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.
A quick primer on credit reporting
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.
Working with credit bureaus during the pandemic
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.
How to help customers navigate COVID-19
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.