Message from Mike Percy, Managing Partner, Financial Services
Dear FIEB readers,
It still seems early enough in 2021 to wish you a happy new year. Let’s hope 2021 is a far better year than 2020. While we have positive news on deploying the most recent stimulus and the COVID-19 vaccines, we still have much uncertainty. From what I have read, and heard, I am cautiously optimistic.
With earnings releases starting to come in, we are seeing a mixture of financial results – on both fourth quarter and year-over-year results as compared to prior periods. It is still very early in the earnings release season to speculate on how the industry fared for 2020. Of course, we will have a much better viewpoint for our next month’s issue.
I think many of those working remotely for almost 10 months, including me, are wondering about the future work landscape. I hope we will have a better picture as 2021 unfolds. Meanwhile, I hope this message finds you, your friends, your family, and your colleagues safe.
Matters of importance from the federal financial institution regulators
Agencies propose requirement for notification of computer security incidents
On Dec. 18, 2020, the Federal Reserve Board (Fed), Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) released a proposal to require banks to notify their federal regulator within 36 hours if they experience certain computer security incidents. These incidents include situations where a bank cannot deliver services to a significant portion of its customer base or when crucial operations are jeopardized as well as situations where the overall stability of the financial sector might be affected. The rule also includes notification requirements for service providers of banks.
Comments are due by April 12, 2021.
Agencies propose changes to suspicious activity report requirements
In December 2020, the FDIC, OCC, and National Credit Union Administration (NCUA) released notices of proposed rulemaking to allow the agencies to issue exemptions for suspicious activity report filing for institutions that develop innovative solutions to meet Bank Secrecy Act requirements more efficiently and effectively. The proposed rules would require in many cases an exemption from the Financial Crimes Enforcement Network (FinCEN) as well.
Comments are due 30 days after publication in the Federal Register.
NCUA finalizes subordinated debt rule
On Dec. 17, 2020, the NCUA finalized a rule to create a new subpart in the NCUA’s final risk-based capital rule to allow certain eligible credit unions to issue subordinated debt for regulatory capital standards. The rule contains requirements related to applying for authority to issue subordinated debt, credit union eligibility to issue subordinated debt, prepayments, disclosures, securities laws, and the terms of a subordinated debt note.
The rule is effective Jan. 1, 2022.
FDIC issues final rule on brokered deposits and interest-rate restrictions
On Dec. 15, 2020, the FDIC issued a final rule to modernize brokered deposit regulations to reflect industry changes and better meet customer needs. The rule implements a new framework to determine whether deposits qualify as brokered deposits, reflecting use by banks of new technologies to interact with customers. The rule also modifies the methodology for calculating the interest-rate restrictions.
The rule is effective Jan. 1, 2022.
CFPB task force releases report on consumer financial protection
On Jan. 5, 2021, the Consumer Financial Protection Bureau (CFPB) Taskforce on Federal Consumer Financial Law released a report including approximately 100 recommendations for improving consumer protections. The task force focused on five principles: 1) consumer protection, 2) information and education, 3) competition and innovation, 4) regulatory modernization and flexibility, and 5) inclusion and access.
Recommendations focus on expanding financial system access for unbanked or underbanked populations. They include authorizing the CFPB to issue federal licenses to financial technology (fintech) companies and identifying opportunities to coordinate efforts among regulatory agencies. The acting comptroller of the currency released a statement in response to the task force report, noting that the OCC should continue to issue federal fintech charters.
CFPB issues final rule on debt collection disclosures
On Dec. 18, 2020, the CFPB issued a final rule implementing Fair Debt Collection Practices Act (FDCPA) requirements relating to consumer disclosures. The new rule requires clearer disclosures at the outset of debt collection, including information about the debt and the consumer’s rights. The rule includes a model form for the disclosure.
The new rule follows another final rule issued in October 2020 relating to the FDCPA. The FDCPA applies to “debt collectors,” generally defined as anyone collecting debt for another party or those collecting their own debts using a different name.
The rule is effective Nov. 30, 2021.
CFPB issues two final rules related to qualified mortgages
On Dec. 10, 2020, the CFPB finalized two rules related to qualified mortgage (QM) loans.
The first rule amends Regulation Z to remove the existing 43% debt-to-income (DTI) ratio as a general QM standard and replace it with a price-based approach. The second rule creates a new category called “seasoned QMs.” A covered transaction would receive a safe harbor from ability to repay liability at the end of the 36-month seasoning period as a seasoned QM if certain requirements are satisfied, including:
- The loan was a first-lien, fixed-rate transaction.
- The loan had no more than two 30-day delinquencies and no delinquencies of 60 or more days within the seasoning period.
- The loan was held in the creditor’s portfolio during the seasoning period.
- The creditor considered and verified the DTI at origination.
The rules are effective March 1, 2021. However, the general QM rule has a mandatory effective date of July 1, 2021.
Paycheck Protection Program (PPP)
New law reinstates and changes PPP
H.R. 133, Consolidated Appropriations Act, 2021, enacted on Dec. 27, 2020, addresses the extension of and changes to the PPP under Section N, Title III in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. Under the new laws, the PPP has been extended through March 31, 2021. The new guidance includes these PPP updates:
- The PPP loan’s covered period can be any length between 8 and 24 weeks as set by the borrower.
- Additional expenses including operations expenditures, property damage costs, supplier costs, and worker protection expenditures will be covered.
- Eligibility is expanded to include 501(c)(6)s, housing cooperatives, and destination marketing organizations, among other types of organizations.
- Greater flexibility for seasonal employees is provided.
- Certain existing PPP borrowers can request to modify their first-draw PPP loan amount.
- Certain existing PPP borrowers are now eligible to apply for a second-draw PPP loan, if the following criteria are met:
- Previously received a first-draw PPP loan and will use or has used the full amount only for authorized uses.
- Has 300 or fewer employees
- Demonstrates at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020
On Jan. 8, 2021, the Small Business Administration (SBA) and the U.S. Department of the Treasury announced that the PPP would reopen on Jan. 11 for community financial institutions to make loans to new borrowers and on Jan. 13 for second-draw loans. On Jan. 14, 2021, the SBA and Treasury announced that the PPP for first and second draws would open to PPP-eligible lenders with $1 billion or less in assets on Jan. 15 and would open on Jan. 19 to all participating lenders.
New guidance addressing the changes to the PPP includes:
- The interim final rule on PPP as amended by the Economic Aid Act combines rules released for PPP forgivable loans for first-time borrowers and includes changes made by the Economic Aid Act.
- The interim final rule on second-draw PPP loans describes the differences between first-draw PPP loans and second-draw PPP loans.
- PPP guidance from SBA Administrator Jovita Carranza on accessing capital for minority, underserved, veteran, and women-owned business concerns provides a commitment from the SBA that at a minimum the first two days of the new PPP application window will be open exclusively to applications from community banks.
Main Street Lending Program (MSLP)
Fed continues to update FAQs
The Fed updated the MSLP frequently asked questions document on Dec. 29, 2020, to provide additional guidance on the program, which ended on Jan. 8, 2021. The Fed revised its response to question L13, addressing the date by which eligible lenders needed to submit loans and how those requests are being processed.
On the same date, the Fed also updated its Main Street for Nonprofit Organizations frequently asked questions.
Troubled debt restructurings (TDRs) and current expected credit losses (CECL)
Consolidated Appropriations Act extends TDR and CECL 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 (TDR) 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. It also adds specific reference to insurance companies in addition to the previously covered financial institutions.
Division N, Section 541 of H.R. 133 extends CARES Act Section 4014, which provided optional temporary relief from CECL guidance. Under this extension, insured depository institutions, bank holding companies, and their affiliates would not be required to adopt Financial Accounting Standards Board Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” before the earlier of the first day of the entity’s fiscal year that begins after the date on which the COVID-19 national emergency terminates or Jan. 1, 2022.
After the CARES Act was enacted on March 27, 2020, the Securities and Exchange Commission (SEC) staff clarified that once the deferral was elected by a registrant, Dec. 31, 2020, adoption of CECL was required, retrospective to Jan. 1, 2020 (ignoring an early termination of the national emergency). Under the amendments, a registrant electing the delay under the CARES Act is further delayed until Jan. 1, 2022, effective as of Jan. 1, 2022 (absent an early termination of the national emergency). With regard to the amendments to Section 4014, the SEC staff indicated it would not object to a registrant early adopting on Dec. 31, 2020, retrospective to Jan. 1, 2020, or Jan. 1, 2021, effective as of Jan. 1, 2021.