CARES Act Enacted: Financial Services Provisions

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the third phase of congressional economic relief in response to COVID-19. Among other things, the wide-ranging law provides for one-time direct payments to individuals of up to $1,200 for adults and $500 per child, subject to certain income thresholds.

Following is an overview of provisions related to financial services in the 850-plus-page law.

Loans to Small Businesses. The CARES Act creates a $350 billion Paycheck Protection Program, under which businesses with 500 or fewer employees, as well as sole proprietors, independent contractors, and eligible self-employed individuals and non-profits, may temporarily apply for loans equaling 250% of an employer’s average monthly payroll, up to $10 million. According to the Senate Small Business Committee, the Program is intended to cover up to eight weeks of cash flow assistance through 100% federally guaranteed loans to employers who maintain their payroll during the outbreak. The loans may be used to cover payroll costs, including U.S. employee wages up to $100,000, paid sick leave, insurance premiums, and mortgage, rent, and utility payments. The interest rate on the loans can be no more than 4%; no payments will be due for at least six months; and the portion of the loans used for covered expenses will be forgiven if employers maintain their payroll. The Program is retroactive to February 15, 2020 and ends on June 30, 2020.

FinTech Opportunity. These loans will be available immediately through existing lenders certified by the Small Business Administration (SBA), including banks, credit unions, and other financial institutions, and the SBA is required to streamline the process to add additional lenders to the existing SBA loan program. In addition, the law provides $25 million to the Treasury Department to expedite the addition of new lenders, including fintechs, to participate in the Program; Treasury will set the requirements for their participation. Lenders will be authorized to make determinations on borrower eligibility and creditworthiness without going through the SBA process. Eligibility will be determined based not on ability to repay, but on whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor. Eligible borrowers will be required to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19, and that they will use the funds for covered expenses.

Under banking capital rules, loans made under the Program will receive a 0% risk weight, so lenders will not need to set aside capital to cover them. In addition, financial institutions will be granted temporary relief from troubled debt restructuring disclosures for loans that are deferred under the Paycheck Protection Program. See § 1102.

Federal Reserve Support for Mid-Sized Businesses. Under the law, Treasury is required to “endeavor to seek the implementation” of a Federal Reserve program to provide financing to banks or other lenders to make loans to eligible businesses or non-profits with 500 to 10,000 employees. The interest rate on the loans could be no more than 2%, and no payments would be due in the first six months. Borrowers would be required to certify, among other things, that they will use the loan to retain at least 90% of their workforce at full compensation and benefits until September 30, 2020, and that they intend to restore at least 90% of the workforce they had on February 1, 2020 within four months of the end of the COVID-19 emergency.  See § 4003(c)(3)(D).

Troubled Debt Restructuring. Financial institutions may temporarily suspend the requirements under U.S. generally accepted accounting principles for loan modifications related to COVID-19 that otherwise would constitute troubled debt restructuring, including impairment for accounting purposes. The covered period began on March 1, 2020 and ends on the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency. See § 4013.

OCC Lending Limits. The Office of the Comptroller of the Currency (OCC) will be permitted to temporarily waive lending limits imposed on national banks for loans or extensions of credit to non-bank financial companies that are approved by the OCC. The OCC also may exempt any transaction or series of transactions from the lending limits if the OCC determines that the exemption is in the public interest. This provision is effective upon enactment until the sooner of December 31, 2020 or the end of the COVID-19 emergency. See § 4011.

Community Banks. Currently, community banks with less than $10 billion in assets are considered to be in compliance with capital reserve requirements if their leverage ratio is greater than 9%. The law directs financial regulators to issue a temporary rule that reduces this ratio to 8%, and provides a grace period for community banks that do not meet this requirement. See § 4012.

Debt Guarantee Program. The CARES Act requires the Federal Deposit Insurance Corporation (FDIC) to establish a temporary program to guarantee the debt of federally insured banks and bank holding companies, including affiliates. Any guarantee would be required to terminate by December 31, 2020. See § 4008(a).

Deposit Insurance. The FDIC is authorized to temporarily guarantee deposits in non-interest bearing transaction accounts held at insured depository institutions. See § 4008(a). Similarly, the National Credit Union Administration is authorized to temporarily provide unlimited share insurance coverage for non-interest bearing transaction accounts held at federally insured credit unions. In both cases, the provisions terminate on December 31, 2020. See § 4008(b).

CECL Standard. The CARES Act provides large lenders with temporary relief from compliance with the Current Expected Credit Losses (CECL) accounting standard promulgated by the Financial Accounting Standards Board in 2016. The law gives financial institutions that have already implemented the CECL standard until December 31, 2020, or the end of the COVID-19 emergency, whichever comes first, to revise how they calculate losses on bad loans. See § 4014.

Credit Reporting. Under the law, furnishers of consumer report information may allow consumers affected by COVID-19 to defer or suspend debt payments, or make partial payments, from January 31, 2020 until the later of 120 days after the CARES Act is enacted, or 120 days after the end of the COVID-19 emergency. When accommodations are made to current customers and those customers comply with the terms of the accommodations, furnishers will have to report those accounts as current to consumer reporting agencies. When accommodations are made to customers with delinquent accounts, furnishers should continue to report those accounts as delinquent. However, if customers become current during the accommodation period, furnishers also will have to report those accounts as current. This provision does not apply to charged-off accounts. See § 4021.

Mortgage Payments. Borrowers may submit requests to their mortgage loan servicers for up to 180 days of forbearance (plus one 180-day renewal) on federally backed mortgage loans if they experience financial hardship because of the COVID-19 emergency. This federal forbearance measure exceeds the measures taken to date by certain states. During the forbearance period, no interest, fees or penalties will accrue other than amounts that would apply if borrowers made regularly scheduled payments. Servicers will be required to grant forbearance even if the borrower is delinquent, and no borrower documentation will be required beyond an attestation of financial hardship. In addition, there is a 60-day moratorium, beginning March 18, 2020, on servicer foreclosure actions, including evictions and sales of federally backed mortgage loans. See § 4022.

Financial Agents. The Treasury Secretary is authorized to designate financial institutions as financial agents of the United States to “perform all reasonable duties the Secretary determines necessary to respond to the coronavirus.” See § 4003(g).