Credit Reporting Agencies are the backbone of our nation’s lending practices, as the information they deliver about a consumer’s financial profile often determines the terms of any loan and whether an application is approved. In normal times, as a best practice, banks and other financial institutions regularly furnish customer data to those agencies, also known as credit bureaus – but they maintain autonomy on what they furnish and to which agency.
As part of the nation’s $2 trillion stimulus package, many politicians are pushing for a federal halt on negative reporting. The general idea here is that freezing current scores would temporarily protect consumers’ creditworthiness as millions become unemployed due to social distancing measures.
The credit agencies – joined by others in the industry – countered that a moratorium would, in fact, cause the exact opposite effect – and for good reason. The biggest concern in pausing credit reporting is that no one has offered a sound exit strategy. Simply turning credit bureau activity back on whenever we determine the economy is ready again could hurt consumers even more if they continue to run delinquent.
Instead, banks and lenders must explore meaningful ways to help customers manage credit amid COVID-19. Now is the time for financial institutions to weigh the opportunities and identify ways to support consumers for the long haul. While we can’t predict when various states or our federal government might fully reopen, it’s likely that the impacts to credit scores will be realized in three to six months down the road.
The origins of credit bureau reporting came from forward-thinking federal legislators, who wanted to make sure consumers could easily find out what lenders are saying about their personal finance histories. Congress also wanted to protect people from unfair or shady lending.
Banks that furnish customer information to credit bureaus follow strict federal regulations on accurate reporting. Consumers who pay what’s due on time are reported as current. Consumers behind on payments are reported with a minor delinquency or a major derogatory condition (including repossession, foreclosure, charge offs, and bankruptcy).
Most major financial institutions provide customer information across their loan portfolio to the three major bureaus: Equifax, Experian, and TransUnion. A smaller bank might only furnish to one agency.
While a single missed payment might not harm a credit record, many consecutive missed payments can be catastrophic for consumers wanting to purchase or keep a home or car – as well as something as simple as applying for a basic credit card. And if they somehow manage to qualify or make a payment agreement with their bank for a delinquent loan, they likely face higher interest rates because of their credit rating.
Those average $1,200 federal stimulus checks or unemployment benefits can only be stretched so far. For many, that money is going to basic necessities, like groceries, rent, and car payments.
The daily business news reminds us that the coronavirus pandemic isn’t just a health crisis. For many families, this is also a financial crisis. By June, the U.S. unemployment rate could reach 20 percent. That’s higher than during the Great Depression.
With those high rates expected into the summer, many Americans will be struggling to keep afloat. Suspending negative credit reporting sounds like a great idea for those people, but that data will stand frozen in time, getting staler by the day. During that pause, a customer’s situation might worsen, with a job loss or bankruptcy filing. An initial 30-day delinquency notation could boomerang with nonpayment throughout that pause, resulting in further delinquency and a shocking impact on the credit score. Maybe if reporting is halted with only one bureau, the impact won’t be as big if the other reporting agencies are staying up to date.
If banks choose to pause negative reporting, it’s critical they inform their contracted credit agencies. The agency will want to know what you’re doing, why you’re doing it, and your exit strategy. This decision comes with countless short and long-term operational issues to settle up front, and your legal and compliance teams must be part of that process. At a minimum, you should confirm that your bureaus can accurately process a windfall of files when you relaunch reporting.
Let’s go back to the idea that credit bureau reporting was designed to support consumers in their borrowing journeys. How banks support consumers struggling financially during this pandemic should align with that intent. That makes empathetic and clear customer service your most valuable tool in the moment.
An important component of the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows for banks to offer consumers accommodations and keep reporting their account as current. Common short-term loan modifications include deferment of payment, forbearance (delaying a foreclosure), skipping a payment or an interest waiver.
Accommodations come with deadlines, and that’s when negative reporting occurs if consumers aren’t current. The downside is that customers don’t always remember, say, when a two-month agreement to skip payments has ended. They expect you will continue to report their account as current. If financial hardships from COVID-19 continue for months longer, many will think that accommodation will continue as well. This is a critical customer service touchpoint. A best practice would be to remind customers the accommodation will be ending and normal payments should resume to maintain current reporting.
A temporary suppression on credit reporting is another avenue, but that puts other lenders at a disadvantage. They rely on credit scores in reviewing loan applications, and suppression could be a very risky decision.
The lost customers are those in the minimal delinquency stage and don’t qualify for assistance. One option to consider is a short-term suppression in reporting, but know these consumers have a lower likelihood to pay – and make sure they understand to be prepared for what might happen if they don’t continue to pay. You want to provide financial education and room to improve their history.
Engage with these customers who are on the bubble and ask smart questions. Is there a way they could get at least one account paid up so that you qualify for loan-assistance programs? If you can only pay a minimal amount, where can you be most successful and have the biggest impact? Ask them why they don’t qualify – you might discover one late fee that the customer doesn’t know about.
Banks will serve their customers best by helping them figure out those answers – before they find out their credit score has hit the bottom.
What resources and services are your bank or lending organization providing to customers facing financial hardship during this pandemic? Don’t hesitate to reach out with questions about our approach or additional suggestions.
Following a period of rapid growth, a large US commercial bank realized it needed to rethink the way it organized its business units, as a means to create greater visibility into risk and opportunities. The organization’s Enterprise Risk Management (ERM) team tapped Spinnaker to help justify that transition and begin to envision what transformation might actually look like.
Customer Channels & Operations Management, Risk Management & Regulatory Compliance 1 minute read
The Big Picture Pick up recent copies of The Wall Street Journal or American Banker, and you’ll see headline after headline about consent orders and hefty fines issued by the Consumer Financial Protection Bureau to mortgage companies caught using deceptive advertising practices. This summer alone, eight have been issued. Two things immediately strike me when I see these stories: Many of these cases didn’t have to happen. And while these particular consent orders were concentrated in the mortgage sector, similarly problematic issues are most certainly occurring in other lending segments across the financial services industry. After a hundred years or so, you’d think we would know how to follow regulatory rules –particularly those put in place to protect consumers. Indeed, the first such laws were framed by the states before World War I – although the first meaty federal law, the Truth in Lending Act, wasn’t passed until 1968. Every new regulation layered in since then largely continues to further shield consumers from unfair practices – which often start with glossy ad campaigns designed to get them in the physical or digital door. The reasons why we’re still struggling with compliance aren’t too difficult to understand: turnover within organizations, competing priorities, a lack of sound controls, new staffers who are unfamiliar with existing regulations, and a never-ending list of new ones, including Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) and the Mortgage Acts and Practices (MAP) – Advertising Rule. There’s also often a gap between the intent of any new regulation and how marketing teams interpret it. The risks of not crossing every “t” and dotting every “i” are significant, as evidenced by these recent consent orders. Doing things the wrong way also can mean costly penalties, time-consuming regulatory remediation, and loss of customer trust – which can translate into higher complaint volumes and even lawsuits. Let’s explore some long-lingering myths about how banks advertise their lending products – and, more importantly, what your financial institution should be doing. MYTH: Legal and Compliance don’t need to review my ad since I’m the expert in marketing. FACT: This is the biggest myth that persists in financial services marketing and advertising. Every word you use to communicate has specific and nuanced meanings, and your legal and compliance teams have a responsibility to protect your company and consumers alike. No external ads or marketing materials should be released until you get signoff from your legal or compliance team. It’s not any more complicated than that. MYTH: Our marketing team knows what Legal and Compliance have told us. We get it, but we need leeway to make our ads eye-catching and even a bit sexy so we can get business in the door. One little word change doesn’t really make a difference. FACT: Remember how former President Bill Clinton faced legal drilling over his interpretation of the word “is”? You’d be surprised at exactly what a bank must validate before it advertises anything as “free.” That word “free” – and countless more – are triggers, often requiring specific disclosures on how they apply to what you’re advertising right at that moment. Ideally, your marketing and advertising teams should collaborate almost daily with your legal and compliance teams. Of course there’s going to be some friction between the advertising folks, who see in every color of the rainbow, and the legal and compliance folks, who typically only see in black and white. The important thing is to build processes and procedures that enable effective and efficient reviews of all advertising and marketing materials, and that begins with concepts. When you involve those responsible with compliance up front, they can help rethink an approach in ways that ensure the final ad meets regulatory requirements. Also, try taking their early “no” to mean “not yet” and be open to ideas on what could translate into an easy reframing. But go to them at the end with an ad that fails on every compliance front, and their “no” will be just that. When I was at a bank that now has more than $30 billion in assets, my compliance team worked diligently to become a strategic partner to the marketing team. It took some time, but our peers came to see that we never aimed to derail their vision. As our relationship evolved, so did our interactions. In fact, we created a desktop resource that allowed marketers to easily look up the latest laws or match sales terms with the necessary disclosures, delivering a self-service tool that also empowered them to create responsibly and expedite the review process. Rest assured, the goal of your bank’s lawyers and compliance officers is not to thwart creativity, but to ensure that amazing ad concepts give consumers precise, clear information about the company’s products and services, allowing them to make smart financial decisions. Believe me: Compliance teams want powerful, compelling and even award-winning advertising that brings more revenue in the door, because when you have that, everyone benefits. MYTH: Our market competitor ran an ad just like that. If they got away with it, then it’s OK and the legal and compliance team is overreacting. FACT: This is the corporate version of your mother asking you, “If everyone was jumping off a cliff, would you do it, too?” The only truth here is that your competitor ran an ad. You don’t really know if that financial institution “got away with it.” In fact, you might learn not too far down the road that your competitor actually got caught red-handed with a compliance violation. After all, the underlying premise of advertising is to spread the word, and regulators are paying close attention. Frankly, you should be analyzing what your competitors are doing, but I’m not talking about their advertising. Take a good look at every consent order or other regulatory action you hear about and compare it to what’s happening in your shop. Are you doing things the right way? Are you identifying and avoiding the possible risks in your process? In other words, consider that the teacher has given you every answer to the test, and you don’t want to fail down the road. MYTH: The bank’s advertising agency developed that campaign – not our internal team – so we’re not going to get in any trouble. FACT: Time and time again, oversight organizations stress that any third-party vendor – whether it’s an ad agency or a cross-sell phone queue – is a seamless extension of your financial institution. If they get it wrong, so do you. You don’t outsource the compliance responsibility along with the work. MYTH: All of that applies to my bank or mortgage company – not to me as a loan officer. I’ll post a special offer on my social channels just for my customers. FACT: Your very title of “loan officer” means you’re an officer of your financial institution, and the same exact requirements apply to you. Without question, the growing influence of social media makes consumer outreach easy, but the brevity and ease of these same platforms also make it more difficult to keep your team members from going rogue. The same compliance standards apply to all of your advertising, including any unsanctioned materials. Every employee needs to understand this responsibility. (BTW, don’t forget about old-fashioned tactics, such as a quick sales flyer that a teller might create and post in a branch. Whether that flyer meets your advertising brand standards is the least of your worries, because you’re most likely out of regulatory compliance.) MYTH: Getting an internal review takes so much time that we’re losing competitive advantage. FACT: Doing it right takes a fraction of the time needed to fix things – particularly if you’re cited for a regulatory infraction – and maintains your institution’s reputation. Yes, a legal or compliance review is another step in your marketing process, but it’s a short blip in the lifetime of a successful business. In my previous role, I was intentional about building interactions with the marketing team that served everyone’s needs as efficiently as possible. If a federal agency comes at you with a consent order or Matter Requiring Attention, you’re going to spend significantly more time finding the root issue, solving for your misstep, gaining regulatory signoff and getting back to work. You also can’t rebuild consumer confidence overnight – even with the most attractive offers in your marketplace. After all, if your customers know you’ve been under scrutiny before, do you think they’re going to trust that you’re being straight with them this time around?
Risk Management & Regulatory Compliance, Compliance, Risk Management 5 minute read
Every year, tens of thousands of pages are published in the Federal Register, with a good chunk of themdetailing what banks need to deliver in serving their customers. In the past decade, the Dodd-Frank Wall Street Reform and Consumer Protection Act came in at the equivalent of nearly 1,000 pages and prompted several thousand more pages of rules and regulations, including, as just one example, the TILA-RESPA Integrated Disclosure (TRID) rules. Tack on relatedregulations published as a result of the Dodd-Frank Act,other more recent regulatory amendments likethose made to the Fair Debt Collection Practices Act (FDCPA), as well as state-specific requirements, and you’ve got enough paperwork to fill a library.
Risk Management & Regulatory Compliance, Compliance, Operational Efficiency 6 minute read
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