Lenders’ COVID-19 Response: A Roadmap for Keeping It Compliant

Lenders are already handling a flood of consumer and business requests for financial relief related to the COVID-19 pandemic. Yet they need to put another important consideration on their plate: regulatory oversight. In the name of fairness and in the interest of meeting regulatory expectations, lending in this time of hardship will need to meet many of the same rigorous compliance standards applied to lending in better times. In this article, we provide a high-level roadmap and detailed monitoring and testing worksheet to support COVID compliance.

The COVID-19 Lending Context

The pandemic has resulted in economic and financial distress for many consumers and businesses. Federal and state governments and agencies, regulatory agencies, lenders, and government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac have taken many steps to help mitigate the economic impact of the pandemic.

For Businesses. Congress created a special variation of the Small Business Administration (SBA) 7(a) loan called the Paycheck Protection Program (PPP) through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under PPP, eligible businesses can receive loans of up to $10 million, depending on payroll expenses. The loans are fully guaranteed. And the SBA will forgive the loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. Loan payments for amounts that are not forgiven are deferred for six months, and unforgiven balances carry an interest rate of 1 percent. As of this writing, the PPP had resulted in 4.2 million loan originations totaling more the $531 billion.

The CARES Act also provides for Small Business Debt Relief (SBDR) where the SBA will pay six months of principal, interest, and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020. SBDR excludes PPP and Economic Injury Disaster Loans.

For Consumers: The CARES Act includes mandatory payment forbearance for those borrowers with a federally backed mortgage loan¹, and specified borrowers receiving this forbearance would be reported to credit bureaus as current during the forbearance period. The CARES Act also provides consumer stimulus payments of up to $1,200 per adult, depending on income. The CARES Act suspended student loan payments and interest on some federal student loans, excluding Federal Family Education Loans and some Federal Perkins Loans. In addition, the CARES Act mandated temporary increases in unemployment eligibility and payments and provided colleges and universities with approximately $6.3 billion for distribution to eligible students affected financially by the pandemic.

Beyond federal programs, many state and local governments have implemented consumer and commercial mortgage payment deferrals. Individual lenders have also offered borrower assistance such as fee waivers, forbearance, temporary increases in credit lines, or temporary reductions in interest rates or payments.

Fairness of COVID Lending Under Scrutiny

Given the substantial federal funding, rapid program roll-out, public interest, and the oversight functions created by the CARES Act, it should come as no surprise that many are keeping close watch on the fairness of the COVID-19 response. The Board of Governors of the Federal Reserve System (FRB), the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) have all issued informal guidance encouraging financial institutions to work with distressed consumer and business customers. These agencies have noted the fair lending and Community Reinvestment Act (CRA) implications of PPP implementations and borrower support offerings. Several advocacy groups and members of Congress have expressed concern that COVID-19 recovery funding is not reaching historically marginalized or underserved communities. Some members of Congress have requested information on lending and workout practices. Most state banking regulators and some state attorneys general have provided guidance on pandemic recovery assistance efforts and the treatment of federal benefits under various state laws.

Since the PPP was implemented, the Office of the Inspector General of the SBA and the National Bureau of Economic Research have released reports critical of the PPP implementation. At least 24 state attorneys general have informed Congress of their concerns with the implementation of the PPP.

And if the mortgage crisis of the early 2000s is a guide, concerns will not be limited to PPP loans. Loan servicers are receiving large volumes of borrower requests for assistance. Some borrowers are seeking the mortgage forbearance offered by the CARES Act, while others have different needs, such as assistance with a credit card, auto loan, or home equity line of credit (HELOC). Borrowers with HELOCs or other lines of credit may request temporary increases in credit lines to help weather this crisis. Mortgage borrowers, along with other borrowers, may seek to refinance to lower monthly payments. Similar to events following the mortgage crisis, Treliant expects significant regulatory interest in which borrowers received what types of assistance.

A Roadmap for Meeting COVID-19 Lending Scrutiny

So how can lenders prepare for current and future scrutiny? Here are four areas of focus for your compliance roadmap:

Document, Document, Document. The time to implement PPP was limited, which may not have allowed lenders adequate time to document the implementation process using their standard project management methodology. If that was the case, it is not too late to take the time now to document. As decisions are made, and while circumstances and decision-making processes are fresh in memories, document why the institution took the approaches it did. The documentation should include rationales for key decisions, such as any institutional overlays to PPP eligibility, how customers seeking assistance were prioritized, and types of assistance available to financially stressed consumer and commercial customers. In addition, Treliant recommends documenting any resource constraints or other considerations that influenced decision-making.
Monitor Performance and Results. How do your PPP lending and forgiveness requests and your consumer and commercial loss mitigation efforts perform when viewed through a fair lending, responsible banking, or CRA lens? Is your performance consistent with your internal policies and procedures? Have you complied with all relevant requirements from federal, state, and local governments and agencies, including requirements for any guarantees or forgiveness? For loans sold in the secondary market or serviced for another lender, have you complied with investor requirements? It is a best practice to include your relief efforts in your fair lending and responsible banking monitoring and testing plans. Your fair lending work plan should cover redlining as well as disparities in application channels, underwriting, pricing, and servicing outcomes. Similarly, your CRA monitoring should consider the geographic and demographic distribution of assistance efforts. We note that monitoring will require geocoding of customer data and may require the use of proxies for demographic groups, although the SBA has included a request for borrowers to voluntarily provide demographic information in the PPP loan forgiveness application. (See Monitoring and Testing Worksheet below.)
Track Complaints. When conducting your monitoring and testing, don’t forget to include relevant complaints. Data mining complaints can offer critical insights into fair and responsible banking risks as well as other compliance risks. Analysis of the complaint data may also help identify areas of risk that need further robust review. In addition, complaint analysis is typically part of regulatory consumer protection examinations.
Conduct a Review. Consider having an independent assurance function, such as internal audit, or an external partner review your performance, particularly in areas of higher risk. An independent review can provide perspective and assist in preparation for examinations or other external reviews. In addition, a third-party independent review can provide insights comparing your programs and compliance management systems to those of others in the industry.

Monitoring and Testing Worksheet

To provide the essential baseline for these four areas of focus, Treliant suggests using the monitoring and testing worksheet below. Of course, there can be no one-size-fits-all approach to this critical function, and the situation is fluid. So, knowledge of your institution’s specific risk factors may identify additional considerations—as may ongoing review of social media, trade press, mainstream media, and regulatory or political pronouncements. We hope that this worksheet, and our roadmap, help in these trying times.

Examples of Monitoring and Testing Considerations
Product	Fair Lending	CRA	Responsible Banking
Paycheck Protection Program Loans and Other SBA Programs	Did institution-specific requirements tend to exclude or discourage applicants on a prohibited basis? In setting your PPP strategy, did you prioritize assisting underserved and rural markets? Does a geographic distribution analysis of PPP loan applications and originations show lending patterns indicative of redlining? Are there disparities in underwriting or servicing outcomes, including forgiveness, on a prohibited basis? Where applicable, did you provide accurate adverse action notices in a timely manner? For applicants that were ineligible for PPP loans, did you offer other forms of assistance? If you offered other SBA relief loans, such as Express Disaster Bridge Loans, have you analyzed your loan distribution and performance from a fair lending and redlining standpoint?	Did your applications and originations include borrowers in low and moderate income (LMI) areas? In setting your PPP strategy, did you prioritize assisting underserved and rural markets? Have you collected sufficient information to report PPP loans as small loans to businesses or farms if appropriate? For applicants that were ineligible for PPP loans, did you offer other forms of assistance?	Were institution-specific requirements communicated transparently to applicants? Did you fund approved loans in a timely fashion? Did you require or encourage applicants to open additional accounts? Where volume required use of less experienced staff, has their work been reviewed for accuracy? For existing SBA 7(a), 504, and Microloans subject to SBA Debt Relief, have you conformed to program requirements? If you collected any borrower payments after March 27, 2020, on loans subject to SBA Debt Relief, have you honored the borrower’s choice of returning the payment or applying the payment to further reduce the loan balance? For SBA loans subject to SBA Debt Relief or automatic deferral, have you notified the borrowers of the need to cancel any pre authorized debits or recurring payments?
Other Loans, Including Mortgages	Does a geographic distribution analysis of approved borrower assistance show gaps in lending patterns affecting minority neighborhoods Are there disparities in assistance offerings or servicing outcomes on a prohibited basis? Are exceptions or overrides permitted in loss mitigation decisions? If so, have you analyzed the effects on protected classes? If you increased, reduced, or suspended credit lines, did the strategy have a disproportionately adverse impact on protected class applicants or minority neighborhoods Where applicable, did you provide accurate adverse action notices in a timely manner?	Does a geographic distribution analysis of approved borrower assistance show gaps in lending patterns in LMI areas? Are there disparities in assistance offerings or servicing outcomes that are disadvantageous to LMI borrowers or communities? If you increased, reduced, or suspended credit lines, did the strategy have a disproportionately adverse impact on LMI households or communities? Have you maintained information on your relief efforts for consideration in your next CRA performance evaluation?	Were customer communications and marketing materials reviewed to ensure they do not misrepresent the programs or services offered If you offered borrower assistance, were terms, conditions, and potential impact, if any, on credit scores or future access to credit clearly disclosed to borrowers? If you offered short-term loans, did you do so in a fair and responsible manner consistent with the Interagency Lending Principles for Offering Responsible Small-Dollar Loans and the guardrails identified in the Consumer Financial Protection Bureau’s response to the Bank Policy Institute’s request for a no-action letter? Did you comply with all relevant requirements from federal, state, and local governments and agencies? If you use a third-party servicer, have you tested their compliance Where volume required use of less experienced staff, has their work been reviewed for accuracy? Are fees charged or waived in a manner that is less advantageous to vulnerable populations?
Deposit Accounts	Have you analyzed customer assistance related to deposit accounts, such as overdraft fee waivers, changes in overdraft availability, or similar topics, for disparate impact on a prohibited basis?	Have you analyzed customer assistance related to deposit accounts, such as overdraft fee waivers, changes in overdraft availability, or similar topics, for effect on LMI households or geographies Have you maintained information on your relief efforts for consideration in your next CRA performance evaluation?	Did you exercise right of set-off against any funds received in deposit accounts from CARES Act payments or other consumer stimulus payments? Did you tie receipt of assistance to the opening of deposit accounts?
Branches	Have you evaluated changes in branch services hours, service offerings, or reopening schedules for redlining or other fair lending risks?	Have you evaluated changes in branch services hours, service offerings, or reopening schedules for their impact on LMI households or communities Have you maintained information on changes in branch service hours, service offerings, and reopening schedules for use in your next CRA performance evaluation?	Have you kept customers informed regarding changes in branch services hours, service offerings, and reopening schedules?
All Programs	Have you tracked and evaluated complaints for allegations of discrimination? Are complaint trends reported to senior management? Does management reporting highlight complaints related to COVID response where appropriate?	Have you tracked and evaluated complaints for allegations that you are not serving LMI people or neighborhoods Are complaint trends reported to senior management Does management reporting highlight complaints related to COVID response where appropriate?	Have you tracked and evaluated complaints for allegations of unfair, deceptive, or abusive acts and practices Are complaint trends reported to senior management Does management reporting highlight complaints related to COVID response where appropriate?

^[1]“Federally backed mortgage loan” means any loan secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families that is: (1) insured by the Federal Housing Administration under Title II of the National Housing Act (12. U.S.C. 1707 et seq.); (2) insured under section 255 of the National Housing Act (12 U.S.C. 1715z–20); (3) guaranteed under section 184 or 184A of the Housing and Community Development Act of 1992 (12 U.S.C. 1715z–13a, 1715z–13b); (4) guaranteed or insured by the Department of Veterans Affairs; (5) guaranteed or insured by the Department of Agriculture; (6) made by the Department of Agriculture; or (7) purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

(As seen in ABA Bank Compliance Magazine September / October 2020 issue)