Good afternoon. This is Frank Kressman. I am the Acting General Counsel at the National Credit Union Administration (NCUA). I will be speaking to you today about the very recently passed H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act also known as the “CARES Act.”
The CARES Act contains numerous provisions to help workers, families, and businesses, including unemployment insurance benefits and loan guarantee programs. It contains provisions supporting healthcare workers, funding for COVID-19 testing, and a wide variety of provisions to assist severely distressed sectors of the economy.
Today, I will be discussing those provisions of the CARES Act that most affect the NCUA and the credit union industry. Those provisions are as follows.
Central Liquidity Facility
As noted by the Chairman, the CARES Act makes several changes to the Central Liquidity Facility, or CLF. As a reminder, the CLF is a mixed ownership government corporation created to improve the general financial stability of credit unions by serving as a liquidity lender to credit unions experiencing unusual or unexpected liquidity shortfalls. Member credit unions own the CLF, which exists within the NCUA. The President of the CLF manages the facility under the oversight of the NCUA Board.
Moving now to the CARES Act, Section 4016 of the act makes four amendments to the CLF provisions of the Federal Credit Union Act. All of these amendments sunset or expire on December 31, 2020.
First, the CARES Act removes the reference to “primarily serving natural persons” under the Federal Credit Union Act’s definition of “liquidity needs” so as to permit temporary access for corporate credit unions in addition to natural person credit unions.
Second, the Federal Credit Union Act’s CLF membership provision is amended to provide greater flexibility to corporate credit unions serving as agent members with respect to the amount they need to pay to subscribe to the capital stock of the CLF.
Third, the CARES Act amends the Federal Credit Union Act provision regarding member applications for extensions of credit by removing the reference to the NCUA Board disapproving applications that are filed with the intent to expand credit union portfolios. Instead, before approving an application the Board must first obtain evidence from the applicant that the applicant has made reasonable efforts to first use primary sources of liquidity of the applicant, including balance sheet and market funding sources, to address the liquidity needs of the applicant.
Fourth, the CARES Act temporarily increases the Board’s borrowing authority on behalf of the CLF through December 31, 2020. The borrowing authority currently must not exceed twelve times the subscribed capital stock and surplus of the CLF. During the temporary increase period, it increases to 16 times the subscribed capital stock and surplus of the CLF.
Taken together, these amendments enhance the Central Liquidity Facility’s ability to serve as an effective liquidity provider to credit unions.
Insured Deposits Threshold
Section 4008 of the CARES Act permits the NCUA Board to increase by an unlimited amount, or such lower amount as the Board approves, the share insurance coverage provided by the National Credit Union Share Insurance Fund on any non-interest bearing transaction account in any federally insured credit union without exception. Any such increase must terminate no later than December 31, 2020.
Temporary Relief from Troubled Debt Restructurings
Section 4013 of the CARES Act permits financial institutions, including credit unions, to suspend the requirements under generally accepted accounting principles (GAAP) for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as troubled debt restructurings. Financial institutions may also suspend any determination of a loan modified as a result of the effects of the COVID-19 pandemic as being a troubled debt restructuring, including impairment for accounting purposes.
Any such suspension shall be 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. Any such suspension shall not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic.
The applicable period referred to above begins on March 1, 2020 and ends either 60 days after the date on which the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020 terminates or December 31, 2020, whichever is earlier.
The CARES Act requires the NCUA, and the federal banking agencies, to defer to the determination of the financial institution to make a suspension under this section. However, financial institutions “should” continue to maintain records of the volume of loans involved and the NCUA “may” collect data about such loans for supervisory purposes.
Optional Temporary Relief from Current Expected Credit Losses (CECL)
Although credit unions are not currently required to comply with CECL, Section 4014 of the CARES Act provides that no federally insured credit union or any affiliate thereof shall be required to comply with the Financial Accounting Standards Board (FASB) Accounting Standards Update No. 2016–13 (“Measurement of Credit Losses on Financial Instruments”), including the CECL methodology for estimating allowances for credit losses, during the period beginning on the date of enactment of the CARES Act and ending on the earlier of (1) the date on which the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020 terminates; or (2) December 31, 2020.
Paycheck Protection Program
Under Sections 1102 and 1109 of the CARES Act, the Small Business Administration (SBA) is authorized to create a loan guarantee program, called the Paycheck Protection Program (PPP) for small businesses, non-profit organizations, veterans organizations, Tribal businesses, independent contractors, and the self-employed to help such entities who have been impacted by COVID-19 to meet their payroll needs, cover utilities, and pay employee salaries, sick leave, health insurance and paid leave expenses.
Insured depository institutions and insured credit unions may participate to the extent that participation does not impact the safety and soundness of the institution. With respect to their particular risk-based capital requirements, federal financial regulators would give a zero risk weight to loans made under the PPP.
The SBA can make loans directly to recipients or delegate that authority to approved lenders. The interest rate on a covered loan under the PPP cannot exceed 4 percent. The PPP requires participating lenders to provide complete payment deferral relief for not less than 6 months. The SBA is authorized to provide loan forgiveness to participants and make payment to the lender equal to the forgiven amount. Lenders receive five percent of the outstanding balance of each loan from the SBA as a processing fee. The current loan limit of $350,000 under the SBA’s Express Loan Program is raised to $1 million under the PPP.
PPP builds on the SBA’s existing loan guarantee program for small businesses. SBA is required to issue guidance for the PPP within 30 days of enactment of the CARES Act and must issue regulations on the PPP within 15 days of enactment of the CARES Act.
Pursuant to Section 1110, the SBA has also made its Economic Injury Disaster Loan (EIDL) program available to assist small businesses across the country that have been adversely impacted by COVID-19. The SBA is authorized to provide small business relief in the form of direct grants for businesses that do not qualify for the EIDL program. Section 1112 also gives the SBA authority to make six months of principle and interest payments for all SBA-backed business loans.
The SBA has updated its website to provide information on all these new resources, and how to apply (opens new window). The link is included on the resources page of the slides accompanying this webinar.
Credit Protection during COVID-19
Section 4021 of the CARES Act requires that furnishers to credit reporting agencies who agree to account forbearance, or agree to modified payments with respect to an obligation or account of a consumer that has been impacted by COVID-19, must report such obligation or account as “current” or as the status reported prior to the accommodation during the period of accommodation unless the consumer becomes current. This applies only to accounts for which the consumer has fulfilled requirements pursuant to the forbearance or modified payment agreement. Such credit protection is available beginning January 31, 2020 and ends at the later of 120 days after enactment of the CARES Act or 120 days after the date the national emergency declaration related to the coronavirus is terminated.
Foreclosure Moratorium on Single Family Mortgages and Consumer Right to Request Forbearance
Section 4022 of the CARES Act prohibits foreclosures on all single-family federally backed mortgage loans for a 60-day period beginning on March 18, 2020. It provides up to 180 days of forbearance for borrowers of a federally backed mortgage loan who have experienced a financial hardship related to the COVID-19 emergency, as attested by the borrower with no further documentation required. Applicable mortgages include those purchased by Fannie Mae and Freddie Mac, insured or guaranteed by HUD, VA, or USDA, or directly made by USDA. The authority provided under this section terminates on the earlier of the termination date of the national emergency concerning the coronavirus or December 31, 2020.
Forbearance of Residential Mortgage Loan Payments for Multi-family Properties with Federally Backed Loans
Section 4023 of the CARES Act provides up to 90 days of forbearance for multi-family borrowers with a federally backed multi-family mortgage loan who have experienced a financial hardship. Borrowers receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period. Applicable mortgages include loans to real property designed for five or more families that are purchased, insured, or assisted by Fannie Mae, Freddie Mac, HUD, or any other federal agency. The authority provided under this section terminates on the earlier of the termination date of the national emergency concerning the coronavirus or December 31, 2020.
Temporary Moratorium on Eviction Filings
Section 4024 of the CARES Act provides a 4-month moratorium on eviction proceedings on certain single-family and multi-family properties, including those secured by federally backed mortgages.
Economic Stabilization through Loans, Loan Guarantees, and Other Investments
Sections 4002, 4003, and 4004 authorize the Treasury Department to inject at least $450 billion into loans, loan guarantees, and investments in support of the Federal Reserve’s lending facilities to eligible businesses, states, and municipalities. As you’ll recall, the Federal Reserve used its broad authority extensively during the 2008 financial crisis. Any lending done through a Federal Reserve facility must be broad-based, with verification that each participant is not insolvent and is unable to obtain adequate financing elsewhere. Loan forgiveness is not permissible in any such credit facility.
The CARES Act specifically authorizes the Federal Reserve to establish a Main Street Lending Program that supports lending to small and mid-sized businesses. The act also encourages the Treasury Department to implement a special facility through the Federal Reserve targeted specifically at lenders that make direct loans to nonprofit organizations and businesses between 500 and 10,000 employees.
We will be monitoring the establishment of these programs, working with Treasury and the Federal Reserve to make them workable for the credit union system, and we’ll be updating you regularly as new information becomes available.
Finally, on March 18, Congress passed the Families First Coronavirus Response Act (opens new window), which includes a 100 percent reimbursement to employers to recover the cost of providing coronavirus-related sick leave and family leave. The CARES Act makes some technical amendments to those leave provisions. The Department of Labor1 and the IRS2 have posted guidance on their websites with a number of fact sheets and FAQs to help navigate these new provisions.
This concludes my portion of the webinar regarding those provisions of the CARES Act that most impact the NCUA and the credit union industry.
I do also want to mention that last Thursday, the NCUA issued a Letter to Credit Unions encouraging credit unions to consider making responsible small-dollar loans to members in response to the COVID-19 crisis. This letter was sent in conjunction with the NCUA’s release of a joint statement made with the other federal financial regulators on the same topic. For the benefit of your members and our financial system, credit unions should consider offering small-dollar loans to both consumers and small-businesses.
There are a variety of open-end and closed-end small-dollar products you can make available to members now having financial difficulties. Credit unions should structure the terms appropriately and ensure repayment requirements will benefit each individual borrower. The NCUA also urges you to provide loan modifications where they better fit the circumstances.
I would also like to remind federal credit unions of the availability of Payday Alternative Loans, or PALs, which are permitted under the NCUA’s regulations. Both PALs I and PALs II provide you with flexibility to make safe credit available to existing and new credit union members.
As always, you must ensure the new credit and modifications are made consistent with safety and soundness principles. It is important that you provide members with appropriate consumer protections and treat everyone fairly.
We did receive one question related to small dollar loans, which was, “Can I offer my members a short-term loan at zero percent or do I have to charge some type of interest?”
There are no regulations that would prevent a credit union from offering 0-percent interest loans. We encourage credit unions to meet members’ needs through small-dollar loans and other responsible credit products. Your credit union can offer small-dollar loans through a variety of products that may include open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans. For all products, credit unions should offer loans in a manner that is consistent with safe and sound practices, provides fair treatment of members, and complies with applicable statutes and regulations, including consumer financial protection laws.
I will now turn it over to Myra Toeppe, Acting Director of Examination and Insurance at the NCUA, who will discuss additional actions the agency has taken in response to the pandemic. Myra.
1 Department of Labor information available at: https://www.dol.gov/coronavirus (opens new window).
2 Internal Revenue Service information available at: https://www.irs.gov/coronavirus (opens new window).