Special message from Mike Percy, Managing Partner, Financial Services
Dear FIEB readers,
I hope this message finds you, your friends, your family, and your colleagues safe.
With the third quarter in the rearview mirror, the financial reporting results are unfolding. So far, the results are a somewhat mixed bag, with many reporting bleaker earnings year to date as compared to last year – which is not surprising. On a positive note, economic forecasts seem to be trending more positive. I have heard some economists suggest that while we are not out of the woods, we could experience the shortest recession in our history.
This month’s Financial Institutions Executive Briefing continues to focus on the most critical issues, and we will strive to keep you updated as events unfold.
Matters of importance from the financial regulators
FDIC provides temporary relief from Part 363 audit and reporting requirements
The Federal Deposit Insurance Corp. (FDIC) issued, on Oct. 20, 2020, an interim final rule (IFR) to provide relief to insured depository institutions (IDIs) from the costs and burdens of potentially temporary asset growth associated with pandemic-related programs. These programs include the Paycheck Protection Program (PPP), the Money Market Mutual Fund Liquidity Facility, the PPP Liquidity Facility, and other stimulus efforts. The IFR would allow IDIs to determine the applicability of Part 363 of the FDIC’s regulations for fiscal years ending in 2021 based on the lesser of the following:
- The IDI’s consolidated total assets as of Dec. 31, 2019
- The IDI’s consolidated total assets as of the beginning of its fiscal year ending in 2021
Depending on the threshold, relief could be provided for annual audits, internal control over financial reporting, and certain audit committee requirements.
Using Dec. 31, 2019, and June 30, 2020, call report data, the FDIC estimates about 290 IDIs would be able to use the relief. In accordance with the IFR, the FDIC reserves the right to require an IDI to comply with one or more requirements of Part 363 if the FDIC determines that asset growth was related to a merger or acquisition.
The IFR is effective immediately, and comments are due 30 days after publication in the Federal Register.
CFPB issues policy statement on early termination of consent orders
The Consumer Financial Protection Bureau (CFPB) issued, on Oct. 5, 2020, a policy statement regarding applications for early termination of consent orders, which generally have a five-year term. The statement outlines both the application process and the CFPB’s process for evaluating applications.
The statement indicates that applications should demonstrate all of the following items (and that the CFPB intends to grant early termination of consent orders when it determines that these have been met):
- The entity meets all of the eligibility criteria, including that the consent order has been in place for at least one year or all remediation plans have been in place for at least six months, whichever is later.
- The entity has complied with the terms and conditions of the consent order.
- The entity’s compliance position is “satisfactory” in the business line or area applicable to the consent order.
Agencies announce CIP exemption for insurance premium finance loans
On Oct. 9, 2020, the Financial Crimes Enforcement Network (FinCEN), along with the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Fed), the FDIC, and the National Credit Union Administration (NCUA), granted an exemption to customer identification program (CIP) requirements for loans to facilitate purchases of property and casualty insurance policies. FinCEN indicates that these types of loans present low money laundering risks due to the purpose of the loans and the inability to use loan proceeds for any other purpose. The exemption is effective immediately.
OCC releases 2021 supervision priorities
On Oct. 1, 2020, the OCC released its “Fiscal Year 2021 Bank Supervision Operating Plan,” identifying the priorities for each of its supervisory operating units. For the agency’s FY21, which starts Oct. 1, units will focus on these risk areas:
- Credit risk management, commercial and residential real estate concentration risk management, allowances for loan and lease losses, and allowances for credit losses
- Cybersecurity and operational resilience
- Bank Secrecy Act/anti-money laundering compliance management
- Compliance risk management associated with 2020 pandemic-related bank activities
- Community Reinvestment Act performance
- Fair lending examinations and risk assessments
- The impact of a low-rate environment and preparation for the phaseout of the London Interbank Offered Rate (LIBOR)
- Proper oversight of significant third-party relationships
- Change management over significant operational changes
- Payment systems products and services
Agencies finalize interim rules resulting from pandemic
On Sept. 29, 2020, the Fed, the FDIC, and the OCC issued two final rules to adopt identical or substantially similar interim final rules issued earlier in 2020. They are:
- A final rule to temporarily defer appraisal requirements for up to 120 days for certain residential and commercial real estate transactions
- A final rule to neutralize capital and liquidity effects for banks that participate in the Money Market Mutual Fund Liquidity Facility and Paycheck Protection Program Liquidity Facility
The NCUA also issued a similar final rule related to appraisal requirements.
Fed seeks comment on proposed CRA changes
On Sept. 21, 2020, the Fed issued an Advance Notice of Proposed Rulemaking outlining an approach to modernize Community Reinvestment Act (CRA) requirements to align to the current banking landscape. The Fed is seeking comment on revising CRA requirements to:
- Strengthen the CRA’s core purpose of meeting the wide range of low- and moderate-income (LMI) banking needs and addressing inequities in financial services and credit access
- Address banking industry changes
- Include special provisions for activities in federally designated Native American areas and underserved areas, as well as for investments in minority depository institutions and community development financial institutions in order to promote financial inclusion
- Increase clarity, consistency, and transparency in performance evaluations that are tailored to local conditions
- Account for differences in bank sizes and business models in performance tests and assessments
- Clarify and expand eligible CRA activities focused on LMI communities
- Minimize data burden and tailor data collection and reporting requirements
- Recognize the special circumstances of small banks in rural areas
- Create a consistent regulatory approach
The OCC already finalized a rule relating to CRA changes in May 2020, and the FDIC issued a notice of proposed rulemaking in December 2019, which has not been made final.
Comments are due Feb. 16, 2021.
OCC and SEC issue statements on stablecoin reserve deposits
On Sept. 21, 2020, the OCC issued an interpretive letter confirming that national banks and federal savings associations may hold “stablecoin” reserves on deposit as a service to bank customers. A stablecoin is a form of a digital asset where the value of the coin is tied directly to the value of another asset, such as a fiat currency (for example, the U.S. dollar). According to the letter, stablecoin issuers often wish to hold their fiat currency reserves in U.S. banks and wish to promote the fact that their reserves are held in banks to establish that their stablecoin is trustworthy. However, the letter extends this interpretation only to stablecoins that meet these criteria:
- Has keys stored on a hosted wallet
- Is backed by a single fiat currency
- Is redeemable on a 1:1 basis for the underlying fiat currency
In order to ensure compliance with the 1:1 redemption requirement, a bank holding the stablecoin reserves must verify reserve account balances daily.
The Securities and Exchange Commission (SEC) Strategic Hub for Innovation and Financial Technology (FinHub) staff issued a related statement indicating that a careful analysis of the stablecoin needs to be undertaken to determine if the stablecoin should be classified as a security under federal securities law. In the statement, the staff encourages market participants seeking to structure and sell digital assets (such as stablecoins) to contact the staff with questions regarding whether their activities may implicate the federal securities laws. The staff statement identifies that the sale of digital assets could be structured in a way that does not constitute a security or trigger the registration and reporting requirements of the various securities laws. However, the staff indicated that the determination of whether a particular asset is a security depends on the applicable facts and circumstances.
Paycheck Protection Program (PPP)
SBA and Treasury announce streamlined PPP forgiveness for loans under $50,000
On Oct. 8, 2020, the Small Business Administration (SBA) and the U.S. Department of the Treasury released a new simplified application for loan forgiveness for PPP loans of $50,000 or less as well as application instructions. The streamlined application will help to expedite the forgiveness process for both small businesses and lenders. Additionally, a new interim final rule on the simpler forgiveness process for PPP loans of $50,000 or less was issued. The IFR provides that borrowers of $50,000 or less are exempted from reductions in forgiveness related to reductions in full-time equivalent employees and employee salary and wages reductions.
SBA updates FAQs, clarifies notification of PPP extension
On Oct. 7, 2020, the SBA and Treasury updated their frequently asked questions about borrower and lender questions on PPP implementation.
Newly added Question 52 clarifies: While lenders are required to immediately extend the deferral period provided by the PPP Flexibility Act of 2020 and should notify the borrower, the SBA does not require a formal modification to the promissory note, and that such a modification will not affect the SBA’s guarantee of a PPP loan.
Main Street Lending Program (MSLP)
Fed continues to update FAQs
The Fed updated the MSLP frequently asked questions document on Sept. 18, 2020, to provide additional guidance on the program as well as other topics. The Fed added questions and answers addressing terms and conditions as well as certifications and covenants.
On Sept. 18, 2020, the Fed also updated its Main Street for Nonprofit Organizations frequently asked questions.
Crowe addresses evaluating accrued interest receivable on loan deferrals/modifications
Institutions might be grappling with what, if any, steps they should take to evaluate the accrual status of loans deferred in response to the COVID-19 pandemic and to assess the collectibility of related accrued interest receivable (AIR) balances. In response, Crowe released, on Oct. 7, 2020, a report that offers observations to help entities develop an approach to evaluating AIR on loan deferrals/modifications. The document addresses interest income recognition and evaluation, including evaluating AIR under current expected credit loss as well as addressing how to comply with nonaccrual and charge-off guidance in a “nothing-is-past-due” environment.
From the Financial Accounting Standards Board (FASB)
Financial Accounting Standards Advisory Council discusses CECL implementation
At its quarterly meeting on Sept. 24, 2020, the Financial Accounting Standards Advisory Council (FASAC) discussed post-implementation review (PIR) of Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” with a focus on the initial costs and benefits of the standard.
This is the first in a series of discussions as part of the FASB’s PIR on the current expected credit loss (CECL) standard and focused on trade receivables. Specifically, members noted that the adoption of the standard had an insignificant financial impact on the allowance for credit losses related to trade receivables. Given the minimal impact, FASAC members discussed whether the standard should be amended to either exclude trade receivables or provide an option to not apply the guidance to trade receivables. It was also noted that that there might be a benefit for private companies applying the standard to trade receivables as it might provide more standardization in how entities calculate their trade receivables allowance for credit losses.
Securities and Exchange Commission (SEC) need to know
SEC releases report on U.S. credit market interconnectedness and COVID-19 effects
The SEC released, on Oct. 5, 2020, a report titled “U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock.” It examines the origination, distribution, and secondary market flow of credit across U.S. credit markets and addresses how credit market interconnections operated during the COVID-19 pandemic. The report also discusses certain credit market interdependencies and key stress points exposed by the COVID-19 shock. While the report is intended to inform policymakers seeking to improve our financial markets, it does not make policy recommendations.
Comments on the issues raised in the report may be submitted electronically to [email protected] and will be posted unchanged on the SEC’s website.
SEC holds roundtable on U.S. credit markets interconnectedness and risk
The SEC hosted, on Oct. 14, 2020, Roundtable on Interconnectedness and Risk in U.S. Credit Markets to discuss the issues raised in the report “U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock,” released on Oct. 5, 2020. The event was livestreamed and included a fireside chat with Chairman Jay Clayton and two panel discussions. The first panel discussion focused on market perspective and the impact of COVID-19 on the six credit markets covered in the report. The second panel discussion addressed the interconnectedness of the market from a regulatory perspective, including which areas of the markets performed well, which showed stress, and where vulnerabilities might still exist.
SEC amends shareholder proposal rule
The SEC, on Sept. 23, 2020, adopted amendments to the shareholder proposal rule included in Exchange Act Rule 14a-8. The amendments seek to balance the interests of shareholders who submit proposals with the costs a company and other shareholders bear when the proposals are included in the company’s proxy statement. The final rules apply to any proposal submitted for an annual or special meeting to be held on or after Jan. 1, 2022, and also provide for a transition period with respect to certain revised ownership thresholds for proposals submitted for an annual or special meeting to be held prior to Jan. 1, 2023.
SEC issues rules on quotations for OTC securities, schedules roundtable on Regulation Best Interest
The SEC adopted, on Sept. 16, 2020, amendments to Exchange Act Rule 15c2-11. The amendments enhance disclosure and investor protection in the over-the-counter (OTC) market by requiring that broker-dealers do not publish quotations for an issuer’s security when current issuer information is not publicly available, subject to certain exceptions.
The SEC says the amendments:
- Provide greater transparency to investors and other market participants by requiring that information about the issuer and its security be current and publicly available before a broker-dealer can begin quoting that security.
- Limit broker-dealers’ reliance on certain exceptions when issuer information is not available.
- Provide exceptions to reduce unnecessary burdens on broker-dealers to quote certain OTC securities that may be less susceptible to fraud and manipulation.
The final rule is effective 60 days following publication of the amendments in the Federal Register, but it has a general compliance date nine months after the effective date and a compliance date two years after the effective date for certain financial information requirements.
Additionally, on Sept. 28, 2020, the SEC announced that it has scheduled an Oct. 26, 2020, virtual roundtable, where the SEC and the Financial Industry Regulation Authority will discuss initial observations on implementation of Regulation Best Interest and Form CRS, which were adopted by the SEC on June 5, 2019. The compliance date for Regulation Best Interest and Form CRS was June 30, 2020.
SEC issues cybersecurity alert
On Sept. 15, 2020, the Office of Compliance Inspections and Examinations (OCIE) issued a cybersecurity risk alert covering safeguarding client accounts. The alert is based on observations from recent OCIE examinations. It “encourages firms to review their customer account protection safeguards and identity theft prevention programs and consider whether updates to such programs or policies are warranted to address emergent risks.”
Takeaways from 2020 AICPA Banking Conference
AICPA holds Banking Conference
As reported in last month’s Financial Institutions Executive Briefing, the 45th annual AICPA National Conference on Banks and Savings Institutions was held virtually Sept. 14-16, 2020, and covered accounting and auditing topics relevant to financial institutions. Focusing largely on the COVID-19 pandemic, the conference addressed issues affecting the banking industry both from an economic outlook and related to an ever-changing accounting landscape. Crowe has issued a comprehensive report covering key takeaways from the conference and insights on economic, accounting, and regulatory updates as well as other banking hot topics.