If they haven’t already, your residents will soon be contacting you about COVID-19 debt information related financial hardships. How you help them through these tough times is up to you (we offered some options in this recent article). No matter what arrangements you make, though, you’ll want to report them accurately to the major credit bureaus.
Requirement or recommendation?
On March 9, 2020, the Board of Governors of the Federal Reserve System and all five federal banking agencies issued a joint press release encouraging financial institutions to “work constructively with borrowers and other customers in affected communities.”
The Office of the Comptroller of Currency (OCC) echoed this recommendation. A March 13 OCC update encouraged banks to “prudently” work with “adversely affected customers.” The agency suggested waiving fees, offering repayment accommodations, and extending payment due dates regarding COVID-19 debt information.
While this guidance is directed toward banks and credit unions, it’s advice that any lender should consider. In fact, the Consumer Data Industry Association (CDIA), which represents consumer reporting agencies, backed the Fed’s suggestions. The organization also shared specific reporting guidance for member companies who want to help consumers avoid credit problems amid the COVID-19 pandemic.
“This guidance is available in the current situation to help consumers work with their banks and other creditors if they are impacted—directly or indirectly—by the virus,” said Francis Creighton, CDIA President and CEO.
At this point, working with your customers or tenants who have been impacted financially by COVID-19 isn’t a requirement. The Fed, OCC, and CDIA are all using words like “guidance” and “recommend” to reiterate this fact. It’s possible, though, that government aid packages may soon include mandatory rules for working with your customers on COVID-19 debt information amid this unprecedented outbreak.
COVID-19 is a natural disaster
There is no policy within the Credit Reporting Resource Guide that specifically addresses COVID-19, coronavirus, or pandemic. However, the Guide — better known as the “Metro 2 manual” — has long included policies on “natural or declared disasters.” Most people use this policy after widespread weather-related emergencies like devastating hurricanes, wildfires, or mudslides.
However, according to the CDIA, the current COVID-19 pandemic falls under this category for credit reporting purposes. Indeed, the economic circumstances facing consumers today, including potential job loss, are through no fault of their own. This is the same criteria that describes the impact of natural disasters on consumers.
“The nationwide credit reporting companies have long had systems in place to minimize the impact of disasters and other singular situations on consumers’ credit standing,” said Creighton. To remind data furnishers of this long-standing policy, the CDIA issued an Important Metro 2 Announcement on March 9.
The CDIA advised data furnishers who report information for consumers affected by natural disasters to refer to FAQ 58 of the Metro 2 Manual for specific reporting guidance.
FAQ 58 highlights
While we encourage you to consult the FAQ 58 documentation for full reporting instructions, here is a summary of the guidance.
- There are two options for reporting natural disaster status on open accounts and closed accounts with balances owing.
- Report the account as deferred or in forbearance (more details below), along with Special Comment AW (affected by natural or declared disaster), OR
- Report the actual account status that applies to the account, along with Special Comment AW
- If an account is already being reported as derogatory, continue reporting these statuses and add Special Comment AW.
When a data furnisher adds Special Comment AW to an account, the notification indicating that the consumer has been impacted by a natural disaster will appear alongside the specific trade line. Traditionally, credit reporting agencies (CRAs) will not count trade lines with the AW code when calculating credit scores. For all intents and purposes, these trade lines are invisible while the code remains in place. It’s up to you as a data furnisher to remove this code from the account when the consumer’s financial situation has stabilized.
Guidelines for deferment or forbearance
As referred to in FAQ 58, deferment or forbearance of an account are popular options for creditors seeking to help consumers during times of natural disaster. Each allows the borrower to temporarily postpone making regular loan payments. However, they differ in the way interest on the account is handled. Typically, an account in deferment does not accrue interest while payments aren’t being collected.
A forbearance arrangement, though, will increase the amount the borrower owes, because interest will not stop accruing during the grace period. While the account is in forbearance status, you may encourage your customer to make reduced payments or interest-only payments if possible.
To report a loan as deferred, follow the step-by-step process outlined in FAQ 44 of the Metro 2 Manual.
To report an account in a forbearance, follow the step-by-step process outlined in FAQ 45 of the Metro 2 Manual. Loans in forbearance will need the Special Comment Code CP (account in forbearance) in addition to code AW (natural disaster).
Remember that when a customer’s account comes out of deferred or forbearance status and begins repayment, it’s up to you as the data furnisher to adjust the reporting fields accordingly.
Be consistent and considerate
In January 2019, the National Consumer Law Center appealed to the heads of the CDIA and the three major credit bureaus to change the way natural disaster codes were recorded on credit reports. The group referenced a 2018 study by the Consumer Federal Protection Bureau (CFPB), which found reporting inconsistencies that negatively impacted consumers.
The Natural Disaster Credit Reporting report focused on consumers in the disaster zone of Hurricane Harvey, which hit the Houston, Texas area in August 2017. The CFPB found that less than 40% of those impacted by Harvey had disaster code AW on their reports. Only 16% of mortgage servicers and 5.7% of credit card issuers added this AW designation.
“[T]his disparity is illogical and unfair,” the NCLC concluded. “[I]f a consumer was impacted by a natural disaster with respect to their mortgage loan, they would be impacted as to their credit card account and other tradelines as well. Without comprehensive coverage, consumers face ongoing harm from unflagged financial hardships beyond their control.”
The NCLC recommended that data furnishers leave the AW code on reports for at least six months. The group also asked that any tradeline with an AW code should not include delinquencies during the time period. In other words, if an account is not in deferred or forbearance status, but has the AW code, data furnishers would use the “current” designation or “D” code for “no information” in the Account Status field.
Again, at this time, these are all recommendations and guidance for data furnishers regarding COVID-19 debt information. However, as we’ve shared before, your consideration and kindness today during these unusual and unpredictable days of COVID-19 may go a long way toward future customer loyalty.
Please feel free to contact us at email@example.com or (425) 780-4530 if you have any questions or need our assistance during this difficult time. https://datalinxllc.com/