Special Alert: CARES Act places significant burdens on servicers of consumer debt but provides some relief to depositories
President Trump late last week signed the Coronavirus Aid, Relief, and Economic Security Act that attempts to soften the negative economic effects of the Covid-19 pandemic on consumers, including by suspending payments for certain student loan borrowers and enabling mortgage loan borrowers to easily obtain temporary forbearances. The act also provides certain limited regulated relief for banks and credit unions.
This Special Alert summarizes the provisions providing relief to borrowers with federal student loans and the provisions of Title IV that dictate the manner in which servicers and collectors report borrowers to consumer reporting bureaus; provide forbearance, foreclosure, and eviction relief throughout the housing market; and provide limited regulatory relief to depository institutions.
Buckley issued a separate Special Alert on the Small Business Administration-related provisions contained in Title I of the act and will be covering separately the new Special Inspector General’s office created by the act, False Claims Act considerations, and other liability risks that we expect to arise.
I. CARES Act Protections for Borrowers and Renters
Relief for borrowers with federal student loans:
Scope: The payment holiday applies to borrowers with Federal Family Education Loan Program (FFELP) and Federal Direct loans. The act does not contain similar provisions addressing the private student loan market.
Relief Provided: The act temporarily suspends student loan payments. During this suspension period, interest will not accrue on these loans, loan servicers will report suspended payments as having been made to consumer reporting agencies, and—for borrowers in loan forgiveness or rehabilitation programs—servicers will treat suspended payments as having been made. The suspension automatically applies to covered loans and the borrower need not request this relief nor show any adverse economic impact from the Covid-19 pandemic. In addition, during the suspension period the Department of Education (ED) may not garnish wages, reduce tax refunds, offset other federal benefits, or undertake “any other involuntary collection activity.”
Procedures for Relief: The payment suspension is automatic. ED must also inform such borrowers of these changes no later than April 11, 2020, and again before resuming regular servicing activities.
Duration: The act suspends all federal student loan payments through September 30, 2020.
Credit reporting relief
The act amends the Fair Credit Reporting Act to require furnishers of information to credit bureaus to modify credit reporting practices if and when they grant an “accommodation”—that is, an agreement to defer payments, modify a loan, or grant other relief—to borrowers impacted by the Covid-19 pandemic, irrespective of asset type. For obligations that were current prior to granting the accommodation, the furnisher is required to continue to report the obligation as current so long as the borrower complies with the accommodation. For obligations that were delinquent prior to granting the accommodation, the furnisher must continue to report the status as it had previously been reporting—even if the actual status deteriorates—but report the borrower as current if the account is brought current during the accommodation. Charged-off accounts are excluded from the new requirements under the act.
Duration: The requirements apply to consumers affected by the pandemic during the “covered period,” which begins on January 31, 2020 and ends on the later of July 25, 2020 or 120 days after the date of the termination of the federally-declared national emergency.
Relief in the single family housing market
The act offers certain borrowers impacted by the Covid-19 pandemic access to expedited forbearance of mortgage obligations.
Scope: The forbearance provisions apply to a “federally backed mortgage loan,” which is a loan that is:
- A first or subordinate lien;
- Secured by residential property, including condos and coops, designed principally for occupancy of 1 to 4 families; and
- Purchased or securitized by Fannie Mae or Freddie Mac, guaranteed or insured by the Federal Housing Authority or Veterans Administration, or made by the Department of Agriculture.
Relief Provided: Subject to the procedures below, borrowers can receive a forbearance of up to 180 days, along with an extension for an additional 180 days, although either period can be shortened at the borrower’s request. During the forbearance period, no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower had made timely contractual payments may accrue on the account.
Borrower Eligibility and Procedures for Relief: To receive this relief, a borrower, regardless of delinquency status, may submit a request—oral, written, or otherwise—to the servicer and attest that the borrower is experiencing a financial hardship caused by the Covid-19 pandemic. Upon receipt, the servicer must, with no additional documentation required regarding the hardship, provide the forbearance for up to 180 days. The forbearance extension also must be granted at the borrower’s request. The act does not expressly address how the forbearance will be documented or when the forborne amounts will become due.
Duration: The forbearance relief applies to borrower requests made during the “covered period.” However, the “covered period” is not defined in this section. It may be appropriate to treat the “covered period” as the earlier of the termination of the federally-declared national emergency or December 31, 2020 given that this was the definition in a prior version of the legislation, which is consistent with the multifamily provisions described below.
Foreclosure Moratorium: Servicers of federally backed mortgage loans (regardless of whether forbearance has been requested or granted) may not initiate any judicial or non-judicial process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale until May 17, 2020.
Eviction Moratorium: Until July 25, 2020, the owner of a property with a loan made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by any officer or agency of the Federal Government, or in connection with a HUD-administered program, or purchased or securitized by Fannie Mae or Freddie Mac may not make or cause to be made any filing with a court to initiate a legal action to recover possession of the dwelling from a tenant for nonpayment of rent or other fees or charges. In addition, the owner also may not charge fees or penalties, or other charges to the tenant for nonpayment of rent, during this period. Finally, the owner must provide tenants 30 days to vacate a unit, and may not issue a notice to vacate until after July 25, 2020.
Relief in the multi-family housing market
The act offers certain borrowers impacted by the Covid-19 pandemic access to expedited forbearance of multifamily mortgage obligations. However, these borrowers are also obligated to provide rental payment relief to their tenants.
Scope: These provisions apply to any loan, other than temporary financing, that is:
- A first or subordinate lien;
- Secured by residential multifamily real property designed principally for occupancy of 5 or more families, including loans where the proceeds are used to prepay or pay off an existing loan secured by the same property; and
- Made, insured, guaranteed, supplemented, or assisted in any way, by any officer or agency of the Federal Government or under or in connection with a HUD-administered program, or purchased or securitized by Fannie Mae or Freddie Mac.
Relief Provided: Subject to the procedures below, a borrower can receive forbearance of 30 days, with up to two additional 30-day extensions, so long as a request is made 15 days in advance of the end of the applicable forbearance period.
Borrower Eligibility and Procedures for Relief: The borrower must have been current on payments as of February 1, 2020 and affirm they are experiencing a financial hardship during the Covid-19 pandemic. When the servicer receives an oral or written request for forbearance, they must document the financial hardship and provide the forbearance, including up to two 30-day extensions.
Eviction Moratorium: A borrower receiving forbearance may not, for the duration of the forbearance, evict or initiate the eviction of a tenant from a dwelling unit located in or on the property solely for nonpayment of rent or other fees or charges. In addition, a borrower also may not charge any late fees, penalties or other charges for late payment of rent. Finally, a borrower also must provide tenants 30 days to vacate a unit, and may not issue a notice to vacate until after the forbearance period has expired. Similar to the Single Family Housing Market provisions of the act, there is an eviction moratorium through July 25, 2020.
Duration: The forbearance relief applies to borrower requests made during the “covered period.” The “covered period” is the earlier of the termination of the federally-declared national emergency or December 31, 2020.
II. CARES Act relief provisions for financial institutions
In addition to offering relief to borrowers and renters, Title IV of the act includes several provisions that are intended to increase the ability of banks, savings associations, and credit unions to extend credit. The federal banking agencies (and for certain purposes, the National Credit Union Administration (NCUA), which supervises credit unions) are authorized or directed to extend guarantees, grant relief from lending limits, and reduce capital requirements for community banks. In addition, Congress acted directly to suspend compliance with an accounting rule change that would have increased the complexity, and potentially the cost, of maintaining adequate reserves against credit losses. These provisions took effect immediately when the act was signed into law except with respect to the reduced capital requirements, which will take effect as soon as the federal banking agencies adopt an interim final rule.
Duration: The provisions will generally remain in effect through December 31, 2020 but, in some cases, may expire earlier if the federally-declared national emergency is terminated before that date.
Flexibility on troubled debt restructurings
The act temporarily suspends the usual rules under generally accepted accounting principles (GAAP) for characterizing loan modifications entered into by banks and credit unions as “Troubled Debt Restructurings” as a result of the Covid-19 pandemic. By doing so, the act also suspends any further determination that would be made as a result of such a characterization, including an impairment. The provision applies to all loan modifications, including forbearances, interest rate modifications and repayment plans, and is not limited to mortgage and other consumer loans, as long as (i) the loan was not more than 30 days past due as of December 31, 2019, and (ii) the modification was entered into as a result of an adverse impact from the Covid-19 pandemic.
Duration: The suspension ends on the earlier of the termination of the federally-declared national emergency or December 31, 2020.
Flexibility to increase deposit insurance coverage
The act expands the FDIC’s authority to adopt debt guarantee programs by permitting it also to cover noninterest-bearing transaction accounts (i.e., checking accounts). As a result, these accounts may be insured, if the FDIC so determines, in excess of the standard deposit insurance limit of $250,000. The NCUA is given comparable authority to increase the insurance coverage of credit union share accounts up to any amount, or in an unlimited amount.
Duration: This authority of the FDIC and the NCUA extends through December 31, 2020.
The act also sets aside the requirement, created by Section 1105 of the Dodd-Frank Act, for a joint resolution by Congress for any FDIC program or guarantee that terminates no later than December 31, 2020.
Lending limit flexibility
Scope: Expansion of requirements for loans to one borrower
The act amends the Section 84 lending limits for national banks. In general, a national bank may make loans or extensions of credit to any person up to an amount equal to 15 percent of the bank’s capital and surplus, and up to an additional 10 percent of the bank’s capital and surplus if the loan or extension of credit is adequately collateralized. The act authorizes the OCC to exempt by order any transaction or series of transactions from these lending limits upon a finding that the exemption is in the public interest and consistent with the purposes of Section 84. As a result, national banks may be authorized to make loans or extensions of credit in additional amounts or larger amounts than would otherwise be permissible, subject presumably to conditions to be established by the OCC to ensure that such loans or extensions of credit are made on terms consistent with safety and soundness.
Duration: The authority of the OCC to issue exemption orders extends through December 31, 2020 or such earlier date on which the national emergency related to the coronavirus is terminated.
Scope: Expansion of permissibility of loans to nonbank financial institutions
The lending limits in Section 84 are also subject to several statutory exceptions, including for loans to any financial institution when the loans or extensions of credit are approved by the OCC. Specifically, the act extends the authority of the Comptroller to include loans or extensions of credit to any “nonbank financial institution,” as that term is defined in Section 102 of the Dodd-Frank Act. That section does not define the term “nonbank financial institution,” but it defines the term “nonbank financial company” to include a company, organized inside or outside the United States, that is “predominantly engaged in financial activities.” In general, this includes any company that derives 85 percent or more of its consolidated annual gross revenues from, or any company of which 85 percent or more of its consolidated assets are related to, activities that are permissible for a financial holding company under the Bank Holding Company act. Financial holding companies may engage in a wide range of lending activities, as well as securities underwriting, insurance agency and underwriting, and other activities that are “financial in nature.” “Nonbank financial institutions” also includes several organizations involved in the exchange, clearance, or settlement of securities and commodities futures and other derivatives. Therefore, the OCC has the authority to approve loans in excess of the lending limits to a variety of companies, from a consumer finance company to a securities exchange or central clearing party for derivative transactions.
Duration: This authority extends through the earlier of the termination of the federally-declared national emergency or December 31, 2020.
Reduced capital requirements for community banks
The act modifies the application of Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, adopted in 2018. Section 201 directed the federal banking agencies to adopt regulations simplifying the capital requirements for qualifying community banks (in general, a bank, savings association, bank holding company, or savings and loan holding company with less than $10 billion of consolidated assets and a suitable risk profile). Under these regulations, a qualifying community bank that maintains a leverage ratio above 9 percent is considered to be well capitalized. The act directs each of the federal banking agencies to adopt an interim final rule that lowers the minimum leverage ratio to 8 percent and provides a “reasonable grace period” for qualifying community banks that fall below this ratio to satisfy this requirement.
Duration: The interim final rules will take effect through the earlier of the termination of the federally-declared national emergency or December 31, 2020.
Accounting relief on current expected credit losses
The act grants temporary relief to banks, savings associations, and credit unions from the application of the “current expected credit losses” (CECL) methodology for estimating their “allowance for loan and lease losses” (ALLL). Pursuant to updated accounting standards adopted in 2016 by the Financial Accounting Standards Board, these institutions must estimate losses even for unimpaired loans over the life of the loan, which introduces additional compliance and operational obligations when compared to the current methodology for estimating allowances for credit losses. CECL takes effect during 2020 for registrants with the Securities and Exchange Commission, and in subsequent years for other companies. Publicly traded banks, savings associations, and holding companies of all sizes are among the companies required to begin applying CECL during 2020, even as they deal with the effects of Covid-19 on their employees, operations, and customers.
Duration: The act provides that no bank, bank holding company, savings association, credit union, or affiliate thereof is required to comply with CECL or other provisions in FASB Accounting Standards Update No. 2016-13 through the earlier of the termination of the federally-declared national emergency or December 31, 2020.
Relief for credit unions
Flexibility to Temporarily Increase Credit Union Deposit Insurance Limit. The act permits the NCUA Board, in coordination with the Federal Deposit Insurance Corporation (FDIC) (see above), “Flexibility to Extend Deposit Insurance Coverage”), to increase the deposit insurance limit for non-interest bearing deposits held at a federally-insured credit union up to a higher limit through the period ending December 31, 2020.
Temporary Expansion of the National Credit Union Central Liquidity Facility. The act makes a number of temporary changes to the National Credit Union Central Liquidity Facility (facility). One of the purposes of the facility is to provide liquidity to credit unions “in the event of unusual or emergency circumstances of a longer term nature resulting from national, regional or local difficulties.” These changes include:
- Temporarily removing the membership limitation to credit unions that primarily serve natural persons;
- Modifying the subscription capital requirement for an agent member (that serves other credit unions) to join from a set ½% of capital and surplus of all of the credit unions it serves (that are not members of the facility) to ½% of the capital and surplus of only the credit unions in that group as the NCUA Board determines, giving the NCUA Board substantial flexibility to reduce the subscription amount;
- Prohibiting the facility from making an advance to a credit union unless the credit union has provided evidence to the facility that it has “made reasonable efforts to first use primary sources of liquidity … including balance sheet and market funding sources, to address the liquidity needs of the applicant”; and
- Increasing the facility’s borrowing capacity from 12 to 16 times the amount of the facility’s subscribed capital stock and surplus.
Duration: The temporary changes to the facility are in effect until December 31, 2020.
If you have any questions regarding the CARES Act, or other related issues, please contact a Buckley attorney with whom you have worked in the past. You can also visit our Covid-19 News & Resources page for a compendium of issuances by federal and state agencies, as well as GSEs and other sources.