The coronavirus (COVID-19) outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The situation is fast moving with wide impacts. We’ve prepared some general guidance on COVID-19: What US business leaders should know, covering areas such as crisis management, supply chain, financial reporting, tax and trade and workforce issues.
Here is our take on some additional issues that consumer lending institutions might face.
Most financial institutions already have business continuity plans, but those may not fully address the fast-moving and unknown variables of an outbreak like COVID-19. Typical contingency plans ensure operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and added travel restrictions that may occur in the case of a health emergency. Financial institutions face additional scrutiny due to potential reputational issues and regulatory requirements.
Both bank and non-bank lenders and servicers face some unique challenges at the moment:
As a financial institution, your response to these issues could be critical to future customer and employee relationships, and it could very well damage your public image if not handled well. Here are our thoughts on how you should be mobilizing now to care for your customers and your employees.
Specific segments of the population are finding themselves in increasingly vulnerable positions, and this has the potential to affect both lenders and servicers. Here are a few trends that are now center stage as we face the current situation.
The gig economy: More than a third (36%) of US workers participate in the gig economy, a term referring to hourly contractors such as Uber drivers, Instacart shoppers and Care.com workers who pick up work assignments through apps. These individuals receive 1099 forms and are classified for tax purposes as independent contractors.
Gig workers face a complicated situation at the moment. Demand for some services actually saw an immediate spike in early March as online food and grocery delivery orders started to climb. But, because of the nature of the work, these individuals have higher odds of being exposed to the virus and getting sick. This raises another issue: The vast majority of gig-economy workers don’t receive sick-leave benefits through the companies they work for. Uber, Lyft, Doordash and others are already discussing creating a fund for drivers who contract COVID-19. Uber announced that it will guarantee 14 days of paid sick leave for any driver who contracts COVID-19.
Many service industry workers will likely see shrinking paychecks. One in ten (10.6% or 16.3 million) Americans work in the hospitality and leisure industry. If travel bans and conference cancellations continue, these individuals will be some of the most affected economically. Of those, hourly and contract workers will be the hardest hit.
Many of these individuals already live without a comfortable emergency fund, so it won’t take long before consumer finance companies start getting requests for help. A study by the Federal Reserve found that four in ten Americans would have difficulty covering a $400 emergency expense. Credit card companies should prepare for delinquencies to climb quickly. Data released in December shows the delinquency rate for credit cards was 2.6%, compared to a rate of 6.8% in the second quarter of 2009, which was the height of the financial crisis.
Student loan debt: In 2009 total outstanding student loan debt in the United States was $772 billion. In late 2019, that amount had ballooned to more than $1.6 trillion. Today’s college graduates leave school with an average of $30,000 in student loan debt. That translates to monthly payments of $304 over ten years. When financial hardship hits home, individuals will likely find themselves deciding which bill will sit unpaid.
Since these trends will likely affect lenders and servicers differently, we’ll discuss them separately.
As a lender, you should address borrower concerns related to both new and in-progress loan applications. Customers are already asking: Can I close on my loan without going to a physical office? Do I really need an appraisal to get a refinance? What happens if my credit score changes between the time I’m preapproved and when my loan closes? Can I get a short-term loan until my income stabilizes? What happens if I need to postpone my closing due to a travel restriction or quarantine?
As a servicer, you should be prepared to address a range of issues as customers deal with financial uncertainty. Borrowers facing financial distress will want to know: Can I skip a loan payment? What special programs are in place and do I qualify? Do I qualify for student loans forbearance? What documentation do I need to show that I’m directly affected?
It’s important to ensure employee safety and security, and you should be looking for appropriate precautions and maintaining timely, consistent and transparent communications. Questions already being raised include: Can I work from home if my child’s school closes? Are temporary measures in place for employees who don’t normally work from home? What about employees essential to keeping physical operations running?
As a lender, you’ll want to make sure that customers can easily find the information they’re looking for, regardless of whether they’re thinking of applying for a loan, line of credit or credit card or whether they have already applied. Here’s what we suggest you do:
As a servicer, you will likely interact with customers who are facing financial struggles firsthand. It’s crucial to prepare your customer-service personnel to treat these borrowers with dignity and respect during this stressful time. Here’s what we suggest you do:
Start here for our recommendations on how to approach workplace issues. For lenders and servicers, here are some specific examples of areas to focus on:
The coronavirus outbreak is, hopefully, a once-in-a-century event. As an industry, we’re likely to learn a great deal from our response to this crisis. When we look back, we’re likely to see that we made remote work more accessible to a larger number of employees, made e-signature loans more efficient and customer friendly, and made a variety of other improvements that we didn’t foresee. We’ll also likely learn some hard lessons in areas where things didn’t go so well.
For now, however, it’s too early to think about the lessons we’ll learn. It’s crucial to let your customers and employees know that you are there for them and that you have plans to address their concerns and provide your services with as little interruption as possible.
Principal, Consumer Finance Group, PwC US
Principal, Consumer Finance Group, PwC US