Federal and state banking agencies have responded to the COVID-19 pandemic by issuing guidance to regulated entities on a variety of topics, including but not limited to pandemic planning and working with customers affected by the coronavirus. During this unprecedented time, it is critical that regulated entities remain abreast of regulatory guidance and directives and consult with their regulators and legal counsel as appropriate.
On March 6, 2020, the Federal Financial Institutions Examination Council ("FFIEC") released the Interagency Statement on Pandemic Planning on behalf of its member agencies. The interagency guidance reminds financial institutions that business continuity plans should address the threat of a pandemic influenza outbreak and its potential impact on the delivery of critical financial services. It also identifies actions that financial institutions should take to minimize the potential adverse effects of a pandemic.
On March 9, 2020, the Board of Governors of the Federal Reserve System ("FRB"), Bureau of Consumer Financial Protection ("CFPB"), Federal Deposit Insurance Corporation ("FDIC"), National Credit Union Administration ("NCUA"), Office of Comptroller of the Currency ("OCC"), and Conference of State Bank Supervisors ("CSBS"), and together, the "Agencies," issued a joint press release encouraging financial institutions to meet the financial needs of customers and members affected by the coronavirus. The agencies noted that they would expedite requests to provide more convenient availability of services in affected communities and would work with financial institutions in scheduling examinations or inspections to minimize disruption and burden.
On March 22, 2020, the Agencies issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The interagency statement provides that the Agencies "have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs [troubled debt restructurings]."
On March 25, 2020, the FDIC, FRB, and OCC issued an interim final rule that allows banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital. Banking organizations that are required under U.S. accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two years. This is in addition to the three-year transition period already in place. The agencies noted that this relief is being provided to allow banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of COVID-19:
While the U.S. government is taking significant steps to mitigate the magnitude and persistence of the effects of COVID-19, the magnitude and persistence of the overall effects on the economy remain highly uncertain. This uncertainty has presented significant operational challenges to banking organizations at the same time they have been required to direct significant resources to implement CECL. In addition, due to the nature of CECL and the uncertainty of future economic forecasts, banking organizations that have adopted CECL may continue to experience higher-than-anticipated increases in credit loss allowances.
To address these concerns and allow banking organizations to better focus on supporting lending to creditworthy households and businesses, the agencies are providing banking organizations that adopt in the current environment an alternate option to temporarily delay a measure of CECL's effect on regulatory capital, relative to the incurred loss methodology.
The interim final rule does not replace the current three-year transition option in the February 2019 CECL rule, which remains available to any banking organization at the time that it adopts CECL.
Other COVID-19 related interagency statements that have been released include the Joint Statement on CRA Consideration for Activities in Response to COVID-19 (March 19, 2020) and the Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19 (March 26, 2020).
The Federal Deposit Insurance Corporation
The FDIC has established a comprehensive COVID-19 website that compiles the agency's COVID-19 guidance and resources for regulated entities.
Notably, Chairman Jelena McWilliams, a former bank executive, asked the Financial Accounting Standards Board ("FASB") to provide three forms of relief to banks on March 19, 2020:
- First, Chairman McWilliams urged the FASB to excluding COVID-19-related modifications from being considered a concession when determining a troubled debt restructuring ("TDR") classification. Chairman McWilliams noted that although the FDIC has encouraged banks to work with borrowers who may be impacted by COVID-19, financial institutions were worried about modifications being classified as TDRs.
- Second, in anticipation of higher-than anticipated increases in credit loss allowances, Chairman McWilliams urged FASB to permit banks that are currently subject to the current expected credit losses (CECL) methodology an option to postpone implementation of CECL given the current economic environment.
- Third, and for the benefit of community banks that are not yet required to implement CECL, Chairman McWilliams urged that FASB impose a moratorium on the effective date to allow these institutions to focus on immediate business challenges relating to the impacts of the current pandemic and its effect on the financial system.
As noted above, on March 22, 2020, the Agencies issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus providing that the Agencies "have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs."
Banks concerned about the impact of CECL should monitor for additional FASB and FDIC guidance on this topic.
The Office of the Comptroller of the Currency
The OCC has established a comprehensive COVID-19 website that compiles the agency's COVID-19 guidance and resources for regulated entities.
The Board of Governors of the Federal Reserve System
The FRB has also established a comprehensive COVID-19 website that compiles the agency's COVID-19 guidance and resources for regulated entities. The Federal Reserve Bank of New York has also established an online Coronavirus Resource Center.
The National Credit Union Administration
The NCUA has established a comprehensive COVID-19 website that compiles the agency's COVID-19 guidance and resources for regulated entities.
The Bureau of Consumer Financial Protection
As of March 24, 2020, the CFPB had not yet established a COVID-19 website for regulated entities.
As noted above, the CFPB did join in the March 9, 2020 interagency press release encouraging financial institutions to meet the financial needs of customers and members affected by the coronavirus. The CFPB has also established a coronavirus website for consumers that, among other things, reminds consumers that they can submit complaints to the CFPB.
The Financial Crimes Enforcement Network
The Financial Crimes Enforcement Network ("FinCEN") issued a press release on March 16, 2020 regarding COVID-19. The press release requests that financial institutions concerned about potential delays in their ability to file required Bank Secrecy Act ("BSA") reports contact FinCEN and their functional regulators as soon as practicable. It also advises financial institutions to remain alert about malicious or fraudulent transactions similar to those that occur in the wake of natural disasters, such as imposter scams, investment scams, product scams, insider trading, benefits fraud, charities fraud, and cyber-related fraud.
The New York State Department of Financial Services
The New York State Department of Financial Services ("DFS") has established a COVID-19 website that compiles the agency's guidance and resources for regulated entities.
In particular, DFS-regulated entities should note the following:
- DFS is requiring regulated institutions, including those engaged in the virtual currency business, to submit a response describing the institution's plan of preparedness to manage the risk of disruption to its services and operations "as soon as possible," but in no event later than April 9, 2020; and
- DFS is requiring regulated institutions to submit a response describing the institution's plan regarding managing the potential financial risk arising from COVID-19 "as soon as possible," but in no event later than April 9, 2020.
New York-chartered banking institutions should also note that Governor Cuomo has temporarily modified Section 39(2) of the New York Banking Law by Executive Order 202.9 through April 20, 2020 to provide that "it shall be deemed an unsafe and unsound business practice if, in response to the COVID-19 pandemic, any bank which is subject to the jurisdiction of the Department shall not grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days." Executive Order 202.9 also requires the Superintendent of DFS to ensure under reasonable and prudent circumstances that licensed or regulated entities provide to New York consumers the opportunity for forbearance of mortgage payments due to financial hardship due to the COVID-19 pandemic. It further empowers the Superintendent to promulgate emergency regulations to direct that ATM, overdraft, and credit card fees be restricted or modified.
On March 24, 2020, DFS Superintendent Lacewell promulgated on an emergency basis new Part 119 of Title 3 of the Official Compilation of Codes, Rules and Regulations of the State of New York in response to Executive Order 202.9. Section 119.3(a) requires New York regulated institutions, including New York-chartered banking organizations, to (i) make applications for forbearance of any payment due on a residential mortgage of a property located in New York, widely available to any individual who resides in New York and who demonstrates financial hardship as a result of the COVID-19 pandemic; and (ii) subject to the safety and soundness requirements of the regulated institution, grant such forbearance for a period of ninety (90) days to any such individual. The regulation does not apply to mortgage loans made, insured, or securitized by certain federal government agencies, instrumentalities, government-sponsored enterprises, or a Federal Home Loan Bank (although banks should note that federal forbearance requirements may apply to such loans).
Section 119.3(b) also requires New York-regulated banking institutions to, subject to the safety and soundness requirements, eliminate ATM, overdraft, and credit card late payment fees for any individual who can demonstrate financial hardship from COVID-19,
In addition, Section 119.3(c) requires New York-regulated institutions to e-mail, publish on their websites, mass mail, or otherwise similarly broadly communicate to customers how to apply for COVID-19 relief. This notification must take place as soon as possible, but in no event later than 10 days after the March 24, 2020 promulgation of Part 119. Among other things, Part 119 also requires regulated institutions to follow-up promptly on information omitted from customers' COVID-19 relief applications and to respond to requests for COVID-19 relief immediately, and in no event later than ten business days after receipt of all reasonably required information.
Interestingly, Section 119.3(f) describes Executive Order 202.9 as modifying Section 39 of the New York Banking Law "to provide that it shall be an unsafe and unsound business practice if, in response to the COVID-19 pandemic, any regulated institution shall not grant a forbearance of any payment due on a residential mortgage for a period of ninety (90) days to any individual who has applied for such a forbearance and demonstrated a financial hardship as a result of the COVID-19 pandemic, as described herein." The regulation provides that "[i]n assessing whether a regulated institution has engaged in an unsafe or unsound practice by denying an application for such a forbearance, the Department will consider the adequacy of the process established by the regulated institution to process such forbearance applications, the thoroughness of the review afforded to the application, the payment history, creditworthiness, and the financial resources of the borrower, the application of any state and federal laws or regulations that would prohibit the grant of a forbearance, as well as the safety and soundness requirements of the regulated institution." Notably, the portion of Governor Cuomo's Executive Order modifying Section 39(2) of the New York Banking Law did not explicitly limit itself to residential mortgages and also provided that the Banking Law was temporarily modified to provide that "it shall be deemed an unsafe and unsound business practice if, in response to the COVID-19 pandemic, any bank which is subject to the jurisdiction of the Department shall not grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days." Further clarification from DFS may be required to determine whether DFS may apply Executive Order 202.9's modification of Section 39(2) of the New York Banking Law to commercial mortgages and mortgages assumed by businesses.
Financial institutions should continue to monitor for guidance and directives from their regulatory agencies and should monitor those agencies' COVID-19 websites, as the situation is changing rapidly and new guidance and directives may continue to be issued.
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