President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law on March 27. The CARES Act includes broad economic stimulus measures, and a number of provisions designed to provide relief to banks and their customers. Below is a summary of those provisions of the CARES Act that most directly impact the banking industry and the financial services sector in general. Click here for the entire text of the CARES Act.
- Paycheck Protection Program
- Subsidies for Other SBA Loans
- Additional Emergency Lending Authorities
- Relief for Women- and Minority-Owned Businesses
- Bankruptcy Relief
- Treasury Loan, Loan Guarantee, and Direct Investment Programs
- Employee Compensation Limits
- FDIC Debt Guaranty Authority
- Lending Limits on National Banks and Federal Savings Associations
- Temporary Reduction of the Community Bank Leverage Ratio
- Temporary Relief from TDR Accounting Requirements
- Temporary Relief from CECL Requirements
- Temporary Guarantee Program for Money Market Mutual Funds
- Relief for Consumers from Adverse Credit Reports
- Loan Forbearances on Residential and Multi-Family Properties, and Foreclosure Relief
- Moratorium on Evictions
1. Paycheck Protection Program
A core component of the CARES Act is the provision of approximately $350 billion to guarantee loans to small businesses. The program, called the Paycheck Protection Program (PPP), is an expanded Small Business Administration (SBA) loan program. The loans will be made by banks, credit unions, and other lenders, and are fully guaranteed by the SBA. Eligible borrowers include any business concern, nonprofit organization, veterans’ organization, or Tribal business that employs not more than the greater of (i) 500 employees, or (ii) if applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates. Eligible borrowers also include sole proprietors, independent contractors, and self-employed individuals, such as “gig economy” workers. The maximum PPP loan is equivalent to 250% of the employer’s average monthly payroll costs during the one-year period before the loan is made or $10 million, whichever is less. The CARES Act sets the maximum interest rate for PPP loans at 4% and allows borrowers to defer payments (including principal, interest, and fees) for at least six months and possibly up to one year, depending on SBA regulations to be adopted. Loans only begin to mature after the date on which the borrower applies for loan forgiveness if there is a balance remaining after reduction of the loan based on the loan forgiveness provisions of the CARES Act, and can have a maximum maturity of 10 years from the date the borrower applies for loan forgiveness. Click here for our comprehensive summary of the CARES Act Paycheck Protection Program.
Nutter Notes: The CARES Act provides for loan forgiveness for businesses that retain employees or rehire laid-off employees. Subject to certain conditions, businesses will be eligible for forgiveness up to the amount of payroll costs and certain mortgage, rent, and utilities payments that are incurred during an eight-week period starting on the loan origination date. The CARES Act provides relief from the penalties arising under the loan forgiveness program resulting from a reduction in the workforce for those employers that rehire laid-off employees and/or raise previously lowered wages and salaries. Under the CARES Act, forgiveness will be reduced proportionately by any reduction in employees or by any reduction in pay of any employee beyond 25% of their compensation for the prior year. The amount forgiven may not exceed the loan’s principal. Within 90 days of determining the amount eligible for forgiveness, the SBA will remit the amount to the lender (including any interest accrued through the date of the payment). The CARES Act also provides that any SBA Section 7(a) registered lender can report on a given loan or loan pool to the SBA Administrator on the amount eligible for forgiveness and the SBA will purchase the expected forgiveness amount as if the amount were the principal amount of a Section 7(a) guaranteed loan within 15 days of the report.
2. Subsidies for Other SBA Loans
Existing SBA loans that are not made under the PPP are eligible for subsidies of principal and interest under the CARES Act. These include loans made under Section 7(a) of the Small Business Act, including the Community Advantage Pilot Program, under Title V of the Small Business Investment Act, and loans and grants pursuant to the SBA Microloan program pursuant to Section 7(m) of the Small Business Act. For these loans, the SBA will pay the principal, interest, and any associated fees that are owed for a six-month period as long as the loan is in a regular servicing status. In connection with this relief, the CARES Act also requires that the SBA Administrator “encourage” the FDIC, OCC, and state bank regulators to relax any requirements for lenders to increase their reserves for accounts that are relying on payments received from the SBA. It also requires the SBA to encourage those agencies to waive statutory limits on the maximum loan maturities for certain deferred loans and to extend any lender site visit requirements in the event of adverse events (no more than 60 days) and payment defaults (no more than 90 days).
3. Additional Emergency Lending Authorities
For businesses that cannot obtain a PPP loan, there are other types of loans available through the SBA or SBA preferred lenders, including economic injury disaster loans (EIDL) and emergency grants. EIDLs are made directly by the SBA. Small businesses, private nonprofit organizations of any size, small agricultural cooperatives, and small aquaculture enterprises that have been financially impacted as a direct result of the global COVID-19 pandemic since January 31, 2020 may qualify for EIDLs of up to $2 million to help meet financial obligations and operating expenses which could have been met had the disaster not occurred. The interest rate is 3.75% for small businesses and 2.75% for private nonprofit organizations. The SBA offers EIDLs with long-term repayments, up to a maximum of 30 years. The CARES Act establishes an emergency grant to allow an eligible borrower who has applied for an EIDL to request an advance on that loan, of not more than $10,000, which the SBA must distribute within three days. If the application for an EIDL is denied, the CARES Act provides that recipients are not required to repay emergency advance funds. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.
Nutter Notes: The CARES Act restricts a borrower from receiving a PPP loan and an EIDL for the same purpose. The Act does allow an eligible borrower who has an EIDL unrelated to the global COVID-19 pandemic to apply for a PPP loan, with an option to refinance that loan into the PPP loan. The emergency EIDL grant award of up to $10,000 would be subtracted from any amount otherwise forgiven under the PPP.
4. Relief for Women- and Minority-Owned Businesses
Under the SBA’s Women’s Business Center (WBC) Program, the SBA may provide financial assistance in the form of grants to private nonprofit organizations to conduct five-year projects for the benefit of small businesses owned and controlled by women. One condition to obtaining such funding is that each Women’s Business Center must obtain certain levels of cash contributions from non-federal sources. The CARES Act temporarily suspends the non-federal cash contribution requirements for three months, beginning on March 27, 2020, meaning that such requirements are not required to be met by Women’s Business Centers until June 27, 2020. The CARES Act separately allocates $10 million to the Minority Business Development Agency (MBDA) to administer grants to minority business centers and chambers of commerce. The grants are to be used to provide education, training, and resources to minority-owned small businesses in such areas as applying for and receiving resources provided under the CARES Act, understanding the effects of the global pandemic on essential aspects of their businesses and their businesses’ continued operation, and the management and mitigation of effects of the global pandemic on their businesses and their businesses’ continued operation. In addition, the CARES Act authorizes the MBDA to waive the requirement for minority business centers and chambers of commerce to match federal funding received with non-federal funds.
5. Bankruptcy Relief
The CARES Act contains several provisions that make federal bankruptcy relief more accessible to financially distressed consumers and small businesses. The bankruptcy-related provisions of the CARES Act are effective for one year. Significant changes include an increase in the eligibility threshold for businesses seeking relief under the new Subchapter V of Chapter 11 of the U.S. Bankruptcy Code by increasing the debt limit from $2,725,625 to $7,500,000. After one year, the debt limit will be reduced again to $2,725,625 in accordance with the temporary nature of these bankruptcy amendments. The law creating Subchapter V of Chapter 11, the Small Business Reorganization Act of 2019, was approved last summer, but only became effective on February 19, 2020. The goal of Subchapter V is to make Chapter 11 reorganization relief more affordable and more achievable for the nation’s small businesses. The CARES Act also specifically provides that coronavirus-related payments received from the federal government will not be classified as “income” for purposes of calculating “current monthly income” of individuals seeking federal bankruptcy relief under Chapters 7 (liquidation) and 13 (adjustment of debts of an individual with regular income – commonly referred to as a “wage earner restructuring”). Other statutory changes impacting Chapter 13 bankruptcy cases include: excluding from the calculation of “disposable income” any coronavirus-related payments when determining the confirmability of an individual debtor’s proposed chapter 13 restructuring plan; and authorizing current individual Chapter 13 debtors to seek payment plan modifications if experiencing economic hardship due to the pandemic.
6. Treasury Loan, Loan Guarantee, and Direct Investment Programs
The Secretary of the Treasury (Secretary) is authorized under the CARES Act to make up to $500 billion in loans, loan guarantees, and investments in order to provide liquidity to a broad range of eligible businesses, states, and municipalities to offset losses incurred as a result of the COVID-19 pandemic. These loans, loan guarantees, and other investments are subject to certain conditions and restrictions designed to protect taxpayer interests. Interest rates are to be set at a rate determined by the Secretary based on the risk and the current average yield on outstanding marketable obligations of the United States of comparable maturity. Within 10 days of enactment of the CARES Act, the Secretary must adopt application procedures and minimum requirements for making loans, loan guarantees, or other investments. The CARES Act imposes a number of restrictions on loans and loan guarantees made by the Secretary under this new authority. For example, the duration of any loan or loan guarantee may not be longer than five years. The CARES Act also restricts stock repurchases, dividends, and other capital distributions by eligible recipients that receive a loan or loan guarantee until the date that is 12 months after the date the loan or loan guarantee is no longer outstanding. The CARES Act also requires that participating businesses maintain their employment levels as of March 24, 2020 until September 30, 2020, to the extent practicable, and in any case may not reduce employment levels by more than 10%.
The CARES Act directs the Secretary to endeavor to implement a program or facility that provides financing to banks and other lenders that make direct loans to eligible businesses including, to the extent practicable, nonprofit organizations, with between 500 and 10,000 employees. The interest rate for such direct loans may not be higher than 2% annualized interest. The Secretary has the discretion to waive principal or interest on such direct loans for the first six months or a longer period. Eligible borrowers applying for such a direct loan must make a good-faith certification as to certain eligibility requirements, including that the loan is necessary to support the ongoing operations of the recipient given the uncertainty of economic conditions as of the application date, and that the funds will be used to retain at least 90% percent of the recipient’s workforce, at full compensation and benefits, until September 30, 2020. The recipient must also certify that it intends to restore not less than 90% of its workforce as of February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than four months after the termination date of the COVID-19 public health emergency.
Nutter Notes: The CARES Act also authorizes the Federal Reserve to establish a Main Street Lending Program or other similar program or facility that supports lending to small and mid-sized businesses under Section 13(3) of the Federal Reserve Act, including any such program in which the Secretary makes a loan, loan guarantee, or other investment, as described above. The Federal Reserve announced its intent to establish such a facility on March 23, 2020 before the CARES Act’s enactment. Click here for a copy of the Federal Reserve’s announcement. The CARES Act also directs the Secretary to endeavor to implement a program or facility that provides liquidity to the financial system that in turn supports lending to states and municipalities.
7. Employee Compensation Limits
The Secretary is generally prohibited from making loans or loan guarantees using the new authorities granted under the CARES Act without certain limitations on executive and employee compensation being imposed by agreement. Officers and employees of the following eligible businesses are subject to the compensation restrictions: (i) passenger air carriers, and certified businesses approved to perform inspection, repair, replacement, or overhaul services relating to passenger air service, and ticket agents; (ii) cargo air carriers; (iii) businesses critical to maintaining national security; and (iv) an eligible business participating in the Federal Reserve’s credit facilities established under Section 13(3) of the Federal Reserve Act for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states, or municipalities. The restrictions on officers and employees of eligible businesses extend from the date upon which a loan agreement or loan guarantee is executed and end one year after the loan or loan guarantee is no longer outstanding. Each officer and employee of an eligible business whose total compensation exceeded $425,000 in calendar year 2019 is prohibited from receiving total compensation which exceeds, during any 12 consecutive months, the total compensation received by the officer or employee in calendar year 2019. “Total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee. Severance pay or other termination of employment benefits may not exceed twice the maximum total compensation received by the officer or employee in calendar year 2019. This restriction, however, does not apply to employees whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020. Each officer or employee of an eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 is prohibited from receiving during any 12 consecutive months total compensation in excess of the sum of $3,000,000 and 50% of the excess over $3,000,000 of the total compensation received by the officer or employee in calendar year 2019.
8. FDIC Debt Guaranty Authority
The CARES Act amends Section 1105 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which restricted the FDIC’s emergency authority to guarantee certain debt obligations of insured banks and their bank holding companies without Congressional authorization. The CARES Act grants the FDIC advance Congressional approval that would otherwise be required under the detailed procedural requirements of the Dodd-Frank Act, effective immediately. The FDIC’s authority to establish a debt guarantee program and to issue guarantees terminates no later than December 31, 2020. Any FDIC debt guarantee program authorized by the Cares Act must include a maximum amount of outstanding debt that is guaranteed. The FDIC may adjust deposit insurance coverage above statutory limits to an unlimited or lower amount as it may determine.
Nutter Notes: Section 1105 of the Dodd-Frank Act authorizes the FDIC to create a widely available program to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies (including any affiliates thereof) during times of severe economic distress, except that a guarantee of obligations may not include the infusion of equity in any form. During the 2008-09 global financial crisis, the FDIC increased the deposit insurance limits for noninterest-bearing deposit accounts and guaranteed certain new debt issued by insured depository institutions and their bank holding companies.
9. Lending Limits on National Banks and Federal Savings Associations
The CARES Act authorizes the OCC to temporarily exempt, by order, any transaction or series of transactions from the limits on loans to one borrower applicable to national banks upon a finding by the OCC that the exemption is in the public interest. Federal law applies the same limits to federal savings associations as it applies to national banks. The OCC may waive such limits until the earlier of the termination of the COVID-19 public health emergency or December 31, 2020. The CARES Act also exempts loans to nonbank financial companies approved by the OCC from the limits on loans to one borrower during the same period. It is not clear whether similar relief from limits on loans to one borrower applicable to state-chartered banks will be implemented by bank regulators.
10. Temporary Reduction of the Community Bank Leverage Ratio
The CARES Act temporarily reduces the minimum community bank leverage ratio (CBLR) to 8% percent, from the original level of 9%, until the earlier of the termination of the COVID-19 public health emergency or December 31, 2020. A qualifying community banking organization that opts into the CBLR framework and continues to maintain a tier 1 leverage ratio of more than 8% during this period will be considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rule and will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations. Such a qualifying community banking organization will not be required to report or calculate risk-based capital. The CARES Act also directs the federal banking agencies to provide a community banking organization that has opted into the CBLR framework with a grace period if the organization falls out of compliance with the CBLR during the same period. If a banking organization’s CBLR deteriorates below the minimum threshold, it may choose to opt-out of the CBLR framework and again become subject to the generally applicable risk-based capital requirements. To qualify for the CBLR framework, a community banking organization must have less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.
11. Temporary Relief from TDR Accounting Requirements
The CARES Act permits banks to elect to temporarily suspend the requirements under U.S. GAAP applicable to troubled debt restructurings (TDRs) for loan modifications related to the COVID-19 pandemic for any loan that was not more than 30 days past due as of December 31, 2019. Loan modifications that would otherwise be categorized as TDRs are not required to be reported as such, and banks are not subject to TDR impairment requirements for accounting purposes, if the bank elects to suspend TDR treatment. The suspension may be effective until the earlier of December 31, 2020, or the date that is 60 days after the date on which the COVID-19 public health emergency is terminated. Any such suspension is applicable for the term of the coronavirus-related loan modification, and will not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic. Banks must continue to maintain records of the volume of loans subject to a TDR suspension.
12. Temporary Relief from CECL Accounting Requirements
Under the CARES Act, insured depository institutions and depository institution holding companies are not required to comply with the current expected credit losses (CECL) methodology accounting standard until the earlier of the termination of the COVID-19 public health emergency or December 31, 2020. The Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduced CECL to U.S. GAAP, in 2016. The effective date of ASU 2016-13, and therefore the mandatory use of the CECL methodology, varies for different banking organizations.
13. Temporary Guarantee Program for Money Market Mutual Funds
The CARES Act authorizes the Secretary to use Exchange Stabilization Fund assets to establish a new temporary guarantee program for money market mutual funds, similar to a program established during the 2008-09 global financial crisis. A guarantee may cover the value of a shareholder’s account in a particular money market mutual fund as of the day before announcement of the guarantee and will expire on December 31, 2020. The CARES Act also authorizes the appropriation of new money to the extent that fees or premiums charged to the funds are not sufficient to make all guarantee payments.
Nutter Notes: The U.S. Treasury Department has not yet released details of the new money market mutual fund guarantee program. It is not clear whether this will replace or merely supplement the Money Market Mutual Fund Liquidity Facility (MMLF), announced March 18, which authorizes the Federal Reserve Bank of Boston to loan money for banks to acquire certain assets from money market mutual funds. Click here for information about the MMLF.
14. Relief for Consumers from Adverse Credit Reports
The CARES Act amends the Fair Credit Reporting Act to provide that, if a bank or other financial institution that furnishes information to credit bureaus makes an “accommodation” on a consumer credit obligation or account related to the COVID-19 pandemic, and the consumer makes any required payments or is not required to make any payments during the period of the accommodation, then the institution must report the obligation or account as “current” (or as the status reported prior to the accommodation) during the period of the accommodation. The term “accommodation” means an agreement to defer 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 consumer who is affected by the COVID-19 pandemic during the period from January 31, 2020 until the later of 120 days after the enactment date of the CARES Act or 120 days after the date on which the COVID-19 public health emergency is terminated.
15. Loan Forbearances on Residential and Multi-Family Properties, and Foreclosure Relief
The CARES Act allows a borrower to request forbearance from payments on a federally backed residential mortgage loan. To qualify, the mortgage loan must be secured by a residential one-to-four family property, and the borrower must be experiencing financial hardship due, directly or indirectly, to the COVID-19 public health emergency. The borrower need not be current on payments. The loan must also be either (i) insured by the Federal Housing Administration; (ii) guaranteed or insured by the U.S. Department of Veterans Affairs or the U.S. Department of Agriculture (USDA); (iii) made by the USDA; or (iv) purchased or securitized by Fannie Mae or Freddie Mac. A forbearance request must be made between March 27, 2020 and the sooner of December 31, 2020 or the termination of the national emergency. To request forbearance, a borrower must submit a request to the mortgage servicer and affirm that the borrower is experiencing financial hardship due to the national emergency. The borrower should include the desired duration of the forbearance, which can initially be up to 180 days. A subsequent extension of up to an additional 180 days can be requested. The mortgage servicer must then provide forbearance for the requested duration with no additional documentation required from the borrower. The borrower will not accrue any fees, penalties, or interest beyond the amounts that would be due as if the mortgage payments were made on time. Additionally, the CARES Act imposes a 60-day foreclosure moratorium which prohibits a mortgage servicer of a federally backed residential mortgage loan from (i) initiating any judicial or non-judicial foreclosure process, (ii) moving for a foreclosure judgment or order of sale, or (iii) executing a foreclosure-related eviction or foreclosure sale during the 60-day period beginning on March 18, 2020, unless the property is already vacant or abandoned.
Nutter Notes: The CARES Act also allows a borrower to request forbearance from mortgage payments on a federally backed multi-family mortgage loan. To qualify, a borrower must be current on mortgage payments as of February 1, 2020 and be experiencing financial hardship due, directly or indirectly, to the COVID-19 public health emergency. The loan must be secured by residential property designed for the occupancy of five or more families, and must be either (i) made, insured, or guaranteed by the U.S. Department of Housing and Urban Development, or (ii) purchased or securitized by Fannie Mae or Freddie Mac. Forbearance requests must be made between March 27, 2020 and the sooner of December 31, 2020 or the date on which the COVID-19 public health emergency is terminated. To request forbearance, the borrower must submit a written or oral request to the mortgage servicer and affirm that the borrower is experiencing financial hardship due to the national emergency. The borrower should include the desired duration of the forbearance, which can initially be up to 30 days. Two subsequent extensions of up to 30 days each can also be requested. The mortgage servicer must then provide forbearance for the requested duration with no additional documentation required from the borrower. A borrower receiving forbearance cannot evict tenants or charge penalties solely for nonpayment of rent. Additionally, the borrower cannot require tenants to vacate without giving 30 days’ advance notice, which cannot be given until after the term of the forbearance.
16. Moratorium on Evictions
The CARES Act imposes a 120-day moratorium on evictions by prohibiting all lessors of “covered dwellings” from filing new eviction actions or charging penalties for non-payment of rent during the 120-day period beginning on March 27, 2020. Additionally, lessors cannot require tenants to vacate without giving 30 days’ advance notice, which cannot be given until after the 120-day moratorium has expired. The moratorium applies to every lessor of a covered dwelling regardless of whether the lessor is requesting a forbearance on mortgage payments under the CARES Act, as described above. A “covered dwelling” includes a property on which a mortgage loan has been either (i) made, insured or guaranteed by HUD or (ii) purchased or securitized by Fannie Mae or Freddie Mac. A “covered dwelling” also includes a property that participates in either (a) a “covered housing program” as defined by the Violence Against Women Act; or (b) the rural housing voucher program under section 542 of the Housing Act of 1949.