An Overview of Financial Services Provisions in the CARES Act (COVID-19 Relief Legislation)

Sec. 4003, Emergency Relief and Taxpayer Protections

The statute authorizes the Secretary of the Treasury to provide loans, make loan guarantees and otherwise make investments to support businesses, states and municipalities, up to a total of $500 billion. Of this amount, a maximum of $46 billion is available for the Secretary of the Treasury to provide direct support to airlines, air cargo carriers and businesses critical to national security. The balance (plus any unspent funds for airlines, air cargo carriers or national security) is to be made available to Federal Reserve programs or facilities meant to provide liquidity to businesses, states and municipalities.

Borrowers from either set of programs generally are required to agree that they will not buy back shares, pay dividends to common shareholders until one year after the loan is repaid or exceed limitations on officer and employee compensation for the same period. Recipients of loan guarantees under the airline relief programs are subject to similar limitations until one year after the loan guarantee ends. Borrowers generally must also be organized in the United States, have significant operations therein and have a majority of their employees in the United States Moreover, loans made pursuant to any of these programs cannot be reduced through loan forgiveness.

With respect to Federal Reserve programs or facilities, these restrictions attach to programs in which the Secretary of the Treasury uses appropriated funds and that make direct loans. Direct loans are defined as loans that (i) are entered into directly with an eligible business as a borrower and (ii) are not part of a syndicated loan, a loan originated by a financial institution in the ordinary course of business or a securities or capital markets transaction. Additional restrictions apply to loans made directly by the Secretary of the Treasury. The statutory language leaves open the possibility that some of the restrictions described in this paragraph might not apply with respect to certain Federal Reserve programs. As of the date of this publication, much remains subject to further clarification and guidance.

The statute also provides that the Secretary should encourage the Federal Reserve to establish a program to provide financing to banks and other lenders to make direct loans, with an emphasis on midsize U.S. companies with 500 to 10,000 employees. These loans are subject to requirements including workforce retention, limitations on buybacks and dividends, limitations on outsourcing and limitations on antiunion activity. The statute also provides for the Secretary to encourage formation of a lending program for state and municipal governments. Pursuant to this authority, the Secretary is also authorized to designate financial institutions as financial agents of the U.S. for purposes of this program.

Sec. 4008, Debt Guarantee Authority

The statute reauthorizes the expired authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide debt guarantee and transaction account guarantee programs. Pursuant to this, the Federal Deposit Insurance Corporation (FDIC) is authorized to establish a program to guarantee the obligations of solvent insured depository institutions and their holding companies. Such guarantees cannot include the provision of equity but may be established to guarantee non-interest-bearing transaction accounts for amounts in excess of FDIC insurance coverage. The statute grants similar authority to the National Credit Union Administration to increase share insurance coverage on non-interest-bearing accounts. These guarantees must terminate no later than December 31, 2020.

Sec. 4011, Temporary Lending Limit Waiver

The statute creates a temporary exemption from the loans-to-one-borrower limitations applicable to national banks. This temporary exemption, which ends on the sooner of the termination of the COVID-19 national emergency or December 31, 2020, permits the Office of the Comptroller of the Currency (OCC) to approve loans in excess of the statutory limitations to a nonbank financial company (which includes securities exchanges, clearing agencies, swap facilities and other listed entities). It also grants the OCC a discretionary power to exempt transactions deemed to be in the public interest from the loans-to-one-borrower limitations.

Sec. 4012, Temporary Relief for Community Banks

The statute provides temporary relief for community banks by directing the appropriate federal banking regulators to set the community bank leverage ratio at 8 percent. The community bank leverage ratio is currently set by regulation at 9 percent. However, any qualified community bank that fails to meet the adjusted community bank leverage ratio shall have a reasonable grace period to meet the required ratio and, during such grace period, will be presumed to meet the applicable capital and leverage requirements.

The requirement to reduce the community bank leverage ratio terminates on the earlier of the termination of the COVID-19 national emergency or December 31, 2020. The statute does not specify how the relevant agencies should handle the transition back to prior regulatory requirements once this authority terminates.

Sec. 4013, Temporary Relief From Troubled Debt Restructurings

The statute provides financial institutions with the ability to suspend the requirements under U.S. generally accepted accounting principles (GAAP) for loan modifications that would otherwise be considered troubled debt restructurings, provided such restructuring relates to the COVID-19 outbreak. It also permits banks to suspend determinations related to troubled debt restructurings for loans so modified, such as impairment determinations. The suspension solely applies to loan modifications or forbearance arrangements that relate to an interest rate modification or other arrangement that defers or delays the payment of principal of payment or interest with respect to a loan that was not more than 30 days past due as of December 31, 2019. These suspensions will remain in place for the term of the loan modification. Moreover, the federal banking regulators are required by law to defer to financial institution determinations related to such suspensions.

A financial institution may elect to suspend GAAP principles for such loan modifications and suspend determinations related to those modifications between March 1, 2020, and the earlier of December 31, 2020, or the day 60 days after the termination of the COVID-19 national emergency.

Notably, it is not clear that this section of the statute provides similar relief to nonbank lenders.

Sec. 4014, Optional Temporary Relief From CECL

The statute provides temporary relief from the updated current expected credit loss (CECL) methodology implemented by the 2016 Financial Accounting Standards Board (FASB) Accounting Standards Update. The provision authorizes insured depository institutions (including credit unions), bank holding companies and their affiliates to disregard requirements under the “Measurement of Credit Losses on Financial Instruments” FASB Accounting Standards Update, including the CECL methodology for estimating allowances for credit losses, from the date of enactment of the legislation to the earlier of December 31, 2020, or the day the national emergency concerning COVID-19 terminates. The section does not clarify how organizations will operationalize returning to the prior standards upon expiration of the temporary relief period, which will pose a particular challenge if the relief period ends in the middle of an accounting period or if the national emergency is declared terminated with little notice. Notably, the section also does not appear to provide relief to nonbank lenders that are not affiliated with an insured depository institution or bank holding company.

Sec. 4021, Credit Protection During COVID-19

The statute amends the Fair Credit Reporting Act to protect the credit history of borrowers who receive loan forbearances from any negative consequences of the way the forbearance is reported to credit bureaus. The provision applies if a creditor agrees to an account forbearance, modified payments or other relief for a consumer affected by COVID-19, and the consumer fulfills the requirements applicable to their account forbearance or other accommodation. Under these circumstances, if a creditor furnishes information to a credit bureau, the creditor must report the credit obligation as current (or if the credit obligation was delinquent before the forbearance or accommodation, maintain the pre-existing delinquent status unless the consumer becomes current). The relief applies during a period beginning January 31, 2020, and ending the later of 120 days after the enactment of the legislation or 120 days after the date the national emergency concerning COVID-19 terminates. This reporting requirement does not apply with respect to a credit obligation or account that has been charged off.

Sec. 4022, Foreclosure Moratorium and Consumer Right to Request Forbearance

The statute provides a forbearance right and a foreclosure delay for mortgages backed by the federal government. A borrower of a mortgage loan that is purchased or securitized by Fannie Mae or Freddie Mac, guaranteed or insured by the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs or the Department of Agriculture (USDA) or made directly by the USDA (a “federally backed mortgage”) that is experiencing financial hardship due, directly or indirectly, to COVID-19 may request forbearance on the mortgage by submitting a request for forbearance to their mortgage servicer along with an attestation of financial hardship caused by COVID-19. No documentation, other than the attestation, evidencing financial hardship is required.

Upon the borrower’s request, a forbearance will be granted for up to 180 days, and will be extended an additional 180 days if requested by the borrower, provided that that the period of forbearance may be shortened upon the borrower’s request. During the period of forbearance, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all payments on time and in full may accrue on the borrower’s account. The legislation provides that borrower requests for forbearance must be made within an undefined “covered period.” Prior versions of the legislation defined the covered period as beginning the day of enactment of the legislation and ending the earlier of December 31, 2020, or the day the national emergency concerning COVID-19 terminates, but this was removed from the final version passed by the Senate.

Additionally, mortgage servicers of federally backed mortgages may not initiate a foreclosure process, move for a foreclosure judgment or order of sale or execute a foreclosure-related eviction or sale for the 60-day period beginning March 18, 2020. Vacant and abandoned properties are excluded.

Sec. 4023, Forbearance of Residential Mortgage Loan Payments for Multifamily Properties With Federally Backed Loans

The statute provides forbearance relief for multifamily property mortgages backed by the federal government, conditioned on the borrower’s forbearance for tenants. A multifamily borrower of a mortgage loan for residential property designed for occupancy of five families or more that is made, insured, guaranteed, supplemented or assisted by any officer or agency of the federal government, including Fannie Mae, Freddie Mac or HUD, may request forbearance on its mortgage if experiencing financial hardship due, directly or indirectly, to COVID-19. The borrower must have been current on its payments as of February 1, 2020. Upon request, the servicer must provide forbearance for up to 30 days and, upon request of the borrower, for up to two additional 30-day periods, provided each extension request is made at least 15 days before the end of the current forbearance period. The type of forbearance is not defined in the legislation. The request for forbearance, including each request for extension of the forbearance period, must be made during the period beginning the date the legislation is enacted and ending the earlier of December 31, 2020, or the day the national emergency concerning COVID-19 terminates.

Any borrower that receives forbearance under this section may not charge tenants any late fees or penalties for late payment of rent or issue any eviction notices to tenants during the forbearance period, and may not require any tenant to vacate the property for 30 days after the end of the forbearance period.

Sec. 4029, Termination of Authority

The statute removes authority to make new loans, loan guarantees and investments under the Coronavirus Economic Stabilization Act of 2020 as of December 31, 2020, but provides flexibility to modify or restructure the terms of, but not to forgive, existing loans, loan guarantees and investments after that date. Loans made to passenger airline carriers, eligible businesses that are certified by part 145 of title 15, Code of Federal Regulations, and approved to perform inspections, repair, replace or overhaul services, and ticket agents must have a duration of five years or less.