How the $2 Trillion COVID-19 Relief Law Impacts Banking

The CARES Act tackles many of the coronavirus impacts on the economy through creating loans and credit guarantees. It relies on a mix of efforts by the Treasury Department, the Small Business Administration, the Federal Reserve and bank and credit union consumer, business and mortgage lenders.

The often-controversial CARES Act — Coronavirus Aid, Relief, and Economic Security Act — signed by President Trump March 27, contains multiple points of interest for banks and credit unions as well as for their consumer and small business accounts.

The $2 trillion package is the third federal stimulus bill passed in response to the coronavirus pandemic, and is sometimes referred to as “Phase 3.” Phase 1 was legislation setting up small business loans, among other measures, and Phase 2 included increased unemployment payments and tax credits for employers who offer staff paid sick leave. Together those two packages total over $108 billion. However, observers are already beginning to talk about a fourth package. The Wall Street Journal speculates that that fourth package could be even larger than the CARES Act spending total.

Many consumers will be focused on the one-time stimulus payments of as much as $2,400 for married couples and $1,200 for individuals provided by the act, as well as increased unemployment benefits. The act also ramps up assistance to the health care sector — even providing a temporary tax break for the production of alcohol for making hand sanitizer. But there is much for financial institutions to review that may help them best meet the needs of customers.

In fact, financial marketers will want to find a way to bring news of these developments to consumers and businesses as the government puts more “meat on the bones” of the act. Kabbage, the online fintech business lender, has already launched a news update email for small firms that want details on the payroll protection provisions of the act, outlined below. The company also set up a program through which the public can buy gift certificates for participating small businesses, in order to give them some cash while many are closed down.

Here are banking-oriented highlights of the CARES Act, with references to specific sections of the Act for those who want verbatim details. Consult the law for specific effective dates, some of which will be covered in implementing regulations or agency announcements to follow. Note: Since initial publication multiple updates have been made to provide links to key implementing documents and forms.

Paycheck Protection Loans

The act allocates $350 billion in SBA 7 (a) loans to small businesses that keep staffers on their payroll. The applicants must be impacted by COVID-19 and have fewer than 500 employees. The maximum loan size is $10 million. Overall, payments are deferred for six months. However, loans made for qualifying purposes can be forgiven, subject to limitations, and forgiveness must be applied for to the lender, which will make the decision. Qualifying purposes include payroll, rent, mortgage payments, and utilities payments. Unlike other SBA loans, paycheck protection loans are 100% federally guaranteed. SBA will compensate private lenders for amounts forgiven.

The law grants SBA and Treasury the ability to admit additional lenders to the 7 (a) program. Both banks and credit unions can participate. Additional types of borrowers will be allowed as well: Sole proprietorships, independent contractors and qualifying gig workers.

The act addresses reimbursement fees to be made to institutions making these loans. The act also raises the ceiling on SBA Express loans to $1 million from $350,000 for a limited period.

Next step: Implementation guidelines from SBA. Treasury Secretary Steve Mnuchin has stated that he hopes to get the program moving by April 3. Update: Treasury published official loan terms and conditions on March 31. SBA has set up a page about the program. On March 31 Treasury set up a program page including four downloads: a summary of the program, information for lenders, information for borrowers and a loan application PDF. On April 2 SBA published an interim final rule governing the Paycheck Protection Program. On April 6, in response to banking industry concerns about being stuck with low-interest loans, the Federal Reserve announced that it would be releasing details of a program to buy the loans. And the Treasury Department issued an updated question and answer document addressing key banker questions. On April 9 federal banking regulators issued an interim rule “neutralizing” capital requirements that would otherwise be imposed on PPP lending. On April 9 the Federal Reserve also announced a series of new related initiatives, including details on its new Main Street Lending Program and the Paycheck Protection Program Liquidity Facility. The PPPLF will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.

Where to look it up: Section 1102 and 1106.

Also to know:

  • A special Treasury fund of $500 billion will be created to fund loans, loan guarantee programs and related efforts. Among these are multiple Federal Reserve Direct Loans, including a program for larger companies and a Main Street Lending Program intended for small and medium-sized businesses. (Section 4003)
  • Qualifying employers that shut down but which retain employees will be able to claim a 50% payroll tax credit for staff retained during the crisis. (Section 2301) Update: Treasury announcement on using this credit.
  • Aspects of SBA’s Emergency Injury Disaster Loans have been liberalized. These can be used to meet payroll, cover sick leave, rent, mortgage, supply chain disruption and repayment of debt that can’t otherwise be paid due to revenue loss. (Section 1110)
  • The government is also offering subsidies for 7 (a) loans that are not for paycheck protection, to encourage lenders to offer payment deferral. (Section 1112)
  • The Current Expected Credit Losses standards — which would have required covered lenders to forecast the performance of loans going forward for loan reserve purposes — are put on hold until yearend 2020 or the end of the national coronavirus emergency, whichever comes first. (Section 4014) Update: Federal regulators published guidance on this.

Full FDIC Coverage of Transaction Accounts Permitted

The act authorizes FDIC to insure noninterest bearing transaction accounts in full, rather than subject them to insurance coverage restrictions. If FDIC goes ahead with this program, intended to be of short duration, it would be similar to a multi-year program used in the aftermath of the financial crisis.

The National Credit Union Administration is authorized to take like action for coverage by NCUSIF (National Credit Union Share Insurance Fund).

As envisioned in the act, both authorities would run through the end of 2020.

Where to look it up: Section 4008.

Also to know: The act provides a waiver of penalties for early withdrawal from retirement accounts and plans if a consumer or their spouse have been tested and found to have COVID-19. The act covers both withdrawals and payments of withdrawn funds. (Section 2202)=

Forbearance for Federally Backed Mortgages

Troubled borrowers can request forbearance for covered home loans (see below) for 180 days, with the option on the borrower’s part of requesting an additional 180 days relief. During the forbearance period, only originally scheduled interest, fees, etc., can accrue. Borrowers must attest to financial hardship to qualify but need not document that hardship.

This provision applies to mortgage loans:

  • Purchased or securitized by Government Sponsored Entities like Fannie Mae and Freddie Mac.
  • Made, guaranteed or insured by the Department of Agriculture.
  • Guaranteed or insured by the Department of Veterans Affairs.
  • Insured by Federal Housing Administration.

Where to look it up: Section 4022.

Also to know:

  • Foreclosures on federally backed mortgages are barred until mid-May. (Section 4022)
  • Forbearance provisions also apply to certain multifamily loans. Recipients of this aid may not evict tenants. (Section 4023-4024)

Waiver of Troubled Debt Restructuring Status

The act broadens the policy statements issued by regulators regarding restructuring. The act allows loan modifications to be made without putting a loan into “troubled debt restructuring” mode, thus avoiding accounting penalties. This would last until up to 60 days after the end of the national pandemic emergency is declared.

Where to look it up: Section 4013.

Credit Reporting Protection During Coronavirus Crisis

The act amends the Fair Credit Reporting Act to require financial institutions reporting to credit bureaus to report an account as being current if the borrower has elected to defer, modify, seek forbearance, or make partial payment. However, if the borrower was delinquent before the crisis, they would retain that status unless they brought the account current prior to seeking aid.

Where to look it up: Section 4021.

This article was updated March 31 and April 2 with links to Treasury and SBA information relating to the legislation, as well as guidance from federal banking regulators and the interim final regulation published by SBA for the paycheck program. It was updated subsequently with news of the Federal Reserve’s plans to set up a program to purchase paycheck protection loans and additional regulatory announcements.

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