Temporary Bank Forbearance on Loans Due to COVID-19 Hardships

On March 21, 2020, New York Gov. Andrew Cuomo issued New York Executive Order 202.9, “Continuing Temporary Suspension and Modification of Laws Relating to the Disaster Emergency" (the “Executive Order.”) The Executive Order focuses on forbearance of loans by banking institutions for individuals and businesses suffering financial hardships stemming from the COVID-19 pandemic.

New York Executive Order 202.9

The Executive Order modified New York Banking Law § 39(2) to deem it an “unsafe and unsound business practice” for any bank that is subject to the jurisdiction of New York’s Department of Financial Services (“DFS”) to not grant loan forbearance to “any person or business who has suffered a financial hardship as a result of the COVID-19 pandemic” for a period of 90 days. It is unclear how broadly the term “bank” will be interpreted. The most narrow interpretation of the term “banks” that are subject to DFS jurisdiction would only include New York State chartered banks; however, some question whether such a narrow interpretation was the actual intent of the Governor given that, as a general proposition, the Executive Orders issued to date in connection with the pandemic have evidenced an intention to be as wide-reaching as possible.

A broader interpretation of banks that are subject to DFS jurisdiction may include, among others, all New York State chartered banks, out-of-state chartered banks that maintain one or more branches in New York State, and foreign banking corporations licensed by DFS to do business in New York State. National banking associations and other federally chartered banking institutions would likely not be covered even under a broader reading of the term. Under New York Banking Law §39(2), DFS may issue an order to any banking institution subject to its jurisdiction to discontinue any unsafe and unsound business practice. Under New York Financial Services Law § 309(a), DFS can also prosecute actions to obtain an injunction against banks for violating provisions of the Banking Law. The Executive Order will stay in effect until at least April 20, 2020.

The Executive Order also directed DFS to promulgate emergency regulations developing a relief program for consumers to assist individuals suffering financial hardships from COVID-19 in applying for forbearance of residential loans. DFS was further directed to promulgate regulations restricting and or modifying ATM fees, overdraft fees, and credit card late fees charged by banking institutions licensed or regulated by DFS.

3 NYCRR § 119

In response to the directive from the Executive Order, DFS promulgated a new part 119 to Title 3 of the New York Code, Rules and Regulations (“3 NYCRR § 119”) on March 24, 2020, detailing the COVID-19 Relief Program for individuals with respect to residential loans. 3 NYCRR § 119.3(a) requires banking institutions subject to DFS jurisdiction to develop and make widely available applications for forbearance of any payment due on a residential mortgage located in New York State for individuals who can demonstrate financial hardship stemming from the COVID-19 pandemic and, following determination that the individual application qualifies for COVID-19 relief, grant forbearance for a period of 90 days. 3 NYCRR § 119.3(b) states that all banking institutions under DFS jurisdiction will provide the following relief for any individual who qualifies for COVID-19 relief: the elimination of (1) ATM fees on machines owned or operated by the banking institution; (2) overdraft fees; and (3) any credit card late payment fees. While these forms of COVID-19 relief are required by the regulations, banking institutions are not limited to these forms of relief and are in fact encouraged to offer additional forms of relief whenever possible.

3 NYCRR § 119.3(c) requires banking institutions to e-mail, publish on their website, mass mail, or otherwise broadly communicate to individuals how to apply for COVID-19 relief and provide contact information for official responsible at the banking institution. Such broad communication should take place as soon as reasonably possible, but no later than 10 business days following promulgation of 3 NYCRR § 119.

While the regulations set out in 3 NYCRR § 119 allow banking institutions to develop the criteria to qualify for the COVID-19 relief program, 3 NYCRR § 119.3(d) does require that the criteria be clear and easy to understand, as well as reasonably tailored to what the banking institution will need to know to determine whether it will provide COVID-19 relief to an individual applicant. Further, banking institutions are required to respond promptly to any individual applicant who omits information needed to process the application and explain to the individual applicant how that information can be obtained and delivered to the banking institution.

Applications for COVID-19 relief must be processed and responded to no later than 10 business days following receipt of all necessary information to process the application. Banking institutions must also develop an expedited procedure for those applicants who demonstrate exigent circumstances and request expedited processing because of those exigent circumstances. All determinations by banking institutions should be communicated to applicants in writing, either detailing what additional steps need to be taken to obtain relief, granting the relief requested, or detailing the reason why the application was denied (and providing a statement that an appeal can be filed with DFS, along with DFS contact information, if the appeal was denied).

Banking institutions are encouraged to seek the guidance of DFS with respect to notices, communications, applications, and other issues arising from 3 NYCRR § 119. Finally, 3 NYCRR § 119.3(k) states that the DFS regulations do not apply to loans other than residential mortgages, thus expressly excluding commercial mortgages.

Federal Guidance

On March 22, 2020, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of Comptroller of the Currency, the Consumer Financial Protection Bureau, and the State Banking Regulators (collectively known as the “Federal Financial Agencies”) collectively issued guidance related to financial institutions who are working with borrowers affected by financial hardships stemming from COVID-19. In this guidance, the Federal Financial Agencies stated that loan modification programs are positive actions that can help limit the financial hardships resulting from the COVID-19 pandemic. The Federal Financial Agencies have made it known that they will not criticize financial institutions for such loan modifications and have directed the supervising institutions over such financial institutions not to automatically categorize COVID-19 loan modifications as “troubled debt restructurings” or (“TDRs”).

In conjunction with the Financial Accounting Standards Board, the Federal Financial Agencies have determined that short-term modifications (up to six (6) months) made because of COVID-19 hardships, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment will not be considered a TDR under U.S. Generally Accepted Accounting Principles (GAAP). Further, loan modifications and other forbearance measures on one-to-four family residential mortgages, where the loans are “prudently underwritten” and “not past due or carried in non-accrual status” will not result in these loans being considered restructured or modified for purposes of risk-based capital rules.

As it applies to past-due reporting rules, provided that a loan is not required to be reported as past due for any other reason, the fact that a loan has been forborne due to COVID-19 hardships will not trigger the requirement to report the loan as past due during the life of COVID-19 forbearance. During the COVID-19 forbearance period, the loans should also not be reported as non-accrual, unless applicable regulatory reporting instructions state otherwise.

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