The shutdown's impact on financial services

The government shutdown is now the longest in American history, officially hitting that mark over the weekend. Though only a partial shutdown, it is having an outsize impact on banks, credit unions and mortgage lenders across the country. Some of these have been mitigated due to actions by the Trump administration, while others continue largely unaddressed.

With President Trump refusing to end the shutdown until Democrats agree to fund a wall on the southern border, it is unclear when the shutdown will end. Some predict Trump may eventually give up and instead seek to invoke emergency powers to build the wall, a strategy that carries significant legal risk. Others argue the president will keep the shutdown in place in the hopes pressure builds on Democrats to make a deal.

Following is a look at where financial services are most affected.

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IRS income verification
The government shutdown, which began on Dec. 22, has already caused a backlog of mortgage applications and was threatening to do even worse.

Some lenders had become wary of closing loans without IRS documentation known as Form 4506-T, which provides official income verification and tax return transcripts. The form was unavailable with the government closed. But after mortgage officials began lobbying the Treasury Department on the issue, the Trump administration opted to declare personnel who deal with the form as "essential," thus allowing them to return to work, according to a story that The Washington Post broke late last week.

Though the Post story couched it as the administration doing a favor for a powerful lobby, it may be as much about self-preservation as helping the industry itself. Without access to the form, the mortgage market was in danger of grinding to a standstill, a prospect that would worsen the economic damage from the shutdown. With most polls showing that Americans blame Trump, not Democrats, for the shutdown, the administration was highly motivated to find a way around the issue.
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Broader mortgage impact
The Federal Housing Administration has continued to process government-backed loans during the shutdown, but since only a fraction of the mortgage insurance agency is at work, a paperwork backlog has built up and is expected to grow as the shutdown goes on.

The FHA has also stopped assisting financial institutions in underwriting loans. That move mostly doesn't hurt larger lenders that use the FHA's automated underwriting system, but it is potentially causing delays for smaller banks, credit unions and other lenders.

House Financial Services Committee Chairwoman Maxine Waters, D-Calif., has warned that worse is yet to come, noting that 95% of Department of Housing and Urban Development employees are on furlough. She noted other areas beyond the FHA that could be affected, including those that rely on HUD's rental assistance programs.
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SBA lending grinds to a halt
The shutdown is eroding confidence in the Small Business Administration as it is unable to process and approve loan applications, creating a backlog that is pushing small businesses to costlier alternative financing.

“Depending on how long the shutdown is in effect, we could see some negative impact to the program and economy,” said Miguel Maldonado, senior vice president at the $9 billion-asset Randolph-Brooks Federal Credit Union in Live Oak, Texas. “The delay ... can affect small businesses and their ability to operate, or even get off the ground.”

The longer the shutdown drags out, the worse the impact is liable to be, according to financial services executives.

Alternative lenders, meanwhile, have tried to fill the void, positioning themselves as able to help while banks and credit unions cannot.
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Flood insurance
After protest from lawmakers and the mortgage industry, the Federal Emergency Management Agency has resumed selling and renewing flood insurance policies during the shutdown.

The turnabout came after earlier guidance that said FEMA would suspend sales as a result of a lapse in funding.

The agency faced backlash from Waters and industry groups because Congress had voted in December to extend the National Flood Insurance Program through May 31, 2019.
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Banks, credit union cut rates
Banks and credit unions across the country are waiving fees and offering low- to no-interest loans to help federal workers affected by the partial government shutdown.

U.S. Bancorp on Friday began offering loans of $100 to $6,000 at low rates to qualified federal employees who have an existing U.S. Bank account so they can cover expenses until they return to work.

Many other large and regional banks have taken similar steps. Citigroup, for example, will make adjustments to fees and interest rates to affected customers across several lines of business, a company spokesman said. Bank of America said late Friday that it had contacted its customers who are affected by the shutdown to let them know about the bank's assistance programs.

The five federal banking regulators issued a joint statement on Friday encouraging banks and credit unions to assist customers in these ways. The agencies said that assistance offered to workers “should not be subject to examiner criticism.”
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Impact on federal employees
Among the hardest hit are federal employees, many of whom are either furloughed and not being paid or forced to work without pay.

For those 800,000 or so employees, not including government contractors, many will miss their ability to pay mortgage or rent payments. Zillow estimated $249 million in lost residential mortgage payments, and further noted that many employees will be scared off from buying new homes or moving.

For now, many lenders are treating the shutdown as if it were a natural disaster.
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Stress for ag lenders
The shutdown is restricting cash flow to farmers by putting a halt to grant and loan applications and certain subsidies. Background checks for potential hemp farms and crop reports are also on hold.

That's unwelcome news for agricultural lenders that have already been keeping a close eye on commodities prices.
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Overall economic impact?
One thing is clear: The longer the shutdown goes on, the bigger overall economic impact it's going to have.

S&P has said that if it lasts two more weeks, it will cost the economy roughly $6 billion, more than the $5.7 billion in funding Trump wants to start building the wall.

There are also fears, however, that a prolonged shutdown will depress stock prices, hurt consumer confidence and possibly even start a recession. Retailers, too, may feel pain, though it would be mild if the shutdown ends soon. But with no end to the shutdown in sight, it's hard to predict what the full toll will be.