Financial Services Industry Fears Slashing Unemployment Aid Will Lead to Loan Defaults

With further COVID-19 relief legislation in limbo due to a stalemate in Congress, many Americans who have been unemployed as a result of the global pandemic are now seeing a lapse in the temporary $600 enhanced unemployment benefits they received as a result of the CARES Act, passed at the beginning of the pandemic in March. Some in the financial services industry, according to American Banker, are concerned that this reduction in unemployment benefits will lead to credit delinquencies or defaults.

Senate Republicans proposed follow-up legislation to the CARES Act, called the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act, legislation that would cut the supplemental unemployment benefits from $600 to $200 per week. The legislation Senate Republicans have proposed would also grant another round of $1,200 stimulus checks, increase funding for the Paycheck Protection Program, and allow student loan borrowers to continue deferring payments.

“There’s no question that it’s going to push some people, who at $600 a week can afford to maintain all of their loans payments—their credit card, their car loan, the mortgage, the rent—into making decisions about which payments to miss, or whether to seek forbearance on the mortgage or whether to try and negotiate with their landlord,” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics.

“So far our customers are making their payments,” said Roger Hochschild, CEO of Discover Financial Services. Those in the industry worry that consumer spending will slow down “if government aid is pulled back too quickly.”

Some believed that the proposal would pave the way for Senate Republicans to negotiate with Democrats on an amount to continue providing relief to Americans. Too big of a cut could prevent the economic recovery anticipated by the Trump administration. Those negotiations have stalled, however, and both Houses of Congress have returned to their districts and states for the August District Work period. They could be called back to Washington, though, if a deal is made.

“It is something we’ve been concerned about,” said Bill Kilmer, senior vice president for legislative and political affairs at the Mortgage Bankers Association. “We believe that all the evidence points to the fact that the income supports that were put in place by the CARES Act, whether that was the first wave of stimulus checks, or certainly the altered unemployment insurance benefits have helped people continue making mortgage payments.”