COVID-19: Cares Act Provisions Impacting The Banking Sector

The Coronavirus Aid, Relief, and Economic Security (CARES) Act offers broad-based economic support for companies contending with the disruptions caused by the coronavirus (COVID-19) pandemic. This LawFlash provides a comprehensive overview of the aid that is available to or directly affects banks and related companies.

LOANS, LOAN GUARANTEES, AND OTHER INVESTMENTS

The CARES Act provides loan assistance to certain small, mid-sized, and large businesses through the following programs:

Payroll Protection Program Loans (Sec. 1102). The CARES Act provides new and increased federally guaranteed Paycheck Protection Program (PPP) loans through the Small Business Administration (SBA) to small businesses that keep their workers employed. These loans are the typical SBA loans available through banks and other lenders.

By maintaining employees on their payroll through the duration of the crisis, these small businesses can qualify for PPP loan forgiveness. Due to affiliation rules, large businesses that control subsidiary or affiliated entities may not qualify for relief under this provision.

Eligible companies include

• businesses and 501(c)(3) nonprofits with 500 or fewer employees (subject to SBA affiliation rules);
• independent contractors;
• self-employed individuals;
• individuals who operate as sole proprietorships; and
• small businesses as defined by the SBA Size Standards at 13 CFR 121.201.

The PPP provides up to a $10 million non-recourse loan with a maximum 4% interest rate. Loan proceeds may be used to cover

• payroll costs (excluding individual employee compensation over $100,000);
• group healthcare benefits (including benefits during periods of paid sick, medical, or family leave, and related insurance premiums);
• mortgage interest payments (but not any prepayment or payment of principal); and
• rent, utilities, and interest on other debt incurred prior to the covered period (February 15–June 30, 2020).

The amount of the loan will be the lesser of $10 million or a payroll-based formula calculated in one of two ways:

Calculation 1

• 2.5 multiplied by the sum of the borrower’s 12-month average monthly payroll cost for the one-year period prior to the date of the loan being made (or for seasonal employers, either the 12-week period beginning on February 15, 2019, or at the election of the borrower, March 1, 2019, and ending on June 30, 2019); and

• the amount of outstanding Economic Injury Disaster Program (EIDP) loans made during the period beginning January 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan.

Calculation 2

If the borrower was not in business during the period beginning February 15, 2019 and ending June 30, 2019, the below calculation applies:

• 2.5 multiplied by the sum of the average total monthly payments for payroll costs for the period beginning January 1, 2020 and ending February 29, 2020; and
• the amount of outstanding EIDP loans made during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan.

Note that in both calculations, compensation above $100,000 for any single employee is excluded.

Additional PPP Resources

• CARES Act SBA loan calculator
• SBA’s Interim Final Rule on the PPP
• Treasury guidance for borrowers
• SBA PPP application form
• Read our detailed LawFlash on the Paycheck Protection Program
• Read our detailed analysis on the Disaster Loan Program
• View the Treasury Department website for more details

Loans, Loan Guarantees, and Other Investments to Air Carriers and Defense Businesses (Sec. 4003). The CARES Act allocates $29 billion for loans and loan guarantees to passenger and cargo air carriers, as well as an additional $17 billion for businesses critical to maintaining national security.[1] The principal obligation will not be forgivable.

Loan and loan guarantees may be made available if

• credit is not reasonably available;
• the intended obligation is prudently incurred;
• the loan is reasonably secured;
• the term is no longer than five years;
• stock buybacks are barred for the life of the loan, plus one year—excepting current contractual obligations;
• dividends and other capital distributions are barred for the life of the loan, plus one year;
• to the extent practicable, eligible businesses maintain employment at March 24, 2020 levels and do not reduce employment levels by more than 10% as of that date;
• eligible businesses certify that they are created or organized in the United States or under US law and have significant operations and employees based in the United States; and
• pursuant to a determination by the secretary of the Treasury, eligible businesses must have losses that would jeopardize continued business operations.

Mid-Sized Business Loan Program (Sec. 4003). The CARES Act directs the Treasury secretary to “endeavor” to create a loan program available to “mid-sized” businesses with between 500 and 10,000 employees. Loans will be capped at 2% interest, and no payments will be due (interest or principal) for the first six months of the loan. The principal obligation will not be forgivable.

A borrower applying for a direct loan under this program must make a “good faith certification” that the borrower

• is applying due to economic uncertainty and the need to fund ongoing operations;
• intends to use the funds to retain at least 90% of its workforce, at full compensation and benefits, until September 30, 2020;
• intends to restore not less than 90% of its workforce as of February 1, 2020 levels and to restore all compensation and benefits to workers no later than four months after the termination of the emergency declaration;
• is created or organized in the United States or under US laws, and has significant operations and employees based in the United States;
• is not a debtor in a bankruptcy proceeding;
• will comply with the compensation restrictions set forth in Section 4004 (discussed below);
• will not pay dividends or make other capital and stock buybacks during the life of the loan;
• will not outsource or offshore jobs for the term of the loan and for two years after completing repayment of the loan;
• will not abrogate existing collective bargaining agreements for the term of the loan and for two years after completing repayment of the loan; and
• will remain neutral in any union organizing effort for the term of the loan.

Main Street Lending Program (Sec. 4003). The act provides for the possibility of a “Main Street Lending Program” that supports lending to small and mid-sized businesses. The Board of Governors of the Federal Reserve System has discretion to create such a program. And if such a program is created, the Board may make the funds available on terms and conditions consistent with section 13(3) of the Federal Reserve Act (12 USC 343(3)).

Limits on Compensation for Loan/Investment Recipients (Sec. 4004). The Cares Act includes restrictions on employee compensation for individuals earning more than $425,000 per year and additional restrictions on employees and officers earning more than $3 million per year. Specifically:

• No officer or employee whose total compensation exceeded $425,000 in calendar year 2019 will receive (a) compensation greater than what they received in calendar year 2019 or (b) a severance package twice their 2019 pay; and
• no officer or employee of the eligible business whose total compensation exceeded $3 million in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of (a) $3 million plus (b) half of any total over $3 million.

View the SBA Interim Final Rule on the PPP.

SPECIAL RETIREMENT PLAN PROVISIONS

Early Withdrawals and Loans from Retirement Plans (Sec. 2202). This section allows a retirement plan holder to take an early distribution of up to $100,000 without incurring a 10% tax penalty if the plan holder or spouse is diagnosed with COVID-19 and/or if the plan holder experiences adverse financial consequences as a result of being quarantined, being laid off from employment, or needing to close a business or reduce business hours.

• Taxable amounts from such distributions can be included in income ratably over three years, which allows the plan holder to repay the distribution to the plan within three years without regard to the plan’s normal annual contribution limits.
• Section 2202 also increases the limit on how much a retirement plan can loan a plan holder from $50,000 to $100,000 for COVID-19-affected plan holders, as discussed above.
• Repayments of loans from retirement plans due in 2020 and subsequent repayments will be postponed for a year.

Advisors should consider advising COVID-19-affected clients of their ability to take an early retirement plan withdrawal without incurring the 10% penalty. Advisors also should be aware that some states, e.g., California, have their own early withdrawal penalty statutes, so care should be taken in determining the overall tax situation of individual clients.

Required Minimum Distribution Modifications (Sec. 2203). Any required minimum distribution for certain qualified retirement plans (not 403(a), 403(b), individual retirement plans, or deferred compensation plans) will be temporarily waived in 2020 for one year. This means that those retirement plan holders who would typically be required to take minimum distributions from their retirement plans will not have to do so through December 31, 2020.

Retirement plan advisers should make their clients aware of this relief from required distributions when offering advice.

TEMPORARY RELIEF FROM TROUBLED DEBT RESTRUCTURING AND EXPECTED CREDIT LOSSES

Debt Restructurings (Sec. 4013). This section allows financial institutions to elect to suspend the requirements under generally accepted accounting principles (GAAP) for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring. It will be up to the financial institution to determine whether to make a suspension under this section.

By suspending applicable GAAP requirements for troubled debt restructurings, this section would enable bank and credit union lenders to modify loans in troubled condition solely by reason of the COVID-19 crisis and avoid classification as troubled debt subject to write-down. Further, by requiring the banking agencies to defer to any determination of the bank or credit union under this section, affected financial institutions are provided with substantial leeway to make these COVID-19-related terminations without the need for banking agency approval.

It is unclear whether this section requires any further federal banking agency action for implementation; the statutory language does not appear to require agency action, but regulatory action to clarify and further refine this provision is not out of the question.

Optional Temporary Relief from Current Expected Credit Losses (Sec. 2014). This section provides temporary relief for insured depository institutions, bank holding companies, and their affiliates from required compliance with the applicable expected credit losses methodology for estimating allowances for credit losses.

The suspension of this controversial change to accounting standards for expected credit losses will provide affected financial institutions with flexibility to avoid possible negative financial reporting consequences by not having to apply the new current expected credit losses (CECL) standards to COVID-19-related loans.

HOUSING RELIEF AT THE STATE LEVEL

In addition to the federal CARES Act, many states are enacting executive orders or offering guidance to financial institutions with respect to consumer mortgage payments, foreclosures, and evictions. Among these states are California, New York, and New Jersey.

Read our LawFlashes on these orders:

• California Executive Orders Provide Consumer and Commercial Relief During COVID-19
• New Jersey Governor Announces Mortgage Payment Relief Financial Protections for Residents
• New York Executive Orders Temporarily Limit Bank Mortgage Servicer and Landlord Remedies

CREDIT FACILITIES AND TALF 2.0 ISSUES

The Term Asset-Backed Securities Loan Facility (TALF) 2.0 forms are being drafted for circulation to and comments by various constituencies, including Structured Finance Association (SFA) member banks. This area is in flux.

Linked is a chart depicting borrowing procedures based on TALF 1.0. We will update this chart when TALF 2.0 procedures are released. This chart is a useful refresher on how the TALF offering process worked.

CREDIT REPORTING

CARES Act Amendments to Fair Credit Reporting Act (Sec. 4201). This section of the CARES act provides, with certain exceptions, the following:

[I]f a furnisher makes an accommodation with respect to 1 or more payments on a credit obligation or account of a consumer, and the consumer makes the payments or is not required to make 1 or more payments pursuant to the accommodation, the furnisher shall—(I) report the credit obligation or account as current; or (II) if the credit obligation or account was delinquent before the accommodation—(aa) maintain the delinquent status during the period in which the accommodation is in effect; and (bb) if the consumer brings the credit obligation or account current during the period described in item (aa), report the credit obligation or account as current.

In addition, Section 3513 of the CARES Act addresses the furnishing of certain student loans for which payments are suspended.

CFPB Policy Statement on CARES Act’s Effect on Credit Reporting. The Consumer Financial Protection Bureau (CFPB) Policy Statement highlights furnishers’ responsibilities under the CARES Act and how they intersect with the Fair Credit Reporting Act (FCRA) and Regulation V.

The CFPB encourages financial institutions to work constructively with borrowers and other customers affected by COVID-19 to meet their financial needs, and encourages furnishers to continue providing information despite the current crisis. The CFPB says it will not take action against furnishers that provide information to credit reporting agencies (CRAs) that “accurately reflects the payment relief measures they are employing.”

Recognizing that some CRAs and furnishers may not be able to meet FCRA’s 30-day limit for investigation of consumer disputes due to COVID-19-related workforce and information-flow disruptions, the CFPB is willing to relax the 30-day compliance window when appropriate, analyzing the individual CRA’s or furnisher’s particular circumstances. It is expected that this flexibility will be extended to smaller businesses and institutions rather than larger businesses and institutions.

STATE CREDIT REGULATIONS

Massachusetts

The Massachusetts Office of the Attorney General issued an emergency rule concerning practices by creditors and debt collectors under the Massachusetts Consumer Protection Act, M.G.L. c. 93A. The rule provides that for the 90 days following the effective date (March 27–June 25, 2020) or until the State of Emergency Period expires, whichever occurs first, it is an unfair or deceptive act or practice for any creditor, including a debt collector, to

• initiate, file, or threaten to file any new collection lawsuit;
• initiate, threaten to initiate, or act upon any legal or equitable remedy for the garnishment, seizure, attachment, or withholding of wages, earnings, property, or funds for the payment of a debt to a creditor;
• initiate, threaten to initiate, or act upon any legal or equitable remedy for the repossession of any vehicle;
• apply for, cause to be served, enforce, or threaten to apply for, cause to be served or enforce any capias warrant;
• visit or threaten to visit the household of a debtor at any time;
• visit or threaten to visit the place of employment of a debtor at any time; or
• confront or communicate in person with a debtor regarding the collection of a debt in any public place at any time.

This rule does not apply to telephone, gas, and electric utility companies regulated by M.G.L. c. 164 and the Department of Public Utilities or the Department of Telecommunications and Cable.

• View the Addendum to Massachusetts Secretary of State Regulation Filing Form
• Read our April 2 LawFlash: Massachusetts Prohibits Certain Credit and Debt Collection Practices During COVID-19 Emergency

CORONAVIRUS COVID-19 TASK FORCE

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
Elaine McChesney
Matthew Furlong

New York
Michael Kraut
Samuel Shaulson 

[1] Neither the CARES Act nor the supplemental guidance issued by the Treasury Department on March 30, 2020, address what businesses will qualify as being “critical” to maintaining national security.