COVID-19 and Mortgage Lenders and Services, MAC Clauses in Loan Agreements, Fair Credit Reporting Act Changes, and Employee Benefit Considerations
March 28, 2020
Authored by: Robert Klingler
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.
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.
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.
Among other things, the CARES Act permits consumers to defer loan payments, obtain a forbearance, or obtain other loan assistance (called “accommodations”) during the COVID-19 pandemic if certain conditions are met. The CARES Act then modifies the Fair Credit Reporting Act by precluding furnishers of credit information from reporting the accommodation. Instead, furnishers will be required to continue reporting the consumer using the consumer’s account status (i.e., current or delinquent) at the time that the accommodation began. This alert identifies the CARES Act modifications that require a careful operational review of credit information reporting/tracking systems to ensure both regulatory compliance and to minimize litigation risk.
U.S. employers may look to the impact that a temporary reduction in their business has on their existing U.S. employee benefit programs, adjust those benefits to meet the needs of both employers and employees and consider the impact of the newly created obligations under recently enacted and pending federal legislation. Many employers are grappling with significant reductions in force, the furloughing of employees and/or reducing hours and compensation for employees as a result of this crisis. All of these consequences significantly impact employee benefit plans and policies. In addition, employers may need to make temporary or permanent changes to these employee benefit plans and policies. It is important for employers to review all of their employee benefit plans and policies and service provider contracts to assess the impact these actions may have on employee benefit programs. With this in mind, this alert provides a summary of issues related to service provider contracts, emergency paid sick leave, family leave and related tax credits, health and wealthfare plans, qualified requirement plans, and incentive compensation and non-qualified deferred compensation plans.
Much more to follow…