Fair Lending Pitfalls #2: The CARES Act & Reporting Delinquencies
When Congress passed the Coronavirus Aid, Relief, and Economic Security Act (more commonly known as the CARES Act) last month, it made temporary changes to consumer reporting requirements for consumers impacted by COVID-19—raising a variety of fair lending concerns.
The CARES Act temporarily amends the Fair Credit Reporting Act (FCRA), making it illegal for lenders to report borrowers as delinquent they have given the borrower an “accommodation” as a result of COVID-19. This holds true even if the borrower has missed a payment since agreeing to the accommodation. (The key exception is borrowers who were already reported as delinquent before an accommodation was granted. Those borrowers may still be reported as delinquent.)
It also alters Reg V and dispute response. Recognizing the increased workload lenders currently face, they now have 45 days to research a dispute vs. the usual 30 days.
Both of these rules are retroactive to January 31, 2020.
In this second blog in our series on the CARES Act and its potential fair lending pitfalls, we’ll explore the temporary changes to delinquency reporting and dispute resolution and how they impact fair lending.
Inside the CARES Act: What Counts as An Accommodation?
Any modification, assistance, or relief on an existing loan due to the impact of COVID-19 counts as an accommodation. That includes:
- Partial payments
Unless a borrower was reported delinquent before January 31, 2020, a borrower who receives an accommodation must be reported as current on their loan.
Where Is the Fair Lending Risk?
Just as with mortgage loan servicing, the fair lending risk lies in the subjectivity and discretion. Not every lender centralizes decisions related to accommodations. At many financial institutions, loan officers are empowered to make modifications for borrowers. At others, loan officers may manage the loan for the first 90 days.
With so many individuals involved in decisions about accommodations, having and communicating clear policies and procedures about accommodations communicating rules about accommodations is essential.
Accommodations shouldn’t be made on an ad hoc basis. Policies and procedures defining requirements are necessary to avoid accusations of disparate treatment down the road. There needs to be rules to convey:
- Are accommodations being made? (Regulatory agencies “recommend” FIs work with borrowers but aren’t required to.)
- Who is eligible for an accommodation?
- What type of accommodations are available?
- How many accommodations can be made to a single borrower?
- How will this information be conveyed to those involved in lending?
Not only does an FI need guidelines about who qualifies for what accommodation, but it also needs to communicate the rules regarding credit reporting. Everyone who touches the borrower relationship needs to know eligibility requirements and understand that the lender can’t report the borrowers as delinquent once they receive an accommodation.
Fail to make this point clear, and an FI can easily violate the FCRA.
It’s also important to review accommodations going back to January 31, 2020. If a COVID-19 accommodation was made after that date, you can’t report the borrower as delinquent unless they were already reported as delinquent.
Inside the CARES Act: Why Disputes Matter?
Under Reg V, when consumers report a mistake on their credit reports, lenders normally have 30 days to research the issue. Under the CARES Act, they now have 45. While this may seem like a gift to overburdened lenders, it comes with a caveat: the extension may end up compounding the problem.
When a borrower misses a payment, the next payment made is typically applied to the missed payment. That means while the first payment is caught up, a second payment is marked as late.
If a lender mistakenly reports a missed payment, the 45-day investigation period means that the lender will continue to report a missed payment for a longer period.
For example, if a borrower’s March loan payment is mistakenly reported as delinquent, the FI may end up reporting the April and May payments are also late due to the longer timeframe. This opens an FI up to potential UDAAP violations.
Does an FI have to take 45 days to investigate? No, it’s an option. Before deciding to take advantage of it, review the potential consequences and decide if the extra time is worth the added risk.
The CARES Act gives lenders flexibility and options for dealing with borrowers impacted by COVID-19, but it also introduces fair lending challenges. Make sure you evaluate the available options before deciding to use them. There can be unintended consequences that cost you down the road.