The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) included several provisions affecting financial institutions.
Debt Guaranty Authority
(Applicable to Insured Depository Institutions)
The CARES Act amended provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to allow the FDIC to provide increased amounts of insurance for checking or other transaction-based accounts that do not bear interest.(This authorization is similar to the account guarantee program implemented during the 2008 financial crisis, except that the 2008 authorization allowed the FDIC to provide an unlimited amount of insurance.)
The provisions of the CARES Act require the FDIC to place a maximum cap on the amount of insurance it can provide under these amended provisions. The Act further allows the Board of the National Credit Union Administration (NCUA) to increase to unlimited, or a lower amount the NCUA Board approves, the share insurance coverage provided by the National Credit Union Share Insurance Fund on any non-interest bearing transaction account in any federally insured credit union without exception. Both the FDIC and NCUA authorizations must terminate by December 31, 2020.
Temporary Lending Limit Waiver
(Applicable to National Banks)
The Office of the Comptroller of the Currency (OCC) is authorized to allow national banks to exceed their legal lending limit for one or more loans to a borrower who is a nonbank financial institution. The OCC is further authorized to exempt a transaction or series of transactions from the legal lending limit if it determines it to be in the public interest. These provisions are effective until (a) the termination date of the national emergency concerning the COVID–19 outbreak declared by President Trump on March 13, 2020, under the National Emergencies Act; or (b) December 31, 2020, whichever is sooner.
Temporary Relief Provisions for Community Banks
(Applicable to Community Banks)
For community banking institutions, the CARES Act lowers the Community Bank Leverage Ratio (CBLR) to 8%. It also permits community banks who fall below that ratio to have a “reasonable grace period” (to be established by regulation) to satisfy the CBLR. During this grace period, the community bank will continue to be considered a qualifying community bank and shall be presumed to satisfy its capital and leverage requirements.
The relief provisions of this section of the Act are effective until the ending on the sooner of (a) the termination date of the national emergency concerning the COVID–19 outbreak declared by the President; or (b) December 31, 2020.
Temporary Relief from Troubled Debt Restructurings
(Applicable to All Financial Institutions).
The Act also contains provisions allowing the suspension of the accounting treatment for troubled debt restructurings resulting from the effects of the Coronavirus pandemic.
During the period beginning on March 1, 2020, and ending on the earlier of (i) December 31, 2020, or (ii) the date that is 60 days after the termination date of the national emergency concerning the COVID–19 outbreak declared by the president, a financial institution (including credit unions) may elect to:
(A) Suspend the requirements under the United States generally accepted accounting principles (GAAP) for loan modifications related to the Coronavirus pandemic, that would otherwise be categorized as a troubled debt restructuring; and
(B) Suspend any determination of a loan modified as a result of the effects of the Coronavirus pandemic as being a troubled debt restructuring, including impairment for accounting purposes.
Any suspension of the GAAP requirements described in (A) above:
- Shall be applicable for the term of the loan modification, but solely with respect to any modification (including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest), that occurs during the period for which the suspension is allowed under the Act for a loan that was not more than 30 days past due as of December 31, 2019; and
- Shall not apply to any adverse impact on the credit of a borrower that is not related to the Coronavirus pandemic.
This section of the Act requires the applicable financial institution regulators (the FDIC or NCUA) to defer to the financial institution in making the determination to elect the suspension allowed under this section.
Finally, for modified loans for which a suspension is applied, financial institutions should continue to maintain records of the volume of loans involved. Regulators may collect data about such loans for supervisory purposes.
Optional Temporary Relief from Current Expected Credit Losses
(Applicable to Insured Depository Institutions and Bank Holding Companies)
The CARES Act includes additional optional accounting relief by allowing insured depository institutions (including credit unions), bank holding companies, and their affiliates to determine whether to comply with the Financial Accounting Standards Board (FASB) Accounting Standards Update No. 2016–13 (“Measurement of Credit Losses on Financial Instruments”). This update includes the current expected credit losses (CECL) methodology for estimating allowances for credit losses, during the period beginning on March 27, 2020, and ending on the earlier of the termination date of the COVID-19 national emergency declaration or December 31, 2020.
Temporary Credit Union Provisions
(Applicable to Credit Unions)
Through December 31, 2020, the CARES Act temporarily allows credit unions to have broader access to the National Credit Union Central Liquidity Facility by allowing all credit unions, and not just those serving “natural persons,” to access the Facility and by making a broader class of credits unions eligible for assistance from the National Credit Union Central Liquidity Facility.
Credit Protection During COVID-19
(Applicable to All Financial Institutions and Others)
This section of the Act requires a financial institution or other person who agrees to an “accommodation” on an account of a consumer impacted by COVID-19, and who furnishes information to a credit reporting agencies with respect to that consumer, report the account as “current” or as the same status as before the “accommodation.”
An “accommodation” includes an agreement to defer one or more payments, make a partial payment, forbear any delinquent amounts, modify a loan or contract, or any other assistance or relief granted to a consumer who is affected by the Coronavirus pandemic. This credit protection is available during the period beginning January 31, 2020, and ending 120 days after March 27, 2020, or 120 days after the termination date of the COVID-19 national emergency, whichever is later.
Federally-Backed Mortgage Foreclosure Moratorium and Consumer Right to Request Forbearance
(Applicable to Federally-Backed Mortgage Loans)
Except with respect to a vacant or abandoned property, for a period of not less than 60 days after March 18, 2020, a servicer of a federally-backed mortgage loan may not initiate any judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale.
In addition, a borrower with a federally-backed mortgage loan who is experiencing financial hardship due directly or indirectly to the COVID–19 emergency may request up to a 180-day forbearance (which may be extended for up to an additional 180 days at the request of the borrower) on the federally-backed mortgage loan. This request may be made regardless of delinquency status by submitting a request to the borrower’s servicer and affirming that the borrower is experiencing financial hardship during the COVID–19 emergency.
Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally-Backed Loans
(Applicable to Federally-Backed Mortgage Loans)
A multifamily borrower with a federally-backed multifamily mortgage loan that was current on its payments as of February 1, 2020, may submit an oral or written request for forbearance to the borrower’s servicer affirming that the multifamily borrower is experiencing financial hardship during the COVID–19 emergency.
Upon receiving such a request, the servicer must document the financial hardship, provide the forbearance for up to 30 days, and extend the forbearance for up to two additional 30 day periods upon the request of the borrower. The borrower’s request for an extension must be made at least 15 days prior to the end of the original 30-day forbearance period and before the termination date of the COVID-19 national emergency declaration and (b) December 31, 2020, whichever is sooner. The multifamily borrower has the option to discontinue the forbearance at any time.
Participation in SBA Loan Programs under the CARES Act
(Applicable to SBA Lenders)
Financial institutions should evaluate the features of and eligibility and ability to participate in, provide, and administer loans under the Small Business Administration’s (SBA) new Paycheck Protection Program” under the SBA’s Section 7(a) Loan program, and the expanded eligibility for Economic Injury Disaster Loans (EIDL).
(See our alert on Lender considerations for the SBA and PPP loan programs.)
Lenders should also note the CARES Act requirement for the SBA to pay principal, interest, and any associated fees that are owed on existing section 7(a) loans, section 504 loans, or microloan products, for a six month period starting on the next payment due date.
Loans, other than loans under the Paycheck Protection Program, on deferment will also receive six months of payment by the SBA, as will loans made up to six months after enactment. Lenders are encouraged to provide further payment deferments and maturity extensions when appropriate.
Manage the Overall Impact of the Coronavirus
(Applicable to All Financial Institutions)
Finally, in addition to the changes resulting from the CARES Act and other COVID-19 legislation, financial institutions should monitor and manage the effects of the COVID-19 outbreak on their businesses and assets. In addition to addressing issues common to most businesses due to the crisis, (See A Summary of Legal Issues for Businesses), financial institutions should:
- Monitor collateral for impairments, as well as making sure all related filings and documents have been made or received;
- Monitor the occurrence or possibility of defaults on existing lines of credit before draw requests are satisfied; and
- Properly document all waivers, consents, and forbearances.
The Woods Rogers Banking & Financial Services team is ready to help you guide your institution through these difficult times. Please contact us with your questions and concerns.