by Jeff Sovern
How should Congress handle the problem of damage to the credit of consumers who default because of the coronavirus pandemic? Congress has already taken its first stab at the problem in Section 4021 of the CARES Act. That provision states that if lenders work out an "accommodation" with consumers under which the lender agrees to forbearance or reduced payments, the lender will continue to report the consumer as current as long as the consumer was current before the accommodation and lives up to the accommodation. The problem with that approach, as others have observed, is that it helps only if the consumer knows to ask for an accommodation, and the lender chooses to grant it. Getting through to lenders at a time when many others are trying to do so and people are working from home can be a challenge. And while some lenders may grant accommodations in the interest of empathy or good long term customer relations, others may be less, well, accommodating. Lenders also are hurting financially and so may face pressure to collect what they can. In short, this solution is unlikely to be sufficient.
Several legislators have proposed another solution under which furnishers and credit bureaus would not be permitted to report negative information during the crisis. The House bill is here and the Senate version here. This bill too has problems. First, it may not be constitutional. I am no expert on the first amendment limits to reporting truthful speech, but the Supreme Court held unconstitutional a law that limited the dissemination of truthful commercial speech in Sorrell v. IMS Health, Inc. On the other hand, in King v. General Information Services, Inc., the United States District Court for the Eastern District of Pennsylvania upheld the Fair Credit Reporting Act's seven-year limit to reporting negative information in consumer reports. I don't know enough to know if the bill is constitutional, and I'm not sure if anyone does, but if a different approach can be taken that is clearly constitutional, that strikes me as preferable, all other things being equal.
Second, there may be a problem with how the bill's prohibition would work in practice. Suppose someone, call them A, made all their payments during the pandemic. As I understand the bill, it wouldn't prevent credit bureaus from reporting that. Presumably, someone else, call them B, who missed payments would simply have a gap in their credit report. Wouldn't lenders contemplating making a loan to someone understand the difference between A's and B's credit reports? Now lenders may choose to discount defaults during the pandemic anyway, on the theory that they don't indicate a likelihood of defaulting in more normal times, but if that's the case, then the bill would serve no purpose. In short, it seems to me that the bill as written wouldn't prevent lenders from penalizing borrowers who had not met their payment obligations. In fact, it might make things worse for those who, say, make only one late payment. That's because a gap in the information wouldn't enable lenders to determine whether a consumer had defaulted altogether or had had a less damaging problem. That problem might be fixed by barring furnishers and credit bureaus from reporting positive information during that pandemic, but preventing the reporting of truthful positive information is going to be a hard pill to swallow politically.
I think Congress should go in another direction and enact a provision simply barring lenders from taking into account in lending decisions whether consumers who suffered pandemic-caused income losses defaulted in any way during the pandemic.