The federal government's response to Covid-19 has allowed millions of Americans to defer payments on their mortgages, rent, student loans and utility bills.
But as more people are vaccinated and the country sees a return to normal life on the horizon, payments on trillions of dollars of those debts could resume soon, even if debtors remain out of work or in financial distress because of the economic crisis the outbreak wrought.
Consumer finance and regulatory experts, as well as Democratic lawmakers, warn that the coming debt crisis will be catastrophic for many people and that they could be a huge windfall for predatory financial institutions like debt collectors and payday lenders — industries regulated by the Consumer Financial Protection Bureau, or CFPB, which President Joe Biden is trying to rebuild after it was hollowed out under former President Donald Trump.
"As the pandemic winds down, there is a lot of debt overhang: deferred rent, deferred mortgages, deferred student loans. We've basically been living in suspended animation until the pandemic ends," said Harvard Law School professor Howell Jackson, an expert on financial regulation and consumer protection who was a visiting scholar at the CFPB from 2013 to 2015.
"And at some point there is going to be an extraordinary number of people out there who are very vulnerable with debt, and we are going to have major debt collection issues," he said. "We have already seen issues during the pandemic with payday lenders."
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Biden last month extended both the foreclosure moratorium for homeowners and a program that allows homeowners to pause payments on their mortgages through the end of June. Earlier, in one of his first moves as president, Biden had extended the ability for borrowers to pause their federal student loan payments through the end of September, affecting about 40 million borrowers.
Many utility companies have also voluntarily allowed consumers to pause their payments on electric and gas bills during the economic crisis.
Consumer advocates praised the moves, as well as measures under the American Rescue Plan that provide direct financial relief to those people. But for many, the relief and the deferrals are not nearly enough, and even if Biden further extends the windows for not making payments, those, too will eventually close. And when they do, Jackson and others warned, the total amount headed for collection could be staggering.
"These periods of forbearance will eventually end. And when they do, there could be millions of families unable to resume paying mortgages, car payments, credit cards, student loans, who could be at risk of 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 the CFPB's associate director for research, markets and regulation from its inception through February 2020.
In fact, by the end of February, nearly one year into the pandemic, 1 in 5 renters were behind on payments, and more than 10 million homeowners were behind on mortgage payments.
In addition, an "avalanche" of student loan borrowers could soon default on their loans after the deferral period on those payments closes, Rohit Chopra, Biden's nominee to lead the CFPB, warned lawmakers during his confirmation hearing this month.
In all sectors, people of color face more severe economic distress and will bear the brunt of the coming wave of defaults.
According to the latest Census Household Pulse Survey, 18 percent of Hispanic borrowers, 17 percent of Black borrowers, 18 percent of Asian borrowers and 7.3 percent of white borrowers were not current on 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 loan borrowers of color, meanwhile, are more likely to have taken out bigger loans and face a wage cap when they eventually enter the job market — which Chopra called a "double whammy" during his confirmation hearing.
As payments become due later this year, employed people strapped for cash are likely to have to rely on payday lenders, experts warned, while unemployed and underpaid people could face the wrath of aggressive debt collectors.
Experts and Democratic lawmakers, including Sen. Elizabeth Warren, D-Mass., who helped create the agency during the Obama administration, have repeatedly said the CFPB is uniquely equipped to help distressed borrowers deal with those outcomes. But that is only if Biden is able to rebuild the agency to give it some teeth.
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"All of that speaks to why we need to make sure this agency is up and running back to the way it was [under Obama] as quickly as possible," Senate Banking Committee Chairman Sherrod Brown, D-Ohio, said in an interview.
The agency could help bolster regulations of the payday lending industry — many of which were rescinded during the Trump era — and it could resume strict enforcement of aggressive debt collection practices, which were not frequently enforced under Trump.
While the agency cannot prevent debt collection or payday lending, it can significantly curtail how predatory the practices are by ensuring that rules that do exist are forcefully and fairly enforced and by writing new rules. Existing rules govern what kind of contact collectors can make with consumers (and how frequently) and what pressure they can use — mandating that collectors be truthful about the debts they are after — as well as how collectors report nonpayments to credit reporting agencies.
Jackson of Harvard said many debts also have statutes of limitation and become invalid after a certain period of time.
"It's critical to make sure consumers know they have rights in this area," he said. "There are a lot of substantive protections in the debt collection space."
Silberman, who worked at the agency for nearly a decade, said: "At the very least, the CFPB can assure that these consumers are treated fairly by their creditors and by debt collectors.
"It doesn't necessarily mean they wont ultimately suffer adverse consequences. In the end, the federal government will have to decide whether and how it can provide more assistance and relief," he said. "But the agency, if strong, can ensure fair treatment under the law for some of our most financially vulnerable consumers."