the predatory nature of the practices by ensuring that existing rules are enforced forcefully and fairly and by writing new rules. Existing rules govern the type of contact collectors can make with consumers (and how often) and the pressure they can exert – forcing collectors to tell the truth about the debts they seek – as well as how collectors report non-payments to credit bureaus.
Jackson of Harvard said that many debts also have a statute of limitations and become invalid after a certain period of time.
“It is essential to make sure that consumers know they have rights in this area,” he said. “There are many substantial protections in the area of debt collection. “
Silberman, who worked at the agency for nearly a decade, said: “At the very least, the CFPB can ensure that these consumers are treated fairly by their creditors and by debt collectors.
“This does not necessarily mean that they will not ultimately suffer negative consequences. Ultimately, the federal government will have to decide if and how it can provide more aid and relief,” he said. “But the agency, if strong, can ensure fair treatment under the law for some of our most financially vulnerable consumers.”