Collecting on overdrawn or charged-off accounts during COVID-19

As consumers start to receive stimulus payments there is no specific provision in the CARES Act for collecting on negative balances or accounts previously charged off due to a negative balance.  This episode features a discussion of the potential reputational risks and compliance concerns. 

Transcript

spk_0:   0:04
Hello and welcome to another session and our podcast series for John and witnesses. My name is Maggie Company. I am the client success manager. And today we're gonna be talking about operational risk for collecting on overdrawn or charged up accounts during the Cove in 19 Pandemic. Today I have with me Miss Cheryl, often our executive vice president of compliance and debris Poindexter, a partner at Morrison and Foerster, and find council for Jamie's a overdraft privilege program. We do understand that banks are legally allowed to withhold funds that go into account that have negative balances or account previously charged off due to a negative balance and no specific provision in the Cares Act, the $2 trillion relief package that authorized stimulus payments prevents banks from taking customer stimulus money to cover debt. So what? I want to go ahead and view is introduced. Cheryl and abrio how are you ladies held everything going great.

spk_2:   1:04
Thank you so much.

spk_1:   1:06
Thank you.

spk_0:   1:06
Oh, excellent. Thank you so much for being with us today. We greatly appreciate it, and we're excited to talk about this topic today. So let's get started. Should financial institutions use the stimulus funds to cover over, drone or charged off account. What are your thoughts on that? Well, let me just

spk_1:   1:24
level set here On March 27th of this year, the president signed into law the Cares Act. Many of you heard of that. It's the Corona Virus Aid Relief and Economic Security Act. And this was covered third phase of the economic relief. Um, in response to the cove it crisis. Among other things, the law provides for a one time direct payment individuals. And the purpose was to help individuals at you know, this time to really address the economic harm and financial harm that customers were, uh, individuals were facing in, Um, we understand that the first wave of these stimulus funds were kind of released recently, and just to reiterate a point that was made earlier, there is nothing in the care Zack that prohibits a bank from using the stimulus funds that are deposited either through an A. C H or by paper check took cover. Overdrawn account balances order to be directed in some way to pay outstanding bees on the account. So unlike, um ah provisioning the Cares Act that prohibits the use of stimulus funds to pay federal or state debt owed to government. It does not go as far as to prohibit financial institutions to use the funds to offset negative balances our debt owed as a as a matter of law.

spk_2:   3:21
One of the challenges that that that that that that creates is for some consumers their accounts are already negative because perhaps they have had employment stop as a result of the state home orders or the strategies for reducing workplace infection that it causes families to be unable to generate their primary sources of income. And so, for our client financial institutions, it's important that they look at this. It's one more opportunity to continue to communicate with their consumer account holders when a stimulus check of $1200 or more arrived in an account that is now in an overdrawn position. To simply withhold the portion of that stimulus. To cover that negative balance is not necessarily a good strategy for an institution to take, given that the consumer has critical need of those funds for perhaps groceries or utilities or other critical costs. Game recognizes that our opportunity to deal with consumers on a kind of individual or taste by case spaces enables that conversation with that consumer to determine. Is there any opportunity for them to have their needs met without having the requirement for that stimulus payment? And I say that because when an examiner comes in six months or a year from now and and the opportunity for the conversation around, how did that financial institutions service their consumers arises? The best possible answer is for the financial institution to be able to say we work closely with our consumers, and we've made sure that if they had needs that we were there to support them. That that is our first and primary agenda and it is a bria certainly knows that's not to neglect the importance of the security and safety of the financial institution, but instead to support the consumers who were all there to serve. So our focus has to be on. How can we facilitate access to the stimulus funds without causing institutional harm and recognizing that the primary agenda should be servicing those consumers who in many cases are not generating their standard monthly income due to Tokyo? 19

spk_1:   6:02
Charlotte, I think that you highlighted, um, something that's quite important here. And that is what will your examiners think of this practice? And I think you know, there is certainly some reputational risk here. And the reputational risk is that banks could be viewed as using the stimulus funds to cover negative balances and that this is an unfair practice, right? Um, it could be viewed as a taking from a consumer of those funds that are intended to provide important relief to help customers in a time of need. We've heard consumer advocates, um, really take up this issue with the government, um, and have stated that protections are needed to address thanks overdraft charges that are impacting stimulus funds. We know that Treasury, um, is getting complaints about the practice of allowing stimulus funds to cover negative balances. And members of Congress, including Senator Senator Warren, has been criticizing banks for it for the practice. They're 25 state attorneys generals that have called for banks to allow customers to fully use the stimulus funds. So while I did indicate early on that it's not a prohibited practice as a legal matter, um, you know, this is a good time. As a Cheryl noted to look at um, look at the individual customer's needs on a case by case basis and understand, um, if there is, you know, some kind of adjustment or in your policy, that would allow for the full use of the stimulus funds. Um, and I think that's a way of getting in front of this narrative that we're hearing from consumer at advocates in some members of Congress that that, um, some banks are are harming customers by not allowing the use of stimulus funds,

spk_0:   8:30
I feel have, ah, follow up question about documentation, You know, what about documentation for the institutions for these exceptions that are being made? Um, should there be any consideration for special documentation? What do you thought on that?

spk_2:   8:45
I will say that it's always good practice to retain notes associated with conversations with consumers in a circumstance where, for example, an institution might consider that during their cities or their counties, state home, you know, mandate, which again is variable across the country. Not all states are all counties have them, but during that window of time, if financial institutions want to relax their collection model that they're not as aggressive or as consistent in communication with consumers around overdrawn accounts. Um, it affords them the ability to simply record it. Indicate that that's a system. Why policy for that window of time? I'm in a particular county where we have an end date. They've given us an end. Data can change, but for now we have an end date for a stay at home. And so certainly in that circumstance, ah, financial institution can. It can incorporate the the governor or the in our case, State County judges and issue across their institution that kind of, AH single document that records it or in other circumstances, they could record notes on each consumer account. I guess the point. We're always trying to emphasize it, you know, communicate a lot. Make sure consumers appreciate the value of what you're giving them if you give them a forgiveness or there's a if there's a temporary cessation of aggressive collections and communicate that let them know so that they'll appreciate that and know that they'll be able to recognize that the financial institution not not only did not harm but in his in reality assisted families center in crisis. And if I use an example of a real example, I had a conversation with a client, and they said they had made phone calls to their consumers because they wanted to make sure that they knew what was going on. Consumers who normally had deposits weren't thinking, weren't seeing the same deposits. And one of their consumers that got called said, Oh, my brother in law is gonna send me X amount of dollars. Don't worry about me. I'll be fine. Help another family. It was that kind of communication that allows our clients really model, that that's kind of financial, institution service and even now, this difficult time.

spk_0:   11:10
Excellent. All right, so let's talk a little about some action items, and what do you believe are some of the current? Actually, that's our banks and credit unions should have on top of mind right now as the funds are coming into the account. As you

spk_1:   11:24
likely know, um, some of the country's largest banks said that they are making adjustments to ensure stimulus funds are received in full and can be used so that they're not offset by some of the negative balances. For example, there been reports that Wells Fargo, Bank of America, Citigroup and Shave will temporarily stop collecting on the negative balances so that customers will have full access. I know that there other regional in national banks, for example, I think there's been reports that U S A, um will provide temporary credit in some cases retro actively on a case by case basis, um, and waving some of the overdraft fees as well as, um as providing a credit for for whatever amount that they, uh, to cover the negative balance. So those are some of the things that I know, Um, some, uh, banks are considering in credit union. Other things that I know are our top of line is really looking again on a case by case basis for understanding water than need, um, to address essential items that individuals may need at this time. And so, as Cheryl suggested, it may be having Ah ah, customer service number and maybe where folks can call in. And how about some of the needs that they have? It may be outreach. Um, there are, uh, banks that are considering, um, having these kind of proactive, um, programs that automatically will allow for the come full access to the funds. Um, there others that are looking at this on a more reactive basis so that folks can call in in express concern. Um, And then, as I mentioned there, there are some institutions that are providing this temporary credit.

spk_2:   13:50
Some Dame FAA clients. What we've seen is a communication emphasis to all account holders, not just those that are low balance or that Aaron overdrawn status, but instead continuing to have communication around. You know, Covic resource is as well as additional opportunities for consumers to, you know, all of the services that the financial institution provides and then justice, Abrio said, having a way to reach directly into the households where consumers are over trying to again express resources, communicate make sure that consumers feel comfortable talking to the financial institution. Most financial institutions don't have branches open anymore. So much is being done remotely. And so what we see is that that's a wonderful opportunity for especially are small and midsize financial institutions to have regular communication through podcasts through webinars, through opportunities for them to interact with their consumers. And since so many people are at home, it affords it again. That opportunity, heart of what we're saying is you know, continue to be, you know, to communicate outward and to be available to respond to consumers with their with their needs as they come in. I've seen a lot of the kind of altruistic activity of a lot of our clients because they're already aggressively doing things to support the medical community and their kids in their in their region or the first responders on. And that's the kind of again example that we love to see among the institution client. But they're not just sitting in the office waiting on something to happen there, actually reaching out and trying to assist and again from a from A You know how you make sure the consumers are OK. You make sure by checking with him by talking with that and by making options available to them better, more managed, that help to manage the circumstances that they find themselves van Great.

spk_0:   15:53
I mean, I think what's most important is what we're hearing is take care of your account holders. I think you guys could agree on that, Um, the ones right for your account holders? Absolutely. So you know something else that I was thinking about, that I wanted to talk to you about today was what should financial institutions take into consideration when it comes to the account holder based and those who might be depending on those funds to come in? You know, what do you think

spk_2:   16:21
we kind of talked around a lot of at, And I think that one of the perhaps most important things is that we evaluate. Um, I wish I wish I wish we had a crystal ball. I could see when it will end, but I know that for many, many families, March was their first months to not have perhaps full income. We're now halfway through them on the Babel, and it is, at least in my county, not expected to be over before, sometime in late May at the earliest. But of course, there's a lot going on across the country and its variable state by state, and so I think that the opportunity to realize that one this is a small stimulus $1200 is not a lot of money and for a lot of families that regular income would exceed that. And so the announce of money they're coming in from the stimulus will barely cover many households need. I think that it's important that financial institutions remember that we're here to help our account holders and whatever that looks like. So Justice agree mentioned there may be some small credit services that get created at this time to assist families. Certainly there's some opportunity for forgiveness or reduction in collection activity again to assist families. I think that if long as from a regulatory perspective, from an examiner perspective and from a kind of a, you know, reputational risk respected, the goal is always going to be the same. How do we help our household? And what can we do to make their lives not more difficult during a difficult time? And I think that that essential to the conversation that we always want to have with our financial institution clients, because that is what they are having with themselves. And that is, how do we help the families that we serve?

spk_0:   18:11
Absolutely. Thank you so much for that, Cheryl. All right, well, I wanted to give you an opportunity just to express any last thoughts. Um, Cheryl abrio Any final thoughts coming? I think in

spk_1:   18:24
terms of final thought here, it's, you know, as Cheryl suggested. It's really looking at your customer base in in balancing. You know what the needs are of customers are at this time, and that is looking at the policy for modifying some of the collection of overdrawn accounts for a period of time in balancing that with, you know, the banks owned safety and soundness in and and what they need for their you know, your own viability. Um, and I think that's important. And part of that is is really understanding your customers needs and, um, having some outreach. I think that's really important during this time.

spk_2:   19:16
There's probably no way to ensure that, um, you know the stimulus is going to be sufficient for every household or that financial institutions Consol problems. But I think that the marriage of making those dollars available and considering the needs of our consumer accounts allows the financial institution to really perform that partner role with consumers that we so definitely desperately want to do so again. Their technology elements to receiving those dollars in making sure that those dollars are afforded to consumers as much as possible, but at the same time remembering that there's a small it's a small number, their needs are almost certainly going to be greater. What are the resource is? Can the financial institution in able consumers to realize help them through this time? And if it means we, you know so masks or we, you know, serve food to people. I think all financial institution leaders and staff are prepared and eager to support their communities as we go through this together. Wonderful.

spk_0:   20:30
Well, thank you both for being with me today, Cheryl in Umbria. I greatly appreciate your time and and discussion. This is excellent and I will toward to our next conversation for our clients listening today. If you have any additional questions, are looking for additional guidance. Please reach out to your relationship manager or complete the form below.