Consumer Compliance Outlook: Second Issue 2020

How Banks Can Help Customers and Communities Respond to Major Disasters and Emergencies

By Alinda Murphy, Senior Examiner, Federal Reserve Bank of Kansas City

“COVID-19 poses threats to our overall economy, particularly for low-income communities [that] were already struggling prior to this crisis. Banks are poised to provide key leadership during this time and can leverage their resources to reassure customers and stabilize communities.”
— Brina Shrimali, Federal Reserve Bank of San Francisco Community Development Research Briefs, April 7, 2020

“Community banks thrive when they find creative ways to serve their communities, using everything they know to build relationships, offer solutions, and make lending decisions.”
— Governor Michelle Bowman, Federal Reserve Board, February 10, 2020

“While natural disasters capture headlines and national attention short-term, the work of recovery and rebuilding is long-term.”
— Sylvia Mathews Burwell, former Secretary of Health and Human Services

MAJOR DISASTERS AND EMERGENCIES

Major disasters and emergencies can occur anytime and anywhere. While some crises provide advance notice, others happen suddenly. The ongoing, unprecedented COVID-19 pandemic, as well as several recent natural disasters such as Hurricanes Sandy, Harvey, Maria, and Michael; California wildfires; and the 2019 Midwest floods, highlight the vital role financial institutions play in helping their customers and communities weather and recover from substantial personal and financial impacts. Financial institutions are often key players during and after crises because their staff, customers, and communities may be directly impacted, and they can deploy resources to mitigate some of the resulting hardships.

The Federal Reserve issued guidance early in the COVID-19 emergency to encourage its supervised institutions¹ to help their customers and communities through the crisis. Supervision and Regulation (SR) Letter 20-4/Consumer Affairs (CA) Letter 20-3, “Supervisory Practices Regarding Financial Institutions Affected by Coronavirus,”² affirmed that the Federal Reserve’s long-standing guidance included within SR 13-6/CA 13-3, “Supervisory Practices Regarding Banking Organizations and Their Borrowers and Other Customers Affected by a Major Disaster or Emergency,” applies to the current crisis.³ This guidance lists several means by which institutions may facilitate meeting the immediate and long-term recovery and stabilization needs of their affected customers. This article discusses agency guidance on ways financial institutions can help their customers before, during, and after major disasters and emergencies.

Types of Crises Covered by the Guidance

Not all disasters and emergencies resulting in hardship are subject to SR 13-6/CA 13-3. This supervisory guidance applies when the President of the United States declares an event to be either a major disaster or an emergency, as those terms are defined in the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. §5121, et seq. (the act).

The act defines a major disaster as

any natural catastrophe (including any hurricane, tornado, storm, high water, winddriven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought), or, regardless of cause, any fire, flood, or explosion, in any part of the United States, which in the determination of the President causes damage of sufficient severity and magnitude to warrant major disaster assistance under this Act.⁴

The act defines emergency⁵ as a determination by the President that “[f]ederal assistance is needed to supplement State and local efforts and capabilities to save lives and to protect property and public health and safety, or to lessen or avert the threat of a catastrophe in any part of the United States.”⁶ The COVID-19 pandemic meets this definition of emergency, and the President issued a proclamation on March 13, 2020, declaring “that the COVID-19 outbreak in the United States constitutes a national emergency, beginning March 1, 2020.”⁷ The Federal Emergency Management Agency (FEMA) maintains a searchable list on its website of all natural disaster and emergency declarations; financial institutions can visit the site to determine if an event is subject to SR 13-6/CA 13-3.⁸

Preparing to Assist Customers Before a Crisis

Helping customers through natural disasters and emergencies begins with the board of directors and senior management developing business continuity plans (BCP) to respond to crises that may occur. BCPs identify and manage the adverse effects that crises may have on the institution and its customers. SR 20-3/CA 20-2, “Interagency Statement on Pandemic Planning,”⁹ indicates an effective pandemic contingency framework includes plans for communicating with and serving customers, including anticipating how to serve customers when access to institution facilities must be curtailed. It recommends planning and preparing for potential reliance on online banking, telephone banking, automated teller machines (ATMs), and call support services to enhance responsiveness to customer needs and if onsite services become unavailable.

Institutions can proactively enhance customers’ resilience to some types of major disasters before they occur. For example, flooding is the most common natural disaster.¹⁰ The recent Outlook article “A View from the Field: Commonly Cited Violations”¹¹ discusses common flood insurance violations and sound practices to mitigate risks. Institutions can help protect their mortgage and commercial loan customers by maintaining a sound flood insurance compliance program to ensure that borrowers obtaining loans secured by real property located in a special flood hazard area (SFHA) maintain the required amount offlood insurance.¹² Institutions may also explain that flood insurance required under federal law is subject to limits.¹³ If borrowers are insuring properties whose value exceeds the maximum amount of flood insurance available under the law, they may want to consider private flood insurance to fully protect their properties from the risk of flood damage.

In addition, financial institutions can help customers be better prepared for a crisis and have a smoother recovery if one occurs by providing information to consumer and business customers. Useful information may include explaining how to develop crisis preparation and recovery plans, obtain deposited funds, communicate with institution staff during a crisis, and recognize natural disaster scams.¹⁴

Assistance During and Immediately After a Crisis

During a natural disaster, such as a major flood, financial institutions may focus on maintaining staff communications and infrastructure. Similarly, during federal emergencies, such as COVID-19, institutions may have heightened customer service and community communications challenges that continue over an extended time period, as well as staff communications and infrastructure concerns. In either event, senior management may rely heavily on its BCP to address issues as they arise and effectively respond to customers.

Financial institutions may consider taking the specific actions listed in SR 13-6/CA 13-3 and CA 20-4, “CRA Consideration for Activities in Response to the Coronavirus,”¹⁵ or other activities appropriate to the crisis, to ensure customers have access to their deposited funds and can manage loan obligations. Having access to deposited funds helps customers address immediate liquidity needs and avoids frustrating income disruptions during and shortly after a crisis. Moreover, helping borrowers manage their loan obligations can ease cash-flow pressures and improve their capacity to service debt, which facilitates the financial institution’s ability to collect on the loans.¹⁶ SR 13-6/CA 13-3 and CA 20-4 include the caveat that the following actions to help customers should be implemented safely and soundly, with proper management controls and oversight:

Waiving ATM fees for customers and noncustomers;
Increasing ATM daily cash withdrawal limits;
Waiving overdraft fees;
Waiving early withdrawal penalties on time deposits;
Easing restrictions on cashing out-of-state and noncustomer checks;
Using nondocumentary (i.e., public databases, credit reporting agencies, and contacts with other financial institutions) as well as documentary verification methods to identify customers and noncustomers making transactions;
Increasing credit card limits for creditworthy customers;
Expanding the availability of other short-term, unsecured credit products for creditworthy borrowers;
Providing alternative service options to customers in light of limited ability to access branches;
Offering payment accommodations, such as allowing borrowers to defer or skip payments or extending the payment due date, which would avoid delinquencies and negative credit bureau reporting, caused by COVID-19-related issues; and
Offering small-dollar consumer and small business loans, including, but not limited to, open-end lines of credit, closed-end installment loans, and appropriately structured single payment loans for temporary cash-flow needs.

As the current emergency unfolds, Federal Reserve and interagency statements have encouraged institutions to originate prudent, small-dollar loans to consumers and small businesses and provide loan payment accommodations and modifications. Such actions may mitigate the immediate and long-term impacts of this emergency on customers.¹⁷ Agency statements indicate financial institutions working constructively with borrowers will not be subject to supervisory criticism.¹⁸

The agencies recognize the staffing and operational constraints financial institutions face and have also provided guidance on how institutions may comply with federal consumer protection laws and regulations in ways that ease compliance burden without harming customers. In this issue, we have provided a list of Federal Reserve resources that institutions may find useful in exploring assistance for customers. Existing and recently issued supervisory statements from the Consumer Financial Protection Bureau (Bureau) additionally provide guidance on compliance with certain regulatory requirements when an institution is affected by a natural disaster or emergency, including Regulation B’s loan application and valuation provisions.¹⁹ The Bureau’s supervisory statements also address the Real Estate Settlement Procedures Act’s loan servicing provisions²⁰ and the Fair Credit Reporting Act’s requirements for institutions that furnish information to consumer reporting agencies.²¹

Maintaining open communication channels during and immediately after a natural disaster or emergency will allow customers to be aware of temporary relocations and the availability of services. Some consumers may need help understanding and accessing alternative service options, such as mobile banking, or to communicate with institution staff regarding ongoing issues, such as pending loan applications. With regard to agency communications, for institutions supervised by the Federal Reserve, SR 13-6/CA 13-3 suggests the institution should advise the appropriate Federal Reserve Bank of any temporary changes when a major disaster or emergency may result in power, telecommunications, staffing, or other issues requiring the financial institution to limit or cease operations at its location(s) or move to other facilities.

Ongoing Strategies for Longer-Term Crisis Recovery Efforts

In the weeks and months after a major disaster or at the end of an emergency period, financial institutions have additional opportunities to facilitate customers’ and communities’ access to capital that will help them stabilize financially and rebuild infrastructure. In addition to these services that may be provided during and immediately after the crisis, SR 13-6/ CA 13-3 lists the following ways a financial institution may help longer-term recovery efforts:

Waiving availability restrictions of Regulation CC funds when insurance checks are deposited;
Easing credit terms for new loans;
Increasing credit card limits for creditworthy customers;
Waiving late fees for credit card and other loan balances;
Offering payment accommodations and prudent loan workout arrangements; and
Easing documentation requirements²² or credit extension terms for new loans.

Financial institutions may also help customers and communities by monitoring possible disaster-related scams and fraudulent activity that can undermine customer recovery efforts, including scams related to state or federal relief payments. Some relief scams are designed to steal recovery funds from recipients (i.e., identity theft and fraudulent contractors) or divert funds to individuals or businesses not harmed by the crisis, thus, depriving capital from the customers and communities most in need of assistance.

Customer complaints can support financial institutions’ monitoring of customer and community experiences during and after a natural disaster or emergency. Hearing customer pain points can inform senior management where customer communications need enhancement, identify gaps in customer service, and reveal opportunities to reposition resources.

CONCLUSION

Major disasters and emergencies impose severe hardships on financial institutions and their customers, but they eventually will end. Financial institutions position themselves for success in weathering crises by proactively helping customers and communities before, during, and after crises. This article discussed several ways institutions supervised by the Federal Reserve may address the immediate and longer-term needs of customers and communities facing major disasters or emergencies. It discussed ways institutions can help build the financial resilience of customers and communities prior to a natural disaster, including by ensuring that borrowers maintain adequate flood insurance. Although Federal Reserve guidance only addresses federally declared major natural disasters and emergencies, financial institutions may consider using these methods, as appropriate, to help customers in the wake of local and regional crises. Financial institutions should contact their primary regulators with specific questions about preparing for and responding to natural disasters or emergencies.

ENDNOTES

¹ The Federal Reserve is the primary federal regulator for state member banks, bank holding companies, savings and loan holding companies, and U.S. offices of foreign banking organizations, including those with $10 billion or less in consolidated assets.

² See SR 20-4/CA 20-3, “Supervisory Practices Regarding Financial Institutions Affected by Coronavirus,” March 13, 2020.

³ See SR 13-6/CA 13-3, “Supervisory Practices Regarding Banking Organizations and Their Borrowers and Other Customers Affected by a Major Disaster or Emergency,” March 29, 2018.

⁴ See 42 U.S.C. §5122(1).

⁵ See CA 20-4, “CRA Consideration for Activities in Response to the Coronavirus,” March 19, 2020.

⁶ See 42 U.S.C. §5122(2).

⁷ See 85 Fed. Reg. 15,337, March 18, 2020.

⁸ See FEMA, Disaster Declarations by Year.

⁹ See SR 20-3/CA 20-2, “Interagency Statement on Pandemic Planning,” March 10, 2020.

¹⁰ See “Flooding: America’s #1 Natural Hazard!” FEMA Release1530-027, August 16, 2004.

¹¹ See Kamilah Exum, “A View from the Field: Commonly Cited Violations,” Consumer Compliance Outlook, First Issue 2020.

¹² Generally, before a loan secured by improved real estate is made, increased, extended, or renewed, banks must determine whether the improved real estate is located in a SFHA. If the improved property is in a SFHA and the community in which the property is located participates in the National Flood Insurance Program, the institution must ensure adequate flood insurance is in place prior to loan closing. See Kenneth Benton and Michael Schiraldi, “Flood Insurance Compliance Requirements,” Consumer Compliance Outlook, Third/Fourth Quarter 2015; Blessing Chimwanda and Danielle Martinage, “Agencies Issue Final Rule for New Flood Insurance Requirements,” Consumer Compliance Outlook, Third/Fourth Quarter 2015; see CA 19-10, “Revised Interagency Examination Procedures for the Flood Disaster Protection Act,” August 22, 2019.

¹³ For residential properties, the current limit is $250,000 for the property and $100,000 for its contents. For commercial properties, the current limit is $500,000 for the property and $500,000 for its contents.

¹⁴ See, e.g., Federal Deposit Insurance Corporation’s “Natural Disaster Impact on Bank Operations: Advice for Consumers and Business Owners,” May 23, 2019; Consumer Financial Protection Bureau (Bureau)’s “Preparing, Recovering, and Rebuilding after Disasters and Emergencies.”

¹⁵ See CA 20-4, “CRA Consideration for Activities in Response to the Coronavirus,” March 19, 2020.

¹⁶ See CA 20-4, “CRA Consideration for Activities in Response to the Coronavirus,” March 19, 2020.

¹⁷ See SR 20-7/CA 20-5, “Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19,” March 30, 2020; “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” March 22, 2020.

¹⁸ See “Agencies Encourage Financial Institutions to Meet Financial Needs of Customers and Members Affected by Coronavirus,” March 9, 2020; “Agencies Issue Revised Interagency Statement on Loan Modifications by Financial Iinstitutions Working with Customers Affected by the Coronavirus,” April 7, 2020; and CA 20-4, “CRA Consideration for Activities in Response to the Coronavirus,” March 19, 2020.

¹⁹ See the Bureau’s “Statement on Supervisory Practices Regarding Financial Institutions and Consumers Affected by a Major Disaster or Emergency,” September 14, 2018; “The Bureau’s Mortgage Origination Rules FAQs Related to the COVID-19 Emergency: ECOA Valuations Rule,” April 29, 2020.

²⁰ See the “Joint Statement on Supervisory and Enforcement Practices Regarding the Mortgage Servicing Rules in Response to the COVID-19 Emergency and the CARES Act,” April 3, 2020.

²¹ See the Bureau’s “Statement on Supervisory and Enforcement Practices Regarding the Fair Credit Reporting Act and Regulation V in Light of the CARES Act,” April 1, 2020.

²² For the COVID-19 pandemic, there was interagency deferral of certain appraisal requirements for 120 days after loan closing. See “Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus,” April 14, 2020.