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COVID-19: The Financial Industry and Consumers Struggling to Pay Bills

Changes from March 16, 2020 to March 31, 2020

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A growing number of cases of Coronavirus Disease 2019 (COVID-19) have been identified in the United States, significantly impactingimpacting many communities. For background on the coronavirus, see CRS In Focus IF11421, COVID-19: Global Implications and Responses, by Sara M. Tharakan et al.

This outbreak may continue to cause disruptions as federal, state, and local governments limit public gatherings, close schools, and encourage workers to telework to contain the coronavirus's spread. While this situation is evolving rapidly, the economic impact may be large due to illnesses, quarantines, and other business disruptions.

Consequently, many Americans may lose income and face financial hardship due to the coronavirus outbreak. Some workers may need to take time off work if they or their families fall ill. In addition, layoffs or reduced hours may impact workers in particular industries affected by the outbreak, such as the travel, restaurant, and entertainment industries. To address these concerns, on Saturday, March 14, the House passed H.R. 6201, which, among other things, expands sick leave access, unemployment insurance, and food assistance benefits. Even if this bill is enacted, some families may continue to feel the economic impact. This Insight focuses on possible policy optionsThis Insight focuses on regulatory and policy responses relating to the financial services industry for consumers who may have trouble paying their bills due to the outbreak.


Payment Relief for Consumer Loans

On Monday, March 9, federal and state financial regulators coordinated a statement to the financial industry, encouraging it to help meet the needs of consumers impactedaffected by the coronavirus outbreak. They stated that "financial institutions should work constructively with borrowers and other consumers in affected communities," and thatas long as they employ "prudent efforts that are consistent with safe and sound lending practices" would not be criticized by regulators.." This statement was similar to financial regulators' past statements by financial regulators during eventsduring disruptive events, such as natural disasters and government shutdowns. Since then, in order for financial institutions to be in a better position to support consumers' financial needs during this time, federal bank regulators have made adjustments to bank regulation (for more information, see CRS Insight IN11278, Banking Regulators' Response to COVID-19, by Andrew P. Scott and David W. Perkins) and provided liquidity to financial markets in response to COVID-19 (for more information, see CRS Insight IN11259, Federal Reserve: Recent Actions in Response to COVID-19, by Marc Labonte). Moreover, financial regulators have also encouraged financial institutions to provide small dollar loans to affected consumers. During previous such as natural disasters and government shutdowns. On Friday, March 13, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) expanded on this statement with more detailed guidance for the institutions they regulate.

In addition, on Wednesday, March 11, the chairwoman and other members of the House Financial Services Committee sent a letter to financial services organizations "[urging them] to proactively help [their] customers who may be experiencing temporary financial hardship in making payments on their existing credit obligations as a result of this crisis."

During past responses to natural disasters, government shutdowns, or other similar events, the financial industry has providedresponded by providing financial assistance to some impactedaffected consumers. For example, they sometimes help consumers having troubletemporary difficulties paying their mortgages, credit cards, or other loans due to temporary financial problems through forbearance plans, which are agreements that allow extended time for consumers to become current on their payments. Financial institutions also may may also agree to limit late or other fees and extend credit to ease consumer financial struggles amid the outbreak. However, some of these efforts may be more difficult for some institutions if they require changes in credit contracts.

Financial regulatory agencies might also consider employing other policy tools to encourage banks to provide this type of financial assistance. For example, bank regulators may award Community Reinvestment Act (CRA) credits after major disasters in adversely affected communities, even those where the bank does not primarily collect deposits. Regulator guidance under the CRA encourages banks during major disasters to meet customer cash and financial needs by waiving fees and penalties, deferring or skipping loan payments, or other related activities. In order to qualify, the federal government, through the Federal Emergency Management Agency (FEMA), must declare a "designated disaster area" (Category A or B). FEMA's national emergency declaration on Friday, March 13, does not trigger this statute.

Although the coronavirus outbreak may be similar to these other events, making it consistent for the financial industry to provide assistance, it is also possible that this current outbreak may be more widespread than past events. Therefore, it might be more challenging for institutions to provide support alone. Some banks have recently announced measures they are taking to help assist impacted consumers. However, it remains unclear whether these efforts will be sufficient, particularly depending on how large the financial consequences of the outbreak become in the United States. For example, in Italy, which is currently one of the hardest hit countries in the world, mortgage payments generally have been suspended to help people during the crisis. However, this type of action may require direct government support to the financial industry, and other types of government policies outside of the financial industry might better target impacted Americans and be more appropriate given the economic situationIn response to the coronavirus outbreak, some banks have recently announced measures to offer various forms of assistance to affected consumers. In addition, on Friday, March 27, the President signed the CARES Act (P.L. 116-136), which grants consumers a right to request forbearance for many types of mortgages (Section 4022) and for most federal student loans (Section 3513). However, concerns exist about whether the financial industry can process a potentially large volume of loan modification requests. The coronavirus outbreak is more widespread than previous events and financial institutions may have different capacities to be able to enter into these agreements due to their financial situations. Because of the potential strain on the financial system, it might be challenging for institutions to provide this support, and these efforts may be insufficient to provide widespread assistance without direct government intervention. Chairwoman Maxine Waters has introduced H.R. 6321, which would reimburse creditors for incurred costs due to consumer loan forbearance. Other types of government policies outside of the financial industry are also being implemented, such as support for small businesses and unemployed workers.

Other Potential Responses to Help Consumers

Other policy options may be available to help consumers having trouble paying their bills during the coronavirus outbreak. For example, consumers, such as reducing credit score impacts and increasing the availability and accessibility of consumer resources. Consumers can harm their credit scoresscores when they miss consumer loan payments, which can impact their access to credit in the future. In this way, the credit reporting industry may be in a position to help affected consumers. During natural disasters, lenders have the ability to flag affected borrowers by using special comment codes when reporting to credit bureaus. A similar approach might be appropriate during the coronavirus outbreak. Encouraging lenders to furnish this information to credit bureaus could allow the credit reporting industry to limit the impact on affected consumers' credit scores and their future access to credit. Moreover, legislation could be considered to help prevent declining credit scores. However, it may be difficult to target this type of policy to the most impacted people, and, if the policy is too widespread, it may potentially harm the predictiveness of credit scores in the future.

Communication and financial education may also play an importantresponse, Section 4021 of the CARES Act requires financial institutions to report to the credit bureaus during this period that consumers are current on their credit obligations if they enter into an agreement to defer, forbear, modify, make partial payments, or get any other assistance on their loan payments from a financial institution and fulfil those requirements. Before this law was enacted, lenders could choose whether to report loans in forbearance as paid on time; with this law, these options are no longer voluntary for the lender.

Some affected consumers may still experience harm to their credit record because lenders generally can still choose whether to enter into an assistance agreement with an individual consumer. While financial regulators have encouraged lenders to work with consumers, and the CARES Act gave consumers a right to request forbearance in certain cases, for many types of consumer loans (such as auto loans and credit cards), different financial institutions may use different criteria to decide which consumers receive assistance. Therefore, consumers' ability to protect their credit scores could vary widely.

Communication and financial education may also play an important role. Many consumers having trouble paying their bills may not realize that their financial institutions can provide loan forbearance, access to credit, or other assistance under extenuating circumstances. Financial institutions and government agencies such as the Bureau of Consumer Financial Protection (CFPB) may be able toThe Consumer Financial Protection Bureau (CFPB) has published resources for consumers affected by the coronavirus, including those having trouble paying their bills or experiencing a loss of income. Financial institutions also can conduct outreach to consumers to let them know about their possible options.

In recent weeks, there have also been concerns about the increasing elder financial fraud scams related to the coronavirus outbreak. On March 10, the Federal Trade Commission (FTC) published a warning about rising coronavirus scams, and since then, has published additional consumer resources. On March 16, Ranking Member Patrick McHenry and other members of the House Financial Services Committee sent a letter to CFPB Director Kraninger expressing their concerns about the increasing elder financial fraud cases due to the coronavirus and requested an update to applicable guidance for financial institutions. In addition, on March 26, a bipartisan group of 34 Senators sent a letter to the FTC urging them to better inform and assist seniors affected by coronavirus fraud.