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April 23, 2020

Stroock Special Bulletin

By: Brian C. Frontino, Stephen J. Newman, Arjun P. Rao, Quyen T. Truong

COVID-19’s significant economic impact will ripple through the consumer financial services litigation space for some time to come. While there is little doubt that financial services entities will face increased litigation, expansive federal and state regulatory measures, prepared and enacted at incredible speed in a rapidly changing environment, leave many unanswered questions.

These questions encompass various aspects of the industry, including credit reporting, regulatory and enforcement risk, debt collection and even pending litigation.

In this series, we will highlight current and proposed legislation impacting this area. This initial installment discusses potential credit reporting claims and identifies considerations for addressing them.

The CARES Act

A key first step in forecasting what types of claims may arise is to understand the laws, regulations, orders and guidance that have come out of the federal, state and local governments.  The most significant legislation thus far is the now well-known Coronavirus Aid, Relief and Economic Security Act (CARES Act or Act). With respect to credit reporting, the CARES Act amended 15 U.S.C. § 1681s-2(a) to require that, during the cover period (January 1, 2020, and 120 days after the end of the federal COVID-19 state of emergency as declared by the President), broadly defined “accommodations” made to consumers “affected” by COVID-19 shall not result in reporting of an obligation in a more derogatory status than before the accommodation. (Click here for a more detailed discussion of the details surrounding the CARES Act’s amendments to the Fair Credit Reporting Act (FCRA).)

Given that the CARES Act’s changes to the FCRA apply to accommodations made starting January 1, 2020, which was more than 60 days before the pandemic truly took hold, there may well be pockets of consumers whose circumstances could present more litigation risk than they would as time goes on and financial services companies implement more robust processes.

Meanwhile, there was already a noticeable uptick over approximately the last year and a half in individual FCRA lawsuits claiming that lenders failed to conduct reasonable investigations of consumers’ credit reporting disputes (largely the only privately actionable claims against furnishers of credit information). Many of these lawsuits center on issues that could be exacerbated by the CARES Act modifications to the FCRA.

Claims Related to Monthly Payment, Past-Due Amounts and ‘Re-Aging’

There already is a significant volume of litigation challenging how monthly payments and past-due amounts are reported, as well as the potential “re-aging” of delinquent accounts in a manner that causes them to persist on credit reports for more time. The CARES Act does not expressly address these issues. Rather, the statute states only that the consumer cannot be reported in a more derogatory status during the accommodation period than at the start of the accommodation and that charge-offs may still be reported (presumably so as not to interfere with safety-and-soundness banking regulations requiring charge-off after long delinquency).

With respect to the monthly payment amount, the main question is whether to report the contractual payment amount or any reduced payment amount the lender allows. Consistent with the April 1, 2020, policy statement from the Consumer Financial Protection Bureau (CFPB), a defensible approach should include reporting that “accurately reflects the payment relief measures [lenders] are employing.”

Thus, for example, if the borrower’s monthly payment amount on a credit card is $100, but the lender grants a 60-day reduced payment amount, the monthly payment amount could be reported as either the contractual payment amount or the reduced payment amount. Nevertheless, neither the statute nor other guidance clearly states whether the original monthly payment requirement or the reduced amount per an accommodation should be reported. Policy guidance from the CFPB suggests that the reduced amount can be reported, but consumers may challenge either method, and it remains to be seen how the courts might rule on this issue if litigation ensues.

Reporting the amount past due also is not addressed in the CARES Act. Thus, while a borrower’s payment obligation may be deferred or reduced, the amount “past due” could continue to increase, depending on the details of the particular accommodation. Borrowers potentially could dispute this data point and, in litigation, complain that this improperly depressed their credit scores. While it may be “accurate” to report an increasing amount past due (if that occurs) when the borrower already is delinquent, it may be prudent to cease updating the past-due balance during the accommodation period and perhaps some time thereafter (e.g., 30-90 days). Of course, if the borrower’s pay status is changed to “current” during the accommodation period, which would indicate no past-due amount owed, then the past-due amount should be removed. This may both reduce the risk of litigation or provide a defense to allegations of resulting harm.

Another popular credit reporting claim of late is “re-aging” claims. This is when a borrower asserts that a lender improperly modified an account’s “date of first delinquency” reported to a consumer reporting agency to a more recent date, thereby delaying the end of the period during which a derogatory account stays on a borrower’s credit report, which could adversely affect a consumer’s credit score. If a borrower becomes current, the clock is supposed to restart if the borrower again goes delinquent. A borrower who already is current and accepts and complies with an accommodation, such as a payment holiday, would not be delinquent.

The difficulty may arise with a borrower who already is delinquent and accepts an accommodation and then, during the accommodation period, becomes completely current but then still somehow is affected by COVID-19 and goes delinquent again. While it of course is accurate to remove the date of first delinquency once the borrower becomes completely current, it may be prudent to retain or revert back to the pre-accommodation date of first delinquency if the borrower does not maintain current status for some period of time after becoming current after the accommodation (e.g., 60 or 90 days) if still within the CARES Act cover period. This would potentially mitigate the argument that the borrower was rendered worse off from the accommodation. Failure to report the date of first delinquency, if it still is applicable to the trade line most favorable to the borrower, i.e., the oldest date, might result in a new wave of “re-aging” litigation after the COVID-19 crisis subsides.

More difficulty arises when lenders confront internal or banking guidelines that typically would require freezing access to a credit line or reducing credit limits when a borrower is delinquent.  Again, the most practical approach likely is to report accounts as closely as possible to the actual status of the account each month, regardless of the potential effect on any particular borrower’s credit score. Indeed, this oftentimes is the strongest defense. Some consumers, however, may argue that even accurate reporting unfairly harms their credit score, prevents their access to credit or credit on more favorable terms, and unfairly deprives them of some of the value of the accommodation.

Accurately Notating Accounts

One significant open question is what to do if the borrower does not comply with the terms of an accommodation. That the borrower does not comply with the accommodation likely is a sign of trouble to come. This is why it is critical to fully and accurately notate accounts in lenders’ systems of record that an accommodation was made and its terms.

This will be essential when borrowers begin to dispute their account trade lines on their credit reports, or plaintiffs’ attorneys encourage consumers to review their consumer reports to confirm that furnishers “accurately” reported their accounts, following a COVID-19 accommodation. The credit reporting units within furnishers’ teams must be able to access accommodation information easily so that they are able to adequately investigate disputes.

One potential way to flag accounts during this period is to mark them with the “AW” Special Comment Code in Metro II, which translates to “Affected by natural or declared disaster.” This Special Comment Code generally is not used other than when a severe weather event, such as a hurricane, hits a particular geographic region and lenders provide borrowers with some resulting accommodation. While COVID-19 is far more widespread, it is something to consider if it would assist credit reporting and collections teams with identifying borrowers who are subject to broadly defined “accommodations” under the CARES Act.

These are only some of the questions that are likely to arise in attempting to cope with the potential litigation impact of COVID-19 and the CARES Act. The short answer to all of these questions is to ensure that the business operation units work closely with the legal and compliance teams to ensure reasonable and defensible decisions are made.

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For More Information

Brian C. Frontino

Stephen J. Newman

Arjun P. Rao

Quyen T. Truong

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.