The CARES Act Includes New Credit Reporting Guidelines—This Is What Lenders Need to Know

Michael Canale, John DelPonti and Joseph Sergienko

Congress’ stimulus bill has broad accommodations for credit reporting. Banks need to have the right controls in place.

US consumers are already strapped with historic amounts of debt—and the economic effects of COVID-19 threaten to exacerbate the problem drastically. Provisions in Congress’ sweeping stimulus package should help, including those related to credit reporting. 

Lenders should act fast to adjust to this shifting landscape. 

The stimulus (i.e., the Coronavirus Aid, Relief and Economic Security—or CARES—Act) prevents negative information from hitting consumers’ credit reports for a covered period beginning January 31, 2020, and ending 120 days after the bill’s passage or from the end of President Trump’s national emergency declaration.

In other words, if someone’s credit file was current (i.e., not delinquent) before the virus struck, lenders and credit bureaus will have to mark that file as such during the covered period, even if, say, payments are late. If an account was delinquent before the national emergency, however, that status will not change. 

On its face, such provisions sound simple. But lenders know otherwise.

They deal with thousands of accounts across several different systems—from home and student lending to mortgages to credit cards—all of which must now be updated immediately to meet the law’s accommodations. Otherwise, credit data that’s crucial to assessing accurate lending risk may slip through the cracks. For instance, an account will not be negatively impacted during the CARES Act’s covered period; but when the period passes, and that account needs to be brought back on file, it may get lost in the shuffle.

Ensuring this doesn’t happen means developing new policies, procedures and controls for dealing with these accommodations. This starts by asking: Who has approval to make these accommodations within your organization? And for which systems?

With this done, executives need to set up controls to segment out customer populations—that is, those whose accounts were current before January 31 versus those whose were not and so will need to be flagged differently in credit filings. From there, they should implement tracking and reconciliation functions, creating a database of impacted accounts that can then remove said accounts at the right time (i.e., after the covered period).

One wrinkle lenders should take note of: Because the covered period starts on January 31, they may have to go back and revise some of the credit reporting that’s already been filed—if, for instance, a customer’s account was current on January 31 but went delinquent before the national emergency declaration on March 13. 

Given the indeterminate duration of the crisis, it’s vital that lenders act now to update these internal policies, procedures and controls. After all, more legislation and additional modes of consumer economic relief are likely on the way. Even before the passage of the CARES Act, banks and other institutions—at regulators’ urging—sought ways to work with distressed customers, whether it was Fannie Mae and Freddie Mac announcing a freeze on foreclosures and evictions, or Discover Financial Services saying it wouldn’t report missed payments to credit-reporting firms for at least two months. 

As the crisis deepens, banks will have to consider their potential business fallout too. They should be prepared for liquidity issues of their own; on the mortgage side, for example, the number and dollar amount of advances will rise higher as the number of missed customer payments increases. The government may provide assistance to banks in this regard, but several unknowns remain. 

At this point, financial executives should at least make sure to control what they can—the data from newly accommodated accounts, as well as clear internal policies and procedures for tracking, protecting, reporting and reconciling such data across their organizations.