Regulators must stay ahead of the coming wave of loan defaults

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Relief programs created during the COVID-19 pandemic have allowed many Americans to suspend the payment of their largest debts, especially mortgage as well as student loans… Other people have come to terms with Auto loan as well as credit card creditors for payment. This relief has helped many people survive by freeing up money to pay for basic necessities.

But patience does not mean forgiveness. People will have to face debt obligations related to mortgages, car loans, credit cards and student loans. However, in the meantime, people were faced with constant unemployment as well as depleted what little savings they could have. Many may not be able to resume all of their regular debt payments. And people who did not need patience during a pandemic may be in danger of defaulting on their debts.

The pandemic has caused disproportionate damage to communities of color, especially black women. Considering pre-existing households wealth inequalityBlack Americans and other minorities are likely to bear the brunt of the economic impact of the pandemic. In part, this will lead to the need to ask your lenders to amend the loan.

Centers for Disease Prevention and Control recently extended a moratorium on evictions until the end of July in hopes of preventing mass evictions and giving states time to think about how to help rent housing. Likewise, a wave of requests to change loans for a number of consumer debts is approaching. Lenders are currently unprepared for this obstacle, which will be disastrous for families and the economy.

The 2008 financial crisis showed us how poorly prepared many lenders offered successful debt repayments. Problem borrowers were targeted at the so-called debt settlement companieswhich will collect preprocessing fees without any results.

It is time for policymakers and financial regulators to learn from their mistakes during the Great Recession, leaving people to decide how to manage their debts. IN recent articleWe advocate government intervention in the modification of consumer debt contracts to induce people to affordable modifications or, if there are no available options, to direct people to a consumer bankruptcy system.

We urge the Consumer Financial Protection Bureau to use its authority to prevent what we call modification failures… This is when the borrower’s ability to pay off the debt intentionally, carelessly or simply inattentively is not taken into account when discussing loan modification. The CFPB has the power to detect misconduct or practices by a wide range of financial institutions, including issuers and servicing persons of certain auto loans, credit cards and other installment or revolving loans. It may issue a compliance and enforcement bulletin instructing loan service providers to make a reasonable decision that the borrower is able to make all required planned payments due to any changes. This notification should include factors that maintenance personnel should consider when making a decision. It is important to note that the CFPB may consider the failure of the lender to make a reasonable decision about the abuse of an act or practice.

While some might think that our proposal is too aggressive, this approach is not new. 1994 Congress authorized The Federal Reserve has banned “improper lending practices” on home mortgages in response to concerns about mortgage refinancing. After the Great Recession, the Federal Reserve Board did it legislative powers expressly prohibiting lenders from refinancing mortgage loans “regardless of consumer solvency”.

The same repayment concerns should apply to all consumer lending products, and the CFPB has legislative authority to implement this standard in all modifications offered for all covered consumer loans – mortgages, car loans, credit cards, etc.

Requiring service centers to offer affordable loan modifications will necessarily mean that some people will not receive modifications. But without modification control, some lenders will offer people deals that end up with costly defaults. These defaults will lead to home foreclosures, car seizures and higher wages, leading some people to bankruptcy.

Intercepting erratic loan modifications before they are created is likely to result in some people filing for bankruptcy sooner than if they continued to struggle for years. Bankruptcy expensive… But the same thing happens with the payment of non-performing loan modifications several months before the default. A regulatory structure that pushes people towards productive bankruptcies can reduce overall losses by allowing those who can pay their modified debts to do so. Controlling and monitoring the parameters of transactions can help reduce inequalities in change between communities, eliminating gender and class inequalities and providing greater economic benefits to families and the economy.

The COVID-19 pandemic caused a catastrophic financial shock that many American households were not prepared for. Now is the time for the CFPB to use its credibility to push lenders to offer people effective deals on a range of consumer loans.

Pamela Fuhi is Benjamin N. Cardoso Law School Professor of Law; Dalie Jimenez is Professor of Law at the University of California, University of Irvine School of Law; Christopher K. Odinette is a professor of law at the University of Iowa College of Law. Follow them on Twitter @PamelaFoohey, @DalieJimenez and @ChrisOdinet.



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