After Katrina, Norm Silber wrote an article, Debts, Disasters, and Delinquencies: The Case for a Mandatory Force Majeure Provision in Consumer Credit Agreements, and for a Consumer Credit Insurance Fund, 34 New York University Review of Law and Social Change 1 (2010), which has lessons for consumer protection as we grapple with the coronavirus. Here are his thoughtful comments about the cornoavirus:
What can we predict based upon the Katrina experience?
First, that shut-downs, lay-offs, and isolations have already created a perfect storm—great reductions in consumer income, spikes in emergency consumer expenditures–costs for medical supplies, hotels, day care, and so much more– and higher food prices, not to speak of food shortages.
Second, consumer credit balances are going to shoot up, and these will create very large interest charges, very soon. Consumers will soon be making only minimum payments on their balances, and they will be using their credit cards to withdraw cash and buy food; they will surely hit their credit limits and unless consumers have premium cards they will hit over-the-limit fees.
Third, the relief provided in Congressional bills will not be going to pay off credit card balances; from what we have heard it will pay if anything for sick leaves.
Fourth, because of reduced employment and over-the-limit dings and missed payments, credit scores will undoubtedly be adversely affected, and this will be through no fault of consumers; if what happened during Katrina and Sandy is any guide, the credit reporting agencies will not make any distinction between scores affected by the virus and other behavior that indicates inability or unwillingness to pay.
Fifth, access to almost every sort of consumer credit will be harder—the terms of the credit and the difficulty in getting it.
Sixth, people will die in hospitals and their families will have bills to pay. Some of these people will be breadwinners.
Seventh, credit card issuers will “generously” allow some debtors to skip payments, but exceedingly few of them will forgive the interest that results from skipping them.
Eighth, we can expect a rise in consumer bankruptcies, even though credit-balance bankruptcies are not going to be simple to file for.
Ninth, and this is where my proposal hits, we could at least do something now and for the future. We could work for a law which pays interest charges for consumers during the length of this current catastrophe, and adopt my proposal to mandate a force majeure clause in consumer credit agreements in future ones. To avoid moral hazard, to avoid the incentive to charge excessively, Congress should cover a high percentage– but not all– of the credit card interest charges incurred during the catastrophe. The long term fix is laid out in the article.
