What Financial Institutions Need to Know Right Now About the New CARES Act
The new Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes several provisions of significance to financial institutions applicable to workouts with borrowers impacted by the COVID-19 crisis. As financial institutions are developing internal policies regarding borrower requests for loan modifications and/or forbearance agreements, financial institutions can take comfort in new relief provided by the CARES Act regarding classification of Troubled Debt Restructurings. However, institutions also must ensure they adhere to the accommodations to borrowers authorized by the Act. A summary of the new provisions is below. Financial institutions can use this summary to guide internal decision-making on loan workouts and setting up loan modifications or forbearance agreements.
Provisions Granting Temporary Relief From Troubled Debt Restructurings (TDRs)
The CARES Act provides temporary relief to financial institutions from troubled debt restructurings beginning March 1, 2020, and extending for 60 days after the end of the COVID-19 national emergency, allowing banks to suspend the requirements under GAAP principles for loan modifications related to COVID-19 that would otherwise be categorized as TDRs. Federal banking agencies and the National Credit Union Administration (NCUA) must defer to a financial institution to make a suspension under the Act. For loan modifications that financial institutions enter into with borrowers during this time frame, the suspension applies for the term of the loan modification. Such modifications include, but are not limited to, repayment plans, interest rate modifications, fees waivers, and forbearance agreements. These temporary relief provisions only apply to loans on which borrowers were otherwise current, which the Act defines as no more than 30 days past due as of December 31, 2019. Accordingly, the goal of the Act is to provide this temporary relief to borrowers and financial institutions where a borrower was not already having difficulties making payment irrespective of the COVID-19 crisis. Financial institutions will therefore need to differentiate amongst borrowers who were otherwise current and stable preceding the COVID-19 crisis from those who were not, both for purposes of electing the TDR relief authorized in the Act and in deciding whether and how to modify troubled loans.
The provisions in the Act follow on a March 22 joint interagency statement issued from regulators to financial institutions working with borrowers affected by COVID-19. The March 22 joint statement from the Board of Governors of the Federal Reserve System (FRB), the FDIC, the NCUA, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB),and the State Banking Regulators offers further detail on the regulators’ guidance for financial institutions.
Credit Protection for Borrowers
With respect to reporting to credit agencies, financial institutions who enter into forbearance agreements or loan modifications with borrowers due to the COVID-19 crisis must report these borrower accounts as “current” or as the status reported prior to the accommodation during the period of accommodation unless the consumer becomes current. This applies only to accounts for which the borrower has fulfilled requirements pursuant to the forbearance or loan modification. This requirement covers the period from January 31, 2020 for 120 days or 120 days after the date the national emergency declaration related to the coronavirus is terminated.
Foreclosure Moratorium and Borrower Right to Request Forbearance
For federally backed mortgage loans, the Act prohibits foreclosures for a 60-day period beginning on March 18, 2020 (unless a property is vacant or abandoned), and authorizes up to 180 days of forbearance for borrowers of a federally backed mortgage loan who have experienced a financial hardship related to the COVID-19 emergency. Borrowers may request forbearance regardless of delinquency status and without penalties, fees, or interest. This prohibition terminates on the earlier of the termination date of the national emergency concerning the coronavirus or Dec. 31, 2020. For these borrowers, forbearance agreements and loan modifications should be considered.
For borrowers at multifamily properties with federally backed mortgages, the Act provides up to 90 days of forbearance if the loan was current as of February 1, 2020, and prohibits a borrower receiving such forbearance from evicting or charging late fees to tenants during the forbearance period.
Small Business Interruption Loans
The Act created a $350 billion loan program for small businesses guaranteed by the SBA. Loans are allowed up to a maximum of $10 million, and may be used for payroll support, mortgage or rent payments, utilities, and other prior debt obligations. Financial institutions must carefully review the new provisions and qualifications for these loans.
As financial institutions grapple with whether and how to structure appropriate workouts with borrowers and seek to document any such workouts resulting from the COVID-19 crisis, Stokes Lawrence attorneys in the firm’s Financial Services Group can help. Our attorneys are experienced in counseling financial institutions regarding workout plans, drafting loan modifications and forbearance agreements, and, where warranted, pursuing judicial and nonjudicial remedies to maximize recovery. To speak with an attorney in our Financial Services Group about these matters, contact Claire Taylor or Thomas Lerner.