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Lender Obligations under Paycheck Protection Program

Pursuant to the Interim Final Rule published this evening, the SBA has confirmed that banks participating as lenders will have limited liability for the bad acts of their borrowers. This assumes, however that Form 2484, when ultimately published by the SBA, will not contain additional problematic certifications required to be made by the lender.

“SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders must comply with the applicable lender obligations set forth in this interim final rule, but will be held harmless for borrowers’ failure to comply with program criteria; remedies for borrower violations or fraud are separately addressed in this interim final rule.”

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Community Banks Should be Encouraged to Participate (as Borrowers) in the SBA Paycheck Protection Program

Community Banks should not only be permitted, they should be encouraged, to participate as borrowers in the CARES Act SBA Paycheck Protection Program (PPP). Both the Small Business Administration and each of the federal and state banking regulators should expressly acknowledge that community banks with less than 500 employees are both permitted and encouraged to participate, as borrowers, in the PPP. 

[Update, Evening of April 2, 2020. The SBA has now published the interim final rule for the PPP. Although the guidance published under either “2(a) Am I eligible?” or “2(b) Could I be ineligible even if I meet the eligibility requirements in (a) above?” make no mention of banks being ineligible, provision 2(c) provides that “Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10.” Banks are included as non-eligible borrowers under both provisions. As discussed below, this remains in apparent disagreement with the CARES Act, but unless the SBA changes its mind, it appears we’re missing an opportunity to further expand credit for small businesses.]

[Update #2, Still Evening of April 2, 2020. The Interim Final Rule clearly contemplates that the PPP is not otherwise subject to SBA rules as it provides “The program requirements of the PPP identified in this rule temporarily supersede any conflicting Loan Program Requirement.” So, to be clear, the SBA and Treasury chose not to allow community banks to participate.]

Without this encouragement, community banks risk regulatory criticism and reputational concerns that participating in the PPP represents a warning regarding the bank’s safety and soundness.   I would argue that the truth is far different.  Participating in the PPP would demonstrate that bank management, notwithstanding the economic uncertainty, wants to fortify the bank’s safety and soundness while extending its ability to provide credit to households and business throughout the United States.

In the last week, the federal banking agencies have announced a number of regulatory actions intended to “increase banking organizations’ ability to provide credit to households and businesses,” including modifications to the supplementary leverage ratio.  These changes are both reasonable and appropriate, but only affect the largest banking institutions.  Like the aims of the Small Business Administration and the Paycheck Protection Program more broadly, efforts should also be taken to support community banks in their efforts to continue to provide credit to households and businesses as we all work through the impacts of the coronavirus.  Banking regulators could directly “increase community banking organizations’ ability to provide credit to households and businesses” by encouraging their participation in the PPP.  

The text of the CARES Act provides that “any business concern … shall be eligible to receive a covered loan” if the business concern meets the employee thresholds set forth in the CARES Act.  If law school taught me anything, it was that any should mean any. Neither the Borrower nor Lender Information Sheet on the program published by the U.S. Treasury Department discuss any additional limitations based on type of business.  In fact, the Borrowers Information sheet states that “All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply.”  If law school taught me anything else, it was that all should mean all. Similarly, the initial application provided by the U.S. Treasury does not contemplate or provide for any collection of the type of business engaged in by the borrower.

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COVID-19 and the CARES Act; Financial Services Regulators Respond to the Crisis

The devastating impact of the Coronavirus (COVID-19) needs no introduction.  BCLP has consolidated all of its client alerts regarding Coronavirus (COVID-19) as one page of resources. On that page, you can also limit by topic area, jurisdiction and areas of practice.

In this post, we have highlighted some of the client alerts that we believe may be of specific importance to our community bank clients.

U.S. Congress CARES: Legislative Overview of Tax Provisions

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “Act”) was signed into law by President Trump on Friday, March 27, 2020.  The Act provides tax benefits to businesses and individuals and includes a number of changes to the Internal Revenue Code. This alert summarizes the tax provisions in the Act and details how businesses can take advantage of the benefits.

The U.S. Shows it CARES by Enacting Taxpayer-Friendly Modifications to Rules for Deducting NOLs

This alert also focuses on the tax provisions of the CARES Act, but specifically analyzes the taxpayer-friendly modifications to the restrictions placed on the deductibility of net operating losses pursuant to the Tax Cuts and Jobs Act of 2017.

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COVID-19 and Economic Stabilization Act, Foreclosures, Disaster Assistance Loans, and Consumer Class Actions

The devastating impact of the Coronavirus (COVID-19) needs no introduction.  BCLP has consolidated all of its client alerts regarding Coronavirus (COVID-19) as one page of resources. On that page, you can also limit by topic area, jurisdiction and areas of practice.

In this post, which is the second of many, we have highlighted some of the client alerts that we believe may be of specific importance to our community bank clients.

Economic Stimulus under the U.S. Coronavirus Economic Stabilization Act of 2020

The Coronavirus Economic Stabilization Act of 2020, Title IV of the CARES Act provides, among other things, $500 billion to the U.S. Treasury’s Exchange Stabilization Fund to provide loans, loan guarantees, and other investments in support of eligible businesses, States and municipalities and subsidies necessary for such loans, loan guarantees and other investments. This alert summarizes what impact the Stabilization Act may have on businesses and whether those businesses may be eligible for assistance.

Foreclosure and Receiver Issues in the United States during COVID-19

This alert provides an overview of the responses of courts and local and state governments of certain jurisdictions, as well as of the federal government, to the COVID-19 outbreak. The analysis has a particular focus on mortgage foreclosures and evictions, particularly in the commercial context, although information and guidance remains limited. Effects on residential foreclosures and evictions have been included as governments have tended to provide protection to residential properties first. Eventually, more state and local governments may provide guidance as to commercial foreclosures and evictions

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COVID-19 and Mortgage Lenders and Services, MAC Clauses in Loan Agreements, Fair Credit Reporting Act Changes, and Employee Benefit Considerations

The devastating impact of the Coronavirus (COVID-19) needs no introduction.  Community banks across the country are feeling the impact, both as small business themselves, and as providers of credit to so many other small businesses. The impacts of COVID-19 and the legislative responses to COVID-19 are increasingly broad, and affecting almost every aspect of American life. The lawyers of Bryan Cave Leighton Paisner (BCLP) are working to address those issues for companies of all sizes and industries, throughout the word.

As we collectively respond to the developing COVID-19 outbreak, the well-being of our clients and colleagues remains our paramount concern. We continue to closely monitor governmental, CDC, and WHO guidelines on travel, exposure and preventative measures and our firm has instituted a number of internal measures to ensure that BCLP is able to continue to consistently serve our clients’ business needs.  You can read more about the steps we have taken here.

In addition, BCLP has consolidated all of its client alerts regarding Coronavirus (COVID-19) as one page of resources. On that page, you can also limit by topic area, jurisdiction and areas of practice.

In this post, which is the first of many, we have highlighted some of the client alerts that we believe may be of specific importance to our community bank clients.

COVID-19: The New Frontier for Mortgage Lenders and Servicers in the U.S.

Most mortgage lenders and servicers already have business continuity plans in place, but those plans may not fully address the dynamics of the COVID-19 crisis.  Typical contingency plans ensure operational effectiveness following events like natural disasters, cyberattacks, and the like.  They do not, in many respects, account for widespread quarantines, extended business closures, and mass job borrower job loss and income disruption, among other things.  Beyond business continuity, lenders and servicers must grapple with evolving regulatory requirements, the risk of downstream regulatory and litigation scrutiny for actions taken today, and management of reputational risk.  This alert details the key regulatory developments, issues and risk mitigation strategies lenders and servicers should consider.

Enforcement of MAC Clauses in Loan Agreements in Light Of COVID-19 and Related Business Disruption

Material adverse change clauses in loan agreements present important issues that borrowers and lenders alike need to consider carefully in this environment.  There are very few published decisions on enforcement of MAC clauses in the lending context and no published cases addressing a pandemic-type situation like the one we are currently facing. A lender that invokes a MAC clause may seek to declare a default under the loan as a prelude to an enforcement action or to avoid funding, or further funding, its loan to the borrower.  Lenders are often confronted with extreme time pressure when a funding request is involved, which makes these situations even more challenging. This alert addresses whether COVID-19 and the resulting business disruption may be reasonably considered a MAC in a typical commercial loan. 

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COVID-19: Due Date Not Extended for Federal Information Returns

In an effort to provide relief to individuals affected by the COVID-19 emergency, the Secretary of the Treasury extended the due date for filing Federal income tax returns and making Federal income tax payments from April 15, 2020 to July 15, 2020 in IRS Notices 2020-17 and -18. However, the Notices did not provide an extension for the filing of any Federal information returns.

Therefore, all Federal information returns, including Form 5498, Form 1099-INT, Form 1099-OID, Form 1099-R, and Form 1099-B, should be filed by their normal due dates.

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What Businesses and Community Banks Need to Know About the CARES Act, SBA Lending, and Loan Forgiveness

The CARES Act has significant relief for small businesses, including $349 billion in Small Business Administration (SBA) loan guaranties and subsidies and additional funding for SBA programs. Highlights include: 

  • Expansion of SBA’s 7(a) Loan Program to Support New “Paycheck Protection Program” Loans. The SBA’s existing 7(a) program will see:
    • Increase in maximum loan amount to $10 million.
    • Allowable uses expanded to include:
      • Payroll support (including paid sick or medical leave);
      • Employee salaries;
      • Mortgage, rent and utility payments;
      • Insurance premiums; and
      • Other debt obligations. 
  • Loan Forgiveness. Certain borrowers would be eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on:
    • Payroll costs;
    • Interest payment on any mortgage incurred before Feb. 15, 2020;
    • Rent on any lease in force before Feb. 15, 2020; and
    • Utilities for which service began before Feb. 15, 2020.

The amount forgiven would be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of prior year compensation.

  • Subsidies for Certain Existing SBA 7(a) Loans
  • Special Terms for SBA Loans.
    • No personal or collateral guarantee will be required.
    • The eligible recipient does not have to certify that it is unable to obtain credit elsewhere.
    • Eligible borrowers must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; that funds will be used for a permitted purpose; and that they are not receiving fund from another SBA program for the same uses.
    • Maximum term of loan is 10 years.
    • Interest rate cannot exceed 4% but interest payments are completely deferred for 1 year.
    • No prepayment penalty.

Who Qualifies?

The CARES Act program covers business with 500 or fewer employees, unless the covered industry’s SBA size standard allows more than 500 employees, which were operational on Feb. 15, 2020. The size standards are tested on an affiliate basis—combined with all businesses under common control (50% ownership or contractual control)—counting on an aggregate basis towards the size test, except for hospitality and restaurant businesses, franchises, and recipients of Small Business Investment Company (SBIC) investment.

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Bank Regulatory Provisions in the CARES Act

On March 25, 2020, senators released an updated draft of the Coronavirus Aid, Relief, and Economic Security Act (a.k.a the “CARES Act”) (the acronym is so much better than EGRRCPA!) to provide emergency assistance and health care response for individuals, families, and businesses.  Bryan Cave Leighton Paisner’s initial review of the overall Act is available here.

The current draft contains a number of bank regulatory provisions of potential interest to financial institutions of all sizes.

Section 4008 – Debt Guaranty Authority.  Authorizes FDIC to re-implement transaction account guarantee program, subject to cap on amounts insured.  In the 2008 financial crisis, the FDIC provided unlimited insurance for amounts held in noninterest-bearing transaction accounts (i.e. checking accounts that don’t pay interest).  Dodd-Frank prohibited the FDIC from every doing that again.  The CARES Act authorizes the FDIC to provide the program again through December 31, 2020.  Current draft of legislation limits coverage to “a maximum amount” without specifying the amount.  Effectiveness will require FDIC action.  Current draft of legislation also allows the NCUA to provide comparable insurance for credit unions, and permits the NCUA to provide insurance on an unlimited amount in such accounts.  Since its formation, no depositor has ever lost a penny of FDIC-insured funds.

Section 4014 – Optional Temporary Relief from Current Expected Credit Losses.  No financial institution or holding company shall be required to comply with FASB’s current expected credit loss methodology (i.e. CECL) (which otherwise is scheduled to become effective for the largest public bank holding companies for Q1 2020).  Effective from adoption of the Act and ending on the earlier of December 31, 2020 or the termination date of the national emergency. 

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Banking Regulators Clarify TDR Relief for COVID-19 Modifications

On March 18, 2020, the FDIC issued guidance in its Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 indicating the potential for relief from the Troubled Debt Restructuring (TDR) reporting requirements.

Financial institutions should determine whether loans with payment accommodations made to borrowers affected by COVID-19 should separately be reported as TDRs in separate memoranda items for such loans in regulatory reports. A TDR is a loan restructuring in which an institution, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. However, a loan deferred, extended, or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not reported as a TDR.

FDIC FAQ published March 18, 2020

While appreciated, that guidance left a lot of discretion to the regulators to second guess the interpretations by financial institutions and essentially just repeated existing guidance. On Sunday, March 22, 2020, the federal banking regulators collectively issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. This new Interagency Statement fortunately goes further.

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Financial Services Regulators Respond to COVID-19

March 21, 2020

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In just a few short weeks, COVID-19 has had far reaching impacts on public health and the global economy. Regulators overseeing banks and non-bank financial services companies are trying to maintain operations, adapt oversight models and promulgate COVID-19 crisis-specific directives and guidance.

As with the crisis itself, these developments are fast-moving. We anticipate facts and details to change from day-to-day. To be clear, this is the first post on COVID-19 on BankBCLP.com, but it will most certainly not be the last. On our firm website, we are tracking regulatory developments that could have a broad impact across the industry.

BCLP Summary of Financial Services COVID-19 Regulatory Response

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