With the spread of the novel coronavirus (COVID-19) throughout the country, regulators and Members of Congress have begun advising financial institutions on how to handle situations in which the pandemic prevents individuals from repaying loans.
Federal Financial Regulator Actions Related to COVID-19 Pandemic
On March 9, the Board of Governors of the Federal Reserve, Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, National Credit Union Administration, and Conference of State Bank Supervisors issued a joint press release encouraging financial institutions to meet financial needs of customers/members affected by coronavirus. Most revealing was the following:
Regulators note that financial institutions should work constructively with borrowers and other customers in affected communities. Prudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.
The agencies understand that many financial institutions may face current staffing and other challenges. In cases in which operational challenges persist, regulators will expedite, as appropriate, any request to provide more convenient availability of services in affected communities. The regulators also will work with affected financial institutions in scheduling examinations or inspections to minimize disruption and burden.
This joint press release came on the heels of a statement related to the pandemic response issued by the interagency Federal Financial Institutions Examination Council (FFIEC) several days earlier. The statement is an update to earlier guidance first published in 2006 and 2007 on best practices to respond to pandemics. The statement does not specifically mention loan forbearance options, but instead instructs financial institutions to minimize the potential adverse effects of a pandemic and to maintain and update business continuity plans and other preventative programs. The guidance instructs institutions that “Pandemic plans should be sufficiently flexible to effectively address a wide range of possible effects that could result from a pandemic. . . [and] reflect the institution’s size, complexity, and business activities.” The guidance also provides key resources for financial institutions to implement and update these pandemic response plans.
The federal bank regulatory agencies have also released a statement encouraging banks to use the Federal Reserve’s “discount window” so they can continue supporting households and businesses. The agencies explained: “By providing ready access to a backup source of funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress.”
Congressional Attention on Financial Institution and Regulator Response to Pandemic
On a similar note, the House Financial Services Committee, led by Chairwoman Maxine Waters (D-Calif.), sent six letters to Administration officials, financial regulators, financial services organizations and credit reporting agencies regarding necessary COVID-19 preparation. In response to the joint press release, Chairwoman Waters asked the regulators to provide information on “how your agencies are implementing this guidance, and to . . . what extent you are promptly responding to questions not covered by the guidance,” as well as information on what plans the agencies have to protect their own workers. The letter references banks in the United Kingdom offering forbearance on mortgage and loan repayments, and temporarily increasing credit card limits to affected customers, concluding, “these options should be provided in the United States as well.”
In a letter to Secretary of the Treasury Steven Mnuchin, Chairwoman Waters stated, “It is imperative that regulators go beyond just issuing a statement, but rather take concrete steps to ensure the message is being regularly communicated to regulated entities. . .”
In her letters to financial services organizations, credit reporting agencies, and top industry trade associations, Chairwoman Waters requested information on specific accommodations being implemented consistent with guidance provided by regulators in the joint press release. The letter concluded by urging the organizations to “do what you can to minimize any negative consumer or employee harm resulting from the coronavirus to ensure that all communities are well-served and can recover.”
On the Senate side, six Democratic members of the Senate Committee on Banking, Housing, and Urban Affairs—led by Senator Mark Warner (D-Va.) and Senator Sherrod Brown (D-Ohio) —signed a letter on Monday calling on the regulators to “issue guidance to financial institutions encouraging them to work with consumers and businesses affected by the virus and to recognize that they may have difficulty accessing affordable credit and face temporary hardship in making payments on their credit obligations.”
The senators said that the guidance should encourage financial institutions to “make efforts to modify terms on existing loans or extend new consumer-friendly access to credit to help consumers and businesses affected by the virus” and “to take steps to prevent adverse information from being reported to the credit bureaus and utilized in any matter that harms consumers affected by the virus.” The letter requests a response and notes that the senators “are anxious to hear” such response.
The senators also sent a similar letter to the major financial services industry trade groups, including the Consumer Bankers Association, the Financial Services Forum, the Bank Policy Institute, and the American Bankers Association, encouraging member institutions to commit to ensuring protections for their workers, and ensuring that consumers have financial protections. The senators urged the institutions to consider waiving monthly service fees, suspending or modifying student loan, mortgage, and business loan payments, and providing affordable, short-term credit options for affected consumers, as needed.
Following those letters, in a Senate Banking Committee oversight hearing with CFPB Director Kathy Kraninger, Senator Warner pressed the same points, noting that the CFPB has “a remarkable amount of power to urge that kind of forbearance from the lending community, from the credit rating agencies,” including encouraging credit bureaus to utilize special comment codes for lenders to flag impacted borrowers, consistent with practices used during natural disasters. Several senators encouraged assistance to consumers affected by quarantines, business closings, and other disruptions caused by the COVID-19 outbreak. Additionally, Senator Chris Van Hollen (D-Md.) urged a comprehensive response to help consumers, urging Director Kraninger to use her persuasive abilities and authorities “with respect to forbearance by credit card companies and others with respect to consumers who . . . maybe not be able to pay on those debts and credit cards because they’re out of work because of the coronavirus.” In response, Director Kraninger noted that the CFPB is implementing policies that it employs during natural disasters and that “there are conversations even happening on the Hill today” regarding additional steps the Bureau and other regulators may take.
Several senators also asked Director Kraninger about how the Bureau will protect its own employees. Director Kraninger assured senators that the Bureau will remain functional and noted that telework is allowed for almost all CFPB employees, indicating that their supervisory and enforcement work would continue unabated in the coming weeks.
Despite this congressional oversight activity and the limited information relayed in the regulators’ joint press release and FFIEC guidance letter, no formal guidance has been issued by the federal government related to loan forbearance or other emergency policies. It is possible that such policies will arrive after a meeting of the Financial Stability Oversight Council later in March. Additionally, neither the President nor congressional leaders have proposed legislative language that would authorize policies related to financial services industry practices in response to COVID-19, even as they are actively crafting comprehensive COVID-19 emergency response legislation. Pillsbury’s financial services and public policy lawyers will continue to monitor action by financial regulators, as well as Congress, related to these issues and are available to counsel clients as new developments arise.
Pillsbury’s experienced crisis management professionals are closely monitoring the global threat of COVID-19, drawing on the firm's capabilities in supply chain management, insurance law, cybersecurity, employment law, corporate law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 resources page.