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CARES ACT: Impact on banks, their customers and the broader financial markets.

Authors: Philip S. Rosen, Esq. and Pierre-Yves Kolakowski, Esq.

Relief provisions aimed at economic stabilization and assistance to severely distressed sectors of the U.S. economy, including financial industries.

On March 26, 2020, the Senate unanimously passed a $2 trillion stimulus package aimed at limiting the economic impact of the COVID-19 pandemic entitled the Coronavirus Aid, Relief and Economic Security Act, or “CARES.” Included within CARES is the “Coronavirus Economic Stabilization Act of 2020” (Title IV, Subtitle A) (“CESA”) which includes relief provisions aimed at economic stabilization and assistance to severely distressed sectors of the U.S. economy, including financial industries. On March 27, 2020, The House of Representatives passed CARES which now awaits approval from the President which is expected shortly.

Below is a summary of certain provisions of CESA, as it appears in the version passed by the Senate on March 26, 2020, concerning banks and financial institutions:

  • Emergency Loans, Guarantees and Investment Authority. Section 4003 authorizes the Treasury Department to extend up to $500 billion of emergency loans and guarantees to States, municipalities and eligible businesses, subject to rates, terms, conditions and procedures set forth in the Act and established by the Secretary. $454 billion is earmarked for loans, guarantees and investments in programs or facilities established by the Fed benefitting eligible business, States and municipalities, with the remainder earmarked for businesses providing passenger and cargo air services, and businesses critical to maintaining national security.
  • FDIC and NCUA Debt Guarantee Authority. Dodd-Frank authorizes the FDIC to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies (including any affiliates thereof) during times of severe economic distress. Based on the COVID-19 crisis, section 4008 provides the necessary authorization for a temporary guarantee program and extends guarantee availability to noninterest bearing transaction accounts. This section also authorizes the National Credit Union Administration Board to increase share insurance coverage on any noninterest bearing transaction account in any federally insured credit union through December 31, 2020.
  • Temporary Lending Limit Waiver. Section 4011 temporarily amends the single borrower loan limit applicable to national banks (and federal savings associations) by permitting the Comptroller of Currency to waive such limits for loans to “nonbank financial companies” (as defined in Dodd-Frank) until either the termination of the national emergency or December 31, 2020.
  • Temporary Relief for Community Banks. The federal banking agencies jointly issued a final rule, effective January 1, 2020, which provides for an optional, simplified measure of capital adequacy for qualified community banking organizations known as the Community Bank Leverage Ratio Framework. Under this rule, a qualifying community bank is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. Section 4012 provides for an interim rule (effective through the earlier of the duration of the national emergency or December 31, 2020) that reduces the leverage ratio to 8% and further provides a “reasonable grace period” to satisfy the ratio requirements, should a bank fall out of compliance.
  • Temporary Relief from Troubled Debt Restructurings. For the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020 or 60 days after termination of the national emergency, financial institutions may elect to suspend GAAP’s for loan modifications related to COVID-19 that would otherwise be categorized as a “troubled debt restructuring,” so long as the loan was not more than 30 days past due as of December 31, 2019.
  • Temporary Relief from Current Expected Credit Losses. Section 4014 provides for a temporary (through the earlier of the duration of the national emergency or December 31, 2020) exception to required compliance with the current expected credit losses methodology (CECL) for estimating allowances for credit losses, as issued by the Financial Accounting Standards Board (Accounting Standards Update (ASU) No. 2016-13, Topic 326, Financial Instruments – Credit Losses).
  • Temporary Money Market Guarantee Authority. Section 4015 temporarily (through December 31, 2020) suspends the prohibitions on the Treasury Department’s use of the Exchange Stabilization Fund to backstop the U.S. money market and mutual fund industries, thus permitting a guarantee program for these industries.
  • Temporary Credit Union Provisions. Section 4016 sets forth various temporary provisions intended to expand a credit union’s flexibility in extending credit.
  • Oversight Provisions. Section 4018 provides for the appointment of a Special Inspector General for Pandemic Recovery, appointed by the President with Senate approval, whose duties include auditing and investigating the making, purchasing and sale of loans, guarantees and investments under CARES. Section 4020 provides for the establishment of a Congressional Oversight Commission authorized to oversee implementation of the Act by the Treasury Department and the Fed.
  • Credit Reporting. Section 4021 includes a temporary amendment to the Federal Fair Credit Reporting Act, requiring a creditor to report an obligation as current, if the creditor has made an accommodation to the consumer affected by COVID-19. An accommodation is deemed to include an agreement to defer one or more payments, make a partial payment, forbear any delinquent payments or modify a contract or loan.
  • Mortgage Forbearance. Section 4022 provides that borrowers under federally backed mortgage loans, secured by residential 1-4 family property, may request a forbearance due to a financial hardship directly or indirectly caused by COVID-19 under a streamlined request process. The forbearance period can run up to 180 days (with an additional 180 days on request), during which time only regular (non-default) interest, without fees or penalties, may accrue. (Section 4023 includes separate rules and time limitations pertaining to federally backed loans secured by multifamily properties).
  • Foreclosure and Eviction Moratoria. Section 4022 provides for a 60-day moratorium on foreclosures of federally backed mortgages, commencing on March 18, 2020. Section 4024 provides for a moratorium, running from 120 days from the enactment of CARES, prohibiting the initiation of any legal action to recover possession of a covered dwelling (i.e. residential property covered under federal housing programs or subject to a federally backed mortgage).