COVID-19 Resources

A COVID-19 Guide for Financial Institutions: Tracking the Impacts of the CARES Act and Other Agency Statements on Financial Institutions

Written by Jared Koechner andJoshua Bowen on April 1, 2020

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As the COVID-19 pandemic continues to sweep across our nation, healthcare and economic impacts are center stage, and financial institutions are on the brink of potentially significant impacts to their operations, accounting and regulatory compliance.

Financial institutions have received a plethora of interagency statements and agency press releases discussing topics from loan modifications to regulatory reporting deadlines to tax filing requirements.

(This includes the Internal Revenue Service (IRS) postponing the due date of returns from April 15th, 2020 to July 15th, 2020 without the need for an extension and the passage of the Families First Coronavirus Response Act (FFCRA).)

The Coronavirus Aid, Relief and Economic Support Act (CARES Act) also impacts financial institutions responding to the COVID-19 pandemic. Below, you can find a summary of updates concerning the CARES Act and how they may impact your financial institution.

Section 1102 – Paycheck Protection Program

The CARES Act created the Paycheck Protection Program (PPP) under the U.S. Small Business Administration’s (SBA) existing 7(a) loan program. The program set aside up to $349 billion of federally-guaranteed loans to qualifying small businesses (those with no more than 500 employees).

These loans are designed to be forgiven if employers keep employees on their payroll and spend the loan proceeds on qualifying expenses in the eight-week period after origination. Qualifying expenses include payroll, health benefits, interest, rent and utilities.

The amount forgiven will be reduced if the company does not maintain the monthly average of full-time employees it had before the crisis began, but employers will not be penalized if they eliminate the decrease in employee headcount and/or wages by June 30, 2020 The PPP is designed for loans to be provided directly by private lenders through the (SBA) 7(a) loan program.

Warren Averett Insight

The SBA interim final ruling was released on April 2nd. This specifically addresses that financial businesses primarily engaged in the business of lending are not eligible to receive a loan under the PPP program. The rule provides additional guidance to both lenders and borrowers related to the PPP program.

All existing SBA-certified lenders will be able to provide loans under the PPP. The treasury has released information for banks who are not SBA-certified lenders to begin making loans with this program. A new lender will need to submit their application to DelegatedAuthority@sba.gov to apply with the SBA. They can begin making loans as soon as they are approved and enrolled in the program. Access a detailed summary of the CARES Act SBA 7(a) program here.

Section 2205 – Charitable Contributions Limitation Modification during 2020

This provision of the Act increases the corporate limitation on deductions for charitable contributions from 10% to 25% of taxable income during 2020.

Section 2301 – Employee Retention Credit for Employers Subject to Closure Due to COVID-19

According to a summary from the Senate:

The provision provides a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.”

Warren Averett Insight

It’s important to note that these wages cannot be double counted with another tax credit. In addition, if an employer receives a covered loan under the SBA 7(a) program, the employer would not be eligible for this tax credit.

Section 2302 – Delay in Employer-Side Social Security Payroll Tax Until 2021 and 2022

The employer portion of Social Security tax on employee wages can be deferred. According to Stites & Harbison, “The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.”

Warren Averett Insight

It is important to note, if a taxpayer has an SBA 7(a) loan forgiven, the employer would not be eligible for this deferral.

Section 2303 – Modifications for NOL

According to a summary from the Senate: The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.

Section 2305 – Modification of Credit for Prior Year AMT Liability of Corporations

According to a summary from the Senate: The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.

Section 2307 – Technical Correction to Allow Immediate Write-offs of Qualified Improvement Property (QIP)

Due to a drafting error in the Tax Cuts and Jobs Act, businesses had been forced to depreciate QIP over 39 years. The CARES Act corrects this error retroactive to 2018 and allows businesses to write off QIP immediately. The provision will increase cash flow to businesses by increasing deductions and encourages them to invest in improvements.

Section 4012 – Temporary Relief for Community Banks

In November 2019, federal banking agencies jointly issued their final rule to the Community Bank Leverage Ratio (CBLR) framework, which allows qualified community banks to calculate a leverage ratio to measure capital adequacy rather than calculating or reporting risk-based capital (FIL-66-2019).

This final ruling requires qualified institutions to maintain a leverage ratio greater than 9%. Section 4012 relaxes the CBLR from 9% to 8%. Similar to the original final rule, if an institution’s CBLR falls below 8%, the institution will have a “reasonable grace period” to comply with the 8% requirement. This is currently effective and will end at the termination of the COVID-19 national emergency or December 31, 2020, whichever comes first.

Warren Averett Insight

Using the CBLR Framework is optional and as noted in FIL-66-2019, qualifying institutions may opt out of the framework at any time by reverting to the risk-based capital rule. A qualifying institution still reporting under the risk-based capital rules may decide to opt-in if they believe Section 4012 provides temporary relief for their institution.

Section 4013 – Temporary Relief from Troubled Debt Restructurings

This section applies to institutions as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) and the National Credit Union Administration (NCUA).

This section allows institutions to suspend requirements under generally accepted accounting principles (GAAP) for loan modifications related to COVID-19 that would be classified or determined to be a troubled debt restructuring (TDR), including impairment. This includes modifications including forbearance arrangements, interest rate modifications, repayment plans and any other similar arrangement that defers or delays the payment of principal or interest if the loan was not more than 30 days past due as of December 31, 2019. This does not relieve borrowers who are not affected by COVID-19.

Financial institutions should continue to maintain records of the volume of loans involved. Federal regulatory agencies may collect modified loan data for supervisory purposes.

This is currently effective and will end at December 31, 2020 or 60 days after the termination of the COVID-19 national emergency, whichever comes first.

Warren Averett Insight

Federal regulatory agencies issued Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus on March 22, 2020. The Agencies planned to host a webinar for financial institutions on March 27, 2020; however, it was postponed due to the CARES Act.  There are disparities between the interagency statement and the CARES Act (for example, when a borrower should be deemed current and interest rate modifications) which should be addressed by the Agencies in the near future.

The interagency statement also addressed GAAP for TDRs and noted the FASB’s confirmation that short-term (six months) and the delay in payment is insignificant may not be treated as a TDR under ASC 310-40. We believe the disparities between laws and regulations and GAAP may create GAAP reporting issues. Financial institutions should discuss these impacts with their auditors to ensure accounting for loan modifications does not impact their audit opinion. We anticipate that the FASB will release additional guidance on bridging the gap between the CARES Act and GAAP.

There may be instances when a financial institution provides an accommodation for a loan that was more than 30 days past due at December 31, 2019. For example, a customer is historically 45-60 days past due and is monitored on the financial institution’s watch list. Although historically late, the customer never failed to make principal and interest payments. At December 31, 2019, the customer was 45 days past due, exceeding the 30-day requirement by the CARES Act. In this scenario, the customer does not qualify for temporary relief from GAAP under Section 4013. As a result, the financial institution should follow GAAP to determine if the loan modification is a TDR. In this example, although the loan did not meet the requirements of Section 4013, the financial institution may still conclude that the loan is not a TDR if the modification is short-term (six months or less) and the delay in payment is deemed to be insignificant based on ASC 310-40-15-17.

Warren Averett Insight

Recordkeeping and documentation is an important process for each financial institution’s daily operation. Section 4013 requires that institutions maintain additional documentation related to loan volume as noted above. We believe institutions should continue to emphasize the importance of maintaining adequate documentation to staff (documentation of loan volume, changes in internal controls due to the approval process, etc.)

Section 4014 – Optional Temporary Relief from Current Expected Credit Losses (CECL)

This section applies to institutions as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) and the National Credit Union Administration (NCUA).

This section provides relief to institutions implementing CECL by delaying the requirement to comply withthe Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This is currently effective and will end at the termination of the COVID-19 national emergency or December 31, 2020, whichever comes first.

Warren Averett Insight

This delay primarily affects public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies (SRCs) as defined by the SEC, who are required to adopt this standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

We believe the disparities between the CARES Act and GAAP may create GAAP reporting issues. Based on a recent interview by Thomson Reuters with FASB member Harold Schroeder on March 26, 2020, the FASB continues to defend CECL in response to the CARES Act. We anticipate that the FASB and the SEC will release additional guidance on bridging the gap between the CARES Act and GAAP but until then, we believe it is prudent for institutions to follow the CECL guidance if already adopted. Financial institutions should discuss these impacts with their auditors to ensure accounting for CECL does not impact their audit opinion.

Section 4016 – Temporary Credit Union Provisions

This section provides access to additional liquidity through the NCUA’s Central Liquidity Facility for credit unions with liquidity needs through December 31, 2020.

Section 4021 – Credit Protection During COVID-19

This section amends the Fair Credit Reporting Act by providing credit reporting relief to borrowers who receive an accommodation (deferral of one or more payments, make a partial payment, forbear any delinquent amounts, modify a loan or contract, or any other assistance or relief granted to a customer affected by COVID-19) by an institution. As a result, the institution should:

  • Report the loan or account as current; or
  • If the loan or account was delinquent before the accommodation, maintain the delinquent status during the period in which the accommodation is in effect and if the customer brings the loan or account current during the period, report the loan or account as current.

This section does not apply to loans or accounts that have been charged-off.

This is effective beginning on January 31, 2020 and will end on the latter of 120 days after the enactment of this section or 120 days after the termination of the COVID-19 national emergency.

Section 4022 – Foreclosure Moratorium and Consumer Right to Request Forbearance

This section provides a forbearance of up to 180 days, with the option to request an additional 180 days, with a borrower of a federally backed mortgage loan who is directly or indirectly experiencing a financial hardship due COVID-19, regardless of delinquency status. During the forbearance period, no additional fees, penalties, or interest beyond the contractually scheduled or calculated amounts will accrue on the borrower’s account. Loan servicers are only required to obtain the borrower’s attestation to financial hardship caused by COVID-19 to receive the forbearance.

For federally-backed mortgage loans, a judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execution of a foreclosure-related eviction or foreclosure sale is not allowed for no less than a 60-day period beginning on March 18, 2020. This does not apply to vacant or abandoned property.

Warren Averett Insight

This section discusses “covered period;” however, “covered period” was not defined in this section. We note that “covered period” is defined in the subsequent section (Section 4023 – Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans), which defines the covered period as the termination of the COVID-19 national emergency or December 31, 2020, whichever comes first.

Section 4023 – Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans

This section provides a forbearance for multifamily mortgage loans of up to 30 days, with the option to request up to 2 additional 30 days periods, with a borrower who is directly or indirectly experiencing a financial hardship due to COVID-19 and was current on its payments as of February 1, 2020. The forbearance request may be submitted orally or written to the loan servicer who must document the financial hardship.

A borrower who receives a forbearance under this section may not evict or initiate eviction of a tenant from the federally backed mortgage loan property for nonpayment of rent, fees, or charges or charge late fees, penalties, or other charges for late payment of rent.

This section is currently effective and will end at the termination of the COVID-19 national emergency or December 31, 2020, whichever comes first.

Regulatory and Interagency Statements

FIL-22-2020: Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus

This statement provides guidance to financial institutions related to loan modifications and TDRs. Updates are expected to this statement due to the CARES Act as noted above in Section 4013.

FIL-28-2020 and Federal Financial Institutions Examination Council (FFIEC) Press Release: Financial Regulators Highlight Coordination and Collaboration of Efforts to Address COVID-19 (March 25, 2020)

This press release notes that federal banking agencies will not take action against any institution for submitting its March 31, 2020 Call Report after the filing deadline as long as the report is submitted within 30 days of the official filing date.

Warren Averett Insight

The press release encouraged institutions to contact their primary federal regulator in advance should a financial institution anticipate a delayed submission. We recommend that financial institutions continue to communicate with federal and state regulators should there be expected delays or if the institution has questions during this unprecedented time.

Federal Reserve Press Release: Federal Reserve Offers Regulatory Reporting Relief to Small Financial Institutions Affected by the Coronavirus (March 26, 2020)

This press release notes that the Federal Reserve will not take action against a financial institution with $5 billion or less in total assets for submitting its March 31, 2020, Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) or Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies (FR Y-11) after the official deadline, as long as the report is submitted within 30 days of the official filing due date. Institutions are encouraged to contact their Reserve Bank in advance should an institution anticipate a delayed submission.

Interagency Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19

In this statement, agencies encourage institutions to continue to offer small-dollar loans that is consistent with safe-and-sound banking practices, provides fair treatment of customers, and complies with applicable statutes and regulations, including consumer protection laws.

FDIC Press Release: Agencies Announce Two Actions to Support Lending to Households and Businesses (March 27, 2020)

This press release notes two actions to support the U.S. economy and allows banking organizations to continue lending to households and businesses. The first action allows for early adoption of a new methodology on how certain banking organizations are required to measure counterparty credit risk derivatives contracts.

The second provides an optional extension of the regulatory capital transition for the new credit loss accounting standard (ASU 2016-13). This interim final rule allows institutions adopting CECL this year to mitigate the estimated cumulative regulatory capital effects by extending the [already approved] three-year transition period for up to two additional years.  Agencies will accept comments on the CECL interim final rule for 45 days.

FIL-31-2020 – Adjusting the Calculations for Credit Concentration

The agencies are jointly adjusting their calculation for credit concentration ratios used in the supervisory process. Effective March 31, 2020, institutions that elect the CBLR framework are not required to report tier 2 capital. Examiners will calculate ratios that measure credit concentrations by using one of the following as the denominator: tier 1 capital plus the entire allowance for loan and lease losses (ALLL) or tier 1 capital plus the portion of the allowance for credit losses (ACL) for institutions that have already adopted CECL.

FIL-32-2020 Joint Statement on the Interaction of the CECL Revised Transition Interim Final Rule with Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act

This statement clarifies the interaction between the CECL interim final rule (see FDIC Press Release above from March 27, 2020) and the CARES Act (Section 4014) as it relates to regulatory capital requirements.

FDIC FAQ – Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19)

This is a great resource that dives into questions related to Working with Borrowers and Operational Issues.

Warren Averett Insight

We were recently asked a question related to investments and whether other than temporary investment (OTTI) accounting treatment should be used during the COVID-19 pandemic. According to ASC 320-10-35, an impairment evaluation should be made if the fair value of an investment is less than its amortized cost basis at the balance sheet date of the reporting period for which impairment is assessed. At this time, a determination should be made as to whether the impairment is temporary or other than temporary.

We believe that management should follow current guidance in ASC 320-10-35 when evaluating investment impairments. We also believe it’s not unreasonable to conclude that investments are undergoing a temporary decline during the COVID-19 pandemic. Currently, the FASB has not provided investment guidance related to COVID-19; therefore, institutions should continue to follow existing GAAP practices.

Connect with an Advisor

Warren Averett’s Financial Services team continues to monitor changes affecting our financial institution clients during the COVID-19 pandemic. If you have questions or concerns, please do not hesitate to contact someone from our Financial Services team.

Visit our Coronavirus (COVID-19) Resources webpage for more details on the CARES Act and other relevant COVID-19 resource.

 

This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor and also consult with your lender regarding your situation. Please note that Warren Averett is not an Agent under the Paycheck Protection Program loan program (“PPP”). Warren Averett does not provide loan packaging services or guarantee qualification under the PPP or any loan administered by the U.S. Small Business Administration 7(a) loan program.

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