Relief programs created during the COVID-19 pandemic have provided many Americans with breaks from their largest debts, especially mortgages and student loans. Other people have made deals with automatic loan and credit card lenders on payment. This relief helped many people survive, freeing up money to pay for necessities.
But tolerance is not the same as forgiveness. People will have to deal with the debts that come with mortgages, car loans, credit cards and student loans. Yet in the meantime, people have been faced with unemployment and impoverished what little savings they may have had. Many will likely be unable to resume all of their regular debt payments. And people who did not need forbearance during the pandemic may find themselves in danger of defaulting on their debts.
The pandemic has disproportionately harmed communities of color, especially black women. Given the pre-existing existence of these households wealth disparities, Black Americans and other minorities are likely to bear the brunt of the economic fallout from the pandemic. Part of that payoff will be the need to ask their lenders for loan modifications.
Centers for Disease Prevention and Control recently extended the moratorium on evictions until the end of July in hopes of preventing mass evictions and giving states time to figure out how to provide rent assistance. Likewise, a wave of loan modification requests for the range of consumer debt is coming. Lenders are currently not ready for this dam which will have disastrous consequences for families and for the economy.
The 2008 financial crisis showed us just how many lenders had to offer successful debt arrangements. Distressed borrowers were referred to the so-called debt settlement companies, which would collect an initial fee without producing results.
Now is the time for policymakers and financial regulators to learn from their mistakes during the Great Recession by leaving people alone to figure out how to manage their debts. In one recent paper, we advocate for public intervention in changes to consumer debt contracts aimed at guiding people towards affordable modifications or, if there are no affordable options, guiding people towards the end. consumer bankruptcy system.
We ask the Consumer Financial Protection Bureau to use its authority to prevent what we call edit failures. This is when a borrower’s repayment capacity is intentionally, negligently, or simply carelessly ignored when discussing loan modification. The CFPB has the power to identify abusive acts or practices by a wide range of financial institutions, including the issuers and services of certain auto loans, credit cards and other installment or revolving loans. It may issue a Compliance and Enforcement Bulletin directing loan departments to make a reasonable decision that a borrower has the capacity to make all required and scheduled payments in connection with any modification. This notice should include the factors repairers should take into account in making this decision. It is important to note that the CFPB could view a creditor’s failure to make a reasonable decision as an abusive act or practice.
While some may think our suggestion is too aggressive, this approach is not new. In 1994, the Congress authorized the Federal Reserve to ban “abusive lending practices” in residential mortgages in response to concerns about mortgage refinancing. After the Great Recession, the Federal Reserve Board exercised this the legal authority to explicitly prohibit lenders from refinancing mortgages “regardless of the repayment capacity of consumers”.
These same concerns about repayment capacity should apply to all consumer credit products, and the CFPB has the legal authority to implement this standard in all proposed changes regarding all covered consumer loans – loan mortgage, automobile, credit card and more.
Requiring repairers to offer affordable loan modifications will necessarily mean that some people will not get the modifications. But without control over the changes, some lenders will make offers to people that end in costly defaults. These defaults will result in foreclosures, car repossessions and wage garnishments, leading some people to file for bankruptcy.
Intercepting unsustainable loan modifications before they are created will likely result in some people filing for bankruptcy sooner than if they had continued to struggle for years. Bankruptcy is expensive. But the same goes for paying off an impractical loan modification months before the default. A regulatory structure that pushes people into productive bankruptcies has the potential to mitigate overall losses, while allowing those who can pay their amended debts to do so. Controls and monitoring of the parameters of the agreement could help reduce disparities in changes between communities, reducing gender and class inequalities and providing greater economic benefits to families and the economy.
The COVID-19 pandemic caused a catastrophic financial shock that many American households were not prepared to endure. The time has come for the CFPB to use its authority to guide lenders towards viable offers on a range of consumer loans.
Pamela Foohey is Professor of Law at Benjamin N. Cardozo Law School; Dalié Jiménez is Professor of Law at the University of California, Irvine School of Law; Christopher K. Odinet is Professor of Law at the University of Iowa College of Law. Follow them on Twitter: @PamelaFoohey, @DalieJimenez and @ChrisOdinet