by Jeff Sovern
How should Congress handle the problem of damage to the credit of consumers who default because of the coronavirus pandemic? Congress has already taken its first stab at the problem in Section 4021 of the CARES Act. That provision states that if lenders work out an "accommodation" with consumers under which the lender agrees to forbearance or reduced payments, the lender will continue to report the consumer as current as long as the consumer was current before the accommodation and lives up to the accommodation. The problem with that approach, as others have observed, is that it helps only if the consumer knows to ask for an accommodation, and the lender chooses to grant it. Getting through to lenders at a time when many others are trying to do so and people are working from home can be a challenge. And while some lenders may grant accommodations in the interest of empathy or good long term customer relations, others may be less, well, accommodating. Lenders also are hurting financially and so may face pressure to collect what they can. In short, this solution is unlikely to be sufficient.
Several legislators have proposed another solution under which furnishers and credit bureaus would not be permitted to report negative information during the crisis. The House bill is here and the Senate version here. This bill too has problems. First, it may not be constitutional. I am no expert on the first amendment limits to reporting truthful speech, but the Supreme Court held unconstitutional a law that limited the dissemination of truthful commercial speech in Sorrell v. IMS Health, Inc. On the other hand, in King v. General Information Services, Inc., the United States District Court for the Eastern District of Pennsylvania upheld the Fair Credit Reporting Act's seven-year limit to reporting negative information in consumer reports. I don't know enough to know if the bill is constitutional, and I'm not sure if anyone does, but if a different approach can be taken that is clearly constitutional, that strikes me as preferable, all other things being equal.
Second, there may be a problem with how the bill's prohibition would work in practice. Suppose someone, call them A, made all their payments during the pandemic. As I understand the bill, it wouldn't prevent credit bureaus from reporting that. Presumably, someone else, call them B, who missed payments would simply have a gap in their credit report. Wouldn't lenders contemplating making a loan to someone understand the difference between A's and B's credit reports? Now lenders may choose to discount defaults during the pandemic anyway, on the theory that they don't indicate a likelihood of defaulting in more normal times, but if that's the case, then the bill would serve no purpose. In short, it seems to me that the bill as written wouldn't prevent lenders from penalizing borrowers who had not met their payment obligations. In fact, it might make things worse for those who, say, make only one late payment. That's because a gap in the information wouldn't enable lenders to determine whether a consumer had defaulted altogether or had had a less damaging problem. That problem might be fixed by barring furnishers and credit bureaus from reporting positive information during that pandemic, but preventing the reporting of truthful positive information is going to be a hard pill to swallow politically.
I think Congress should go in another direction and enact a provision simply barring lenders from taking into account in lending decisions whether consumers who suffered pandemic-caused income losses defaulted in any way during the pandemic.
There is already a precedent for prohibiting lenders from using certain information: the Equal Credit Opportunity Act, 15 U.S.C. 1691 blocks lenders from discriminating against applicants for credit based on race, color, marital status, etc., in making loans. That way, even if lenders could tell whether a particular applicant had defaulted on a loan because of the pandemic, the lender could not lawfully use that information in deciding the borrower's creditworthiness. To be sure, there would still be enforcement problems, as there are with ECOA, but at least it gets at the problem more directly.
The House bill may be groping for something similar when in section four it says lenders cannot "create or implement a new credit scoring model (including a revision to an existing scoring model) if the new credit scoring model would identify a significant percentage of consumers as being less creditworthy when compared to the previous credit scoring models created or implemented by such person," but I don't think that would address the issue when existing scoring models, even without modifications, inevitably reduce credit scores because of pandemic-caused defaults.
Lenders may protest that defaults during the pandemic may be predictive of future defaults, and that therefore Congress should keep hands off. I don't know if that will turn out to be true, but if it is, let them prove it. Even if they can, Congress could determine that barring discrimination on the basis of pandemic-related income interruptions is worth it, just as is barring discrimination on the basis of many other forms of discrimination. Lenders may also be troubled by their inability to persuade consumers to put their debt ahead of others by threatening an adverse report to a credit bureau. I suspect that those threats will be less effective in the coronavirus era anyway, judging by predictions of the number of looming defaults. In addition, I'm not sure consumers dealing the fallout from the virus should be pushed to juggle their payment priorities by such threats at this terrible time.
UPDATE: NCLC had proposed something similar back in March. NCLC wrote then:
Furthermore, even when a consumer is able to obtain forbearance or other relief, Section 4021 does not require the creditor to report the natural disaster code currently recommended by the credit reporting agencies. This code prevents the account from being considered by credit scoring models.
NCLC also urged that states:
- Allow consumers impacted by COVID-19 to report to credit and other consumer reporting agencies (CRAs) that they have been affected by COVID-19 and require such CRAs to include a COVID-19 alert in their credit or other consumer report.
- If a consumer’s credit or other consumer report includes a COVID-19 alert, or if the consumer informs the user of a consumer report that information in their report was the result of the economic impact of COVID-19, the user is required to disregard COVID-19 related information. Users would include lenders, employers, or landlords.