Yesterday, the IRS announced that it will send letters to approximately 9 million Americans who typically don’t file income tax returns and may be eligible, but failed to claim, their stimulus checks.
The letters are being sent to Americans who did not file a return for 2018 or 2019, and based on an analysis by the IRS, these are people who don't typically have a tax return filing requirement because they have very low incomes or are independent contractors.
Given that approximately 80 million people are estimated to have received an economic impact payment of some kind, we think it is relevant to flag the potential for additional +9 million (or +11%) people, many of whom have low-to-no reported income, being contacted to claim $1,200 from the government.
Key Takeaways:
(1) We think this latest announcement is, at a minimum, bullish on the margin for the debt collectors trade (ECPG, PRAA) as it likely improves the collectability of the existing book as the wait for increased charge-off supply continues.
- Recall, in the second quarter, we observed the positive effect that government transfer payments, mortgage deferrals, and the lock-down of discretionary spending had in shoring up the immediate-term financial positions of many households, with national survey data confirming as much.
- In an August reported released by the National Bureau of Economic Research, 85% of stimulus check recipients said they used the full amount of the one-time payment to either bolster their savings or pay down debt.
- While the collectability of the existing debt collection book typically suffers during the transition from a credit cycle peak, in the last several months we have seen this phenomenon greatly dampened by the size, speed, and directness of government household support, thereby making it easier for investors to look past the short-term and onto the rich opportunity ahead.
(2) Conversely, we think this announcement has an equal potential to extend the credit profile masking that we've seen in the delinquency data from the major credit card lenders (COF, SYF, DFS, AXP). As observed in high-frequency labor data, there is lots of focus on the stalling recovery and the shift from temporary to permanent job loss, and while absent new stimulus, these dynamics will inevitably take hold; however, among the lower segments of the credit spectrum, we could very likely see continued strength through the fourth quarter.
(3) Outside of the direct consumer finance space, we think there is also a bullish element here for Square (SQ) as a strong response rate would likely breathe further life into Cash App growth as some meaningful fraction of that 9 million person figure is likely to be unbanked and thereby strong candidates to take payment through the Cash App.
(4) The caveat here is a tight timeline as the IRS will begin mailing the letters on September 24th and the deadline to register online is October 15th. We are unsure how quickly people, especially those with low-to-no reported income, will open and respond to a letter from the IRS, but it is free money from the government so word will likely spread quickly.
