The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes the following key provisions that affect financial institutions and regulation of financial institutions:
Section 4003 – Emergency Relief and Taxpayer Provisions
Section 4003 of the CARES Act generally authorizes the Treasury Secretary to make loans, loan guarantees, and other investments in support of eligible businesses, States, and municipalities that do not, in the aggregate, exceed $500,000,000,000 and provide the subsidy amounts necessary for such loans, loan guarantees, and other investments in accordance with the provisions of the Federal Credit Reform Act of 1990, including not more than: (a) $25,000,000,000 for passenger carriers and other eligible businesses; (b) $4,000,000,000 for cargo air carriers; (c) $17,000,000,000 for businesses critical to maintaining the national security; (d) $454,000,000,000 and any amounts available that are not used as provided under sections (a) through (c) to make loans and loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States, or municipalities by purchasing obligations or other interests directly or on the secondary market or making loans, including secured loans.
In entering into an agreement to make loans or make loan guarantees, the Secretary must determine that (a) the applicant is an eligible business for which credit is not reasonably available at the time of the transaction; (b) the intended obligation by the applicant is prudently incurred; (c) the loan or loan guarantee is sufficiently secured or is made at a rate that (i) reflects the risk of the loan or loan guarantee; and (ii) is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of COVID–19; (d) the duration of the loan or loan guarantee is as short as practicable and in any case not longer than 5 years; (e) the agreement limits stock buybacks; (f) the agreement limits dividends; (g) the agreement provides that, until September 30, 2020, the eligible business shall maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce its employment levels by more than 10 percent from the levels on such date; (h) the agreement includes a certification by the eligible business that it is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States; and (i) for purposes of a loan or loan guarantee to passenger airlines, cargo carriers and businesses critical to the maintenance of the national security, the eligible business must have incurred or is expected to incur covered losses such that the continued operations of the business are jeopardized, as determined by the Secretary.
Section 4003 of the Act also directs the Secretary to establish a program to provide low-interest loans for eligible businesses (including nonprofit organizations) with between 500 and 10,000 employees. Although these loans do not need to require repayment for at least six months, recipients must certify that (a) the company intends to maintain at least 90 percent of their current workforce; (b) the company will not pay dividends or repurchase stock (or other equity securities); (c) the company will not outsource or offshore jobs during the loan period or two years thereafter; (d) the company will not abrogate existing collective bargaining agreements with labor unions; and (e) the company will remain neutral in any current or future union organizing effort. No entity currently engaged in a bankruptcy proceedings is eligible for the program.
Section 4004 – Limitation on Certain Employee Compensation
Section 4004 of the CARES Act requires recipients of a loan or loan guaranty from the date of execution of the agreement to one year after retirement of the obligation if the agreement provides that (a) no officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020) (i) will receive total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; or (ii) will receive severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019; and (b) no officer or employee of the eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of (i) $3,000,000; and (ii) 50 percent of the excess over $3,000,000 received by the officer or employee from the eligible business in calendar year 2019.
Section 4008 – Debt Guaranty Authority
Section 4008 of the CARES Act authorizes the Federal Deposit Insurance Corporation (FDIC) to establish a debt guarantee program to guarantee the debt of solvent insured depository institutions and depository institution holding companies. Pursuant to such program, noninterest-bearing transaction accounts may be treated as a debt guarantee program, provided that any such program shall include a maximum amount of debt that is guaranteed. This section further extends to the National Credit Union Administration (NCUA) the authority to increase to unlimited the share insurance coverage it provides on any noninterest-bearing transaction accounts to federally insured credit unions. All such programs shall terminate not later than December 31, 2020.
Section 4009 – Temporary Government In The Sunshine Act Relief
Section 4009 of the CARES Act provides the Board of Governors of the Federal Reserve System (Board) temporary relief from the restrictions imposed by the Government in the Sunshine Act (5 U.S.C. section 552b) (Sunshine Act) with respect to the conduct of its meetings. The Sunshine Act provides that, subject to specific exemptions, every portion of every meeting of an agency must be open to public observation. This Section permits the Chairman of the Board to determine that unusual and exigent circumstances exist, under which circumstances the Board may conduct meetings without regard to the requirements of the Sunshine Act. This relief shall expire on the earlier of the termination date of the National Emergency or December 31, 2020.
Section 4010 – Temporary Hiring Flexibility
Section 4010 of the CARES Act grants temporary hiring flexibility to the Secretary of Housing and Urban Development, the Securities and Exchange Commission and the Commodity Futures Trading Commission to recruit and appoint candidates to fill temporary and term positions within their agencies upon a determination by their respective agency heads that such expedited procedures are necessary to respond to the COVID-19 outbreak. Such permission shall expire on the earlier of the termination date of the National Emergency or December 31, 2020.
Section 4011 – Temporary Lending Limit Waiver
Section 4011 of the CARES Act grants a temporary lending limit waiver to nonbank financial companies and temporarily permits the Comptroller of the Currency to exempt any transaction from lending limit requirements upon the Comptroller’s determination that such exemption is within the public interest. The waiver and authority granted by this section shall expire on the earlier of the termination date of the National Emergency or December 31, 2020.
Section 4012 – Temporary Relief For Community Banks
Section 4012 of the CARES Act provides temporary relief to financial institutions that elected to be subject to the Community Bank Leverage Ratio pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The Community Bank Leverage Ratio has been described as a regulatory “off ramp” for community banks that wanted to comply with a simplified capital calculation instead of being subject to a Tier 1 Risk-Weighted Assets Ratio and a Total Risk Weighted Assets Ratio. Pursuant to the EGRRCPA, Bank regulators had announced the Community Bank Leverage Ratio at 9% of Total Assets. This section of the CARES Act lowers the ratio to 8% and grants a qualifying community bank that falls below the Community Bank Leverage Ratio shall have a reasonable grace period to satisfy it. The period of time for the lower ratio is from the date banking regulators issue an interim rule through the sooner of the termination date of the National Emergency or December 31, 2020.
Section 4013 – Temporary Relief For Troubled Debt Restructurings
Section 4013 of the CARES Act provides a temporary relief to financial institutions (including credit unions) from GAAP as relates to troubled debt restructurings. Relief is provided for restructurings from March 1, 2020 to the earlier of December 31, 2020 or 60 days after termination of the national emergency. This section suspends the requirements of GAAP for any loan modification related to the COVID-19 pandemic. The relief is applicable for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019; and does not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic.
Section 4014 – Optional Temporary Relief For Troubled Debt Restructurings
Section 4014 of the CARES Act provides optional temporary relief to financial institutions (including credit unions) from the GAAP impacts of CECL (current expected credit loss) standards. Specifically, this section provides that no insured depository institution, bank holding company, or any affiliate thereof is required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses, during the period beginning on the date of enactment of this Act and ending on the earlier of the termination date of the National Emergency or December 31, 2020.
Section 4015 – Non-Applicability Of Restrictions On ESF During National Emergency Section 4015 of the CARES Act lifts certain restrictions of the Emergency Economic Stabilization Fund to enable Treasury to establish the Treasury’s previously announced Money Market Stabilization Fund. This section provides that Section 131 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5236) will not apply during the period beginning on the date of enactment of this Act and ending on December 31, 2020, but provides that any guarantee established as a result of the application of subsection (a) shall—(1) be limited to a guarantee of the total value of a shareholder’s account in a participating fund as of the close of business on the day before the announcement of the guarantee; and (2) terminate not later than December 31, 2020. This Section contains an appropriation clause that provides that after December 31, 2020 there is appropriated, out of amounts in the Treasury not otherwise appropriated, such sums as may be necessary to reimburse the fund established under section 5302(a)(1) of title 31, United States Code, for any funds that are used for the Treasury Money Market Funds Guaranty Program for the United States money market mutual fund industry to the extent a claim payment made exceeds the balance of fees collected by the fund.
Section 4016 – Temporary Credit Union Provisions
Section 4016 of the CARES Act increases access to the National Credit Union Central Liquidity Facility by (a) broadening the definition of the kinds of credit unions that may access the Facility to all credit unions and not only those serving “natural persons;” and (b) loosening the eligibility requirements in 12 U.S.C. § 1795e(a)(1) for those institutions to receive assistance from the National Credit Union Central Liquidity Facility.