Many companies in the consumer credit industry have quickly responded to the coronavirus pandemic and its impact to their borrowers. As lenders, collectors and debt buyers think about how to provide meaningful relief while keeping their businesses afloat, they should keep in mind the following developments that have occurred at the state and federal levels over the past few weeks:
State Regulatory Guidance
Several state regulatory authorities have provided guidance to their licensees on how to assist borrowers impacted by the coronavirus pandemic. They are advising measures such as:
- Waiving late fees;
- Providing new loans on favorable terms;
- Offering payment accommodations, such as allowing loan customers to defer payments at no cost, extending the payment due dates or otherwise adjusting or altering terms of existing loans, which would avoid delinquencies, triggering events of default or similar adverse consequences, and negative credit agency reporting caused by COVID-19-related disruptions;
- Ensuring that consumers and small businesses do not experience a disruption of service if lenders close their offices, including making available other avenues for consumers and businesses to continue to manage their accounts and to make inquiries;
- Alerting customers to the heightened risk of scams and price gouging during the COVID-19 disruptions, and reminding customers to contact their financial institutions before entering into unsolicited financial assistance programs; and
- Proactively reaching out to customers via app announcements, text, email or otherwise to explain the above-listed assistance being offered to customers.
Some states, such as Nevada, Massachusetts, New York and North Carolina, have issued specific directives related to debt collection, including suspension of both outbound collection calls and collection on state-owed debts. Companies can find a list of current regulatory guidance here, but should know that, as with everything related to this pandemic, information is changing daily, and companies should make every effort to stay current on regulator guidance and directives.
Additionally, choosing not to follow regulatory recommendations on offering relief to borrowers could result in future lawsuits under state and federal unfair, deceptive and abusive acts and practices (“UDAAP”) laws. A plaintiff’s lawyer could argue that failure to follow the chorus of regulators calling for payment deferral, late fee waivers and other relief during this unprecedented economic crisis is evidence of engaging in practices that are unfair or abusive.
Deferring Payments – What Creditors Need to Know
If you are allowing borrowers to miss one or more payments without any repercussions due to the impact of the coronavirus, there are two important things to know. First, lenders should be considering whether they need to provide subsequent Truth in Lending Act (“TILA”) disclosures when changing payment terms. Comment 1026.9(c)(2)(v) to Regulation Z on subsequent disclosure requirements provides that, if a credit program allows consumers to skip or reduce one or more payments during the year, or involves temporary reductions in finance charges, the creditor is not required to provide notice of the change in terms either prior to the reduction or upon resumption of the higher rates or payments, but only if these features are explained on the initial disclosure statement (including an explanation of the terms upon resumption). Otherwise, the creditor must give notice prior to resuming the original schedule or rate, even though no notice is required prior to the reduction. According to the comment, the change-in-terms notice may be combined with the notice offering the reduction. For example, the periodic statement reflecting the reduction or skip feature may also be used to notify the consumer of the resumption of the original schedule or rate, either by stating explicitly when the higher payment or charges resume, or by indicating the duration of the skip option. The comment expressly provides that language such as “You may skip your October payment,” or “We will waive your finance charges for January,” may serve as the change-in-terms notice.
Accordingly, if you did not have anything in the original disclosure about the possibility of payments being skipped, by providing a notice stating that the borrower may skip a payment, but that regular payment expectations will resume after that, you meet your obligations for a change-in-terms notice, and do not need to redo the entire TILA disclosure.
Second, if you furnish information to credit bureaus, the recently enacted CARES Act amends the Fair Credit Reporting Act (15 USC § 1681s-2(a)(1)) to impose particular reporting requirements during the time period where the borrower is receiving a payment accommodation or deferral. Specifically, if a furnisher makes an accommodation with respect to one or more payments on a credit obligation, and the consumer makes the payments, or is not required to make one or more payments pursuant to the accommodation, the furnisher must report the credit obligation or account as current or, if the credit obligation or account was delinquent before the accommodation, it must: (a) maintain the delinquent status during the time the accommodation is in effect, and (b) if the consumer brings the credit obligation or account current during the time the accommodation is in effect, report the credit obligation or account as current. “Accommodation” is defined to include “an agreement to defer 1 or more payments, make partial payments, 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,” and the relevant time period is from Jan. 31, 2020, to the later of 120 days after the date that the CARES Act is enacted, which was March 27, or 120 days after the COVID-19 national emergency declared by the president is terminated.
New Lending for Short-Term High-Interest Lenders
Some states require lenders, particularly short-term high-interest lenders, to assess a borrower’s ability to repay a new loan when the loan is created. Some jurisdictions such as Nevada impose potential regulatory and civil liability for disregard of these laws. In the current environment, however, many borrowers seeking new loans have been furloughed or laid off recently. This complicates the analysis for new loan applications. Such lenders should be extremely cautious when considering loan applications, to ensure compliance with these laws and so the lender is not taking advantage of borrowers during a time of crisis.