On Tuesday, Democrats unveiled their latest legislative proposal: the “Health and Economic Recovery Omnibus Emergency Solutions Act” or “HEROES Act”. The official summary of the bill calls it “transformative legislation to address the challenges of the coronavirus pandemic, increase assistance to state, local and tribal governments”, expand unemployment insurance and provide direct assistance to Americans.
For the consumer financial services industry – specifically the credit reporting and debt collection industries – the HEROES Act aims to amend certain consumer protection laws while providing several moratoria and forbearance options for consumers .
The details of the proposed legislation are as follows:
Credit reports during major disasters
- Negative consumer credit reports would be suspended during the COVID-19 pandemic, other declared major disasters, and for 120 days thereafter;
- New credit scoring models that would reduce existing consumer credit scores during the COVID-19 pandemic or other times of major disaster would be prohibited;
- Prohibit reporting of medical debts arising from COVID-19 treatments; and
- Expand consumer rights to remove negative trade lines.
Restriction on collection of consumer debts during major disasters
- Create a temporary moratorium on consumer debt collection during this COVID19 crisis and for 120 days thereafter (period covered);
- Amendment of the Fair Debt Collection Practices Act (FDCPA) to include creditors under these provisions during the Covered Period;
- Prohibited debt collection conduct would include taking legal action, enforcing security, terminating utility services, and threatening to do any of these activities. Unlawful activity would be permitted but will be limited by refund and opt-out restrictions; and
- Determination that pre-dispute arbitration provisions are invalid and unenforceable during the Covered Period.
Mandatory redemption and abstention
- The FDCPA would be amended to require debt collectors to extend the time to repay a debt resulting from credit within a set repayment time of a payment term for each payment missed by a consumer plus an additional payment term ;
- For credit card debt or indefinite term credit, a consumer could repay the outstanding balance in a manner that does not exceed the repayment options outlined in TILA;
- For all other debts, the consumer could pay in equal monthly installments, but only within a predefined period depending on the amount owed, which may extend over a longer repayment period;
- At the consumer’s request, debt collectors must offer a forbearance program upon request and certification of financial hardship, directly or indirectly related to COVID-19, until the end of the covered periods. The consumer does not have to provide proof in support of the damage; and
- The Federal Reserve will establish a credit facility to provide debt collectors with low-cost, long-term loans to temporarily compensate them for financial losses caused by the forbearance program.
Government payments for private student loans
- Extend student loan payment and CARES Act consumer protections (such as debt collection bans) to private borrowers not currently covered by the CARES Act;
- Provide up to $10,000 in debt relief to apply to a private student loan with the Department of Treasury making monthly payments on behalf of the borrower up to $10,000 through September 2021. Borrower n is not obligated to use this money to repay any private student loan;
- A debt collector could not pressure a borrower to choose to apply any amount received from the Treasury to a private student loan. Such conduct would be considered an unjust and deceptive act under Dodd-Frank as well as a violation of the FDCPA; and
- Private education loan holders must modify all existing loan contacts to provide the same repayment plan and remission programs available under the Federal Direct Loan Plan.
Mortarium on Small Business Collections
- Amend the FDCPA to include a temporary moratorium on small business debt collection during the same covered period;
- The redemption and forbearance proposals applicable to consumer debtors would apply to small business debt; and
- The Federal Reserve will establish a credit facility to make low-cost, long-term loans available to small business debt collectors to temporarily compensate them for financial losses caused by forbearance.
The proposal to offer low-cost loans to the debt collection industry for “documented losses resulting from forbearance” needs careful consideration. How is the loss documented? What if the consumer never pays or declares bankruptcy? This is not a real bailout and the debt collection industry will need to carefully consider whether taking on this type of debt is a good business decision.