5 CARES Act Components Affecting the Consumer Financial Industry
The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was adopted into law on March 27, 2020. This bulletin highlights five key components of the package for the consumer financial industry: mortgages; student loans; treatment of loan modifications, forbearance and credit losses; other bank regulatory relief; and direct recovery payments to individuals.
As anticipated, the CARES Act expands on recent directives from the Federal Housing Finance Agency (“FHFA”) and the Department of Housing and Urban Development (“HUD”) for federally backed residential mortgages.
Forbearance. Servicers must notify borrowers in writing of their forbearance option during the national emergency. By submitting a request to the servicer and a bare attestation of financial hardship due to the coronavirus, regardless of the delinquency status of the federally backed residential mortgage, a borrower may obtain forbearance for 180 days, plus up to another 180 days upon request. No fees or penalties beyond regular (non-default) interest shall accrue during the forbearance period.
Borrowers with a federally backed multifamily mortgage loan that was current on February 1, 2020, may request a 30-day forbearance and up to two 30-day extensions. For the duration of the forbearance, such borrowers shall not evict, charge late fees or charge penalties to tenants. The covered period ends on the earlier of termination of the national emergency or December 31, 2020.
Foreclosure and Eviction. The CARES Act imposes a 60-day moratorium on foreclosures of federally backed mortgages (except for vacant and abandoned properties), beginning March 18, 2020. The Act also imposes a 120-day moratorium on commencement of actions to recover possession from a tenant of any residential property that is under a federal housing program or a federally backed mortgage.
Potential Relief for Servicers. The relief mandated by the CARES Act will place substantial pressure on mortgage loan servicers as they must make escalating advances on top of handling overwhelming volumes of borrower requests. We anticipate that the Federal Reserve Board (“FRB”) will announce a mortgage servicing advance facility in the coming weeks to provide much needed liquidity for servicers. Moreover, to maintain credit availability, the FRB is likely to expand the Term Asset-Backed Securities Loan Facility, created in the 2008 financial crisis and restarted on March 23, 2020, to support the issuance of asset-backed securities collateralized by eligible servicing advance receivables, credit card receivables, auto loans and leases, student loans, equipment loans, floorplan loans and certain loans by the Small Business Administration.
Federal Student Loans
The CARES Act allows borrowers of student loans owned by the federal government (“Federal Student Loans”) to suspend payments without penalty through September 30, 2020. The suspended payments would apply toward student loan forgiveness under income-driven repayment (“IDR”) plans and the Public Service Loan Forgiveness (“PSLF”) program. Among other steps to ensure no interest or penalty applies for deferred payments, servicers will need to cancel any auto-debit payments and, when the forbearance period is about to expire, notify borrowers and provide instructions on how to resume payments. The CARES Act’s provisions do not apply to student loans owned by private entities, such as commercial institutions, colleges and universities.
Previously, following the March 13, 2020, declaration of a national emergency, the Department of Education (“ED”) had set the interest rate on all Federal Student Loans to zero for 60 days and allowed borrowers to request administrative forbearance for at least two months. Under that framework, time spent and any payments made during the period of administrative forbearance would not have counted toward forgiveness of the loan under an IDR plan or the PSLF program, thus creating a potential disincentive for forbearance requests. There also had been great concerns regarding the requirement for borrowers to make forbearance requests for processing by overwhelmed loan servicers. The CARES Act resolved both these issues, in addition to extending the relief for an additional four and a half months. Some borrowers nevertheless may choose to make partial or full payment during this period to reduce their loan principal while zero interest applies.
Borrowers on the Federal Family Education Loan (“FFEL”) Program and Federal Perkins Loans not owned by the federal government may seek to consolidate these private loans into a Direct Consolidation Loan to obtain the relief available for Federal Student Loans. However, after the temporary zero interest rate period ends, the interest rate on the new Direct Consolidation Loan may be higher than what borrowers are paying under their existing student loans, as the servicer would certify the loans for consolidation using the regular statutory interest rate, not the temporary zero percent interest rate.
Treatment of Loan Modifications, Forbearance and Credit Losses
Credit Reporting. The CARES Act includes a temporary amendment to the Fair Credit Reporting Act (“FCRA”), applicable until the later of 120 days from enactment of the Act or the end of the national emergency. The amendment requires a creditor to report an obligation as current, even if the creditor has granted a loan modification or forbearance to a consumer affected by the coronavirus. This requirement does not apply if the credit obligation or account has been charged off or if the borrower fails to meet the requirements of the loan modification or forbearance. If the account was delinquent before a coronavirus accommodation was requested, then the delinquent status would continue during the period in which the accommodation is in effect. But if the consumer brings the delinquent account current during the accommodation period, then the furnisher must report the credit obligation or account as current.
Troubled Debt Restructuring (“TDR”). For loans not more than 30 days past due as of December 31, 2019, financial institutions may make loan modifications for consumers affected by the coronavirus without categorizing them as TDRs and may suspend any determination of such loan modifications as TDRs, including impairment for accounting purposes. This suspension of Generally Accepted Accounting Principles (“GAAP”) may apply for the term of such loan modification (although not in regard to any adverse impact on the borrower’s credit that is unrelated to the coronavirus). This exception applies until the earlier of either December 31, 2020, or 60 days after termination of the national emergency.
Please click here for our March 23, 2020, discussion of the interagency statement issued by the FRB, Office of the Comptroller of the Currency (“OCC”), Federal Deposit Insurance Corporation (“FDIC”), Consumer Financial Protection Bureau (“CFPB”), National Credit Union Administration (“NCUA”) and Conference of State Bank Supervisors (“CSBS”) (collectively, “Regulators”) regarding their treatment of short-term loan modifications, as they encouraged financial institutions to work with borrowers affected by the coronavirus. Besides assuring institutions that they need not categorize such loan modifications as TDRs, the Regulators stated that examiners will not automatically adversely risk rate affected credits and, even if the modifications are considered TDRs or are adversely classified, examiners will not criticize prudent loan modifications made to manage or mitigate coronavirus impacts on borrowers.
Current Expected Credit Losses (“CECL”). The CARES Act also allows financial institutions to delay compliance with the Financial Accounting Standards Board Accounting Standards Update No. 2016-13 (Measurement of Credit Losses on Financial Institutions), including the CECL methodology for estimating allowances for credit losses. This exception applies until the earlier of either the end of the national emergency or December 31, 2020.
Other Temporary Bank Regulatory Relief
Debt Guarantees. The CARES Act amends the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) to authorize the FDIC to establish a temporary program to guarantee obligations of solvent insured depository institutions and solvent depository institution holding companies, including any affiliates thereof, and extends guarantee availability to noninterest bearing transaction accounts. The CARES Act also authorizes the NCUA to increase the share insurance coverage on any non-interest bearing transaction account in any federally insured credit union. These authorizations apply through December 31, 2020.
Lending Limit. The CARES Act authorizes the OCC to waive the single borrower loan limit applicable to national banks and federal savings associations for loans to “nonbank financial companies” as defined in the Dodd-Frank Act. The OCC also gets temporary authority to waive lending limits for any transaction where it deems the waiver to be in the public interest. This lending limit waiver applies until the earlier of either the end of the national emergency or December 31, 2020.
Community Banks. The CARES Act requires federal prudential banking agencies to adopt an interim final rule to reduce the community bank leverage ratio (“CBLR”) from 9% to 8% for qualifying community banks and provide a “reasonable grace period” if a bank falls below that ratio. The interim rule would be effective from the date of its issuance until the earlier of either the end of the national emergency or December 31, 2020.
Credit Unions. The CARES Act also includes various provisions to expand credit unions’ flexibility in extending credit, including enhancing their access to the Central Liquidity Facility (“CLF”), through December 31, 2020.
Recovery Payments to Individuals
Although not aimed at financial institutions, the CARES Act’s allocation of $250 billion for recovery payments to individuals and families also could have significant ramifications for the industry. The Act provides for direct payments of $1,200 to eligible individuals who have Social Security numbers and adjusted gross income up to $75,000, $2,400 for couples who have adjusted gross income up to $150,000, plus $500 per qualifying child.
The Internal Revenue Service (“IRS”) will make automatic direct deposits for individuals who previously have filed their income tax returns electronically. Major challenges remain, particularly with regard to the disbursement of funds to unbanked individuals. The Treasury Department will be considering disbursement options, including the issuance of debit cards and prepaid cards, or use of digital wallets and push-payment channels for faster distribution than paper checks. Accordingly, as in other day-to-day activities during the coronavirus crisis where use of digital technologies for transactions, communication and entertainment is becoming ubiquitous, the disbursement of recovery payments under the CARES Act will contribute to the transition of financial transactions to the digital platform. While digital innovators, from established institutions to market disruptors, will be the most obvious beneficiaries, accelerated user acceptance of digital mechanisms in consumer financial transactions could transform the industry as a whole.
Side by side with implementation of the CARES Act, federal and state authorities continue to find new ways to respond to the coronavirus turmoil – from encouraging or requiring the industry to assist affected consumers and businesses in specific ways (e.g., the California Governor’s March 22, 2020, memorandum advocating various accommodation practices; New York’s March 21, 2020, Executive Order requiring forbearance on mortgages and fees; New York, Nevada and Chicago’s suspension of debt collector operations; federal Regulators’ March 26, 2020, joint statement supporting responsible small dollar lending), to providing relief on regulatory reporting and supervisory exams (e.g., the FRB relaxing exams on most subjects and not taking action on the late filing of financial statements; the CFPB providing flexibility in exams and suspending Home Mortgage Disclosure Act (“HMDA”), credit card and prepaid accounts Truth in Lending Act (“TILA”) reporting requirements). We continue to monitor developments and stand ready to answer your questions in the evolving coronavirus crisis.
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