In recent weeks, the U.S. economy has experienced a noticeable shift. The regulatory landscape has changed and is evolving rapidly. Attorneys from Venable's Consumer Financial Services Practice Group participated in a panel discussion addressing the impact of COVID-19 on consumer behavior, the implications of these cascading changes for businesses and companies, and how federal and state regulatory agencies are responding.
Federal Response to COVID-19
The federal response to the coronavirus pandemic includes congressional action aimed at providing support for small businesses, facilities to support liquidity provisions, individual assistance to taxpayers, and additional consumer protection activities. Multi-agency guidance is being issued on how credit bureaus should deal with delinquent accounts, and the U.S. Department of Housing and the Federal Housing Finance Agency have issued a 60-day moratorium on certain evictions and foreclosures. These actions are part of a broader attempt by federal regulatory agencies to account for consumer challenges.
The current pandemic feels similar to those economic crises that have happened in the past, marked by market volatility, liquidity freezes, and other negative economic factors. Because the current situation is a public health crisis, however, it is coming at a time when banks and financial institutions are very strong. These banks and institutions are being asked to take the lead on mitigating the damage to consumers, businesses, and the economy overall. The Department of Homeland Security (DHS) has identified financial services sector workers as part of the "critical infrastructure" workforce: they process and maintain systems for processing financial transactions and services.
Financial institutions are being asked to expand the scope of their services to consumers facing challenges, to include waiving fees, raising credit limits, offering payment accommodations, and working with customers who are temporarily unable to work. Federal regulators are providing banks with tools in the form of enhanced credit resources, regulatory relief, exam relief, and relief from reporting responsibilities where banks are taking prudent steps to comply. Small business lending has also seen a boost as a result of increased focus by federal regulatory agencies.
Lending, Mortgage, and Debt Collection
Following the 2008 financial and housing crisis, various changes to mortgage practices – regulation, servicing, and origination – were implemented. These and other rules have been in place since then and are about to be tested in today's challenging climate. A current trend stemming from the coronavirus pandemic is one of states and cities placing moratoria on evictions and foreclosures; it is being more commonly accepted to accommodate borrowers who are distressed to keep them performing on a mortgage. With mortgage origination, those pieces requiring traditional methods of verification – employment, income, and appraisal – are being undertaken in more creative and flexible ways.
In considering practical tips for mortgage lending, the trend for digital closing will continue and opportunities for new technology will expand. This may accelerate a push toward digital lending and the inclusion of contract clauses to allow for changes in circumstance (force majeure clauses, for example). For servicers, it may be necessary to increase staffing now to deal with loss mitigation issues. Servicers will face the challenge of staying up to date on matters impacting the industry. Collections practices and credit dispute actions will vary as states enact their individual regulations. Consumer assistance may come in the form of entrepreneurs and nonprofit credit counseling services seeking to provide debt relief, an area that is already highly regulated.
State Supervision, Exams, and Licensing
States are joining the efforts of federal regulators to offer guidance to financial institutions in the interest of meeting the financial challenges of consumers. States have signaled a willingness to expedite certain requests for relief, with each state taking a slightly different approach. For those in the National Multistate Licensing System and Registry (NMLS), that system is up and running, with applications being processed and exams being adjusted from in-person, on-site to paper exams.
Federal Enforcement Priorities
Federal agencies are not bound by state orders or state mandates, allowing federal regulators to operate even in those states with work restrictions in place. The Federal Trade Commission (FTC) is monitoring claims and filing litigation when necessary, dependent on federal courthouse status. Settlements that have been ongoing will roll out.
The Consumer Financial Protection Bureau (CFPB) has maintained a consistent workflow with only a slight delay. Recent guidance issued by the CFPB reminds consumer finance companies that company responses to the COVID-19 crisis are still being monitored carefully and reminds consumers about the complaint portal operated by that agency and its use in reporting companies misleading consumers in this crisis. Compliance practices cannot be relaxed at this time because agencies and their enforcement branches will undertake a broad-reaching "look back" at some point and will take action. Maintaining good compliance management systems will continue to establish best practices, set expectations, and address any potential reputational or regulatory risks. Documentation of this is important – policies and procedures outlining practices being created to address the pandemic will position a business to defend against any potential investigations in the future.
The financial services industry is providing technologies for contactless payments and e-commerce transactions, vital components of maintaining critical infrastructure in this pandemic. Regulators have a history of targeting the payments industry for facilitating fraud by merchants. The Federal Trade Commission (FTC), Department of Justice (DOJ), and CFPB have historically brought enforcement actions, and that is likely to continue. Issues will likely arise between sponsor banks and their business partners providing payments. Small businesses may also be examined as consumers in arrangements with payment processors and may also be open to scrutiny.
Guidance and regulations continue to develop as this pandemic unfolds. In the near future consumers may see impacts on loan servicing and underwriting, credit reporting requirements and practices, data collection within remote work parameters, delays in reporting timelines and fraud risks, policy and advocacy developments related to privacy and data security, coding and responses to consumer complaints, mergers and acquisitions, and opportunities related to due diligence in mortgage loans and service provider settings.