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Federal agencies issue FAQs covering CRA and Covid-19
On May 27, the Federal Reserve Board, the OCC, and the FDIC posted Community Reinvestment Act (CRA) FAQs related to Covid-19. The FAQs acknowledge that while Covid-19 affected states are categorized by the Federal Emergency Management Agency (FEMA) as Category B, which would normally not be considered designated disasters under the CRA, the agencies will grant consideration for activities that revitalize or stabilize affected areas by protecting public health and safety. The FAQs frequently cite to the joint statement on CRA consideration for activities in response to Covid-19, issued by the agencies in March (covered by InfoBytes here). Among other things, the FAQs discuss how Paycheck Protection Program and Main Street Lending Program loans may be eligible for CRA consideration and how bank examiners will consider affordable housing measures under the CRA.
Boston Fed releases Main Street Lending Program forms and agreements
On May 27, the Federal Reserve Bank of Boston posted the necessary legal forms and agreements for eligible borrowers and eligible lenders to participate in the Main Street Lending Program on their website. The documents include, among other things, lender registration certifications and covenants, lender wire instructions, loan participation agreements, and servicing agreements. The Boston Fed has also updated the Main Street Lending Program’s FAQs.
Additional details about the Main Street Lending Program can be found in a previous InfoBytes post here, and a Buckley Special Alert here.
Prudential regulators outline principles on small-dollar lending
On May 20, the FDIC, Federal Reserve Board, OCC, and NCUA issued joint principles for offering responsible small-dollar loans. The agencies note the “important role” that small-dollar lending can play during times of economic stress, such as the Covid-19 pandemic, and issued the guidance to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses. The principles cover various loan structures, including open-end lines of credit with minimum payments, closed-end loans with short single payment terms, and longer-term installment payments. The guidance indicates that reasonable loan policies and risk management practices would generally address the following:
- Loan structures. Loan amounts and repayment terms should align with eligibility and underwriting criteria that support successful repayment of the loan, including interest and fees, rather than re-borrowing, rollovers, or immediate collectability in the event of default.
- Loan pricing. Pricing, including for loans offered through managed third-party relationships, should reflect “overall returns reasonably related to the financial institution’s product risks and costs” and comply with applicable state and federal laws.
- Loan underwriting. Underwriting should use internal and/or external data sources to assess a customer’s creditworthiness. Underwriting may use new technologies and automation to lower the cost of providing the small-dollar loans.
- Loan marketing and disclosures. Disclosures should comply with applicable consumer protection laws and regulations and provide information in “a clear, conspicuous, accurate, and customer-friendly manner.”
- Loan servicing and safeguards. Timely and reasonable workout strategies, such as payment term restructuring, should be provided for customers who experience financial distress.
As previously covered by InfoBytes, the federal financial regulators issued a joint statement in March, encouraging institutions to offer reasonable, small-dollar loans to consumers and small businesses to help mitigate the effects of the Covid-19 pandemic.
Treasury and Fed testify on CARES Act relief
On May 19, the Senate Committee on Banking, Housing, and Urban Affairs conducted a hearing with Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven T. Mnuchin to discuss the agencies’ efforts to implement the CARES Act relief provisions to support consumers and help stabilize the infrastructure of the economic system. Topics discussed included emergency lending facilities, such as the Main Street Lending Program and the Municipal Liquidity Facility, as well as the Paycheck Protection Program (PPP) and the Payroll Support Program.
Mnuchin testified that Treasury has “worked closely with the Small Business Administration on the [PPP] to ensure the processing of more than 4.2 million loans for over $530 billion[.]” He issued praise for the nearly 400 Community Development Financial Institutions and Minority Depository Institutions, as well as the many small and non-bank lenders that are participating in the program. Mnuchin noted that, while Treasury has already committed up to $195 billion of the $500 billion provided by Congress, the agency plans to use the remainder to create or expand programs as necessary after determining how best to deploy the money to help losses associated with the Covid-19 pandemic. “The only reason I have not allocated it fully is we are just starting to get these facilities up and running,” Mnuchin emphasized during the hearing. “We want to have a better idea as to which one of the facilities needs more capital as well as the potential for adding additional facilities.” Mnuchin also stated that Treasury is “fully prepared to take losses in certain scenarios on that capital.”
Powell discussed lending programs and monetary policy efforts taken by the Fed under section 13(3) of the Federal Reserve Act since the pandemic started, including measures to help stabilize short-term funding markets. These include lengthening the term and lowering the rate on discount window loans to depository institutions, and—together with Treasury—establishing the Commercial Paper Funding Facility and the Money Market Mutual Fund Liquidity Facility. Powell also discussed the Term Asset-Backed Securities Loan Facility, which will lend against asset-backed securities “backed by newly issued auto loans, credit card loans, and other consumer and small business loans.” Powell stressed that “public input has been crucial” in the agency’s development of these facilities and that additional adjustments may occur “as we learn more” about the needs of potential borrowers.
SEC issues exemption for broker-dealer TALF Agents
On May 15, the SEC granted an exemption to broker-dealers designated by the Federal Reserve Bank of New York (NY Fed) as Term Asset-Backed Securities Loan Facility (TALF) Agents from certain requirements of Section 11(d)(1) of the Exchange Act. As previously covered by InfoBytes, under the TALF, the NY Fed will provide loans to U.S. companies that are secured by certain eligible consumer and small business asset-backed securities, such as student loans, auto and credit card loans, loans guaranteed by the SBA and certain other assets. The exemption for broker-dealers was requested by the NY Fed on May 12, because Section11(d)(1) would prevent TALF Agents from arranging nonrecourse loans in which the broker-dealer participated as a member of a selling syndicate or group.
The SEC granted the exemption with respect to asset-backed securities that are or may be designated as “eligible collateral,” declaring that any broker-dealer designated as a TALF Agent and participating in TALF 2020 is exempted from the requirements of Section 11(d)(1).
Federal agencies allow supplementary leverage ratio flexibility
On May 15, the FDIC, Federal Reserve Board (Fed), and the OCC announced an interim final rule (IFR) that temporarily permits depository institutions to choose to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the supplementary leverage ratio (SLR) to provide flexibility during the Covid-19 pandemic. The exclusion would enable depository institutions to expand their balance sheets to provide additional credit to households and businesses. The SLR and the IFR apply to depository institution subsidiaries of U.S. systemically important bank holding companies and depository institutions subject to Category II or Category III capital standards. According to the FDIC’s Financial Institution Letter FIL-57-2020, if a depository institution elects to exclude U.S. Treasury securities and deposits from the SLR, it, among other things, (i) must notify its primary federal banking regulator within 30 days after the IFR is effective; (ii) may choose to reflect the exclusion as if the IFR has been in effect the entire second quarter of 2020; and (iii) must obtain approval from its primary federal banking regulator before making a distribution or creating an obligation to make a distribution, beginning in the third quarter of 2020 through March 2021, so long as the temporary exclusion is in effect. The IFR goes into effect upon publication the Federal Register and is effective through March 31, 2021.
See also OCC Bulletin 2020-52 and additional questions for feedback by the Fed.
Fed details Covid-19 economic strain on households and financial sector
On May 14, the Federal Reserve Board (Fed) issued the latest Report on the Economic Well-Being of U.S. Households, which outlines the results of an October 2019 survey of over 12,000 adults. Notably, the Fed included supplemental data from an April 2020 survey of 1,000 adults, which caused the Fed to state that financial conditions “changed dramatically for people who experienced job loss or reduced hours during March 2020 as the spread of COVID-19 intensified in the United States.” Highlights of the supplemental data include: (i) 19 percent of all adults reported either losing a job or experiencing a reduction in work hours in March; and (ii) among the adults who experienced a job loss or had hours cut in March, 51 percent indicated they were at least “doing okay” financially, while 48 percent were “finding it difficult to get by” or “just getting by.”
Additionally, on May 15, the Fed released its Financial Stability Report, which focuses on the effect of the Covid-19 pandemic on U.S. financial stability and discusses the Fed’s response. The report notes that due to the Covid-19 pandemic, “disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit” and that the banking sector “may experience strains as a result,” even though it had large capital and liquidity buffers before the shock. Overall, the Fed concludes that the outlook for the pandemic and economic activity is “uncertain.” The report also notes that (i) asset prices remain vulnerable to significant price declines; (ii) the issuance of high-yield corporate bonds and the origination of leveraged loans appear to have slowed appreciably; (iii) the prospect for losses at financial institutions appears elevated; and (iv) while funding markets proved less fragile than during the 2007-09 crisis, Fed actions were required to stabilize short-term funding markets.
Federal Reserve issues FAQs on recent Regulation D changes
On May 13, the Federal Reserve published updated frequently asked questions (FAQs) regarding savings deposits under the recent changes to Regulation D. On April 23, the Federal Reserve issued an interim final rule amending Regulation D, which we previously covered here. Among other things, the interim rule deleted restrictions on transfers to address financial disruptions related to Covid-19. The FAQs clarify the definition of a savings deposit under the regulation, requirements for reporting savings deposits, reservation rights, and whether amendments to Regulation D impact Regulation CC.
Agencies finalize policy changes to CECL
On May 8, the FDIC, Federal Reserve Board, OCC, and NCUA finalized an interagency policy statement on allowances for credit losses and interagency guidance on credit risk review systems. As previously covered by InfoBytes, the proposed policy statement and interagency guidance were released in October 2019.
The final policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology. The CECL methodology determines allowances for credit losses applicable to financial assets measured at amortized cost, loans held-for-investment, net investments in leases, held-to-maturity debt securities, and certain off-balance-sheet credit exposures. The policy statement also stipulates financial assets for which the CECL methodology is not applicable, and includes supervisory expectations for designing, documenting, and validating expected credit loss estimation processes. The final policy statement becomes applicable to an institution upon that institution’s adoption of a CECL methodology.
The interagency credit risk review systems guidance—which is relevant to all institutions supervised by the agencies—updates the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses to reflect the CECL methodology. The guidance “discusses sound management of credit risk, a system of independent, ongoing credit review, and appropriate communication regarding the performance of the institution's loan portfolio to its management and board of directors.” Furthermore, the guidance stresses that financial institution employees involved with assessing credit risk should be independent from an institution’s lending function.
See also FDIC FIL-54-2020 and FIL-55-2020 and OCC 2020-49 Bulletin and 2020-50 Bulletin.
Federal Reserve publishes revised terms, other information regarding lending and liquidity facilities
On May 12, the Federal Reserve Board issued additional information regarding the Term Asset-Backed Securities Loan Facility (TALF) and the Payment Protection Program Liquidity Facility (PPPLF). It issued a revised term sheet for TALF, indicating that eligible borrowers include businesses that (i) are created or organized in, or under the law of the United States; (ii) have significant operations in and a majority of their employees based in the United States; and (iii) maintain an account relationship with a primary dealer. The board also announced that, on a monthly basis, it will publicly disclose the name of each participant in the TALF and the PPPLF, as well as amounts borrowed and interest rate charged. In addition, the board issued FAQs regarding the TALF.