CARES Act: Bank Regulatory Relief Provisions | Practical Law

CARES Act: Bank Regulatory Relief Provisions | Practical Law

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. This Update focuses on the bank regulatory related relief provisions of the CARES Act.

CARES Act: Bank Regulatory Relief Provisions

Practical Law Legal Update w-024-7033 (Approx. 3 pages)

CARES Act: Bank Regulatory Relief Provisions

by Practical Law Finance
Published on 31 Mar 2020 • USA (National/Federal)
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. This Update focuses on the bank regulatory related relief provisions of the CARES Act.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)) was signed into law. The CARES Act consists of a $2 trillion economic relief package to aid businesses and workers affected by the 2019 novel coronavirus disease (COVID-19). This Update focuses on the bank regulatory related provisions of the CARES Act.

Lending Limit Waiver

National banks are limited in the amount of loans and extensions of credit they can make to any one borrower. A national bank cannot extend credit to any one borrow in excess of 15 percent of the bank's total capital and surplus. An additional 10 percent of capital is available if the excess credit over 15 percent is fully secured by readily marketable collateral. For more information see Practice Note, Lending Limits for Banks.
The CARES Act:
  • Gives the Office of the Comptroller of the Currency (OCC) the authority to grant an exemption from these limits for any transaction or series of transactions.
  • Provides that loans to nonbank financial companies predominantly engaged in financial activities are excepted from these limits.
These amendments are effective until the earlier of December 31, 2020 or the date the COVID-19 national emergency is terminated.

CECL Relief

The CARES Act allows financial institutions subject to the Financial Accounting Standards Board's recently implemented accounting standard known as Current Expected Credit Losses (CECL) methodology to delay implementation until the earlier of December 31, 2020 or the date the COVID-19 national emergency is terminated.

Community Bank Leverage Ratio Relief

Under the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, federal banking agencies were requited to develop a community bank leverage ratio (CBLR) of not less than eight percent and not more than 10 percent for qualifying community banks. Qualifying community banks that exceed the CBLR are considered as having met:
  • The generally applicable leverage capital requirements and the generally applicable risk-based capital requirements.
  • The capital ratio requirements that are required in order to be considered well capitalized under section 38 of the FDIA (12 U.S.C. 1831o) and any regulation implementing that section.
  • Any other capital or leverage requirements to which the qualifying community bank is subject.
The regulations implemented by the federal bank regulatory agencies set the CBLR at nine percent. The CARES Act requires federal bank regulators to issue an interim final rule that sets:
  • The CBLR at eight percent.
  • A reasonable "grace period" for institutions that fall below eight percent.
The eight percent ratio is effective from the date of the regulatory rulemaking becomes effective until the earlier of December 31, 2020 or 60 days after the date the COVID-19 national emergency is terminated.

FDIC Debt Guarantee Authority

The CARES Act authorizes the Federal Deposit Insurance Corporation (FDIC) to guarantee debt and non-interest bearing transaction accounts of solvent insured depository institutions and their holding companies. This authority will allow the FDIC to reinstate the debts and transaction account programs implemented during the financial crisis, which provided unlimited deposit insurance for business and transaction accounts and to issue FDIC-guaranteed term debt.

Troubled Debt Restructurings

The CARES Act suspends any US Generally Accepted Accounting Principles (GAAP) requirement that a loan modified as a result of COVID-19 be designated as a troubled debt restructuring. The loan must not have been more than 30 days past due as of December 31, 2019, and the modification must be made between March 31, 2020 and the earlier of December 31, 2020 or 60 days after the end of COVID-19 national emergency.
Financial institutions should document the reasons giving rise to the modification and specify that they are COVID-19 related in their loan records.