Federal Government Response to COVID-19: Financial Institution Regulations and Available Measures
In an effort to address growing financial concerns related to the ongoing COVID-19 pandemic, the federal government is taking preliminary steps to address the existing and expected impact on businesses and business lending. The Federal Reserve System (the Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) collectively known as the Federal Bank Regulators, have issued recommendations and guidance to financial institutions to assist them in considering modification and similar accommodation requests from their customers negatively impacted by the COVID-19 pandemic.
This relief, including Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and certain aspects of regulatory relief addressed below, was only just enacted and thus the following statements are subject to change.
Federal Regulators have aligned efforts to provide uniform regulatory relief for financial institutions during the COVID-19 crisis by relaxing financial condition reviews and reporting requirements. Federal Regulators have assured national financial institutions’ efforts to modify terms on new or existing loans to affected consumers within certain parameters will not be subject to examiner criticism and may receive favorable Community Reinvestment Act (CRA) consideration. The efforts will not result in credits being categorized as Troubled Debt Restructurings (TDR) if they are made in a safe and sound manner. TDR designation is an onerous classification requiring bank lenders to provide additional regulatory reporting and establish reserves for anticipated losses.
Financial institutions have been encouraged to “work prudently with borrowers,” and “work with borrowers as part of a risk-mitigation strategy intended to improve an existing non-pass loan.” Federal Regulators have confirmed with the Financial Accounting Standards Board (FASB) that, “short-term modifications made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDR.”
Assuming a borrower is current on its loans (i.e., fewer than 30 days past due at time of the modification), financial institutions can provide short-term concessions including payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment within certain qualitative amount limits without fear of TDR classification. Financial institutions are encouraged to consult the Federal Regulators’ Joint Statement.
The CARES Act, recently approved by Congress and just signed into law by President Donald Trump, includes provisions expanding the FDIC discretionary authority to further guarantee bank debt and noninterest-bearing demand deposit accounts, delays the implementation of CECL (Current Expected Credit Losses) accounting requirements, and temporarily reduces the Community Bank Leverage Ratio (CBLR) by one percentage point to 8.0%.
Business Relief (CARES Act)
The Small Business Administration (SBA) is generally authorized to offer relief to businesses directly through its Economic Injury Disaster Loans (EIDL) and indirectly through qualified lenders pursuant to its expanded 7(a) loan guarantee program.
The CARES Act creates a loan product offered through the SBA’s 7(a) loan program providing low interest rate loans available to small businesses with fewer than 500 employees, sole proprietors, independent contractors, and self-employed individuals. The intent is to cover payroll costs and related expenses and principal payments on mortgages, rent, utilities, and other debt obligations incurred before Feb. 15, 2020. The SBA is permitted to relax guidelines, and authorized 7(a) lenders (e.g., local lending institutions) can process and close the loan without SBA approval.
The CARES Act will further create a Paycheck Protection Program (PPP) specifically created to provide loans to businesses to address payroll, mortgage interest, rent, and utility costs. The PPP allows businesses to obtain a loan of up to $10 million to cover up to eight weeks of costs that will be forgiven if the businesses’ headcounts remain the same. Forgiveness will be reduced proportionally by any headcount or pay reduction compared to the prior year. Businesses must provide evidence of headcount and pay prior to and during the eight-week period..
Federal Regulators have recommended relaxation of retail banking and lending-related operations, provided they remain consistent with safe and sound banking practices. Financial institutions can initiate actions to aid consumers by increasing accessibility to funds and easing cash-flow pressures, including the following:
Waiving supplemental fees (e.g., ATM fees, overdraft fees, late payment fees, early withdrawal penalties, etc.);
Easing restrictions of cashing out-of-state and noncustomer checks;
Expanding availability for short-term, unsecured credit products for borrowers;
Increasing credit card limits;
Providing alternative service options in the event of branch closures and limited accessibility to institutions; and
Offering payment accommodations (e.g., allowing borrowers to defer or skip payments, extending payment due dates to avoid delinquencies and negative credit bureau reporting, etc.).
The measures and recommendations are issued in direct response to the COVID-19 pandemic and will remain effective through the six-month period after the national emergency declaration is lifted, unless further extended.
We recommend the following helpful links to COVID-19-related information. The links include detailed guidance and real-time updates on current measures taken by.
© 2020 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume X, Number 87