Special message from Mike Percy, Managing Partner, Financial Services
Dear FIEB readers,
I continue to hope this message finds you, your friends, your family, and your colleagues safe. With the end of the second quarter just few weeks away, speculation on the financial reporting impact is high. As the country continues to slowly move toward reopening, we still face uncertainty with the coronavirus disease (COVID-19) on many fronts, including the short-term and long-term financial reporting impacts. Given our resiliency, we will find our way to a new normal.
It’s not business as usual, so we have again reorganized this month’s Financial Institutions Executive Briefing to focus on the most critical issues. We will strive to keep you updated as events unfold.
Regulatory capital
NCUA approves interim final rule on prompt corrective action requirements
On May 21, 2020, the National Credit Union Administration (NCUA) approved an interim final rule related to prompt corrective action regulations to provide temporary regulatory relief to credit unions that temporarily fall below the well-capitalized level. The rule reduces the earnings retention requirement for adequately capitalized credit unions, and credit unions unable to meet the requirement will not be required to request approval to decrease earnings retention. In certain circumstances the credit unions might be required to submit an earnings transfer waiver request. The rule was implemented to help ensure that credit unions remain liquid and operational during the COVID-19 pandemic, and it will remain in place until Dec. 31, 2020.
Comments on the interim final rule are due June 29, 2020.
Agencies temporarily change supplementary leverage ratio
On May 15, 2020, the Federal Reserve Board (Fed), the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) announced an interim final rule to provide temporary modifications to the supplementary leverage ratio (SLR) in light of COVID-19 in order to provide flexibility to certain institutions to provide credit to consumers and businesses. The rule allows banks to choose to exclude Treasury securities and deposits at Federal Reserve banks from the calculation of the SLR. For institutions that change the SLR calculation, prior approval from regulators will be required before making any capital distributions. The change is in effect until March 31, 2021.
Comments on the interim final rule are due July 16, 2020.
Other matters of importance from the financial regulators
Agencies propose changes for June 30 call report
The agencies have posted “Redlined Report Form Pages for Call Report Revisions Effective as of the June 30, 2020, Report Date,” to collect information related to COVID-19. The proposed changes to the June 30 call report include:
“1. New items on Call Report Schedule RC-C, Part I, Loans and Leases, and Schedule RC-M, Memoranda, to collect data on:
- “Eligible loan modifications under Section 4013, Temporary Relief from Troubled Debt Restructurings, of the CARES Act, with these items collected on a confidential basis;
- “U.S. Small Business Administration Paycheck Protection Program (PPP) loans and borrowings under the Federal Reserve’s PPP Liquidity Facility (PPPLF); and
- “Holdings of assets purchased under the Federal Reserve’s Money Market Mutual Fund Liquidity Facility (MMLF).
“The agencies expect the collection of these new items to be time-limited.
“2. Revisions to the responses from which to choose in Schedule RC-R, Part I, Regulatory Capital Components and Ratios, item 2.a, to capture more detail on the usage of a CECL transition election as of the report date by institutions that have adopted Accounting Standards Update No. 2016-13 on credit losses.”
CFPB makes several changes related to LIBOR transition
On June 4, 2020, the Consumer Financial Protection Bureau (CFPB) announced three items related to the anticipated discontinuation of the London Interbank Offered Rate (LIBOR) index. First, the bureau released an updated Consumer Handbook on Adjustable-Rate Mortgages (CHARM) to remove references to LIBOR and to streamline the overall content to align with efforts to make disclosures more concise and improve readability and usability. The bureau also issued FAQs related to the LIBOR transition, primarily related to how the discontinuation of LIBOR affects existing regulatory requirements.
Finally, the CFPB issued a Notice of Proposed Rulemaking (NPRM) for Regulation Z to address the transition away from LIBOR. Proposed changes include providing examples of replacement indexes that would meet Regulation Z standards, as well as changing requirements for open-end products such as clarifying current rules specific to the LIBOR transition and providing change-in-terms notices.
Comments on the NPRM are due Aug. 4, 2020.
OCC finalizes Community Reinvestment Act changes
On May 20, 2020, the OCC issued a final rule to modernize its regulations related to the Community Reinvestment Act (CRA) and increase CRA-related lending, services, and investment in low- and moderate-income communities. Several changes and clarifications were made to the proposed rule announced in December.
The final rule includes the following:
- Clarification and expansion of activities that qualify for CRA credit, including loans and investments in tribal lands and minority depository institutions
- Changes to the approach for determining assessment areas, including requirements to identify additional assessment areas based on where deposits are located (for banks that do not rely primarily on branch networks for deposits)
- Changes to the method for evaluating CRA performance to make the process more objective through better use of data, including more transparent and timely public evaluations
- An increase to the qualifying threshold for loans to small businesses and small farms to $1.6 million
- Publication of an illustrative list of qualifying activities
FinCEN issues advisory on COVID-19 medical scams
On May 18, 2020, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to alert financial institutions to an increase in medical scams related to COVID-19. The advisory includes financial red flags, case studies highlighting the scams, and information on reporting suspicious activity.
Agencies issue principles for responsible small-dollar lending
On May 20, 2020, the Fed, FDIC, NCUA, and OCC issued “Interagency Lending Principles for Offering Responsible Small-Dollar Loans” to encourage financial institutions to offer small-dollar loans to consumers and small businesses in a responsible manner during the COVID-19 crisis.
Paycheck Protection Program (PPP)
President signs new PPP legislation
On June 5, 2020, President Donald Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010). The legislation is designed to make it easier for small businesses and other recipients of PPP funding to qualify for loan forgiveness. The act extends from eight weeks to 24 weeks the time PPP recipients have to spend their funds and still qualify for forgiveness, and it lowers to 60% from 75% the portion of PPP funds borrowers must spend on payroll costs to qualify for full loan forgiveness. The Small Business Administration (SBA) and the U.S. Department of the Treasury clarified in a joint statement that partial loan forgiveness also will be available under the 60% threshold and that the 60% is not a cliff threshold.
In addition to these provisions, other features of the act include:
- The deadline for borrowers to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness is extended from June 30 to Dec. 31.
- Two new exceptions allow borrowers to achieve full PPP loan forgiveness even if they do not fully restore their workforce. The two exceptions address situations where borrowers could not rehire former employees or hire similarly qualified employees, or were unable to restore business operations to Feb. 15, 2020, levels due to operating restrictions related to COVID-19.
- The repayment period is extended to five years from two years, and companies may delay payroll tax payments.
In response to the Paycheck Protection Program Flexibility Act, the SBA and Treasury issued, on June 11, a modified borrower application (Form 2483), a modified loan forgiveness application, and an interim final rule, “Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule.” On June 12, the SBA and Treasury issued another interim final rule, “Business Loan Program Temporary Changes; Paycheck Protection Program – Additional Revisions to First Interim Final Rule,” to conform to the act.
Treasury and SBA issue new and revised forgiveness applications
On June 17, 2020, Treasury and the SBA announced new and revised forgiveness applications. A revised loan forgiveness application, Form 3508, and instructions, implements the PPP Flexibility Act of 2020. The SBA also published a new EZ version of the forgiveness application, which requires fewer calculations and less documentation. The EZ application, “PPP Loan Forgiveness Application Form 3508EZ,” and instructions, applies to borrowers that:
- “Are self-employed and have no employees; OR
- “Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR
- “Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.”
The SBA and Treasury also issued, on June 17, another interim final rule, “Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to the Third and Sixth Interim Final Rules,” in accordance with the act.
Treasury and SBA issue new interim rules and guidance
On May 22, 2020, Treasury and the SBA issued two interim final rules on the PPP – one focused on loan forgiveness and one focused on SBA review procedures and lender responsibilities. The SBA also issued a procedural notice on lender processing fee payments and reporting. Information describing the guidance, including financial reporting considerations and legislation, can be found at crowe.com.
Main Street Lending Program
Fed expands Main Street Lending Program
On June 8, 2020, the Fed expanded the Main Street Lending Program to provide more support for small and medium-sized businesses. Changes to the program include:
- Decreasing minimum loan size (from $500,000 to $250,000)
- Increasing the maximum loan size
- Increasing the term from four years to five years
- Extending the repayment period by delaying principal payments for two years (was previously one year)
- Increasing Fed participation to 95% for all loans
Fed updates FAQs with new guidance
Loan modifications
CFPB and state regulators issue guidance on forbearance under CARES Act
On June 4, 2020, the CFPB and Conference of State Bank Supervisors issued joint guidance to provide mortgage servicers additional information on complying with forbearance requirements under the CARES Act. The guidance clarifies how servicers should comply with certain provisions of the CARES Act and which actions might result in consumer harm. A consumer-focused guide was issued on May 15, 2020.
Financial Accounting Standards Board (FASB) Activities
FASB delays revenue recognition and leases for certain entities
On June 3, 2020, the FASB issued Accounting Standards Update (ASU) 2020-05, “Revenue From Contracts With Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities,” to amend the effective dates of the revenue recognition and leases standards for certain entities.
For private companies, the ASU delays the effective date of Topic 842 to annual reporting periods beginning after Dec. 15, 2021, and to interim periods within fiscal years beginning after Dec. 15, 2022, which should be helpful to financial institutions as well as borrowers.
For all entities that have not yet adopted Topic 606 (that is, entities that have not yet issued financial statements or made their financial statements available for issuance reflecting the adoption of Topic 606), the effective date will be for annual reporting periods beginning after Dec. 15, 2019, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2020. Early application is permitted. Given most financial institutions have adopted the standard, the impact likely is greater for borrowers.
Securities and Exchange Commission (SEC) need to know
Recent developments
SEC issues new rules for acquisitions and dispositions of businesses and related pro forma information
On May 21, 2020, the SEC issued a final rule that revises the circumstances that require financial statements and related pro forma information for acquisitions and dispositions of businesses. The rule’s intent is to allow for more meaningful conclusions on when an acquired or disposed business is significant as well as to improve the related disclosure requirements, including for real estate operations and investment companies.
The following table summarizes the most significant changes:
