As noted earlier, a 1,815-page House bill has just been introduced that affords $3 trillion in relief to consumers and businesses impacted by COVID 19. The bill (official title: the Health and Economic Recovery Omnibus Emergency Solutions Act, or “HEROES Act”) addresses numerous topics, but I’d like to focus on one: amendments to the Fair Credit Reporting Act (“FCRA”) designed to prevent reporting of adverse information arising out of a national emergency. However well-intentioned these provisions may be, they work an extreme—some might say unworkable and crazy— shift to the credit reporting landscape. If implemented, these changes would have significant negative impact on the financial services industry and consumers’ ability to get credit at rates reflecting their true repayment risk. The House will vote on the bill this Friday but—unsurprisingly given the bill’s drawbacks— the odds of it passing the Senate and being signed by the President in its current form lie somewhere between very unlikely and a snowball’s chance in Hell.
Calling out a handful of the troublesome amendments to the FCRA proposed by the HEROES Act:
- All Adverse Information Arising from “Major Disaster” Must Be Excluded from Consumer Reports. Under the HEROES Act, consumer reporting agencies (“CRAs”) are prohibited from including “an adverse item of information” (other than a felony conviction) that was the result of “any action or inaction that occurred” during a period declared to be a “major disaster” by the President. There is a similar prohibition on furnishers furnishing such adverse information to CRAs. Think about that. But when is an adverse fact “the result of” an action or inaction that occurred during an emergency? Some cases are easy – I’ve been in the hospital for two months with COVID-19, couldn’t work and so missed payments on my credit cards and mortgage. Fine. But if I’m a CRA and two years from now I want to include a bankruptcy in a consumer report, how could I possibly know if there was some action or inaction that took place during the pandemic such that the bankruptcy could be said to have “resulted” from such action or inaction? It’s an impossible standard.
- A Catalog of Consumer Woe? HEROES Would Create CFPB Website to Track Consumers’ Economic Hardships. The HEROES Act requires the Consumer Financial Production Bureau (“CFPB”) to establish a website where consumers can report “economic hardship” as a result of a major disaster, including the current COVID-19 pandemic. It does not state that specified events resulting from such hardship (liens, bankruptcies, missed loan payments, etc.) are to be reported or otherwise elaborate on what constitutes an “economic hardship” for purposes of this website. It does, however, require the three credit bureaus and CRAs that qualify as “nationwide specialty consumer reporting agencies” to check this CFPB website weekly and delete from their databases “adverse items of information as soon as practicable after information that is reported appears in the database.” But how will a CRA know what to delete if consumers are not required to be specific about what events are a product of their “economic hardship”? Oh, and the HEROES Act prohibits the CFPB from requiring any consumer to produce any documentation substantiating their claim of economic hardship. Makes sense! Then there are the privacy implications of allowing/encouraging/requiring consumers to catalog their hardships in a centralized government database.
- Guidance Regarding the Treatment of Missed Payments Is Insufficient. As noted above, the HEROES Act prohibits CRAs from reporting adverse items of information. That leads to some tricky situations. For instance, suppose a bank’s records show that in some months during the pandemic the consumer made payments on his outstanding credit card balance and in some months he did not. Under the HEROES Act, CRAs are not allowed to report the missed payments because they are “adverse items of information.” So the bank will furnish CRAs with payment history for only the months in which he made payments. How does the CRA then report that information without signaling that the consumer didn’t make the payment during the months not reported?
- Debt Collection. Debt collectors routinely obtain consumer reports prior to attempting to collect a debt in order to confirm that debtors have not declared bankruptcy. If a consumer declares bankruptcy during a pandemic but CRAs can’t notify debt collectors of such bankruptcy, then debt collectors either run the risk of violating the law by attempting to collect debt from a bankrupt debtor or it has to stand up internal processes to check relevant sources to determine whether the debtor is bankrupt, adding significant cost to the collection effort. This will be an unfair burden for debt collectors and increase the cost of credit for consumers.
- Making credit more expensive. While the HEREOES Act raises many questions regarding reporting adverse information during an emergency, one thing is clear—the cost of credit is going up if the HEREOES Act becomes law. When lenders have more information about consumers, they can make finer distinctions among consumers about their relative default risks, which leads to better terms for many consumers. This is the main driver behind the push towards “alternative credit data”: it allows lenders to identify potential borrowers that are a good credit risk in a pool of consumers that don’t have much of a footprint in the traditional credit universe because, g., they lease an apartment, do not use credit cards or don’t have checking accounts. To the extent regulatory prohibitions limit what data lenders are allowed to use in underwriting, the less lenders are able to offer loan terms that match a consumer’s true credit risk, making credit more expensive for everyone. This would undoubtedly happen if the HEROES Act were to pass in its current form.
The HEROES Act is not workable in its current format as it pertains to the FCRA. We will monitoring developments with the HEROES Act and blog about it as it develops.