Balancing Credit Reporting and Compassion In Light of COVID-19

Update April 1: Following the passage of the CARES Act, the CFPB issued a Policy Statement that is intended to afford furnishers "flexibility" in complying with the FCRA's furnisher rules. In particular, the Policy Statement indicates that the CFPB will not, in general, cite in exams or bring enforcement actions where a furnisher has made "good faith efforts to comply" with its FCRA obligations in light of current COVID circumstances.

While the Policy Statement provides a couple of examples demonstrating such flexibility (such as taking up to 45 days to investigate accuracy disputes in certain circumstances), they are examples only and it's not clear if a longer delay would be acceptable or what other instances of non-compliance, despite good-faith efforts (however that is determined) would fall within the intended purview of the CFPB's Policy Statement.

Update March 31: The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020, includes a section enacting an amendment to the Fair Credit Reporting Act (FCRA) requiring furnishers to report as current any consumers who make any payment, or are not required to make payments, pursuant to an accommodation agreement with their lender.

The CARES Act defines "accommodation" as "an agreement to defer 1 or more payments, make a partial payment, forbear any delinquent amounts, modify a loan or contract, or any other assistance or relief granted to a consumer who is affected by the coronavirus disease 2019 (COVID–19) pandemic." Such accommodations, if not already required by state or federal law, are now being offered across the financial industry by institutions ranging from credit card issuers to mortgage servicers.

This reporting obligation covers a period starting January 31, 2020 through the later of 120 days from (1) the enactment of the furnisher provision (or until July 25, 2020) or (2) the termination of the President's declared national emergency order. For accounts that were delinquent before the accommodation, the lender can maintain the account's delinquent status during the accommodation but must report the account as current if that occurs during the accommodation. These reporting requirements do not apply to accounts that have been charged off.

While many financial institutions have taken steps to provide far-reaching financial relief to consumers impacted by the COVID-19 pandemic, not all consumers will get such relief. This could, in turn, result in an increase in late or missed payments, potentially leading to a dramatic increase in negative impacts to consumer credit scores that could have lasting effects beyond this pandemic.

The realization that this outcome is very possible has led financial institutions to ask themselves, what should we do when our customers experience delinquencies and defaults caused by COVID-19, events that would otherwise be reportable to the credit bureaus?

The answer to that question turns on balancing a furnisher's obligation to maintain the accuracy and integrity of information reported to the bureaus, as required by the Fair Credit Reporting Act, while at the same time trying to be fair and compassionate to consumers in light of circumstances outside their control. An institution might, for example, consider a temporary hold on negative reporting in a good-faith effort to avoid present harm.

However, that can have the unintended consequence of endangering the long-term safety and soundness of the banking industry if information on which loans, credit cards, and practically all other credit products are underwritten lacks material information about a consumer's past repayment behavior.

Credit Reporting Initiatives

As financial institutions internally debate how best to address these issues with respect to their own customers, the following is a recap of how legislatures, regulators and the industry are currently trying to resolve them on a broader scale:

• The U.S. Senate is currently discussing proposed legislation that would look to end negative reporting for a four-month period. Senators Sherrod Brown (D-OH) and Brian Schatz (D-HI), members of the Senate Banking Committee, proposed such legislation on March 17, though it remains to be seen if the proposal will make its way into the large package of emergency relief legislation currently under consideration in Congress.
  
  The Senators' proposal is in line with sentiments expressed in a letter from House Democrats to the chief executives of Experian, Equifax, and TransUnion last week, which also called for a moratorium on negative reporting during the crisis.

• Credit bureaus have pushed back against the idea that moratoriums on negative credit reporting are the only means to protect consumers in this situation. The bureaus have indicated their belief that such a moratorium would lead to increasingly inaccurate credit data and loan decisions, ultimately resulting in institutions charging higher interest rates.
  
  The bureaus and their representative industry group, the Consumer Data Industry Association (CDIA), have instead recommended that financial institutions use special coding to flag the credit reports of impacted consumers. This recommendation is in line with previous CDIA guidance related to natural disasters.
  
  The Metro II data specifications promulgated by the CDIA, in conjunction with the nation’s largest credit bureaus, provide that lenders should initially work outside the context of credit reporting channels to assist consumers harmed by natural or declared disasters – for example, by offering liberal alternative payment arrangements. When time to report the credit data of impacted consumers, a set of Metro II FAQs notes that lenders should flag such reports with "Special Comment AW (Affected by natural or declared disaster)."

• Various governmental bodies – including the FDIC, Federal Reserve, and state attorneys general – have provided their own guidance to the effect that offering payment deferrals would diminish the need for negative credit bureau reporting in and of itself.

• Consumer groups appear hesitant to rely on voluntary financial institution or credit bureau measures (like those proposed by the CDIA), however, and continue to push for direct federal legislation or regulatory directives on negative credit bureau reporting related to COVID-19 hardships. A concern, for example, is the 2018 CFPB report on Hurricane Harvey, which found that less than 40 percent of credit reports in the impacted Houston metro area were flagged with the natural or declared disaster code.
  
  

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.