Gerard Scimeca – Chairman, CASE
April 10, 2020
Washington acted swiftly in passing the $2.2 trillion economic relief package to help blunt the ongoing pandemic-led economic downturn. The CARES Act provides financial assistance to millions of Americans losing out on their paychecks, as well as to businesses watching their cash-flow slow to a trickle. Just as importantly, the legislation provides consumers relief in regard to another precious commodity — time.
Workers being laid-off or furloughed will certainly appreciate the checks coming from Washington to help them pay daily expenses. But it will do little good when the calendar turns and next month’s mortgage, credit card bill or student loan payment comes due. What borrowers need as much as financial assistance is breathing room and a hedge against a possible default or delinquency that would tarnish their credit profile and lead to long-term financial injury. Thankfully, Section 4021 of the relief bill sets forth clear guidelines to protect borrowers who, through no fault of their own, are suffering through the current economic maelstrom. Here’s how it works.
Under this section of the relief law, borrowers in good standing who are impacted by COVID-19 will be able to contact their lenders and apply for forbearance or a modified payment arrangement. Lenders will then continue to report their status as “current” with the credit reporting bureaus to avoid the reporting of any negative marks that would otherwise send credit scores plummeting downward.
There is even help in the new law for consumers delinquent in their bills. If they too make the call to their lenders and ask for a modified payment plan, they can maintain the same status with their creditors without defaulting. This is an enormously helpful step for consumers that will prevent COVID-19 from tanking their credit scores and creating long-term financial disaster for millions of families.
As of last year, surveys continue to show that roughly 40 percent of Americans cannot write a $1,000 check to meet an unexpected expense, underscoring just how many are living paycheck to paycheck. As jobless claims skyrocket, the millions of Americans hanging by a thread financially will now be able to avoid economic catastrophe caused by circumstances entirely out of their control. Through the federal government’s swift action, consumers will be far better equipped to tackle today’s difficult financial challenges.
As leaders now turn to new relief packages on the federal and state level, we want to caution against adopting some of the more radical proposals that were floated during the debate over the new law. We are concerned that if some of these ideas get traction, they will end up hurting consumers instead of helping them. One of the most troubling ideas circulating is the notion of mandating the suspension of all negative credit reporting until the crisis has fully passed. We worry that instead of helping consumers, this idea has the potential to leave consumers much worse off.
Failing to account for the differences between legitimate borrower distress and routine delinquency would put lenders in an impossible position, and degrade the predictive power of the credit scoring models that now undergird our financial services industry. By homogenizing forbearance regardless of its connection to the current pandemic, lenders would have little direction in determining a borrower’s ability to repay, leading to massive numbers of applicants who would otherwise qualify for credit being denied. The post-pandemic consumer credit landscape would be an indecipherable hodgepodge, undermining the status of borrowers who have been vigilant in their obligations.
A state-based approach of freezing credit scores would likewise create a confusing array of options for borrowers that would be more difficult to implement, slowing help to consumers as the clock continues to tick. Having one clear set of rules that applies to borrowers across the country creates the clear directive needed by both borrowers and lenders alike.
The clear purpose of the relief package signed by the president last week was to address the current dire circumstances dragging our economy to a halt, and providing relief to help consumers and businesses weather the storm. Using this moment to rewrite the rules and grant blanket amnesty to borrowers whose situation is not a result of COVID-19 is unfair and would compound the nation’s financial difficulties.
Addressing the public health concern of a new and wholly unexpected viral strain is certainly the top priority for lawmakers. But the stress and anxiety that accompany the deep financial difficulty millions of Americans now face can be a toxic force of its own. The importance of maintaining good standing with debt obligations despite an inability to pay is a key part of lessening the pain during the current pandemic. It is also a prescription for a swifter recovery once it has passed.
The additional time granted to borrowers through the relief package will keep countless Americans from tanking their credit scores and help heal their financial wounds sooner.
