Recognizing the critical role that banks and other financial institutions play in providing capital and liquidity to American businesses and consumers, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the economic stimulus legislation designed to provide emergency assistance to individuals, families and businesses affected by the COVID-19 pandemic, provides for the following:
- Expanded SBA lending through the Paycheck Protection Program, with banks as a primary delivery channel;
- Temporary relief from troubled debt restructurings (TDRs);
- Delay in compliance with the current expected credit losses methodology for estimating allowances for credit losses (CECL);
- Temporary reduction of the Community Bank Leverage Ratio;
- Revival of the Bank Debt Guarantee Program;
- Removal of limits on national bank lending to nonbank financial firms; and
- Support for liquidity programs established by the Treasury Department and the Federal Reserve, with banks as potential lenders and servicers under these programs.
These and other provisions of the CARES Act that directly and indirectly benefit depository institutions are discussed in more detail below.
Expanded SBA Lending – Paycheck Protection Program
The CARES Act appropriates $349 billion for “paycheck protection loans” through the U.S. Small Business Administration’s (SBA) 7(a) Loan Guaranty Program and $10 billion in economic injury disaster loan grants. Paycheck protection loans are designed to fund payroll costs, interest on mortgage payments, rent obligations, and utilities, and will be made by banks, credit unions, and other lenders. Paycheck protection loans will be 100% guaranteed by SBA. Eligibility criteria, timing, loan terms and other details are discussed in more detail in the Goodwin client alert discussing the program. The SBA is required to issue rules within 15 days of the CARES Act’s enactment, which rules are expected to further clarify process and eligibility requirements.
Demand for paycheck protection loans is expected to be significant. Borrowers and lenders may wish to begin the paycheck protection loan application and guarantee process as soon as possible as there is no guarantee that Congress or the SBA will expand the program once the SBA guarantees hit the $349 billion limit.
Provisions Benefitting Depository Institutions Directly
Temporary Relief from Troubled Debt Restructurings. Under Section 4013 of the CARES Act, during the period beginning on March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the national emergency concerning the COVID–19 outbreak declared by the President on March 13, 2020 under the National Emergencies Act (the National Emergency), a financial institution may elect to suspend the requirements under U.S. GAAP and federal banking regulations for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR, including impairment accounting. This TDR relief is 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 applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The relief provided by Section 4013 does not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic. The applicable federal banking agency must defer to any such election made by a depository institution. Financial institutions are required to maintain records of the volume of loans modified pursuant to Section 4013 of the CARES Act and the financial institution’s applicable federal banking agency may collect data about such loans for supervisory purposes.
This provision would expand the relief provided by the Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), National Credit Union Administration, Consumer Financial Protection Bureau and Conference of State Bank Supervisors set forth in the March 22, 2020 Interagency Statement on Loan Modifications and Reporting by Financial Institutions Working with Customers Affected by the Coronavirus, which provided that the federal and state banking agencies would not direct supervised financial institutions to automatically categorize all COVID-19 related loan modifications as TDRs and stated that loans subject to good faith, short-term modifications made in response to COVID-19, that were current prior to such relief, are not TDRs. Whereas the regulatory relief provided by the interagency statement clarified that certain modifications would not be considered to be TDRs, the CARES Act provides relief to financial institution lenders for loan modifications that would be considered to be TDRs, thereby incentivizing lenders to engage with borrowers about loan modifications and providing additional flexibility for lenders to modify loans without triggering TDR accounting treatment.
CECL Delay. Section 4014 of the CARES Act provides that banks, savings associations, credit unions, bank holding companies and their affiliates are not required to comply with Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses (CECL), from the date of the law’s enactment until the earlier of the end of the National Emergency or December 31, 2020. Large publicly-traded banks had to start complying with CECL on January 1, 2020, which would have required such banks to apply CECL during the first quarter of this year and include its impact in their first quarter earnings. The CARES Act delays CECL implementation for these banks. On the heels of this delay, on March 27, 2020, the Federal Reserve, FDIC and OCC issued an interim final rule that allows banking organizations that are required to adopt CECL this year to mitigate the estimated cumulative regulatory capital effects for up to two years. The relief afforded by the CARES Act and interim final rule are in addition to the three-year transition period already in place.
Temporary Reduction of the Community Bank Leverage Ratio. Under a final rule adopted in the fall of 2019, as required by Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act, a qualifying community banking organization (generally a banking organization with under $10 billion in consolidated assets and limited trading assets and off-balance sheet exposures) that opts into the Community Bank Leverage Ratio framework and maintains a leverage ratio of greater than 9% will be considered to have met the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules; the well-capitalized ratio requirements in the agencies’ prompt corrective action regulations; and any other capital or leverage requirements. Section 4012 of the CARES Act reduces the Community Bank Leverage Ratio from 9% to 8% until the earlier of the end of the National Emergency or December 31, 2020.
Revival of Bank Debt Guarantee Program. Section 4008 of the CARES Act amends Section 1105 of the Dodd-Frank Act to provide the FDIC with the authority to guarantee bank-issued debt and noninterest-bearing transaction accounts that exceed the FDIC's $250,000 limit through December 31, 2020. This provision grants the FDIC with the authority to revive the financial crisis-era program that provided a temporary guarantee on all noninterest transaction accounts. The FDIC will determine whether and how to exercise this authority.
Removal of Limits on National Bank Lending to Nonbank Financial Firms. Section 4011 of the CARES Act authorizes the Comptroller of the Currency, from the date of enactment of the CARES Act to the earlier of the end of the National Emergency or December 31, 2020, to exempt, by order, any transaction or series of transactions from limits on loans or other extensions of credit, commonly referred to as “loan-to-one borrower” limits, to nonbank financial companies upon a finding by the Comptroller that such exemption is in the public interest.
Provisions Relating to Mortgage Forbearance and Credit Reporting
The CARES Act codifies in part guidance issued over the past two weeks by state and federal regulators and government-sponsored enterprises, including the suspension for 60 days of foreclosures on federally-backed mortgages and that servicers must grant forbearances to borrowers affected by COVID-19 (see the client alert issued by Goodwin’s Consumer Financial Services practice).
Foreclosure Moratorium and Consumer Right to Forbearance on One-to Four-Family Mortgages. Section 4022 of the CARES Act sets forbearance requirements and terms for loans insured or guaranteed by a federal government agency or purchased or securitized by Fannie Mae or Freddie Mac (Federally-Backed Mortgage Loans) during the period beginning on January 21, 2020 and ending on the later of 120 days after enactment of the CARES Act or the end of the National Emergency (the Covered Period). The law requires companies servicing Federally-Backed Mortgage Loans to grant up to 180 days of forbearance to borrowers who request and make an affirmation of financial hardship due to COVID-19. Servicers are not required to document the borrower’s hardship. The initial 180-day forbearance period must be extended up to an additional 180 days at borrower’s request. During this forbearance period, servicers of Federally-Backed Mortgage Loans may not assess fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract. The law also imposes a foreclosure moratorium on Federally-Backed Mortgage Loans of at least 60 days beginning on March 18, 2020.
Right to Forbearance on Multi-Family Mortgages. Section 4023 of the CARES Act permits a multifamily borrower (5+ units) with a federally-backed multifamily mortgage loan that was current on its payments as of February 1, 2020 to, during the Covered Period, request forbearance for a 30-day period, with up to two 30-day extensions. Servicers are required to document borrower’s hardship. In order to qualify for the forbearance, borrowers must provide tenant protections, including prohibitions on evictions for non-payment or late payment fees.
Moratorium on Negative Credit Reporting. Section 4021 of the CARES Act adds a new section to the end of Section 623(a)(1) of the Fair Credit Reporting Act requiring any “furnisher” that agrees to defer payments, forbear on any delinquent credit or account, or provide any other relief to consumers affected by the COVID-19 pandemic (each an accommodation) during the Covered Period to:
- report the credit obligation or account as current if the credit obligation or account was current before the accommodation;
- except if the credit obligation or account is charged-off, if the credit obligation or account was delinquent before the accommodation:
- maintain the delinquent status during the period in which the accommodation is in effect; and
- report the credit obligation or account as current if the consumer brings the credit obligation or account current during the Covered Period.
Support For Liquidity Programs Established by the Treasury Department and the Federal Reserve
Section 4003 of the CARES Act appropriates $500 billion for a government-backed lending package, including $25 billion for passenger air carriers, $4 billion for cargo air carriers, and $17 billion for businesses critical to national security. Of this $500 billion, $454 billion is allocated to support loans, loan guarantees, and investments in support of funding facilities established by the Federal Reserve pursuant to its emergency powers under Section 13(3) of the Federal Reserve Act. The funding facilities announced to date include:
- Loans and bond financing to U.S. companies with investment grade debt ratings through the Primary Market Corporate Credit Facility (PMCCF).
- Secondary market purchases of bonds issued by U.S. companies with investment-grade debt ratings though the Secondary Market Corporate Credit Facility (SMCCF).
- Loans to U.S. companies that are secured by asset-backed securities with underlying credit exposure to consumer and small business loans, including student loans, auto and credit card loans, equipment loans, loans guaranteed by the Small Business Administration, and certain other assets through the Term Asset-Backed Securities Loan Facility (TALF).
- Loans to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds through the Money Market Mutual Fund Liquidity Facility (MMLF) in order to assist money market funds in meeting demands for redemptions by households and other investors.
- Purchase by a special purpose vehicle of unsecured and asset-backed commercial paper rated A1/P1 directly from eligible companies through the Commercial Paper Funding Facility (CPFF).
- A yet to be detailed Main Street Business Lending Program to support lending to eligible small- and medium-sized businesses.
Businesses accepting assistance pursuant to programs supported under the CARES Act may be required to agree not to make stock repurchases or pay dividends for a period of 12 months after the date on which the loan is repaid and agree to comply with the executive compensation provisions of Section 4004 of the CARES Act.
A portion of this $454 billion is allocated to providing financing to banks and other lenders that make direct loans to eligible businesses including, to the extent practicable, nonprofit organizations, with between 500 and 10,000 employees, with loans being subject to an annualized interest rate that is not higher than 2% per annum. For the first six months after any such loan is made, or for a longer period as the Secretary of the Treasury may determine in his discretion, no principal or interest shall be due and payable.
The CARES Act also allows the Treasury Department to designate depository institutions as “Financial Agents of the Secretary,” allowing banks to serve as servicers for these loans.
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