Financial Institution Regulators Promulgate Extensive Guidance on COVID-19

COVID-19 Update

While the government currently responds to the changing landscape posed by the COVID-19 virus, federal financial institution regulators are moving quickly to address multiple areas of concern posed by these unprecedented developments. The following summary highlights five key takeaways that all financial institutions should be aware of:

1. Promoting lending. On March 17, 2020, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) issued an interim final rule that revises the definition of “eligible retained income” in the agencies’ capital rules to permit banking organizations to more freely use their capital buffers to promote prudent lending without compromising their ability to make distributions or discretionary bonus payments. 

Prior to adoption of the interim final rule, banking organizations were limited in their ability to make capital distributions or pay discretionary bonuses based on the amount of their relevant capital buffer thresholds. If a banking organization does not have capital ratios that exceed the buffer thresholds, the amounts such organization can pay out as discretionary bonuses or capital distributions are a function of their “eligible retained income.”

Previously, eligible retained income was defined as an organization’s net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in income. Banks that consistently paid out dividends equal to their net income thus had little eligible retained income. Under normal economic conditions this was not a concern, but the extreme challenges presented by COVID-19 may cause a swift reduction in those capital buffers and an immediate threat to a banking organization’s ability to pay distributions, thus leading to a decline in lending. The definition of eligible retained income has now been revised to be equal to the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, or (2) the average of a banking organization’s net income over the preceding four quarters. As the regulators note, “By modifying the definition of eligible retained income and therefore allowing banking organizations to more freely use their capital buffers, this rule should help to promote lending activity and other financial intermediation activities by depository institutions, bank holding companies, and savings and loan holding companies and avoid compounding negative impacts on the financial markets.” The regulators released a companion statement reminding banks to use their capital and liquidity buffers to promote lending during this difficult time.   

2. Working with borrowers. The FDIC is encouraging all of its regulated institutions to work with borrowers affected by COVID-19, and in particular borrowers in industries that have been especially hard-hit by the economic downturn, including those in the travel and hospitality industry, and small businesses that are more susceptible to temporary economic disruption. In addition, the FDIC is encouraging multiple accommodations for borrowers as a result of this temporary hardship, including waiving late-payment fees, offering loan payment deferrals and restructuring loans. The agencies also indicated on March 19, 2020 that they will favorably consider retail banking services and retail lending activities in a financial institution's community reinvestment act (CRA) assessment areas that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by COVID-19 consistent with safe and sound banking practices. This includes waiving certain fees, easing restrictions on cashing certain types of check, expanding availability of short-term unsecured credit products, increasing credit card limits, providing alternative service options to customers in light of limited access to branches and offering payment accommodations to avoid delinquencies and negative credit bureau reporting caused by COVID-19-related issues.

3. Updating business continuity plans. The Federal Financial Institutions Examination Council (FFIEC) has updated its guidance to remind banking organizations that business continuity plans must address the threat of a pandemic like COVID-19 and the impact such a pandemic will have on the delivery of financial services. The FFIEC has noted that pandemic planning is unique in planning for natural disasters, as the duration and scale of a pandemic are largely unknown. Financial institutions are cautioned to make their pandemic plans flexible enough to effectively address the broad range of economic effects a pandemic can have on an institution depending on the institution’s size, complexity and range of business activities. An effective business continuity plan should provide for the following:

  1. A preventive program to reduce the overall effects of a pandemic event, including monitoring of outbreaks, communication with critical providers and services, and training of employees.
  2. A written strategy that provides for how to respond to a pandemic, including the notion of a rise and fall of pandemic waves.
  3. A thorough framework of procedures and systems to ensure continuity of critical operations during a pandemic, including how to handle social distancing, telecommuting and conducting operations from remote sites. The FFIEC notes that “the framework should consider the impact of customer reactions and the potential demand for, and increased reliance on, online banking, telephone banking, ATMs, and call support services.”
  4. A testing program to validate the institution’s pandemic operations.
  5. An oversight program to ensure ongoing review and updates to the overall pandemic plan.

4. Flexible banking. Through a series of frequently asked questions, the FDIC is encouraging financial institutions to be as flexible as possible in conducting their operations and servicing customers while still acting prudently. This includes maintaining appropriate documentation that considers a borrower’s payment status prior to COVID-19 and after COVID-19, and limiting access to branch offices to drive-up windows and web-based applications. At the same time, the FDIC has indicated that it stands ready to work with banks that are experiencing difficulty in their ability to meet regulatory reporting responsibilities and will not require banks to file an application if they need to temporarily close their facilities in order to take precautionary measures. 

5. Keeping the public informed. As we previously reported, the Securities and Exchange Commission (SEC) has recognized the challenges the coronavirus outbreak presents to reporting companies. SEC Chairman Jay Clayton noted in a statement made in January that SEC staff would “monitor, and to the extent appropriate, provide guidance and other assistance to issuers and other market participants regarding disclosures related to the current and potential effects of the coronavirus.” He also noted that companies “need to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with guidance included in Accounting Standards Codification 855.” Financial reporting companies must continually remain aware of their disclosure obligations, including providing material and specific information that they believe is necessary to an understanding of their financial condition, changes in financial condition, liquidity and results of operations. Companies must disclose known trends, events or uncertainties that are reasonably likely to have a material impact on the company’s business; make sure their risk factor disclosures directly describe the potential impact of COVID-19; and make sure their boards of directors are assessing the impact on a company’s public reporting obligations.

We will continue to provide updates and analysis regarding these rapidly emerging developments, and we invite you to reach out to a member of Manatt’s Financial Services team with any questions you may have.

For regular updates on the major challenges companies are facing, please visit our COVID-19 resources page and subscribe for timely updates in your inbox here.

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