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Fed: Lenders must consider pre-pandemic condition when underwriting Main Street Lending Program loans
On September 18, the Federal Reserve Board, in conjunction with the FDIC and the OCC, revised the Main Street Lending Program (MSLP) FAQs (for-profit here, nonprofit here) to clarify underwriting expectations, supervisory expectations, and details regarding co-borrower loans. Specifically, the FAQs note that a lender is expected to “conduct an assessment of each potential borrower’s pre-pandemic financial condition and post-pandemic prospects” when reviewing an application to determine approval. Additionally, the FAQs state that Fed supervisors will “not criticize” lenders for originating loans in accordance with MSLP requirements, even when “such loans are considered non-pass at the time of origination,” provided the weaknesses are due to the Covid-19 pandemic and expected to be temporary. Finally, the FAQs include new details covering co-borrower loans, as the Federal Reserve Bank of Boston anticipates the MSLP will accept loans made to multiple co-borrowers starting next week.
Agencies give guidance on working with borrowers affected by hurricane, wildfires
On September 1, the Federal Reserve Board, OCC, FDIC, NCUA, and the Conference of State Bank Supervisors (CSBS) issued a joint statement covering supervisory practices for financial institutions affected by Hurricane Laura and the California wildfires. Among other things, the agencies called on financial institutions to “work constructively” with affected borrowers, noting that “prudent efforts” to adjust loan terms in affected areas “should not be subject to examiner criticism.” Institutions facing difficulties in complying with any publishing and reporting requirements should contact their primary federal and/or state regulator. Additionally, the agencies noted that institutions may receive Community Reinvestment Act consideration for community development loans, investments, and services that revitalize or stabilize federally designated disaster areas.
Additionally, HUD announced it will make disaster assistance available to Louisiana, which will provide foreclosure relief and other assistance to homeowners living in parishes affected by Hurricane Laura. Specifically, HUD is providing an automatic 90-day moratorium on foreclosures of FHA-insured home mortgages for covered properties and is making FHA insurance available to those victims whose homes were destroyed or severely damaged. Additionally, HUD’s Section 203(k) loan program will allow individuals who have lost homes to finance the purchase of a house, or refinance an existing house along with the costs of repair, through a single mortgage. The program will also allow homeowners with damaged property to finance the rehabilitation of existing single-family homes.
Agencies finalize three pandemic-related rules
On August 26, the Federal Reserve Board, FDIC, and OCC finalized three rules that were temporarily issued in March and April to assist financial institutions during the Covid-19 pandemic. Highlights of the three rules include:
- Community Bank Leverage Ratio (CBLR). The agencies adopted, without change, two interim final rules issued in April (covered by InfoBytes here) that temporarily lower the CBLR threshold and provide a gradual transition back to the prior level in order to enable qualifying community banking organizations to support lending during the Covid-19 pandemic. Effective October 1, the final rule, among other things, lowers the leverage ratio to eight percent through 2020 and increases the ratio to 8.5 percent in 2021 and nine percent in 2022.
- Current Expected Credit Losses (CECL). The agencies adopted, without substantial change, an interim final rule issued in March (covered by InfoBytes here), which provides an additional two years to the three-year transition period that is already available to “mitigate the estimated cumulative regulatory capital effects” of CECL. The final rule expands the pool of eligible institutions to include any institution adopting CECL in 2020 and is effective upon publication in the Federal Register.
- Capital distributions. The agencies adopted, without change, an interim final rule issued in March revising the definition of “eligible retained income” to allow for a more gradual application of any automatic limitations on capital distributions if an institution’s capital levels decline below certain levels. Additionally, the final rule includes the adoption of a Federal Reserve-only interim final rule (covered by InfoBytes here), similarly revising the definition of “eligible retained income” for purposes of the total loss-absorbing capacity rule. The final rule is effective January 1, 2021.
Agencies clarify BSA/AML enforcement
On August 13, the OCC, the Federal Reserve Board, the FDIC, and the NCUA (collectively, the “agencies”) issued a joint statement, which clarifies how the agencies apply the enforcement provisions of the Bank Secrecy Act (BSA) and related anti-money laundering (AML) laws and regulations. Specifically, the statement discusses the conditions that require the issuance of a mandatory cease and desist order under sections 8(s) and 206(q). According to the agencies, there are no new exceptions or standards created by document. Among other things, the statement:
- Provides examples of when an agency shall issue a cease and desist order in accordance with sections 8(s)(3) and 206(q)(3) for “[f]ailure to establish and maintain a reasonably designed BSA/AML Compliance Program. The statement notes that an institution would be subject to a cease and desist order when the one component of their compliance program “fails with respect to either a high-risk area or multiple lines of business… even if the other components or pillars are satisfactory.”
- Describes circumstances in which an agency may use its discretion to issue formal or informal enforcement actions related to unsafe or unsound BSA-related practices. The statement notes that the “form and content” of the enforcement action will depend on a variety factors, including “the capability and cooperation of the institution’s management.”
- Describes how the agencies incorporate customer due diligence regulations and recordkeeping requirements as part of the internal controls pillar of an institutions BSA/AML compliance program.
- Discusses the treatment of isolated or technical compliance program requirements that are generally not issues resulting in an enforcement action.
Fed announces new details of the FedNow Service
On August 6, the Federal Reserve Board (Board) announced details of its new payment clearing system, the FedNow Service, which the Board plans to implement through a phased approach with a target launch date sometime in 2023 or 2024. As previously covered by InfoBytes, in August 2019, the Board issued a request for information on a “round-the-clock real-time payment and settlement service,” seeking feedback on how the service might be designed in order to support payment system stakeholders and the general functioning of the U.S. payment system. The Board notes that the newly released details are based on the input received from stakeholders. The Federal Register notice discusses the phased released approach, noting that the “approach will ensure the core features and functionality are delivered as quickly as possible,” even if “certain desirable features” are not available in the initial release. Highlights of the core features of the “24x7x365” FedNow Service include, among other things, (i) a payment flow where the receiver’s bank has an opportunity to confirm that it holds a valid account for the receiver and intends to accept the payment message, before interbank settlement occurs; (ii) the use of the “widely accepted ISO 20022 standard and adopt other industry best practices” for payment message format; (iii) a transaction limit that will be “consistent with market practices and needs at the time” of the launch of service; and (iv) a liquidity-management tool that will allow participants to transfer funds to each other to support the liquidity needs of instant payments. After the initial launch, the Board intends to offer additional features related to fraud prevention, error resolution and case management.
Federal Reserve Board announces revised pricing for its Municipal Liquidity Facility
On August 11, the Federal Reserve Board announced revised pricing for its Municipal Liquidity Facility. The revised pricing reduces the interest rate spread on tax-exempt notes for each credit rating category by 50 basis points and reduces the amount by which the interest rate for taxable notes is adjusted relative to tax-exempt notes. The MLF, originally covered here, was one of several facilities intended to support the flow of credit in the economy.
FFIEC discusses additional Covid-19 loan accommodations
On August 3, the member agencies of the Federal Financial Institutions Examinations Council (FFIEC) issued a joint statement on managing loan accommodations granted to borrowers pursuant to federal, state, and local law to address Covid-19 related hardships. Specifically, the statement provides risk management and consumer protection principles to financial institutions working with borrowers that are near the end of their initial loan accommodation period. Among other things, the statement outlines:
- Risk Management Practices. The statement encourages financial institutions to institute sound credit risk management practices following an accommodation period, such as “reassess[ing] risk ratings for each loan based on a borrower’s current debt level, current financial condition, repayment ability, and collateral.” Additionally, the statement encourages institutions to provide “clear, accurate, and timely information to borrowers and guarantors regarding the accommodation” being granted.
- Sustainable Accommodations. The statement notes that the Covid-19 pandemic may have “long-term adverse impact[s] on borrower’s future earnings” and financial institutions should consider additional accommodation options to mitigate losses for the borrower and institutions by assessing “each loan based upon the fundamental risk characteristics affecting the collectability of that particular credit.”
- Consumer Protection. The statement encourages financial institutions to provide consumers with options to support repayment at the end of accommodations to avoid delinquencies and to consider offering credit product term changes to “support sustainable and affordable payments for the long term.”
- Accounting and Regulatory Reporting. The statement emphasizes that financial institutions should consider the effects of the Covid-19 pandemic in its allowance for loan and lease losses, or credit losses, estimation processes, consistent with generally accepted accounting principles.
- Internal Control Systems. The statement notes that internal control functions for the end of initial accommodation periods and for additional accommodations typically “include appropriate targeted testing of the process for managing each stage of the accommodation.” Additionally, the statement reminds financial institutions of their responsibility for ensuring service providers in charge of these functions act consistently with the institution’s policies and all applicable laws and regulations.
Fed extends temporary repurchase agreement facility through March 2021
On July 29, the Federal Reserve Board announced the extensions of its temporary U.S. dollar liquidity swap lines as well as the temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility) through March 31, 2021. As previously covered by InfoBytes, the FIMA Repo Facility was established in March in response to the Covid-19 pandemic to allow central banks and other international monetary authorities with accounts at the Federal Reserve Bank of New York to enter into repurchase agreements with the Federal Reserve to temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions.
The Fed notes that the extension “will allow approved FIMA account holders to continue to temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions.”
Fed updates FOIA rules for CSI
On July 24, the Federal Reserve Board issued a final rule revising its “Rules Regarding Availability of Information,” to update and clarify the Board’s regulations implementing the Freedom of Information Act (FOIA) and the rules covering the disclosure of confidential supervisory information (CSI). The final rule, among other things, adopts standards consistent with the OCC’s rules, including (i) permitting supervised financial institutions to disclose CSI with their directors, officers, and employees “when necessary or appropriate for business purposes”; (ii) “permitting disclosures to the supervised financial institution’s outside legal counsel and auditors when the disclosures are ‘necessary or appropriate in connection with the provision of legal or auditing services’”; and (iii) “eliminat[ing] the requirement that supervised financial institutions obtain prior [Board] approval to disclose [CSI] to their other service providers, such as consultants, contractors, and contingent workers.” The final rule also updates definitions for expedited processing, clarifies terms, and helps users “more easily navigate the process of filing a FOIA request.” The final rule is effective 30 days after publication in the Federal Register.
Fed extends several Covid-19 lending facilities through December 31
On July 28, the Federal Reserve Board announced the extension of several lending facilities designed to help the economy recover from the Covid-19 pandemic. The following facilities were previously set to expire on or around September 30 and are now extended through December 31: (i) the Primary Dealer Credit Facility; (ii) the Money Market Mutual Fund Liquidity Facility; (iii) the Primary Market Corporate Credit Facility; (iv) the Secondary Market Corporate Credit Facility; (v) the Term Asset-Backed Securities Loan Facility; (vi) the Paycheck Protection Program Liquidity Facility; and (vii) the Main Street Lending Program.
The Municipal Liquidity Facility was already set to expire on December 31 and the Commercial Paper Funding Facility is set to expire on March 17, 2021.