As the United States enters the third month of the coronavirus pandemic, states are implementing plans for phasing out shelter-in-place orders and re-opening non-essential businesses. The past months have brought widespread layoffs and furloughs. By the end of April 2020, the unemployment rate soared to 14.7% and 30 million Americans had filed employment claims. Within the initial weeks of the pandemic, many Americans became worried about how they would make ends meet. In response to the unprecedented health and economic crisis, at the end of March, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The CARES Act seeks to help people and companies weather the worst of the coronavirus storm, particularly given that the federal and state governments ordered the cessation of almost all economic activity. In a series of essays and opinion pieces, we have critiqued the CARES Act’s key provisions for American families as taking an unproductive and potentially destructive approach to helping people financially, both during the initial months of the crisis and as the country adapts to a new normal. This approach largely is one of offering credit, either by pausing payment on existing debt obligations or by extending them new credit. Unfortunately, financing families and small businesses through the pandemic is unlikely to be an effective response. Instead, this response threatens to extend and exacerbate the ongoing economic crash.
Congress’s Credit Offerings to American Families
Our two new essays contain the core arguments which develop our critique. As background, to help American families financially, Congress had two principal options—give them money or temporarily halt requirements that they pay for recurring and necessary expenses. In CARES Act Gimmicks: How Not To Give People Money During a Pandemic And What To Do Instead (2020 U. Ill. L. Rev. Online 81), we focus on the main provisions that give people money or money-like relief: the relief rebates and enhanced unemployment benefits. Even without later-evident issues with states’ ability to deploy enhanced unemployment benefits, it seemed clear that the offered funds would prove insufficient to meet people’s basic expenses during the initial months of the pandemic. Since the CARES Act passage, multiple surveys have found that many Americans need more than the provided $1,200 or $2,400 (plus $500 per child) to make ends meet during the throes of the crisis. This is especially true for lower-income Americans, about half of whom lost their job or lost wages due to coronavirus, as well as black and Latinx Americans, who are losing jobs at higher rates than other Americans. The all-but-certain second wave of infections is only going to exacerbate this problem.
Instead of providing people with needed cash, in the CARES Act Congress primarily offered people moratoria of their contractual obligations, mandating what amount to modified existing credit relationships. In The Folly of Credit As Pandemic Relief, , we detail how the foreclosure and eviction moratoria are credit products disguised as relief. The most obvious problems with these moratoria are their terms and their scope. For those eligible homeowners and renters, nothing in the CARES Act (or other law) directs mortgage servicers or landlords about how to account for missed payments during the moratoria. Servicers and landlords can come up with loan and rental agreement modifications to help people catch up on missed payments. Or they can require that all missed amounts be paid in one lump-sum soon after the moratoria are lifted.
Early reporting shows that some mortgage servicers are requiring homeowners to sign agreements that provide all missed amounts become immediately due at the end of the forbearance period. Likewise, landlords seem on track to evict tenants if they do not pay the accumulated missed rent at the end of the moratorium. Even in non-crisis times, few Americans likely have enough savings to cover multiple months’ worth of mortgage payments or rent all at once. And with dwindling wages and job loss, if servicers and landlords work with homeowners and tenants to revise payments to account for the missed amounts over a longer period of time, there still is no guarantee that people will be able to keep up with payments after the moratoria are lifted.
This concern is more acute for renters because the CARES eviction moratorium lasts only four months as compared to up to a year for foreclosures. Furthermore, the foreclosure moratorium covers two-thirds of mortgages, but the eviction moratorium only covers about one-quarter of rental agreements. Other people are left to hope that their states will enact similar moratoria to cover their mortgages and, of more concern, leases. Many states have stepped in to halt evictions. As we detail in our essay, the way that states have done so creates a patchwork of solutions, all of which ultimately are the same credit product offered by the CARES Act’s moratoria.
Considered together, as we wrote in a piece published in Bloomberg Law’s Insight series, the result is that the CARES Act’s primary provisions that purport to help Americans may end with millions of people ending up on the street. As the United States works to stop the spread of the coronavirus, this outcome threatens to undo our collective work to manage this extraordinary public health crisis.
Other provisions of the CARES Act that provide the equivalent of credit products have also proved problematic. Like the foreclosure and eviction moratoria, the CARES Act legislates a pause on payment of direct student loans held by the Department of Education through the end of September 2020. However, the payment moratorium does not include private or refinanced student loans and many Federal Family Education Loan (FFEL) program and Perkins loans. These gaps in coverage are substantial. For instance, the student loan payment moratorium does not apply to about 7.2 million borrowers who took out loans under the FFEL program.
In addition, the Department of Education promised to suspend garnishment of people’s bank accounts and wages to cover past-due student loan payments, as it is required to do by the CARES Act. But at the beginning of May, student loan borrowers filed a class action lawsuit against the Department of Education and Secretary Betsy DeVos alleging that garnishments have continued throughout the moratorium. Prior reporting supports the allegation that garnishment proceeded despite the CARES Act.
Beyond the scope and collection issues, the student loan moratorium also has the same issue of timing as the other credit products in the CARES Act. What happens in October when student loan payments resume is of great concern, so much so that it has prompted renewed calls to cancel student loan debt. These calls reflect our core argument that the federal government’s primary tactic of extending Americans’ existing credit obligations rather than providing true relief will potentially prove destructive to families’ finances in the months and years of rebuilding following the crisis.
Congress’s Primary Credit Offering to Small Business Owners
Although our writings have focused solely on money and credit-based relief extended directly to American families via the CARES Act and related state efforts, many families will also be significantly impacted by provisions that provide funding to small business owners. These provisions likewise offer credit to sustain people who own small businesses. The Small Business Administration (SBA) administers the offerings, such as the Paycheck Protection Program (PPP). Notably, in describing small business owners’ options, the SBA specifies that they provide “access to capital.”
As with other CARES Act programs, the PPP loans in particular experienced very public roll-out problems. The loans were given to large businesses, such as Shake Shack and Ruth’s Chris. There were regional disparities in apportionment of funds. Black-owned and women-owned businesses reported being shut out of the funds. Overall, many small business owners were unable to access the loans, leading Congress to pass another round of funding for PPP loans and the SBA to set up a special application window only for small businesses. The roll-out of this round of funding also experienced glitches under “unprecedented demands” from small businesses across the country.
Unlike the credit-based relief provided to American families, the PPP loan program includes the potential for forgiveness. If the business uses the money to cover payroll and other crucial costs for an eight-week period, the loan becomes a grant. That is, it turns into direct money relief. However, as with other provisions of the CARES Act, the forgiveness criteria have problems. Forgiveness increasingly seems like a pipedream for many small businesses owners who are finding that they are facing a new operating normal that the provisions do not take into account. Most PPP loans will remain liabilities on businesses’ balance sheets.
Nonetheless, the PPP loan program at least contemplates forgiveness. As one commentator noted, “[i]n a perfect world, no business would assume financial responsibility for abiding by public health recommendations and government restrictions.”
Offering Families and Small Businesses Credit as Relief Puts Off Pandemic’s Full Financial Fallout
According to the federal government, however, the above quote does not hold true for American families. Indeed, to the extent that the government gave money relief to people via the rebate payments, it simultaneously did nothing to protect that money from people’s current creditors. As we wrote in Time is Running Out to Protect Americans’ Relief Payments from Debt Collectors – published in the Harvard Law Review Blog before the Treasury Department deposited the first round of payments to people’s bank accounts – Congress failed to include a provision in the CARES Act that protected the payments from garnishment by creditors and debt collectors.
There was a simple fix that we and others pointed out. All the Treasury needed to do before sending the payments was to code the payments in a certain way. It declined to do so. People soon reported that their banks held onto their relief payments if their accounts were overdrawn when the money was deposited. The story of USAA, a large financial institution that serves veterans, taking $3,500 in CARES Act relief payments from a disabled veteran made national news. States were forced to step in to prevent garnishment of the relief payments.
We and others were able to correctly predict that financial institutions would garnish CARES Act relief payments because for years research has shown that Americans must finance necessary and unexpected expenses with credit. Widening income and wealth inequalities have affected people’s ability to save and increased their reliance on credit. Credit inevitably leads to default. Even before the coronavirus emerged, nearly 70 million Americans had debts in collection. Collection of these debts has continued despite the pandemic, except in those few states whose courts, governors, or attorneys general have stepped in with more comprehensive halts of collection activities in their jurisdictions.
As the foreclosure, eviction, and student loan payment moratoria end, many American families will be faced with even more debt to pay, potentially due immediately, and likely with no savings left to meet those debts. Similarly, as small businesses’ PPP loans come due, they may face fatal difficulties in paying, particularly because a majority of small businesses entered the crisis with outstanding debt, which they also will need to continue to pay. If small businesses are unable to keep up with debts, the effect will ripple to their employees and families.
Given the state of American households’ and small businesses’ finances, it was foolhardy to think that offering them restructured or additional credit would be an effective response to the coronavirus pandemic. Forcing people to finance their way through the crisis threatens to extend and exacerbate the ongoing economic crash.
Instead, Americans need a series of cash infusions that will keep their families financially afloat and, in turn, allow them to infuse money into the economy. As the crisis continues, more legislators are rallying behind proposals to give most Americans relief checks every month for the duration of the crisis. Such a stimulus package would be a boon for people and a boon for the economy. And it just might lessen the continued cataclysmic economic effects of the pandemic.