While auto-finance providers communicate with their customers impacted by the coronavirus pandemic, six different federal regulatory agencies encouraged institutions to work constructively with borrowers affected by COVID-19 while providing additional information regarding loan modifications.

Meanwhile, Hudson Cook partner Anastasia Caton shared exclusive insight with SubPrime Auto Finance News about what those recommendations and upcoming actions by lawmakers might mean for collections and repossessions.

The agencies not only encouraged financial institutions to work with borrowers, they said they will not criticize institutions for doing so in a safe and sound manner.

The regulators also said they will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs). The joint statement went on to provides supervisory views on past-due and nonaccrual regulatory reporting of loan modification programs.

Along with the Federal Reserve, the other agencies that joined in this week’s statement included:

— Conference of State Bank Supervisors

— Consumer Financial Protection Bureau

— Federal Deposit Insurance Corp.

— National Credit Union Administration

— Office of the Comptroller of the Currency

“The agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 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 regulators said in their statement.

The statement reminded institutions that not all modifications of loan terms result in a TDR.

The regulators explained short-term modifications made on a “good-faith basis” in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term — for example, six months — modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

The update went on to mention the agencies’ examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected, including those considered TDRs.

“Regardless of whether modifications are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers,” officials said.

Insight from Hudson Cook

Late on Wednesday, Caton sent this message to SubPrime Auto Finance News. Below are her comments in their entirety:

The proposals floating around in Congress (some of which are ideas, and some of which are proposed legislation) relating to debt collection are well-intentioned. Millions of Americans are very suddenly without work and without any way to make ends meet. Add to that the extreme stress of health-related uncertainty and children being out of school, and they are not likely to devote their attention and, in many cases, limited resources to repaying debt. The proposals and a lot of recent regulator guidance acknowledge that reality.

The most recent bill in the Senate (introduced by Sen. Sherrod Brown) would amend the federal FDCPA to effectively prohibit debt collectors (not creditors) from actively attempting to collect debt, including by repossession, during a disaster period. It would allow debt collectors to contact consumers in writing, but for informational purposes only.  The moratorium on collection would last for 120 days after the end of the disaster period. Most importantly, though, Senator Brown’s bill would not impact the ability of a creditor to directly collect from its own customers or to repossess vehicles.

Rep. Maxine Waters released a memo that goes much further, including by proposing to suspend all consumer and small business credit payments during a pandemic, to suspend all negative consumer credit reporting during the pandemic and for 120 days after the pandemic ends, and to prohibit collection of all consumer debt, including medical debt, and repossessions during the pandemic and for 120 days after it ends.  These proposals would apply generally to all creditors and debt collectors and would likely have a seismic impact on the consumer credit industry.  Rep. Waters’ proposals are aggressively aimed at easing the burden on consumers during this time of uncertainty.  Important to note, though, is that they are not part the legislative process (yet).

As of this morning (March 25), it appears that Congress and the White House have struck a deal on a stimulus package. At this time, it does not appear that either Sen. Brown’s bill or Rep. Waters’ proposals will be a part of the stimulus package.  That does not mean they will not be a part of later legislation addressing the ongoing crisis, especially as circumstances evolve.  If there is anything COVID-19 has taught us, it is that everything can change in the course of one day.  And, states could still take action.  Nevada, for example, has banned all collection activity by licensed collection agencies in the state.  Other states have been more flexible, including by encouraging creditors and collectors to ease their collection practices and work with customers experiencing financial distress, and by expressly allowing employees to work from home without (in some states) needing a branch office license.

With the potential looming for more aggressive steps to limit collection, auto finance companies should consider how they might revise their collection strategies, including by curtailing collection activity, reassessing repossession policies, and pivoting to customer assistance programs (e.g., payment accommodations and modifications) as the primary objective of customer outreach.  By working with customers using empathy, sensitivity, and creativity, auto finance companies will draw less potentially negative attention from state and federal regulators and legislators (at the same time generating good will with customers who are under an enormous amount of stress right now).  In fact, regulators at both the state and federal level have encouraged creditors to take all steps necessary to accommodate customers, and have indicated that they will limit regulatory scrutiny of creditors that actively work with customers to mitigate financial distress. 

I will end by saying that auto finance companies also employ millions of Americans. Servicing and collection activities can mostly take place in remote locations (especially given the easing of state regulations relating to doing business at a licensed location) without jeopardizing the health or safety of employees. Auto finance companies therefore are extraordinarily fortunate to be able to continue to employ people through this unusual and uncertain crisis. Consumer credit trade associations are hard at work bringing this fact to the attention of state and federal regulators and legislators.