Nutter Bank Report: May 2020

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Headlines

  1. Division of Banks Updates Guidance on COVID-19 Forbearance Under Emergency Law
  2. CFPB Publishes ECOA Compliance Guidance on Paycheck Protection Program Loans
  3. Massachusetts Begins Phase 1 of Four-Phased COVID-19 Reopening Strategy
  4. OCC Amendments to CRA Rules Modernize Evaluation Criteria and Assessment Areas
  5. Federal Banking Agencies Issue Policy Statement on Allowance for Credit Losses
  6. Other Developments: Cloud Computing, Small-Dollar Lending, Home Mortgage Loan Disclosures, Flood Insurance, and GSE Seller/Servicer Guidance

1. Division of Banks Updates Guidance on COVID-19 Forbearance Under Emergency Law

The Massachusetts Division of Banks has updated its guidance in the form of answers to frequently asked questions (FAQs) about Chapter 65 of the Acts of 2020, An Act Providing for a Moratorium on Evictions and Foreclosures During the COVID-19 Emergency. Among other things, the Division’s May 1 update to its FAQs clarifies that a bank or other lender may not charge any fees, penalties, or interest to a home mortgage borrower that has been granted a forbearance on loan payments due to financial hardship related to COVID-19 as required by Chapter 65 beyond the amounts scheduled and calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage loan. As a result, if the payments of principal and interest deferred under a qualifying COVID-19 forbearance are tacked on to the end of a mortgage loan per the requirements of Chapter 65, interest may not accrue during the period of forbearance, according to the Division’s updated FAQs. The Division’s updated FAQs also advise lenders and borrowers to enter into a written agreement that memorializes any forbearance granted under Chapter 65. The Division’s original FAQs issued on April 24 clarified that, unless the lender and borrower agree otherwise, any deferred payments subject to a COVID-19 forbearance under Chapter 65 must be added to the end of the term of the mortgage loan. Click here for a copy of the updated FAQs.

Nutter Notes:  Section 4022 of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act provides similar forbearance relief for borrowers affected by COVID-19 who have a “federally backed mortgage loan.” The term “federally backed mortgage loan” generally includes home mortgage loans purchased or securitized by Fannie Mae or Freddie Mac, insured by the FHA, guaranteed, directly provided by, or insured by the VA or USDA, and certain loans guaranteed under HUD programs. Section 4022 of the CARES Act requires servicers of federally backed mortgage loans to grant a forbearance to qualifying borrowers for a COVID‑19 related hardship for up to 180 days (which may be extended for an additional period of up to 180 days at the request of the borrower). Like Chapter 65, Section 4022 provides that “no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract” may accrue during the forbearance period. However, Section 4022 does not specify how or when the borrower must repay the mortgage loan payments deferred during the forbearance period, while Chapter 65 specifies that deferred payments must be added to the end of the term of the mortgage loan unless lender and borrower otherwise agree.

2. CFPB Publishes ECOA Compliance Guidance on Paycheck Protection Program Loans

The CFPB has issued Equal Credit Opportunity Act (ECOA) compliance guidance for banks and other lenders in the form of answers to frequently asked questions related to the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). The FAQs issued on May 6 address the 30-day deadline for creditors to notify a PPP applicant of action taken on a “completed application,” and provide guidance on adverse action notice requirements when a creditor does not submit a PPP loan to the SBA, and denials of PPP loan applications for incompleteness. The FAQs clarify that, for purposes of ECOA’s implementing regulation, the CFPB’s Regulation B, a PPP application is generally not considered to be a “completed application” until the creditor receives a loan number from the SBA or a response from the SBA about the availability of funds. As a result, the 30-day timeline to notify the applicant of action taken on a completed application does not begin until a creditor has received either a loan number from the SBA or a response that funds are unavailable. However, if a creditor makes a credit decision on a PPP application without submitting the loan to the SBA, the creditor must provide an adverse action notification within 30 days after making the credit decision even if the application is incomplete. Click here for a copy of the CFPB’s FAQs.

Nutter Notes:  Many banks have limited PPP loans to existing small business customers, in part because banks are required to perform less customer due diligence on existing customers and can more efficiently evaluate the credit risk posed by existing customers. While the SBA does not require a bank to deliver to the SBA a PPP loan application it receives from a non-customer, the CFPB’s FAQs advise that a bank must deliver an adverse action notice under Regulation B to an applicant who has submitted a PPP loan application when an application is not delivered to the SBA. In addition, the FAQs clarify that a PPP loan application may not be denied for incompleteness if a creditor has gathered sufficient data from the loan applicant for a credit decision but has not received a loan number from the SBA or a response about the availability of funds. According to the FAQs, an application may be denied for incompleteness under Regulation B only if an application is incomplete regarding information that the applicant can provide and the creditor lacks sufficient data for a credit decision.

3. Massachusetts Begins Phase 1 of Four-Phased COVID-19 Reopening Strategy

Massachusetts Governor Charlie Baker plans to implement a four-phased strategy to reopen non-essential businesses and activities while continuing to take measures to counter the spread of the novel coronavirus that causes COVID‑19, including sector-specific safety standards for office spaces. The governor released the reopening strategy on May 18 and announced on the same day that Phase 1 of the strategy would begin with the opening of manufacturing facilities, construction sites, and places of worship under guidelines that require social distancing and other protective measures. Offices other than those in City of Boston were permitted to open beginning on May 25, with work from home strongly encouraged and businesses advised to restrict workforce presence to less than 25% of maximum occupancy. According to the strategy, office spaces in the City of Boston will be permitted to open beginning on June 1, subject to the same safety guidelines. According to the strategy, each phase will last a minimum of three weeks and, if public health data trends are negative, specific industries, regions, and/or the entire state may need to return to an earlier, stricter phase. Click here for a copy of the reopening strategy.

Nutter Notes:  Workers who are needed to provide consumer access to banking and lending services are covered by the list of COVID-19 essential services and therefore have been exempt from the governor’s March 23 declaration of emergency and order that required all businesses and organizations that do not provide COVID-19 essential services to close their physical workplaces and facilities to workers, customers, and the public. The Phase 1 reopening will apply to other bank employees who work in office spaces, such as those performing back-office functions. Banks and other businesses that have been operating as COVID-19 essential services as of May 18, 2020 will have until July 1, 2020 to comply with certain sector-specific occupancy limitations for office spaces. The sector-specific workplace safety standards for office spaces issued by the governor also include requirements to ensure separation of six feet or more between individuals unless this creates a safety hazard due to the nature of the work or the configuration of the workspace, and closing or reconfiguring work stations, common spaces and areas where workers are likely to congregate to allow six feet of physical distancing between workers. The workplace safety standards also require banks and other employers of office workers to provide training to workers on safety information and precautions, such as social distancing, hand washing, and proper use of face coverings. Click here for a copy of the sector-specific workplace safety standards for office spaces.

4. OCC Amendments to CRA Rules Modernize Evaluation Criteria and Assessment Areas

The OCC has adopted a final rule that amends the OCC’s Community Reinvestment Act (CRA) regulation to, among other things, clarify and expand the activities that qualify for CRA credit and modernize the rules governing the establishment of geographic assessment areas. The final rule issued on May 20 updates how national banks and federal savings associations may define their CRA assessment areas by retaining immediate geographies around branches and establishing additional assessment areas that do not rely on branch networks to serve their customers. Reflecting the fact that many banks collect significant deposits from areas far outside their brick-and-mortar branch footprint through various digital platforms, the final rule provides that a national bank or federal savings association that collects 50% or more of its retail deposits from outside of its branch footprint must delineate additional assessment areas in those areas from which it draws 5% or more of retail deposits. The final rule also provides for the evaluation of CRA performance more objectively through quantitative measures that assess the volume and value of qualifying CRA activity. The final rule will become effective on October 1, 2020, but compliance with certain requirements of the final rule will not be mandatory until January 1, 2023 or January 1, 2024, depending on the size and type of bank. Click here for a copy of the final rule.

Nutter Notes The OCC’s final CRA rule includes several changes to the proposed rule that was originally made jointly with the FDIC. For example, the final rule clarifies the importance of the quantity and quality of activities as well as their value in CRA evaluations, and increases credit for mortgage origination to promote availability of affordable housing in low- and moderate-income areas. The OCC’s final rule also clarifies the way in which CRA credit may be granted for financing athletic facilities by providing examples of the types of athletic facilities that have been approved historically to ensure that such projects benefit and support low- and moderate-income communities. The OCC’s final rule defers the establishment of thresholds for grading banks’ CRA performance until the OCC assesses improved data that is also required to be collected under the final rule. The FDIC issued a statement on May 20 in response to the OCC’s issuance of its final CRA rule, saying that “the FDIC strongly supports the efforts to make the CRA rules clearer, more transparent, and less subjective,” but that the FDIC “is not prepared to finalize the CRA proposal at this time.”

5. Federal Banking Agencies Issue Policy Statement on Allowance for Credit Losses

The federal banking agencies, together with the NCUA, have issued a policy statement that describes the measurement of expected credit losses using the current expected credit losses (CECL) methodology and updates concepts and practices detailed in existing supervisory guidance that remain applicable. According to the agencies, the policy statement announced on May 8 is intended to promote consistency in the interpretation and application of the CECL accounting standard. The policy statement also describes the design, documentation, and validation of expected credit loss estimation processes, including the internal controls over these processes, and the maintenance of appropriate allowances for credit losses (ACLs). Among other things, the policy statement directs each bank’s board of directors, or a committee of the board, to review management’s assessments of and justifications for the reported amounts of ACLs. Click here for a copy of the policy statement.

Nutter Notes:  Separately, the federal banking agencies and the NCUA have jointly issued updated interagency guidance on credit risk review systems, which replaces the guidance in Attachment 1 – Loan Review Systems of the December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses. The guidance issued on May 8 emphasizes that credit risk review is an important risk management function that is separate from the determination of the appropriate reserve for credit losses. The agencies explained that the focus of Attachment 1 was on assessing the adequacy of the identification and related impairment calculation of individually impaired loans under the Allowance for Loan and Lease Losses methodology, and that this process will no longer be applicable to loans evaluated under CECL. The guidance discusses the management of credit risk, implementing and maintaining a system of independent credit review, and communicating the performance of a bank’s loan portfolio to its management and board of directors. Click here for a copy of the interagency guidance.

6. Other Developments: Cloud Computing, Small-Dollar Lending, Home Mortgage Loan Disclosures, Flood Insurance, and GSE Seller/Servicer Guidance

  • FFIEC Issues Guidance on Risk Management for Cloud Computing Services

The Federal Financial Institutions Examination Council (FFIEC) issued guidance on April 30 addressing the use of cloud computing services and security risk management principles. The guidance does not contain new regulatory expectations, but highlights examples of risk management practices for a bank’s safe and sound use of cloud computing services and safeguards to protect customers’ sensitive personal information.

Nutter Notes:  Among other things, the guidance stresses that the federal banking agencies expect banks to perform ongoing oversight and monitoring of cloud computing service providers for compliance with contractual requirements, and safe and sound operations. The guidance was likely a response at least in part to a security breach at one of the world’s largest core processing vendors that separately provides cloud computing services. Click here for a copy of the cloud computing guidance.

  • Interagency Guidance Issued on Responsible Small-Dollar Lending

The federal banking agencies, together with the NCUA, issued interagency guidance on May 20 that clarifies regulatory expectations for insured depository institutions that offer small-dollar loans to meet customers’ short-term credit needs resulting from temporary economic stress, including the COVID-19 public health emergency. According to the agencies, the “Interagency Lending Principles for Offering Responsible Small-Dollar Loans” is meant to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes.

Nutter Notes:  Among other things, the guidance reminds institutions to offer small-dollar loans in a manner that is consistent with safety and soundness principles, provides fair treatment of consumers, and complies with applicable statutes and regulations. Click here for a copy of the interagency guidance.

  • CFPB Adopts Interpretive Rule Allowing Waiver of Some TRID Waiting Periods

The CFPB adopted a new interpretive rule on April 29 that allows a borrower to waive certain waiting periods otherwise required by the TILA-RESPA Integrated Disclosure (TRID) Rule and Regulation Z’s right of rescission rules in light of the COVID-19 public health emergency if the borrower determines that his or her need to obtain funds due to a COVID-19 related financial hardship requires closing a home mortgage loan transaction before the end of a TRID Rule waiting period or before the end of the Regulation Z rescission rules waiting period. The interpretive rule became effective on May 4.

Nutter Notes The CFPB also concluded that the COVID-19 pandemic constitutes a “changed circumstance” under the TRID Rule, which allows creditors to use revised estimates reflecting changes in settlement charges for purposes of determining good faith. Click here for a copy of the interpretive rule.

  • Federal Reserve Updates Guidance on COVID-19 Flood Insurance Requirements

The Federal Reserve released guidance on May 6 to state member banks on two commonly asked questions relating to flood insurance compliance requirements during the COVID-19 public health emergency. The guidance addresses flood zone determinations and force placed flood insurance requirements.

Nutter Notes:  According to the new guidance, while a COVID-19 related loan modification may require a new flood zone determination in connection with the modified mortgage loan, the Federal Reserve does not expect to take a public enforcement action against a bank that has made good faith efforts to support borrowers, comply with the flood insurance requirements, and respond to any needed corrective action. Click here for a copy of the new guidance.

  • GSEs Issue Guidance on New COVID-19 Payment Deferral Plans

The Federal Housing Finance Agency (FHFA) announced on May 13 that Fannie Mae and Freddie Mac will allow eligible borrowers who have deferred mortgage payments due to financial hardship related to the COVID-19 public health emergency to elect to repay their missed payments at the time the home is sold, refinanced, or at maturity. The Federal Home Loan Banks also updated their guidance to servicers on May 19 to provide a similar payment deferral option for eligible borrowers who are nearing the end of a COVID-19 related forbearance plan but cannot afford to bring their loans current.

Nutter Notes:  Under their guidance to seller/servicers, the government-sponsored entities will allow mortgage loan payments that were deferred due to a COVID-19 related hardship to be carried as a non-interest bearing obligation of eligible borrowers that will become due and payable at maturity of the mortgage loan, or earlier upon the refinance of the mortgage loan or the sale of the mortgaged property. Click here for a copy of the FHFA’s announcement and click here for a copy of the updated guidance from the Federal Home Loan Banks.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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