Special message from Mike Percy, Managing Partner, Financial Services
Dear FIEB readers,
I sincerely hope this message finds you, your friends, your family, and your colleagues safe. In my 33 years in public accounting, I have lived through many economic ups and downs. But nothing compares to the uncertainty we face with the coronavirus disease (COVID-19). As we all know, this global pandemic affects us all and continues to be a fluid situation. We will find a way with what will be a new normal.
It's not business as usual, so we have reorganized this month’s Financial Institutions Executive Briefing to focus on the most critical issues. We will strive to keep you updated as this unfolds.
Agencies issue interim final rule related to regulatory capital treatment of Paycheck Protection Program lending facility
On April 9, 2020, the Office of the Comptroller of the Currency (OCC), the Federal Reserve (Fed), and the Federal Deposit Insurance Corp. (FDIC) issued an interim final rule to modify capital rules to allow financial institutions participating in the Fed’s Paycheck Protection Program (PPP) facility to neutralize regulatory capital effects as there is no credit or market risk related to the PPP loans. The interim final rule also clarifies that a zero percent risk weight applies to PPP loans, consistent with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Agencies temporarily lower community bank leverage ratio
On April 6, 2020, the OCC, Fed, and FDIC issued two interim final rules to provide relief for community banks and temporarily lower the community bank leverage ratio to 8%. Community banks may elect to use the 8% leverage ratio beginning second quarter 2020 through the end of the year, and the ratio will increase gradually back to 9% by Jan. 1, 2022.
Fed announces temporary change to supplementary leverage ratio
On April 1, 2020, the Fed announced a temporary change to the supplementary leverage ratio calculation for holding companies. The change excludes U.S. Treasury securities and deposits at Federal Reserve banks from the calculation in order to ease strains in the Treasury market. The temporary change will be in effect until March 31, 2021.
Paycheck Protection Program (PPP)
Small Business Administration and Treasury issue FAQ on PPP loans
The Small Business Administration (SBA) and the U.S. Department of the Treasury have issued a frequently asked questions document addressing the Paycheck Protection Program, which will be updated as necessary on a regular basis. According to the introduction to the document, the “U.S. government will not challenge lender PPP actions that conform to this guidance.”
AICPA provides recommendations for PPP applications
On its newly created coronavirus resource center webpage, the American Institute of CPAs (AICPA) provides news and resources related to the CARES Act and specifically guidance and recommendations related to the Paycheck Protection Program. AICPA recommendations regarding PPP application documentation for lenders describe a list of core documents to use in such applications, recommends the use of the gross payroll approach for applications and forgiveness, and discusses the effects of healthcare and retirement benefits related to the annual salary exclusion. The document also provides calculation recommendations and guidance on gathering employer documents.
FinCEN provides information to financial institutions in response to COVID-19
On April 3, 2020, the Financial Crimes Enforcement Network (FinCEN) provided guidance to financial institutions for handling Bank Secrecy Act (BSA)/anti-money laundering obligations as a result of the pandemic. The release includes:
- General guidance on complying with BSA obligations
- Information on beneficial ownership requirements, specific to both PPP loans (also cross-referenced with question 18 in the SBA’s FAQ) and non-PPP loans
- Relaxed rules for BSA reporting obligations, specifically around Currency Transaction Report (CTR) timing and suspended implementation of a recent CTR ruling around entities operating under a “doing business as” name
- A dedicated online contact mechanism to support institutions and lenders as they seek to maintain compliance with BSA-related obligations
- A reminder surrounding increase of fraud and those who are acting with malicious intent, with a link to the Oct. 31, 2017, FinCEN Advisory 20017-A007, “Advisory to Financial Institutions Regarding Disaster-Related Fraud”
FASB discusses leases and interest income recognition for payment deferrals
At its April 8, 2020, board meeting, the Financial Accounting Standards Board (FASB) discussed concerns related to effects of COVID-19. Two modification topics included leases, specifically concessions, and interest income recognition.
Related to leases, the board recognizes that lessors might be issuing broad-based and sweeping concessions, which create operational difficulties when applying the modification guidance in Accounting Standards Codification (ASC) 842/840. The FASB received a question whether any concessions related to COVID-19 must be accounted for under the ASC 842/840 modification guidance, citing the operational difficulties and complexities of assessing such concessions on a contract-by-contract basis. The FASB staff notes that ASC 842/840 did not contemplate the current scope of broad and sweeping modifications and concessions given by lessors. For concessions granted that are specifically related to COVID-19, the FASB staff indicates an entity could elect not to apply modification guidance, provided the cash flows in the modified lease are the same as or less than the original contract. The FASB staff also acknowledges judgment will need to be applied. On April 10, the FASB issued a FASB staff Q&A, “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic.”
For institutions aiding borrowers affected by COVID-19, the FASB staff answered a question about interest income recognition for a fact pattern than involves providing a loan payment holiday where no contractual interest would accrue during the payment holiday. The fact pattern includes that the loan payment holiday is not a troubled debt restructuring (TDR) and the loan payment holiday would not be accounted for as a continuation of the old loan (that is, extinguishment accounting is not applicable). The FASB staff heard two views – in view one, the new effective interest rate of the loan would be applied prospectively from the date of the modification resulting in interest income being recognized during the holiday. In view two, interest income would be recognized using the contractual terms, thus no interest would accrue during the payment holiday. The FASB staff believes both views are acceptable under GAAP. The tentative conclusions from the April 8 meeting include interest income.
The FASB staff acknowledges diversity might exist for both the leasing question and the loan modification question, and it believes disclosure of an entity’s policies for such transactions are key.
Agencies issue statement on loan modifications related to COVID-19
On March 22, 2020, and later revised on April 7, 2020, in response to CARES Act Section 4013, “Temporary Relief From Troubled Debt Restructurings,” the OCC, Consumer Financial Protection Bureau (CFPB), Fed, FDIC, National Credit Union Administration (NCUA), and state regulators issued an interagency statement to encourage and provide information for financial institutions working with borrowers affected by COVID-19. The statement indicates that agencies will not criticize institutions for working with borrowers consistent with safe and sound practices and that institutions generally do not need to categorize modifications related to COVID-19 as TDRs. The statement also includes accounting and reporting considerations, guidance on discount window eligibility, and considerations related to consumer protection laws.
Agencies encourage mortgage servicers to work with homeowners affected by COVID-19
On April 3, 2020, the OCC, CFPB, Fed, FDIC, NCUA, and state regulators released a joint policy statement to provide regulatory flexibility and clarify the application of the Regulation X mortgage servicing rules and the related supervisory approach during the COVID-19 emergency. The guidance primarily relates to communication requirements for loss mitigation under Regulation X, including how the rules apply to short-term forbearance options (such as those available under the CARES Act) and flexibility relating to the timing of certain notices during the emergency. Finally, the statement allows for delays in annual escrow statements if servicers are making a good faith effort to provide statements within a reasonable time.
CFPB issues guidance related to credit reporting during COVID-19 pandemic
On April 1, 2020, the CFPB released a policy statement outlining credit reporting responsibilities for financial institutions during the COVID-19 pandemic. The statement encourages financial institutions to continue to furnish information to consumer reporting agencies and reminds financial institutions of the CARES Act requirement to report loans with payment accommodations made under the act as current. The statement also provides flexibility in the timing to resolve consumer disputes related to credit reporting due to operational disruptions. The bureau indicates that institutions making good faith efforts to investigate disputes quickly, even if outside of regulatory time frames, will not be cited during examinations or subjected to enforcement actions.
Option to delay current expected credit losses (CECL)
CARES Act provides option to delay GAAP provisions
On April 3, 2020, the chief accountant of the Securities and Exchange Commission (SEC) issued a statement noting the CARES Act provides the option to temporarily defer or suspend the application of two provisions of GAAP and would be in accordance with GAAP. The two provisions of the act are Section 4013 and Section 4014, “Optional Temporary Relief From Current Expected Credit Losses.”
As such, eligible registrants can elect to take the delay. Registrants must make the election for the first quarter.
During the delay, a registrant would continue to use the incurred loss model for the allowance for loan and lease losses (ALLL) for each quarter. The delay ends the earlier of the termination of the national emergency or Dec. 31, 2020.
Based on consultation with the SEC staff, the following illustrates when the delay ends and how transition occurs:
- If the national emergency terminates on June 5, 2020, adopt CECL that quarter (June 30, 2020), retrospective to Jan. 1, 2020.
- If the national emergency terminates on Nov. 1, 2020, adopt CECL that quarter (Dec. 31, 2020), retrospective to Jan. 1, 2020.
- If the national emergency does not terminate by Dec. 31, 2020, adopt CECL as of Dec. 31, 2020, retrospective to Jan. 1, 2020.
The result is all calendar year registrants will reflect CECL in their 2020 Form 10-K.
Securities and Exchange Commission (SEC) Need to Know
SEC establishes coronavirus response page
The SEC has established a COVID-19 response page, which describes how the SEC is addressing the impact of COVID-19 through maintaining SEC operations continuity; monitoring markets and engaging with market participants; providing guidance and targeted regulatory assistance and relief, enforcement, examinations, and investor education; and extending comment periods for certain pending actions and rules. The page, which is updated daily, includes links to all of the current resources and guidance related to COVID-19 available from the SEC.
SEC extends conditional reporting deadline relief for public companies
On March 25, 2020, the SEC issued an order, which supersedes its March 4 order, providing coronavirus (COVID-19) impacted registrants temporary relief from certain filing and regulatory requirements. The order provides an additional 45 days to make required Exchange Act filings that would have been due between March 1 and July 1, 2020, if a registrant is unable to meet a deadline because of circumstances related to COVID-19.
The order specifies a Form 8-K is required to be filed by the later of March 16, 2020, or the original report deadline, and the Form 8-K should include:
- A statement that the registrant is relying on the order
- A brief description of why the registrant could not file on time
- The estimated date by which the report or form is expected to be filed
- If appropriate and material, a risk factor explaining the effect of COVID-19 on the registrant’s business
- If the reason the report could not be filed on time relates to the inability of any person, other than the registrant, to furnish any required opinion, report, or certification, an exhibit statement signed by such person stating the specific reasons why he or she is unable to furnish such items
A Form 12b-25 would not need to be filed if the report is filed within 45 days of the original filing deadline, and a registrant can rely on Rule 12b-25 if it is unable to file the required reports on or before the extended due date.
Additionally, the SEC clarified that, for purposes of the eligibility to use Form S-3 or Form S-8 and to meet the current public information eligibility requirements of Rule 144(c), a company relying on this temporary relief order will be considered current in its filing requirements under the Exchange Act if it was current as of March 1, 2020, and it files any report due during the relief period within 45 days of the original filing deadline.
The order also provides certain relief for delivery of proxy or information statements to security holders under the Exchange Act when mail delivery is not possible.
On March 31, 2020, staff of the Division of Corporation Finance (Corp Fin) released two new compliance and disclosure interpretations, which explain how the staff expects registrants to comply with the order.
SEC issues statement on importance of disclosures
On April 8, 2020, SEC Chairman Jay Clayton and Director of Corp Fin William Hinman jointly issued a public statement providing observations addressing the importance of disclosure in this time of uncertainty and requesting actions. The statement includes a call to action “that companies provide as much information as is practicable regarding their current status and plans for addressing the effects of COVID-19.” In addressing this call to action the SEC recognizes “that producing forward-looking disclosure can be challenging and believe that taking on that challenge is appropriate” and that “robust, forward-looking disclosures will benefit investors, companies and, more generally, our fight against COVID-19. Such disclosures will facilitate communication and coordination among the public and private sectors.”
Related to developing robust disclosures as the country’s response to COVID-19 has significantly affected the economy and markets, the statement highlights the following:
“Disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.”
COVID-19 disclosure location considerations for SEC filings
Registrants should consider how and where COVID-19 disclosures should be included in their filings. Potential disclosure topics include:
- Risk factors
- Management discussion and analysis
- Board risk oversight disclosures
- Description of business
- Issuer purchases of equity securities
- Legal proceedings
- Quantitative and qualitative disclosures about market risk
- Financial statement disclosures
- Internal controls over financial reporting
See the Crowe COVID-19 impact and response webpage for additional insights.
SEC provides coronavirus disclosure content guidance
On March 25, 2020, Corp Fin staff issued “Coronavirus (COVID-19): CF Disclosure Guidance: Topic No. 9,” which summarizes the staff’s views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 impacts and disruptions. The staff acknowledges the difficulty in precisely assessing or predicting the company-specific COVID-19 impacts because the actual impacts depend on factors beyond a company’s control. However, the staff also points out that company-specific COVID-19 disclosure (for example, the effects of COVID-19 on the company, management’s expectation of future impacts, and management’s response to current events and plans for related uncertainties) might be material to investment and voting decisions.
The guidance reminds registrants of the need for disclosures related to COVID-19 within the context of the principles-based disclosure system of the federal securities laws and the commission’s focus on registrant disclosure of new and evolving risks and then delves deeper on specific disclosure topics including:
- Assessing and disclosing the impact of COVID-19. The guidance provides a list of questions for registrants to ask with respect to their present and future operations and reminds registrants of the availability of safe harbors for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act.
- The need to refrain from trading prior to the disclosure of material nonpublic information. The guidance reminds registrants of their obligations to monitor their market activities, refrain from selective disclosures, and update disclosures when necessary.
- Reporting earnings and financial results. The staff encourages effective project management steps to address unique and complex accounting issues (for example, early engagement of third-party experts for goodwill impairment assessment) and provides thoughts on non-GAAP measures.
Registrants requiring additional guidance are encouraged to contact the staff directly.