Banking Regulatory Relief Provisions under the CARES Act

March 30, 2020

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains temporary accounting and regulatory relief measures intended to provide financial institutions with increased flexibility to address the needs of their customers during the COVID-19 pandemic. These measures include suspensions of or limitations on otherwise applicable accounting principles regarding troubled debt restructurings (TDRs) and current expected credit losses (CECL), as well as regulatory relief provisions. The CARES Act also authorizes the Federal Deposit Insurance Corporation and the National Credit Union Administration to temporarily (through the end of 2020) guarantee the noninterest bearing transaction accounts at institutions they insure, in effect providing federal deposit insurance coverage for business checking accounts that exceed the otherwise applicable $250,000 insurance limit.

Characterizing a modified loan as a TDR carries significant administrative and financial consequences for a financial institution; the suspension of TDR standards for the effects of COVID-19 is designed to make financial institutions more willing to accommodate loan modifications for COVID-19-affected customers. The CECL accounting standards, which are currently being phased in, have been extremely controversial within the banking industry, primarily due to concerns relating to their impact on lending standards and usefulness for both management and bank investors. Despite these industry concerns, it is quite unusual for legislation to override accounting standards, and the CARES Act provision may presage future legislative actions to extend, or make permanent, these suspensions.

The following is a brief summary of CARES Act accounting and regulatory relief provisions:

  • Accounting treatment for troubled debt restructurings
    • GAAP principles for loan modifications related to COVID-19 that would be otherwise classified as TDRs are suspended.
    • The suspension is applicable for the term of the loan modification, but solely with respect to any modification that occurs during the applicable period (described below) for a loan that was not more than 30 days past due as of December 31, 2019.
    • Covered modifications include forbearance arrangements, interest rate modifications, repayment plans and any other similar arrangement that defers or delays the payment of principal or interest.
    • The federal banking agencies are directed to defer to a financial institution’s TDR determinations.
    • The suspension applies from March 1, 2020 through the earlier of December 31, 2020 or the date that is 60 days after termination of the COVID-19 national emergency, but does not apply to any adverse impact on the credit not related to the COVID–19 pandemic.
  • Suspension of CECL accounting standard
    • The CARES Act suspends Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses, for financial institutions, their holding companies and affiliates.
    • The suspension applies from March 27, 2020 through the earlier of December 31, 2020 or the termination of the COVID-19 national emergency.
  • Reduction of regulatory capital minimums
    • The federal banking agencies must issue an interim final rule reducing the Community Bank Leverage Ratio to 8% (from 9%) and creating a grace period under which a qualifying community bank whose capital falls below the 8% ratio may return to compliance.
    • The new rules will apply from March 27, 2020 through the earlier of December 31, 2020 or the termination of the COVID-19 national emergency.
  • Temporary waiver of lending limits
    • The Office of the Comptroller of the Currency is authorized to waive national bank lending limits upon a finding that such waiver is in the public interest.
    • The authority applies from March 27, 2020 through the earlier of December 31, 2020 or the termination of the COVID-19 national emergency.

To stay abreast of the emerging issues, Lewis Rice has formed a COVID-19 Task Force, which brings together subject matter authorities from various practice areas within the Firm who stand ready to assist our clients as they navigate these complex challenges. Our attorneys are closely monitoring these developments as they occur and will make regular updates to our resource center.

If you have legal questions related to COVID-19, please reach out to one of the authors above or another member of the Task Force.