February 2021 financial reporting, governance, and risk management

| 2/17/2021
February 2021 financial reporting, governance, and risk management

Message from Mike Percy, Managing Partner, Financial Services

Dear FIEB readers,

There seems to be a consensus that we can expect an economic recovery in 2021 – the question is in which quarter. Deploying the most recent stimulus, including reopening the Paycheck Protection Program, and distributing vaccines are encouraging signs for an economic recovery.

With the vast majority of earnings releases in, a picture of how the industry fared in 2020 is taking shape. As a group, CECL adopters saw a significant decline in provision expense as a percentage of average loans. Those still using the incurred-loss model also saw a significant decline in the fourth quarter, whereas the first three quarters were very consistent. Both groups, on average, experienced small declines in nonperforming loans as a percentage of loans while nonaccrual loans as a percentage of loans remained comparable with the third quarter.

Of course, we will have a better picture of the health of the financial institution industry as 2021 unfolds. Meanwhile, I hope this message finds you, your friends, your family, and your colleagues safe.

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Matters of importance from the federal financial institution regulators

White House announces 60-day freeze of pending regulations

On Jan. 20, 2021, the White House issued a memo directing executive departments and agencies to freeze any pending regulations not yet published in the Federal Register. For any rules sent to the Office of the Federal Register but not yet published, the memo directs agencies to withdraw them and seek approval.

While these freezes are common for any new administration, the memo does not specify what agencies are covered and whether it applies to independent agencies, such as the federal financial institution regulators. However, it is expected that these agencies will honor the 60-day freeze and that all pending rules and regulations will be subject to review as outlined in the memo. One example is the announcement from the Office of the Comptroller of the Currency (OCC) to pause its publication of the final rule on fair access to financial services that initially was finalized on Jan. 14, 2021. The OCC release states that this pause will allow the next confirmed comptroller of the currency to review the final rule and the public comments the OCC received, as part of an orderly transition.

We will continue to monitor and report on any specific financial services-related rules or regulations affected by the memo.

Federal regulatory agencies announce leadership nominations and appointments

  • U.S. Department of the Treasury. Former Federal Reserve Board (Fed) Chair Janet Yellen was confirmed by the Senate on Jan. 25, 2021, to serve as secretary of the treasury. Yellen is only the second person to lead both the Fed and Treasury and is the first woman to serve as treasury secretary.
  • OCC. Acting Comptroller of the Currency Brian Brooks resigned on Jan. 14, 2021. OCC Chief Operating Officer Blake Paulson currently is serving as acting comptroller. Several names have been suggested, but a successor has not yet been nominated.
  • Consumer Financial Protection Bureau (CFPB). Kathleen Kraninger resigned as director of the CFPB on Jan. 20, 2021. President Joseph Biden has named Dave Uejio acting director. Rohit Chopra, currently a member of the Federal Trade Commission and a member of the original launch team for the CFPB, is expected to be nominated for director, which will be subject to Senate confirmation.
  • National Credit Union Administration (NCUA). Todd Harper, who has served on the NCUA board since February 2019, was designated chairman on Jan. 20, 2021.

Acting CFPB director signals aggressive approach to supervision and enforcement

In a message to CFPB staff on Jan. 28, 2021, acting Director Dave Uejio indicated the bureau will increase its supervision and enforcement efforts to ensure that companies delivering COVID-19 relief are meeting their legal obligations and protecting consumers.

He also noted the CFPB’s commitment to take “bold and swift action on racial equity,” signaling that he would make fair lending enforcement a top priority. “[W]e will also look more broadly, beyond fair lending, to identify and root out unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.”

FinCEN issues notice on COVID-19 vaccine scams and cyberattacks

On Dec. 28, 2020, the Financial Crimes Enforcement Network (FinCEN) issued a notice to financial institutions about the potential for fraud, cyberattacks, and other criminal activity related to COVID-19 vaccines and vaccine distribution.

In the notice, FinCEN highlights schemes related to sale of unapproved or counterfeit versions of vaccines being offered earlier than what would be permitted. Additionally, the notice alerts financial institutions to look out for ransomware targeting vaccine delivery operations and supply chains.

The notice provides detailed information about what financial institutions should include when preparing and filing suspicious activity reports related to COVID-19.

Regulators issue BSA/AML FAQs

On Jan. 19, 2021, the federal financial institution regulatory agencies and FinCEN jointly issued frequently asked questions regarding suspicious activity reports and other anti-money laundering (AML) considerations. The answers to the seven FAQs in the release clarify the regulatory requirements related to suspicious activity reporting to assist covered financial institutions with their compliance obligations while enabling financial institutions to focus resources on activities that produce the greatest value to law enforcement agencies and other government users of Bank Secrecy Act (BSA) reporting.

In the release, the agencies clarify that the answers to these FAQs neither alter existing BSA/AML legal or regulatory requirements nor establish new supervisory expectations. The FAQs and related answers were specifically developed in response to recent Bank Secrecy Act Advisory Group recommendations, as outlined in FinCEN’s advance notice of proposed rulemaking on anti-money laundering program effectiveness, published in September 2020.

FinCEN issues advisory on COVID-19 healthcare fraud

FinCEN, on Feb. 2, 2021, issued an advisory alerting financial institutions to health insurance and healthcare frauds related to the COVID-19 pandemic. FinCEN noted that these frauds have targeted both government insurance programs and private health insurance companies. The advisory highlights indicators of these fraudulent schemes, including billing schemes, illegal kickbacks, healthcare technology schemes, and offers of unnecessary services. The alert lists pertinent information for financial institutions to include when filing a suspicious activity report related to suspected healthcare and health insurance fraud.

FDIC issues FIL on reservation of authority regarding relief from Part 363 requirements

The Federal Deposit Insurance Corp. (FDIC) issued on Dec. 22, 2020, and reissued on Dec. 28, 2020, Financial Institution Letter (FIL) 116-2020 to provide information on how the FDIC intends to exercise the reservation of authority in relation to an interim final rule (IFR) issued in October 2020. The IFR provides temporary relief from Part 363 audit and reporting requirements for those institutions experiencing asset growth as a result of their participation in pandemic-related stimulus programs.

The IFR allows institutions that surpassed the $500 million and $1 billion thresholds during 2020 to use total assets as of Dec. 31, 2019, to determine whether they are subject to the Part 363 audit requirements. The FDIC reserves the authority to require institutions to comply with Part 363 requirements. FIL 116-2020 outlines the factors the FDIC will use in deciding to exercise this reservation of authority. Some of the factors that the FDIC will consider on a case-by-case basis are:

  • The extent of participation in pandemic-related government programs
  • The institution’s composite Uniform Financial Institutions rating
  • Whether merger or acquisition transactions were supervisory in nature
  • Whether the institution is required to have its financial statements audited by an independent public accountant for reasons other than being required by Part 363
  • The supervisory concerns set forth in a Report of Examination
  • The effectiveness of the institution’s internal audit function

OCC proposes modifications to permissible bank premises

The OCC, on Jan. 4, 2021, issued a notice of proposed rulemaking (NPR) on amendments to its regulations governing national bank or federal savings association ownership of real property. The proposed rule would provide a set of general standards that include an occupancy test along with excess capacity standards to help institutions ascertain whether a real estate acquisition or holding is permissible.

The OCC also provides certain proposed definitions for bank-occupied office premises and bank-occupied premises where the OCC will apply the 50% occupancy standard to each building or severable piece of land. The NPR includes 10 questions for which it is soliciting specific feedback.

Comments are due March 22, 2021.

OCC approves use of stablecoins for payments activities

In an interpretive letter issued on Jan. 4, 2021, the OCC stated that national banks and federal savings associations may use independent node verification networks (INVN), and stablecoins, to perform bank-permissible functions, such as payment activities. According to the letter, an INVN consists of a shared electronic database where copies of the same information are stored on multiple computers; one common form is distributed ledgers that are used to record cryptocurrency transactions.

The OCC also said that banks may validate, store, and record payment transactions by serving as a node on an INVN. Likewise, a bank may use INVNs and related stablecoins to carry out other permissible payment activities. The OCC neither encourages nor discourages banks from participating in and supporting INVNs and stablecoins. Banks that consider using these networks should be aware of potential risks when conducting INVN-related activities and should develop and implement any new activities in accordance with sound risk management practices.

Troubled debt restructurings (TDRs)

OCC updates guidance to conform with Consolidated Appropriations Act TDR relief

H.R. 133, Consolidated Appropriations Act, 2021, which was signed into law on Dec. 27, 2020, extends certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Section 4013 of the CARES Act provided temporary relief from troubled debt restructuring accounting and is amended by Division N, Section 540 of H.R. 133, by extending the end date from Dec. 31, 2020, to the earlier of Jan. 1, 2022, or 60 days after the date on which the COVID-19 national emergency terminates.

In response, the OCC updated its two-page reference guide, “TDR Designation and COVID-19 Loan Modifications,” to conform to the extended TDR provisions.

Paycheck Protection Program (PPP)

SBA reopens PPP portal

The Small Business Administration (SBA) reopened its PPP portal on Jan. 11, 2021, for community financial institutions and on Jan. 15, 2021, for lenders with $1 billion or less in assets to begin processing both new and second-draw loan applications. As part of this rollout, the SBA released updated lender guarantee applications for both first-draw and second-draw PPP loans. The program then opened to all other lenders on Jan. 19, 2021.

The SBA has issued a number of amended rules, FAQs, and other guidance related to this round of PPP loan applications. All PPP-related guidance from the SBA can be found on its PPP Lender Information webpage.

As institutions make submissions to the SBA, many are running into submission errors unrelated to their submitted applications. The SBA has instituted post-submission validations, which are causing many of the errors presented to the lender.

For additional information or questions about processing PPP loan applications or about loan forgiveness, see the Crowe PPP webpage and the Crowe PPP Loan Forgiveness Platform for Lenders webpage.

FinCEN updates PPP FAQs

On a related note, FinCEN, on Feb. 1, 2021, updated its frequently asked questions on the PPP, to address specifically Bank Secrecy Act requirements when extending PPP loans. FinCEN confirmed that the updated FAQs remain applicable to second-draw PPP loans and that lenders may rely on information obtained from a borrower during a first-draw loan application for a second-draw application, provided the borrower is an existing customer.

Main Street Lending Program (MSLP)

Fed issues post-termination FAQs

The Fed released, on Feb. 1, 2021, updated frequently asked questions on post-termination of the MSLP. These FAQs address questions that borrowers and lenders might have about the program facilities, which were terminated on Jan. 8, 2021.

From the Securities and Exchange Commission (SEC)

Corp Fin considers risks of securities offerings during extreme price volatility

While acknowledging the importance of capital formation, the SEC’s Division of Corporation Finance (Corp Fin) believes companies and investors should consider specific risks during periods of extreme market volatility and when a company’s own securities exhibit extreme volatility. The impact of such risks can be more pronounced when a company seeks to raise capital during periods with:

  • Significant stock price increases or recent divergences in valuation ratios
  • High short interest or reported short squeezes
  • Reports of strong and unusual retail investor interest

Such risks also might have a more significant impact on companies experiencing financial distress, liquidity challenges, or smaller public floats. Corp Fin believes that in these circumstances, explicit, tailored disclosures about market events and conditions, the company’s situation, and the potential effect on investors are necessary to provide sufficient information for an investment decision.

To help address disclosures that might be necessary in such circumstances, Corp Fin released, on Feb. 8, 2021, an example letter containing comments that, depending on the particular facts and circumstances, Corp Fin may issue to companies that are seeking to raise capital in a volatile market. The sample comments in the letter do not represent a comprehensive list of the issues that companies should consider, and companies should appropriately tailor any disclosures to the entity’s specific facts and circumstances. In addition, Corp Fin encourages companies to consider these comments in preparing disclosure documents that typically might not be subject to review by Corp Fin (for example, automatically effective registration statements or prospectus supplements for shelf takedowns from an already effective registration statement). Corp Fin indicates any company with questions on proposed disclosures should consider contacting the industry office responsible for the company’s filings.

SEC receives questions on effective date of Regulation S-K amendments

The SEC staff has shared it has been receiving numerous questions regarding whether the effective date of the final rule “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information” will be delayed in light of the Biden administration’s memo ordering a 60-day freeze of pending regulations. The amendments, which were adopted on Nov. 19, 2020, were done by SEC action, and the staff’s understanding is the effective date of the amendments can be delayed only by SEC action. As the staff understands, there are no such plans for SEC action. As a result, the staff expects the effective date of the amendments to remain unchanged at Feb. 10, 2021.

SEC approves PCAOB auditor independence amendments

The SEC issued an order on Jan. 14, 2021, to approve the Public Company Accounting Oversight Board (PCAOB)-adopted amendments to the PCAOB interim independence standards and PCAOB rules to align with the changes recently made by the SEC to its auditor independence rules. The rules will be effective June 9, 2021, 180 days after the date of the publication of the SEC’s Oct. 16, 2020, amendments to Rule 2-01 in the Federal Register.

SEC announces senior policy adviser for climate and ESG

On Feb. 1, 2021, the SEC announced that Satyam Khanna will serve as senior policy adviser for climate and environmental, social, and governance (ESG) issues to acting Chair Allison Herren Lee, and said he will guide SEC initiatives on climate risk and ESG developments. Most recently, Khanna was a resident fellow at New York University School of Law’s Institute for Corporate Governance and Finance, and he served on the Biden-Harris presidential transition team for financial regulation.

SEC names Corp Fin acting director

On Feb. 1, 2021, the SEC announced that John Coates will serve as acting director of Corp Fin. Prior to this appointment, Coates was a professor of law and economics at Harvard University, where he also served as vice dean for finance and strategic initiatives and taught courses on corporate law and governance, securities regulation, and finance. He also served on the SEC’s Investor Advisory Committee.

SEC names acting chief accountant

The SEC announced, on Jan. 22, 2021, that Paul Munter will be acting chief accountant upon Sagar Teotia’s departure in February 2021. Since 2019, Munter has served as deputy chief accountant, where he led the Office of the Chief Accountant’s international work. As acting chief accountant, Munter will serve as the primary adviser to the SEC on accounting and auditing matters and be responsible for assisting the SEC in its oversight of the Financial Accounting Standards Board and the PCAOB.

SEC names new acting chair

Allison Herren Lee was named acting chair of the SEC on Jan. 21, 2021. Lee has served on the staff of the SEC for more than a decade in various roles and as a commissioner since 2019. Upon her appointment Lee said, “During my time as Commissioner, I have focused on climate and sustainability, and those issues will continue to be a priority for me.”

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB shares insights from conversations with audit committee chairs

As part of the PCAOB’s strategic goal of enhancing transparency and accessibility through proactive stakeholder engagement, the PCAOB released, on Feb. 1, 2021, “2020 Conversations With Audit Committee Chairs,” which summarizes feedback received from outreach conducted during 2020. This report provides a summary of perspectives from approximately 300 audit committee chairs at U.S. public companies whose audits the PCAOB inspected. The report focuses on three topics: the auditor and communications with the audit committee, new auditing and accounting standards, and emerging technologies. For each topic area, the PCAOB has provided a list of what is working well as identified by the audit committee chairs.

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