Conflicts Between the CARES Act Credit Reporting Requirements and the FCRA

I. Introduction

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted to provide relief to borrowers affected by the COVID-19 pandemic. Among its many provisions, the Act imposed temporary credit reporting obligations on mortgage servicers. However, the requirements of the CARES Act presented significant challenges for servicers, particularly when juxtaposed with pre-existing Fair Credit Reporting Act (FCRA) obligations. These challenges were compounded by servicers' system limitations and unclear regulatory guidance, which hindered the accurate and timely implementation of credit reporting under the CARES Act.

This memorandum outlines how the CARES Act's credit reporting provisions conflicted with the FCRA, why mortgage servicers struggled with system limitations, and the inadequacy of regulatory guidance provided to mitigate these issues.

II. Conflicts Between CARES Act Credit Reporting Requirements and the FCRA

The CARES Act amended the FCRA by adding a provision (Section 4021) that required servicers to continue reporting accounts as “current” if the borrower had requested forbearance or other relief due to COVID-19, provided that the account was current before the accommodation was granted. The intent was to protect borrowers from adverse credit reporting during the pandemic. However, this mandate conflicted with several key principles of the FCRA:

  1. Accuracy vs. Protection: The FCRA requires that servicers provide accurate and complete information to credit reporting agencies (CRAs). Traditionally, if a borrower misses payments, this would be reported as a delinquency. However, under the CARES Act, servicers were required to report such accounts as current, even when payments were missed due to forbearance. This created a tension between ensuring accuracy, as required by the FCRA, and providing consumer protections under the CARES Act. Servicers were left in a precarious position of balancing the integrity of their reporting systems with the legal requirements to misclassify certain accounts to protect borrowers.

  2. Inconsistencies in Reporting Methods: Prior to the CARES Act, servicers had standardized methods for reporting delinquencies and missed payments to CRAs, guided by FCRA requirements and industry codes such as those in the Metro 2 format. However, the CARES Act’s credit reporting provisions disrupted these standardized practices. Many servicers struggled to reconcile how they could accurately report the true payment status of accounts while complying with the CARES Act’s directive to show them as current.

III. System Limitations and Challenges Faced by Servicers

Servicers experienced significant operational difficulties in aligning their systems with the new CARES Act credit reporting requirements. Key challenges included:

  1. Legacy Systems and Reporting Infrastructure: Many servicers operate on legacy systems, which were not designed to handle the complexities of forbearance programs or the nuanced credit reporting obligations imposed by the CARES Act. These systems often lacked the flexibility to selectively report accounts as “current” while managing forbearance agreements and deferred payments. As a result, servicers faced considerable difficulties in modifying their systems to comply with the new requirements without disrupting their broader servicing operations.

  2. Automation Limitations: Servicers rely heavily on automated reporting systems to ensure accuracy and consistency in their data submissions to CRAs. However, the CARES Act imposed a new and unique reporting paradigm, requiring updates that these automated systems were ill-equipped to handle. Many servicers had to manually override automated processes, leading to a higher potential for human error, delays in reporting, and inconsistencies across the industry in how forbearance accounts were handled.

  3. Data Coding Confusion: The industry standard for credit reporting, Metro 2, lacked clarity on how to report accounts in forbearance while complying with the CARES Act. The Metro 2 format was not initially updated to reflect the CARES Act requirements, leading to confusion among servicers about which codes to use to report such accounts. This created further operational headaches for servicers already struggling with system limitations.

IV. Insufficient and Unclear Regulatory Guidance

A significant factor that exacerbated servicers' struggles was the lack of timely, clear, and actionable guidance from regulators. The CARES Act's credit reporting provisions were implemented rapidly in response to the pandemic, with limited time for servicers to adjust their practices. However, key regulatory bodies, including the Consumer Financial Protection Bureau (CFPB) and other oversight agencies, were slow to provide clear and detailed instructions on compliance.

  1. Delayed Guidance: While the CARES Act became law in March 2020, servicers did not receive meaningful guidance from the CFPB on how to properly report forbearance accommodations until several months later. By the time additional clarifications were provided, many servicers had already implemented ad hoc solutions, leading to inconsistent credit reporting across the industry.

  2. Ambiguity in Instructions: Even when guidance was issued, it was often vague, leaving servicers uncertain about how to comply. For instance, the CFPB’s FAQ document released in June 2020 did not fully resolve questions about how to manage accounts that transitioned between current, delinquent, and forbearance status during the pandemic. The lack of specific, detailed coding recommendations made it difficult for servicers to achieve consistent reporting practices across the industry.

  3. Absence of Harmonized Approaches: Different regulatory bodies, including the CFPB, Federal Housing Finance Agency (FHFA), and prudential regulators, did not fully harmonize their guidance. This fragmentation further complicated servicers’ efforts to remain compliant with the CARES Act’s credit reporting requirements while also meeting FCRA obligations. As a result, servicers were left without a coherent regulatory framework for ensuring compliance.

V. Conclusion

The credit reporting requirements under the CARES Act, while well-intentioned, created substantial challenges for mortgage servicers. These requirements conflicted with the FCRA’s mandate for accuracy, forcing servicers to report accounts as current when, in reality, payments were being deferred. Servicers were also hampered by system limitations, particularly in adjusting legacy and automated systems to meet the new reporting requirements. Furthermore, the lack of timely, clear, and cohesive guidance from regulators left servicers with operational uncertainties and increased the risk of inconsistent or inaccurate reporting.

Given these challenges, future legislative or regulatory interventions in credit reporting should prioritize providing sufficient lead time for servicers to update systems and clearer guidance to ensure compliance. Additionally, harmonization between federal agencies in issuing regulations would reduce confusion and improve compliance outcomes across the industry.

This argument illustrates the significant burden that servicers faced under the CARES Act, demonstrating that while the Act sought to protect consumers, it also inadvertently created compliance difficulties and exposed servicers to potential regulatory and operational risks.