Regulators are rapidly issuing a deluge of new orders, rules, and guidance to protect consumers who are struggling to make loan payments and access cash (“Emergency Regulations”) in response to the sudden financial impact of the COVID-19 pandemic. While laudable, the regulatory response evolves daily and without coordination among jurisdictions, creating an immense burden on banks and Fintech companies that are trying to keep up with changing demands. This Fintech Flash boils down the Emergency Regulations into key takeaways that banks and Fintech companies can use to plan a response that best serves their customers, while also protecting against litigation and regulatory risks.
1. Monitor Updates and Be Prepared to Act Quickly. Most of the Emergency Regulations are effective immediately and remain in effect for a temporary period (typically up to 90 days). Lack of timely notice about a development (or its expiration) may result in inadvertent violations of law. Check your regulators’ websites often, sign up for e-mail alerts, and seek support from your trusted advisors or third party services that track regulatory developments. Goodwin’s Financial Industry COVID-19 Regulatory Tracker is updated daily and can serve as a central resource for learning about Emergency Regulations and announcements from federal and state regulators, financial institutions, government-sponsored entities (GSEs) and industry trade groups that affect the mortgage, student lending, credit card, payments, deposit, debt collection, credit reporting, personal loan, banking and consumer lending industries.
2. Review Customer Communications Practices. Consumer-facing companies should review their communications practices in light of several state orders and regulations that temporarily prohibit outbound communications to struggling consumers (including Colorado, Illinois, Massachusetts, Nevada, and Washington, D.C.). Many of the regulations that are intended to limit “debt collection” attempts apply very broadly to companies that may be communicating in a manner meant to be helpful, including routine servicers, purchasers of loans, and Fintech lending platforms that communicate with borrowers in their own name, rather than in the name of their bank partner or the owner of the loans. Some orders, like the Washington, D.C. order, prohibit nearly all types of communications including text messages and emails, while others, like the Massachusetts order, are limited to phone calls and voicemails. The majority of these orders apply to communications with borrowers who are more than 30 days delinquent. Therefore, proactive communication to borrowers about available options for relief before borrowers become delinquent is important. New York goes so far as to require lenders to proactively communicate the availability of mortgage relief programs to all borrowers. The regulations do not prohibit providers from responding to consumer-initiated communications.Banks and Fintechs are encouraged to work with borrowers who ask for help.
3. Carefully Plan Relief Programs for Struggling Consumers. Regulators have encouraged financial institutions to make prudent accommodations to assist consumers with a demonstrated hardship as a result of the COVID-19 pandemic. Banks and Fintech companies should design and offer relief programs, such as loan forbearance, fee waivers, payment reductions, or interest rate reductions, which are tailored to the nature of the emergency, and which can be offered fairly at scale to all consumers who qualify. The program features and their eligibility criteria should be clear and consistently applied.Use of discretion and case-by-case relief may increase fair lending, discrimination, and UDAAP risks. Any exceptions made to the established program in order to help a consumer with a unique hardship should be justified and documented. Refusals to grant relief may trigger a requirement to send an adverse action notice. Fintech platforms are urged to coordinate with their bank partners and investors to ensure compliance with contracts as well as the Emergency Regulations that impact those partners, such as the inter-agency statement to banks and credit unions about classifying and accounting for loan modifications. Banks and Fintech companies should also coordinate with and provide a game plan to vendors, such as call centers and debt collectors, to implement a coordinated response to assist consumers.
4. Be Aware of Required Assistance Programs. Fintech companies and banks should be aware of financial assistance that is required by law to be provided to struggling consumers, which are specific to the loan type and jurisdiction. Examples include:
- Student Loans. The U.S. Department of Education temporarily set the interest rate of all federal student loans to 0%, and will give borrowers the option to defer payments for at least two months beginning on March 13, 2020. A coalition of states also struck a deal with several private student loan servicers to offer relief.
- Mortgages. The U.S. CARES Act grants certain rights of forbearance if borrowers are unable to pay a federally-backed mortgage because of the pandemic. The GSEs also mandated that mortgage lenders and servicers offer a number of assistance options. Impacted homeowners with a Fannie Mae or Freddie Mac loan are eligible for a forbearance plan to reduce or suspend their mortgage payment for up to 12 months in the event their performance is impacted by the pandemic. The GSEs further stated that homeowners in such a forbearance plan cannot incur late fees and, after forbearance, the servicer must work with the borrower on a permanent plan to help maintain or reduce monthly payment amounts as necessary (including a loan modification). Several states, including Massachusetts, adopted similar bills and regulations requiring lenders to cease foreclosures and offer forbearance options. New York stepped in to fill gaps by requiring lenders and servicers to offer forbearances to all New York homeowners regardless of whether the mortgage is federally-backed or GSE-securitized, and declared it an unsafe and unsound practice to fail to do so, though New York’s authority to uniformly enforce this order, including against banks that are not state-regulated is the subject of debate.
5. Tread Carefully When Taking Legal Action. The U.S. CARES Act prohibits mortgage lenders and servicers from beginning a judicial or non-judicial foreclosure, or from finalizing a foreclosure judgment or sale, for 60 days after March 18, 2020. It also prohibits landlords from initiating eviction proceedings or charging fees for the nonpayment of rent for 120 days after March 27, 2020. Massachusetts, Washington, D.C., and other jurisdictions adopted regulations temporarily prohibiting creditors and debt collectors from initiating or threatening a lawsuit, garnishment, seizure, attachment, withholding of wages or repossession of a vehicle, to satisfy a debt. As described below, further action has been taken to prohibit the garnishment of CARES Act stimulus checks in some jurisdictions. Providers of consumer deposit accounts and stored value, and employers, should understand these obligations and be prepared to ensure that the funds they hold are not unlawfully seized.
6. Tailor Credit Reporting to Relief Programs. If you are a furnisher of credit report data, any plan for providing relief to borrowers should also include plans for appropriately furnishing data about that relief to credit bureaus. The CARES Act amends the Fair Credit Reporting Act and requires that a borrower’s account be reported as current if an accommodation is given to a borrower affected by the COVID-19 pandemic, and the borrower makes the payments required by the modification agreement.If the borrower was delinquent before receiving the accommodation, the account may be reported as delinquent until the borrower brings the account current.
7. Help Customers Keep their Stimulus Checks. The CARES Act provides cash assistance of up to $1,200 for each eligible individual or $2,400 in the case of eligible individuals filing a joint return, plus an additional $500 per dependent child. The movement of a large amount of cash into consumer accounts presents a risk that the funds will never reach the intended recipient. There have been numerous reports of criminals diverting stimulus funds to their own accounts. If the funds do reach the intended account, but the account is in overdraft status, the funds may be immediately set-off by the account-holding institution to satisfy the negative balance. Accounts might also be garnished by creditors. A group of 25 states sent a letter to Treasury Secretary Steven Mnuchin, urging Treasury to adopt regulations to address the risk that these actions may undermine the purpose of the CARES Act.Although federal action seems unlikely, more than 10 states, including New York, Massachusetts and Vermont independently took action to classify stimulus checks as government assistance that is exempt from seizure by creditors. These orders generally prohibit judicial action to garnish the accounts holding the funds, and should not impact the receipt of routine payments that are authorized by the consumer. Several banks have nonetheless announced that they will not use stimulus checks to set off overdrafts.
8. Consider Waiving or Reducing Fees. The financial impact of the COVID-19 pandemic is expected to result in the reduced availability of cash, and a rise in overdrafts and late payments. Consumers facing a financial hardship may be further impacted by financial service fees. As noted above, some late payment fees are prohibited. Many financial institutions are also voluntarily waiving or reducing late fees, ATM fees, overdraft fees, and others. New York is urging Banks and Fintech companies that offer consumer deposit services to waive overdraft and ATM fees, and encouraging lenders to waive late fees and increase credit card limits for creditworthy borrowers without over-the-limit fees. Existing laws make it illegal to charge upfront fees for credit repair and loan modifications before services are rendered.
9. Balance Cash Access and Overdraft Flexibility with an Eye for Fraud. To increase consumer access to cash, New York also called for banks to temporarily increase ATM withdrawal limits, and waive penalties for early withdrawals from time accounts. While access to stimulus funds, fee reductions, and fewer penalties for overdrafts may help consumers cover a temporary cash shortfall, it increases the risk of fraud losses and charged-off accounts for which Banks and Fintech companies will be left holding the bag. This is further aggregated by the alarming incidence of pandemic-related scams. Further losses may result from the theft of provisional credit granted during an investigation of an unauthorized transaction claim. Sensible relief should be accompanied by keen account monitoring, swift investigation of unauthorized transaction claims, and if necessary to prevent imminent fraud, the use of account restrictions or account closing.
10. Seek Regulatory Relief but Prepare for Law Enforcement. A large number of laws and regulations require banks and Fintech companies to respond to borrowers or to take specified actions (whether within a specified period of time or otherwise). It may be difficult to comply with these requirements during the COVID-19 pandemic due to staffing and resource challenges, including a general lack of human capital to address unprecedented call volumes, inadequate vendor support, and limitations of remote work forces. Several federal agencies released Interagency Guidance that encourages financial institutions to work with borrowers and indicates that it will not criticize institutions for doing so in a safe-and-sound manner. Similarly, the CFPB is relaxing certain disclosure requirements and timing requirements for mortgage lenders, credit reporting agencies and furnishers of credit report information, and payment providers. However, when conditions improve, regulators are expected to examine issues that arose during the pandemic. In particular, regulators may focus on whether financial institutions implemented and documented a measured process to address the impact of the pandemic. New plans and procedures, and any exceptions to typical compliance management programs, should be commensurate with the emergency presented, and documented in a way that enables the regulators to understand that the response to the pandemic was fair, reasonable, and in the best interest of consumers.