Consumer Financial Services COVID-19 Update—Breaking Developments
In response, the Congress and state legislatures, federal and state regulatory agencies, and institutions in the consumer finance space are beginning to roll out myriad programs and initiatives to mitigate the economic impact of these emergency measures and assist businesses and individuals for the duration of the crisis and likely for some time thereafter. As these programs and initiatives continue to develop, we provide a brief survey of the current state of efforts in the consumer financial services space to support and protect businesses and individuals.
Federal Legislative Developments
Relief to businesses and individuals. The Congress is poised to send a third relief package (package), likely to contain up to $2 trillion in economic assistance for businesses and individuals, to the President’s desk for approval in the coming days. This follows the President’s March 13, 2020, national emergency declaration, which provides up to $50 billion for states’ responses to the outbreak, and, most recently, a bill signed by the President on March 19, 2020, that focuses on providing emergency food assistance, increased health care access, and paid sick leave. Democratic and Republican plans continue to progress through negotiations between House and Senate leaders, with a final package likely to offer cash payments to Americans earning up to a maximum annual income ceiling, in addition to possible prohibitions on recipient companies’ use of the relief funds to conduct stock buybacks or compensate senior executives; the temporary blocking of evictions and foreclosures; and additional funding for hospitals or other health providers, SNAP and unemployment benefits funding, and state and local governments. Arent Fox’s COVID-19 Task Force is preparing a more fulsome analysis of the package, which is forthcoming.
Consumer credit reporting. Aside from the broader Congressional packages in progress, Senators Schatz (D-HI) and Brown (D-Ohio) have introduced a bill (proposed bill) that would ban negative credit reporting (ban) during the crisis as a result of late or missed rent, mortgage, or utility payments. The ban would be backdated to January 31, 2020, when HHS Secretary Azar declared the current public health emergency in response to the outbreak, and terminate 120 days after the rescinding of the emergency declaration, with an option for consumers’ to request an extension of up to 270 days. The ban would alleviate any burden on consumers to obtain forbearances from creditors – including utilities and lenders – or to correct credit report errors resulting from a reporting agency’s incorrect application of exception codes. With the current outbreak affecting the entire country, rather than a distinct region or industry, the proposed bill will allow credit bureaus uniformly to help all consumers affected by the crisis.
Overdraft protection. Senator Booker (D-NJ), joined by Senator Brown, also introduced a bill, the full text of which is not yet available, that would prohibit depository institutions from assessing overdraft and insufficient-funds fees during the current crisis and future disasters. The bill was referred to the Committee on Banking, Housing, and Urban Affairs on March 22, 2020.
Similar legislative proposals are likely to continue issuing from Congress, given House Financial Services Committee Chairwoman Maxine Waters’s (D-CA) communication to governing federal agencies and consumer financial services entities and trade associations of the Committee’s commitment to protect consumers from negative financial fallout from the crisis. The Senate Committee on Banking, Housing, and Urban Affairs similarly encouraged federal regulating agencies to provide financial institutions (FI) with guidance to employ flexibility in helping consumers impacted by the crisis. The responses of regulating agencies and consumer financial services industry stakeholders are already taking shape.
Federal Agency Developments
Consumer Financial Protection Bureau (CFPB or Bureau)
While the federal agency dedicated solely to the protection of consumers has yet to issue its own formal industry guidance in response to the crisis, the CFPB joined the Federal Financial Institutions Examination Council (FFIEC) in its issuance of updated guidance for FIs to ensure business continuity and minimize the adverse effects that arise during and after pandemics. The Bureau more recently published a blog post with recommendations for individuals already suffering financial difficulties as a result of the crisis and offers a resource page on its website dedicated to the crisis offering an abbreviated list of similar resources.
Federal Reserve Bank (FRB or Fed)
The FRB, in addition to its actions to lower the guideline federal interest rate to 0% and inject $1.5 trillion into the bond markets, most recently has significantly expanded its lending activity under its Section 13(3) authority. On March 17, 2020, the FRB announced the formation of a Commercial Paper Funding Facility to purchase A1/P1-rated unsecured and asset-backed commercial paper directly from eligible companies (funding facility). The funding facility, which will serve as a backstop for slowed or stopped lending if issuers are unable to compensate investors, is set to remain open for one year and received its initial $10 billion in funding from the Department of the Treasury’s Exchange Stabilization Fund, with additional lending from the New York Fed.
Further, as of March 20, 2020, the FRB has established a Primary Dealer Credit Facility (PDCF) to support households’ and businesses’ credit needs and “allow primary dealers to support smooth market function.” The PDCF will offer overnight and short-term funding (with up to 90-day maturities) at interest rates tied to the New York Fed’s primary credit rate. The PDCF is currently authorized for six months, with the option to extend its operation if necessary.
Most recently, the Fed published two press releases on March 23, 2020 announcing additional supportive actions. The first announced a technical change to an interim final rule that will gradually phase in automatic restrictions concerning a firm’s “total loss absorbing capacity” (TLAC) buffer requirements if levels decline, while the second announced the FRB’s plan to backstop all U.S. credit markets without limitation. The second announcement details the FRB’s Federal Open Market Committee’s plan to purchase additional Treasury securities and agency mortgage-backed securities, having already committed to purchase $500 billion and $200 billion of the same, respectively. The Fed will purchase $75 billion in Treasury securities and $50 billion in mortgage-backed securities each day this week alone. The Fed also stated that it will also buy certain corporate bonds, a historical first, and outlined plans to announce a “Main Street Business Lending Program” for small and large businesses.
Joint Agency Guidance
The Conference of State Bank Supervisors, CFPB, FDIC, FRB Board of Governors, National Credit Union Administration, and Office of the Comptroller of the Currency (agencies) issued joint guidance on March 9 and March 22, 2020. The March 9 guidance encourages FIs to continue to meet the financial needs of customers and members affected by the crisis and work constructively with affected borrowers and other customers. The guidance further notes that “[p]rudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.” The March 9 guidance also suggests a continued rollout of regulatory assistance to affected institutions within the agencies’ jurisdiction and the agencies’ commitment to respond to affected institutions expedited requests so they can make services more conveniently available. The March 9 guidance further states that examinations and inspections of affected institutions will be scheduled to avoid disruption of services and minimize any burden on those institutions.
The March 22 guidance further advises that the agencies “will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs)” and touts the making available of loan modification programs to affected consumers as “positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk.” The March 22 guidance also exempts from classification as TDRs all short-term, good-faith payment delay modifications, including payment deferrals, fee waivers, and repayment term extensions, to affected borrowers who otherwise previously met their payment obligations.
Private Sector Developments
Banks’ and Other FIs’ Responses
In response to Chairwoman Waters’s communication discussed in the Legislative Developments Section above, banks have reported their implementation of multiple measures intended to mitigate the negative financial impacts of the crisis on consumers, including waiving fees, lowering minimum monthly payments, suspending the reporting of negative information to credit bureaus, and offering payment deferral and forbearance options to qualified individuals. To reduce the spread of the outbreak, banks and FIs are promoting the 24/7 online access to financial accounts via their websites or mobile apps for consumers to conduct almost all banking activity online.
Lenders have further expanded the availability of online loan applications and processing of the same, with approvals and disbursement of funds arriving on an expedited basis. Lenders are offering crucial non-recourse financing options for small businesses, which would eliminate loan principal liability if the business fails, and that otherwise tie rates of repayment to revenue, allowing for payment reductions should business decrease.
To protect consumers from increased vulnerabilities and account hacking attempts during the crisis, banks and other FIs continue to utilize fraud detection systems to investigate pending transactions flagged by payment processors. These institutions are working closely with customers to obtain the transaction information necessary to confirm fraudulent activity. Such systems are also being utilized to identify and help to eliminate price gouging of high-demand items, including hand sanitizer and protective face masks. Further, the use of point-to-point encryption at each step of a transaction, from the moment a card is swiped or payment device is tapped until the transaction is authorized and processed, helps to eliminate hackers’ access to consumers’ financial account and personal information. Similarly, transaction tokenization offers an additional layer of protection by replacing account numbers with one-time unique identifier tokens, which only banks and payment processors can use to identify the underlying transaction information, such that even in the event of breach, the token is useless to a hacker.
The crisis has further highlighted the advantages of contactless payments, including Apple Pay and Google Pay, not least of which is the elimination of exchanges of cash or a physical card at points of sale, in addition to the facilitation of more secure transaction processing. Similarly, peer-to-peer payment platforms, including Venmo, Zelle, and the Cash App, facilitate the virtual transfer of money between friends and even consumers and merchants, further reducing face-to-face transactions and the exchange of cash or physical cards.
Payment Processor Responses
Payment processors fielded $21 trillion in global payments in 2019, which equals 2.4 billion transactions per hour. In response to the crisis, payment processors have increased their transaction monitoring to prevent fraudulent actors from exploiting the drastically increased reliance on virtual and online payment systems. Payment processors’ transaction monitoring systems use machine learning and AI algorithms to examine each transaction as it is processed, considering the relevant parties’ past activities, purchasing patterns, and over 500 other risk factors, all in under one second.
The monitoring systems also run each transaction against known fraud schemes, and the data from each transaction enhances machine learning and AI algorithms to spot new or dynamic fraud schemes. The monitoring systems have already identified multiple fraudulent charities or causes soliciting donations and malicious e-mails similarly soliciting donations that instead seek account numbers and login information to compromise financial accounts.
While the ultimate impact of the crisis on the US and world economies and the longterm consequences remain to be seen, legislatures, regulators, and regulated institutions are sure to continue to take legislative measures, issue guidance to FIs, and provide vital financial products to the benefit of consumers.
 Federal Reserve Act § 13(3) permits the FRB, “in unusual and exigent circumstances” like the current crisis, to “discount for any participant in any program or facility with broad-based eligibility, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the” FRB without Congressional approval.