Cost and Benefits of the CARES Act

Congress passed the Coronavirus, Aid, Relief and Economic Security (“CARES”) Act on March 27, 2020, to provide economic relief resulting from strenuous burdens of the COVID-19 pandemic. The Act provides significant relief through programs such as the Paycheck Protection Program (PPP), and relaxing certain requirements of the Fair Credit Report Act (FCRA.) These programs stimulate employment and relieve consumers of credit-related liabilities, beyond what Congress intended when passing the FCRA.

However, despite these benefits, the CARES Act also placed substantial compliance costs on institutions subject to its provisions. For example, under the PPP, the Small Business Administration (SBA) forgives loans made to certain entities when the funds are used for qualifying expenses. To accommodate the purpose of the CARES Act, underwriting requirements for a PPP loan are significantly less onerous than generally applied in small business lending. This factor, coupled with the increased volume of loan applications, resulted in disingenuous applicants submitting fraudulent loan applications to take advantage of funds Congress allocated for emergency relief. Indeed, the United States Department of Justice (DOJ) recently announced a total of $157 million, of total identified fraudulent applications and 57 persons indicted on PPP loan fraud charges, to date.

While the PPP fraud issue is a general national cost, it presents very particular costs to banks and lenders. It limits the ability of lenders to process legitimate applications and increases regulatory compliance burdens. For example, the Bank Secrecy Act (BSA) requires lenders and banks to file Suspicious Activity Reports (SARs), when the institution identifies such activity. However, the pandemic and the CARES Act impacted even the filing of SARs. Many lenders agree that general fraud signs are ineffective to identify suspicious activity related to PPP loans. Legitimate borrowers may not have access to required documentation for valid reasons and certain expenses are also understandable in light of the emergency, which would not otherwise arise. However, quick transfers of money, upon approval, are signs of malfeasance and require additional scrutiny. To ease the burden of BSA compliance, FinCEN issued interpretive guidance, explaining that reasonable delays in complying with SAR related regulations will likely not result in enforcement actions if are done in good faith.

Further, on April 1, 2020, the Consumer Financial Protection Bureau (CFPB), issued guidance, wherein the bureau requires furnishers of credit reports to comply with the CARES Act provisions. Furnishers are generally institutions that report consumer information to credit reporting agencies. Therefore, a lender or a bank is a furnisher and subject to the CARES Act credit protection provisions. For example, the CARES Act requires lenders to grant forbearance to consumers with a federally insured mortgage. Such a forbearance is an accommodation for the purposes of the FCRA. In the event of an accommodation, under the CARES Act, a furnisher cannot report the consumer as delinquent to credit reporting agency or advance an existing delinquency that existed prior to the forbearance.

Further, the FCRA requires the accurate reporting of information. However, the accommodation provisions of the CARES Act are numerous and, in some cases, making it difficult to determine whether a forbearance exists as a form of accommodation. While the consumer protection provisions of the CARES Act are beneficial, the costs of compliance to lenders is significant. Lenders must ensure to adequately adhere to guidelines, while avoiding potential FCRA liability of inaccurate reporting, and violating the CFPB guidance addressing the CARES Act provisions.