Elected officials and regulatory agencies have issued a series of emergency orders, regulations, and guidance in response to the global health and economic crisis. The financial and legal implications of these actions impact a wide range of financial activities.
Focusing on consumer impact, Richard Cordray (former Director CFBP), John Roddy (Partner Bailey & Glasser LLP), Alan S. Kaplinsky (Consumer Financial Services, Ballard Spahr), and Christopher J. Willis (Consumer Financial Services Litigation, Ballard Spahr) addressed a number of pressing legal issues in the Ballard Spahr webinar: Consumer Financial Regulatory and Litigation Fallout from the COVID-19 Crisis.
Fraud
The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB), among others, are warning consumers about the need for caution amidst the proliferation of fraud as bad actors take advantage of the COVID-19 crisis to line their own pockets. Predatory lenders are likely to target those who have suddenly been laid off with high cost loans. Scam artists may use tactics similar to those seen during the 2008 recession relating to foreclosure rescue, debt relief, and credit repair.
Debt Collection
Numerous states are enacting emergency debt collection regulations that limit debt collection during the pandemic. The Massachusetts attorney general has issued emergency regulations making it a UDAP (Unfair and Deceptive Acts and Practices) violation “to file a collection suit, garnish wages, repossess a vehicle, serve a capias warrant, or threaten any such action until 30 days after the governor lifts the emergency declaration. These regulations prohibit debt collection calls for the same period.” The federal CFPB could adopt similar debt collection measures.
Fair Debt Collection Practices Act (FDCPA) and State collection law violations are bound to happen. As more people start to fall behind on their bills, they become subject to increased collection activity, resulting in more problems with lenders, servicers, and debt collectors, and potential litigation. According to Willis, it will be necessary to take a “looser approach with debt collection right now” and companies that fail to do so will have to answer to the regulators when the crisis starts to resolve.
Credit
Corday suggested that the CFPB should be more proactive in assisting consumers during the economic crisis. The CFPB could take a number of steps, such as: enforcing government backed mortgage protections, waiving bounced check and late/insufficient payment fees, and encouraging CRAs to use “natural or declared disaster” flags to prevent credit scores from collapsing.
The CARES Act provides that if an institution grants an accommodation on a credit obligation because of the COVID-19 pandemic, then the institution must report the account as “current” if the account was current before the accommodation.
At the state level, any changes that impact the terms of credit (e.g. late fees, payment due dates, interest accrual) will only apply to state chartered entities. National banks and financial institutions will not be legally obligated to comply, though they may be compelled to do so or risk reputational damage.
Housing and Mortgages
The CARES Act provides a foreclosure moratorium and a right to forbearance for federally held residential loans. Furthermore, the CARES Act has simplified the paperwork required to get a foreclosure deferral. Roughly 70% of home mortgages are federally backed, leaving 30% that are not covered by the CARES Act. Several state governors are working to expand mortgage moratoriums while the CFPB is providing guidance to lenders, and servicers, and borrowers impacted by the pandemic.
In comparison to the 2008 recession, there is an expectation that lenders will take a “more reasoned and thoughtful approach” to foreclosure issues. Nonetheless, legal experts anticipate an “avalanche” of foreclosure activity in the wake of the pandemic, including wrongful foreclosure and failure to comply with emergency restrictions.
Several state governors are addressing the concerns of renters by issuing emergency orders restricting evictions or implementing measures to impede the process.
Student Loans
Payments and interest on certain federal student loans (primarily Family Federal Education Loans) have been suspended payments for 180 days. The roughly 30% of student loans that are not government owned do not qualify for suspended payments and interest, potentially resulting in financial hardship for millions of borrowers.
Lenders and servicers of these loans are facing an even more difficult financial situation, as evidenced by the fact that Navient (one of the largest student lending institutions) saw its stock price drop 75% in one week.
Due to continual changes in guidance and regulation surrounding student loans and mortgages, call center representatives are not always aware of the most up to date information. As a result, borrowers are being given incorrect information. The rapid changes and effect of misinformation will likely hurt a large number of borrowers, leading to both individual and class action lawsuits.
Other student loan issues that could lead to litigation include: “charging fees for no or suspended service, loan grace period abuses, and predatory practices.”
Businesses that Remain Open
Businesses that remain open need to prioritize the health and safety of their employees and customers. Business owners want to know, from a legal standpoint, what to do if one of their employees is diagnosed with COVID-19. It is important that businesses tell people what risks may exist and that they take sufficient preventative measures to ensure, in the event of a lawsuit, that they have done everything reasonably possible to secure the safety and health of their employees and customers. “The number one duty that sellers have is to fully disclose all of the material considerations that a reasonable consumer would think about in deciding whether to enter into a transaction.”
Financial Institutions
Working remotely could negatively impact a number of operational areas which, if not functioning correctly, could lead to regulatory problems or litigation. To reduce exposure to increased regulation and litigation, financial institutions would be wise to consider the long term implications of their actions.
Conclusion
The barrage of emergency orders and increased regulation at the federal, state and local levels have made it difficult for businesses to stay informed of and in compliance with the most current guidance. Regardless, those in violation will be subject to enforcement and penalties. Emergency orders are given a lot of leeway in benefit of the consumer, so if in doubt, business would be well advised to favor the consumer.