The CARES Act and Credit Reporting: What Credit Unions Need to Know

by Bill Maurer and Melissa Wrapp, Center of Excellence for Emerging Technology, Filene Research Institute - creating research, innovation and connections for credit unions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted on March 27, 2020, to provide emergency relief to consumers and businesses suffering from the economic fallout of the COVID-19 pandemic. The CARES Act contains a section (Sec. 4021) specifically addressing the credit reporting consequences of the pandemic. Even with direct stimulus payments, increased unemployment benefits, and the Paycheck Protection Program, consumers are facing dire financial circumstances. The expiration of relief payments and enhanced unemployment protection on July 31 has only made their situation more precarious.

Section 4021 does not go nearly far enough. It places the entire burden on consumers. It does not include all forms of debt, including debt collection accounts (which includes 99% of medical debt on credit reports). It does not standardize credit reporting practices. And more.

Still, there are ways your credit union can help your members.

PROBLEM: Protections are not automatic.

Consumers are required to contact creditors to ask for an accommodation. They are also required to do so for all their accounts. Most don’t even know where to begin.

What your credit union can do:

• Proactively contact your members to let them know how to ask for an accommodation from their creditors.
• Remind them of the top five most likely creditors they should contact. You can either look for trends in your area or go for the most likely creditors that any member would have. Provide them a checklist: Mortgage; car loan; student loan; credit cards.
• Provide phone numbers or websites to the national credit reporting agencies (NCRAs) so they can obtain their free credit reports.
• Preserve the dignity of your members and don’t overrun your call centers! Instead, consider automatic loan deferments or online/mobile solutions for loan deferment requests.

PROBLEM: Only deals with active accounts.

The CARES Act only deals with active credit accounts, not debt collection accounts like medical debt or debt owed to collection agencies employed by former landlords.

What your credit union can do:

• Target small-dollar lending products to utility delinquencies, medical debt, or other debt collection accounts.
• Help members identify court records of evictions and petition the court to have them expunged or sealed. The easiest way is to look at the Public Records section of their credit reports. They can also look up records on line via the National Center on State Courts website or partner with a third-party provider like MyRentalHistoryReport.Com (which charges a $29.95 fee). Or, identify and partner with a local nonprofit legal aid foundation.
• Provide a dated letter of reference to members with eviction records indicating they are a member in good standing of your credit union that they can share with potential landlords when filling out a rental application.

PROBLEM: Consistency using the AW code.

Furnishers are not consistently using the AW code (“natural disaster”) in providing data about COVID-related delinquencies.

What your credit union can do:

• Demand from NCRAs that furnishers of credit data use the AW code or CP (“short term forbearance”) in any data they provide to NCRAs.
• Lobby Congress for consistent application of Metro 2 ® codes related to natural disasters, including pandemics. Make this an immediate and high priority for our trade groups.

PROBLEM: Student loans.

75% of forbearances are for student loans.

What your credit union can do:

• Reach out to student borrowers and others with student loans to discuss their options. Identify them through your student loan providers/servicers; or, look for student loan payments in ACH files.
• Ask your student loan providers/services to advertise the benefits provided in the CARES Act for student borrowers.

PROBLEM: Poor understanding of credit reports.

Consumers poorly understand their credit reports. The 3 NCRAs are currently providing weekly free reports during the pandemic.

What your credit union can do:

• Make your members aware of the NCRAs free reports.
• Provide educational materials for members on their credit reports, how to read them, the importance of their credit score, and how to improve their credit score. Direct them to the websites of the NCRAs or the CFPB, which has a handy primer on credit scores.

For full original post, additional resources, and detailed specifications from the CARES Act, go to:

https://filene.org/blog/the-cares-act-and-credit-reporting-what-credit-unions-need-to-know

Important Note

At the time the guide was prepared (August 2020), the second major stimulus and relief act has passed the House of Representatives, but negotiations are stalled between the House, Senate, and Trump administration. The House bill, called the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES) Act, replaces section 4021 of the CARES Act and provides a couple of important additional protections. Most significantly, it bans reporting medical debt related to COVID-19 treatment. This is a step in the right direction, but many individuals will suffer medical debts unrelated to COVID-19 treatment that they will still struggle to repay given the economic fallout from the crisis. It also forbids the use of alternative credit scoring models that “would identify a significant percentage of consumers as being less creditworthy when compared to the previous credit scoring models.”