An Approaching Crisis in Consumer Lending

The past year’s been tumultuous for consumer loans – while almost every sector of the economy has been impacted in some way, federal moratoria on foreclosures and evictions in combination with mortgage forbearances have put a huge piece of consumer loan servicing on an indefinite hold, as deadlines have shifted from initial positions at the end of February to the end of June, and will likely be extended again through at least the end of September.

“That’s had a huge impact on mortgage servicing issues, huge impacts on default servicing,” said Patrick Kennedy, Senior Counsel with the National Consumer Financials Services Litigation-Practice group at Seyfarth Shaw LLP. “What COVID has done, and the legislation from it has done, is allow borrowers to put off their mortgage payments for months, and months, and months, and not allowed the owner of the loan to pursue remedies because of the default situation.”

What these forbearances haven’t done is offer any kind of payment relief – foreclosures may have been put on pause, but it’s no get-out-of-your-loan-free card.  Monthly statement balances and interest have continued to accrue, with no remedy for banks as balances grow ever-farther out of reach for pandemic-affected borrowers, and that’s a situation that ultimately serves neither side of the equation.

“We think that once the foreclosure moratoria come to an end, there’s going to be a huge number of loans in default,” Kennedy said.  “That’s going to result in a very large number of foreclosures, servicing disputes, and litigation over servicing disputes due to the delayed access to foreclosure remedies.”

Congress has noticed this crisis, however, and has made some moves to address the issue – a $25 billion federal rental assistance fund from the December 2020 aid package passed under the Trump administration has begun disbursement to some of the estimated 14 million Americans behind on their rent, and the new bill currently being debated in the Senate following a late Friday night passage through the House allocates $19 billion into housing assistance programs, and a further near-$10 billion for homeowners with outstanding mortgage payments.

The direct stimulus payments also in the bill could also make a dent in consumer debt; some 35% of the initial stimulus payment from the summer of 2020 were put directly into debt servicing.

But ultimately, the longer the pandemic crisis and economic issues surrounding it continue, the more these issues will continue to compound.  It seems increasingly certain that once life starts to return to normal in the United States, the foreclosure crisis will be there waiting to take center stage.

— Jessica Purdy