Alerts and Updates

CARES Act Impacts Banking and Finance Industry

March 30, 2020

The unprecedented $2 trillion stimulus package includes, among other things, provisions for the removal of the cap on the FDIC’s guarantee of insured deposits.

The Coronavirus Aid, Relief and Economic Security (CARES) Act includes wide-ranging provisions that will have direct and indirect impacts on the banking and finance industry.

The unprecedented $2 trillion stimulus package includes, among other things, provisions for the removal of the cap on the FDIC’s guarantee of insured deposits; waiver by the OCC of single-borrower lending limits for national banks; reduction of the minimum leverage ratio for community banks; favorable accounting treatment for loan modifications; and authority for a guarantee program for the U.S. money market mutual fund industry.

The CARES Act also provides the U.S. Department of the Treasury with the authority to make up to $500 billion of emergency loans, guarantees, grants, investments and other aid to states, municipalities and “eligible businesses,” which include air carriers and industries that have not received “adequate economic relief” under the Act. The program includes $61 billion in loans, guarantees, grants, tax benefits and other relief to airlines and other aviation sector businesses. Another $130 billion is set aside for health, medical and hospital industries, including to address supply, drug and equipment shortages.

In addition, the Act provides for dramatic expansion and liberalization of conventional Small Business Administration and disaster loans, including deferral and forgiveness provisions.

The following provisions of the Act impact many banks and financial institutions:

Depository Guarantee Cap Removed

In an effort to reassure depositors and maintain confidence in the U.S. banking system, Section 4008 permits the FDIC to guarantee bank-issued debt and noninterest-bearing transaction deposits that exceed the $250,000 limit for deposits and obligations of solvent insured depository institutions and holding companies. As of this Alert, the maximum amount has not been set by the FDIC, but there is speculation that it will be unlimited, as it was during the 2008 financial crisis. In addition, the Act permits the National Credit Union Administration (NCUA) to increase insurance coverage on noninterest-bearing transaction accounts at federally insured credit unions in an unlimited amount. The authority for the FDIC and the NCUA is effective until December 31, 2020. The FDIC last removed the cap on funds in noninterest-bearing transaction accounts during the credit crisis in 2008. The Dodd-Frank Act had subsequently prohibited the FDIC from doing so again, but the CARES Act provides the necessary authority for the FDIC to implement the emergency program.

OCC Waiver of Single Borrower Lending Limits 

Section 4011 of the Act permits the Office of Comptroller of the Currency to waive single-borrower lending limits for national banks if the OCC finds that the waiver is in the public interest. This provision does appear to require OCC approval of each bank’s request to exceed the lending limits. OCC waivers are permitted until the earlier of the end of the national emergency or December 31, 2020.

Community Bank Leverage Ratio Reduction 

Section 4012 reduces the community bank (i.e., less than $10 billion in total consolidated assets) leverage ratio (i.e., tier 1 capital divided by average total consolidated assets) minimum from 9 percent to 8 percent. The measure is temporary and expires on the earlier of the termination of the public health emergency or December 31, 2020. The provision also requires bank regulators to adopt rules permitting community banks a “reasonable grace period” for failing to comply with the modified leverage ratio.

Relief from GAAP Loan Modification Rules

Section 4013 permits banks and other financial institutions (including credit unions) to suspend requirements under generally accepted accounting principles (GAAP) that loan modifications be characterized and reported as troubled debt restructurings or result in loans being deemed impaired. The change is intended to allow banks to enter into loan modifications related to COVID-19 for loans that were not more than 30 days past due as of December 31, 2019, without negative regulatory consequences, including increased capital reserves that may result from reported troubled debt restructurings. The modifications included are forbearance, deferral or delays in payment of interest and/or principal, fee waivers and interest rate adjustments. The authorization follows the position taken by the federal bank regulators on the matter in a joint release issued by them on March 22, 2020, and applies to loan modifications made on or after March 1, 2020, to the date that is the earlier of December 31, 2020 or the termination date of the national emergency.

Relief from Current Expected Credit Losses

Section 4014 provides financial institutions and bank holding companies or affiliates with the option to delay compliance with FASB’s Measurement of Credit Losses on Financial Instruments including the current expected credit losses methodology for estimating allowances for credit losses (CECL) until the earlier of the termination of the public health emergency or December 31, 2020.

Money Market Guarantee Program

Section 4015 permits the Department of the Treasury to establish a guarantee program for the U.S. money market mutual fund industry through December 31, 2020. The provision temporarily removes restrictions on the Exchange Stabilization Fund, including a prohibition on the establishment of any future guaranty program for the money market mutual fund industry.

In addition to the CARES Act, the Board of Governors of the Federal Reserve Board (FRB) has taken action to support the money market mutual fund industry. On March 18, 2020, the FRB announced the Money Market Mutual Fund Liquidity Facility (MMLF), which provides loans to financial institutions that are collateralized by high quality money market securities purchased by the financial institutions from certain prime and tax-exempt money market funds. The MMLF is intended to provide a lifeline to money market funds facing investor demands for redemptions.

Several other sections of the Act are relevant to banks and financial institutions, including consumer-oriented provisions that provide for a foreclosure moratorium and a consumer right to request forbearance. Section 4021 of the Act amends the Fair Credit Reporting Act and provides that if accommodations are made regarding a loan and the borrower was otherwise current before the accommodation and satisfies the terms of the accommodation, the creditor has to report the account as “current.” The Act prohibits foreclosures on federally backed mortgage loans for a 60-day period beginning on March 18, 2020, and provides up to one year of forbearance for borrowers under federally backed mortgage loans who have experienced a financial hardship related to the COVID-19 pandemic. There is also a 120-day moratorium on eviction filings for tenants of eligible properties, which include properties under mortgages purchased or backed by Fannie Mae or Freddie Mac. 

About Duane Morris

The Duane Morris COVID-19 Strategy Team is advising clients on all aspects of the legal implications of COVID-19 including contractual, employment, insurance and healthcare issues. The team has also reviewed the various provisions of the CARES Act and its implications on various industries, businesses and individuals.

For More Information

If you have any questions about this Alert, please contact Christopher M. Winter, Arthur A. Coren, any of the attorneys in our Banking and Finance Group, and member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.