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Credit Reporting & Collections Forbearance per the CFPB

The CFPB issued guidance and consumer information tools last week covering components of the Coronavirus Aid, Relief and Economic Security (CARES) Act. In this rapidly environment, financial services companies might do well to check the CFPB blog frequently to keep abreast of new developments and to be aware of specific information and tools consumers may reference in difficult hardship conversations. 

Credit Reporting Policy Statement: On April 1, the CFPB issued a Policy Statement regarding the CARES Act credit reporting requirements lenders and credit furnishers and reporting agencies must follow under the fair Credit Reporting Act and Regulation V.

The Statement recognizes the importance of accurate credit reporting and information to the consumer financial services market system. In a press release Director Kraninger said: “During this time of uncertainty, we are providing clarity to ensure the consumer reporting industry can continue to function. Consumers rely on their credit report to purchase a new car, their new home, or to finance their college education. An effective consumer reporting system is critical in promoting fair and efficient access to credit in the consumer financial services market.”

While highlighting the adverse impact of the COVID-19 pandemic on consumers, the Policy Statement recognizes the operations and staffing challenges lenders, servicers and reporting agencies are having as well. “The Bureau intends to consider the circumstances that entities face as a result of the COVID-19 pandemic and entities’ good faith efforts to comply with their statutory and regulatory obligations as soon as possible. The Bureau believes that this flexibility will help furnishers and consumer reporting agencies to manage the challenges the current crisis poses.”

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Tax Effects on Paycheck Protection Program Borrowers

With regard to the interplay of various tax provisions of the CARES Act and the Paycheck Protection Program (PPP), we note the following:

  • If a borrower takes a PPP loan, they are restricted from claiming the employee retention credit, even if the PPP loan is not forgiven.
  • If any portion of a borrower’s PPP loan is forgiven, the borrower is restricted from taking advantage of the deferred payment of the employer portion of Social Security tax obligations.
  • If all or a portion of borrower’s PPP loan is forgiven, the statute provides that such forgiven amount shall be excluded from gross income.

Employee retention credit. The CARES Act provides certain eligible employers a refundable credit with respect to the employer’s share of Social Security tax for due in an amount equal to 50% of qualified wages paid after March 12, 2020 and before January 1, 2021 (up to $10,000 per employee for all calendar quarters). Eligible employers generally include those required to fully or partially suspend operations due to a COVID-19 related government order or that have a 50% decrease in gross receipts for a calendar quarter when compared to the same quarter in 2019.  Generally, all employee wages paid by employers with up to 100 full-time employees in 2019 are eligible for the credit. However, if an employer had more than 100 full-time employees in 2019, only wages paid to employees who are not providing services due to the suspension of operations or significant decrease in gross receipts are credit-eligible. If an employer takes a PPP loan, they are not eligible to take advantage of the employee retention credit.

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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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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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