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Continued fallout from the COVID-19 pandemic

Financial, Executive and Professional Risks (FINEX)
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By Alison MacLaren | February 3, 2021

Key concerns and recommendations for the banking industry based on the potential impact from COVID-19.

Mortgage Forbearance

Observation

The CARES Act provides mortgage forbearance assistance for individual homeowners. Individuals experiencing hardship may request forbearance for an initial 180-day term, and up to a total of 12 months, for federally backed mortgages.

Concern

Lenders and servicers face potential complaints from borrowers who feel that the terms of their forbearance were not adequately explained to them, particularly if certain borrowers are being treated differently from others with respect to repayments. “Robo-forbearance” class actions have been filed alleging banks unilaterally placed borrowers into forbearance to take advantage of incentives.

Servicers also have an ongoing duty to make payments to the investors of mortgage-backed securities. Absent the cashflow from loan payments made by borrowers, non-bank mortgage servicers face a potential liquidity crisis. Modifications to loans serviced but not owned may also be a concern. The last large-scale wave of mortgage restructurings and modifications during 2008 generated litigation against servicers who voluntarily restructured mortgages by MBS investors who bore the losses.

Considerations

Lenders should be prepared to speak to their forbearance procedures and liquidity position.


Paycheck Protection Program

Observation

The SBA Paycheck Protection Program via the CARES Act allotted $659B in short-term, low interest loans up to a maximum of $10M for small businesses. Loans are reimbursed by the SBA and forgiven if primarily used for payroll costs, though forgiveness metrics are in constant flux. An additional $248B was approved in December 2020 and extended eligibility to non-profits.

Concern

Concerns exist over the degree to which banks may be responsible for verifying borrower information under time pressure and held liable for fraudulent loans. For this reason, some banks used gating procedures to limit participation. This prompted litigation by would-be borrowers, much of which has stalled. Forgiveness eligibility calculations present new risks, and auto-forgiveness remains in question.

Fintech lenders — more apt to automate underwriting — were responsible for only 15% of PPP loans overall but handled 75% of loans found fraudulent by the DOJ.

Considerations

Lenders should be prepared to discuss the extent of their participation in the PPP and internal procedures for vetting borrower requests. Assess lender liability cover and evaluate loan servicing definitions that may apply to forgiveness assessments.


Stimulus Check Deposits

Observation

The CARES Act provided for economic impact payments of up to $1,200 for individuals and married couples getting up to $2,400 and $500 per child in the first round which began April 2020. The second round of checks offered $600 to each eligible adult and child in December 2020. A third round is under discussion.

Concern

Banks may face scrutiny over treatment of stimulus check deposits, and liability may exist for banks that apply stimulus funds to debts or overdrawn accounts. The federal government equivocated on the permissibility of such action during the first round and guided banks to work with their own legal counsel to determine how to proceed. In April 2020, 25 state attorneys general sent a letter to the Treasury Department requesting further action be taken to prohibit banks from taking these funds.

By law, the second round of checks may not be used to satisfy delinquent child support or outstanding debt, but individual banks have the choice to apply funds to overdrafts.

Considerations

Banks should evaluate and be prepared to discuss procedures for how stimulus checks are treated after direct deposit.


Credit Reporting

Observation

A portion of the CARES Act amends the Fair Credit Reporting Act. The amendment instructs lenders to report that borrowers are “current” on their credit obligations when a special payment accommodation (like a forbearance) is in place due to COVID-19-related hardship.

These amendments are retroactive to January 31, 2020, meaning that furnishers may need to update information from February or March if accommodations were offered during that time period.

Concern

Mortgage forbearance or other consumer debt-related accommodations are likely to lead to increased disputes by consumers who believe their accounts should be reporting as current. In April and May 2020, the CFPB received ~42,400 and 44,100 complaints, respectively — the highest monthly complaint volumes in its history.

Considerations

Banks and other servicers need to consider notice and reporting obligations at the time of receipt of these consumer disputes, as they are likely to form the basis of future litigation.

Assess the need to revise previous reports for accommodations granted to the retroactive date.

Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

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Banking Industry Leader, Willis Towers Watson

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