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02.25.2021 | Legal Update

Headlines

1. HUD, VA, and USDA Coordinate Extensions of COVID-19 Relief for Homeowners
2. FDIC Adjusts Deposit Insurance Assessment Calculations to Address CECL Transition
3. Federal Banking Agencies Announce Call Report Changes Related to COVID-19 Relief
4. OCC Issues LIBOR Self-Assessment Tool to Gauge Rate Transition Risks for Smaller Banks
5. Other Developments: Fair Housing and Paycheck Protection Program

1. HUD, VA, and USDA Coordinate Extensions of COVID-19 Relief for Homeowners

The U.S. Department of Housing and Urban Development (HUD), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA) have announced a coordinated extension of forbearance and foreclosure relief programs for homeowners through June 30, 2021 in response to the ongoing COVID-19 public health emergency. The agencies announced on February 16 that each will extend its existing moratorium on evictions and foreclosures for home mortgage loans guaranteed by the VA or USDA, and for single-family home mortgage loans insured by the Federal Housing Administration (FHA) from March 31 through June 30. The agencies also announced the extension of the deadline for approving initial forbearance requests on home mortgage loans guaranteed by the VA or USDA and those insured by the FHA from March 31 to June 30. HUD also announced an expansion of the COVID-19 forbearance program for FHA insured home mortgage loans to allow up to two additional forbearance extensions of up to three months each for homeowners who request an initial COVID-19 forbearance on or before June 30, 2021. Click here for a copy of HUD’s announcement, click here for a copy of the VA’s announcement, and click here for a copy of the USDA’s announcement.

Nutter Notes: The extension of the FHA’s foreclosure and eviction moratorium applies to all FHA insured forward or Home Equity Conversion Mortgage loans, and Section 184 or Section 184A mortgage loans, except for properties that are legally vacant or abandoned. HUD prohibits servicers from initiating or proceeding with foreclosure and foreclosure-related eviction actions during the moratoriums. HUD also extended the deadlines for the first legal action and reasonable diligence timeframes for loan servicers to 180 days from the date of expiration of the foreclosure and eviction moratorium. The USDA’s foreclosure and eviction moratorium announced applies to all Single Family Housing Direct Loan Program and Single Family Housing Guaranteed Loan Program mortgage loans. The moratorium does not apply in cases where the USDA or the servicing lender has documented that the mortgaged property is vacant or abandoned. The VA’s foreclosure and eviction moratorium applies to all VA guaranteed mortgage loans, including those previously secured by VA guaranteed loans but currently in the VA’s other real estate owned portfolio.

2. FDIC Adjusts Deposit Insurance Assessment Calculations to Address CECL Transition

The FDIC has adopted a final rule that will address the temporary effects on deposit insurance assessments that result from certain optional regulatory capital transition provisions relating to the implementation of the current expected credit losses (CECL) methodology accounting standard. The final rule announced on February 16 will prevent a specified portion of the CECL transitional amount or the modified CECL transitional amount, as applicable, from being counted twice in the calculation of certain financial measures that are calculated using the sum of Tier 1 capital and reserves and that are used to determine assessment rates for large or highly complex banks (generally, banks with more than $10 billion in assets, or those that are being treated as a large bank for deposit insurance assessment purposes). The final rule will also adjust the calculation of the loss severity measure to prevent a specified portion of the CECL transitional amounts for large or highly complex banks from being counted twice. The final rule does not affect regulatory capital or the regulatory capital relief provided in the form of transition provisions that allow banking organizations to phase in the effects of CECL on their regulatory capital ratios. The final rule becomes effective on April 1. Click here for a copy of the FDIC’s final rule.

Nutter Notes: In 2019 and 2020, the FDIC, the OCC, and the Federal Reserve issued rules that allow banking organizations to phase in the adverse effects of the transition to the CECL accounting methodology on regulatory capital ratios. The rules allowed banking organizations to elect to delay, for up to two years, an estimate of CECL’s effect on regulatory capital. For banking organizations that elect the CECL regulatory capital transition provision or delay under the 2019 and 2020 rules, a portion of the CECL transitional amounts would have been counted twice in certain financial measures used to determine assessment rates for large or highly complex banks and that are calculated using both Tier 1 capital and reserves during the CECL transition period. According to the FDIC, for banks electing to use the 2019 CECL transition rule, the CECL transitional amount is the difference between the closing balance sheet amount of retained earnings reported for the fiscal year-end immediately before the bank’s adoption of CECL and the balance sheet amount of retained earnings reported as of the beginning of the fiscal year in which the bank adopts CECL. For banks electing to use the 2020 CECL rule transition provision, retained earnings are increased for regulatory capital calculation purposes by a modified CECL transitional amount that is adjusted to reflect changes in retained earnings due to CECL that occur during the first two years of the five-year transition period.

3. Federal Banking Agencies Announce Call Report Changes Related to COVID-19 Relief

The federal banking agencies, through the FFIEC, have published revisions to the Call Report that provide relief to banks with under $10 billion in total assets as of December 31, 2019 by allowing them to elect to calculate their asset size for applicable regulatory thresholds in certain rules during calendar years 2020 and 2021 based on total assets as of December 31, 2019 if that figure would be lower than total assets calculated as of the normal measurement date. The asset thresholds covered by the Call Report changes announced on February 18 include the $5 billion threshold for limiting eligibility to use the FFIEC 051 version of the Call Report, and the $100 million, $300 million, $1 billion, and $10 billion thresholds for reporting certain additional data items in the Call Reports. The federal banking agencies issued an interim final rule in November 2020 to temporarily adjust the total asset measurement dates for FFIEC 051 Call Report eligibility due to rapid, short-term growth in assets by some banks in 2020, which resulted in part from banks’ participation in various COVID-19 related relief programs. The agencies are also requesting comments on all aspects of the temporary Call Report threshold changes. Public comments are due by March 22, 2021. Click here for the federal banking agencies’ Federal Register notice on the Call Report changes.

Nutter Notes: The federal banking agencies have separately requested comments on changes to the Call Report that were proposed on February 23 to help to evaluate funding stability of sweep deposits over time to determine their appropriate treatment under liquidity regulations and to assess the risk factors associated with sweep deposits for determining their deposit insurance assessment implications, if any. Specifically, the agencies are requesting comment on revisions to the reporting forms and instructions for the Call Report related to the exclusion of sweep deposits and certain other deposits from reporting as brokered deposits, as indicated by the agencies in the Net Stable Funding Ratio final rule and by the FDIC in its final rule on brokered deposits and interest rate restrictions (brokered deposits final rule), respectively. The agencies have also proposed revisions to the Call Report addressing brokered deposits to align them with the brokered deposits final rule. The changes to the Call Report are proposed to take effect as of the June 30, 2021 report date. Public comments on the proposed changes are due by April 6, 2021. Click here for a copy of the agencies’ Federal Register notice on the proposed Call Report changes.

4. OCC Issues LIBOR Self-Assessment Tool to Gauge Rate Transition Risks for Smaller Banks

The OCC has published a self-assessment tool designed for community banks to evaluate their preparedness for the expected transition away from the London Interbank Offered Rate (LIBOR) as a reference rate benchmark. According to the OCC, the self-assessment tool published on February 10 can be used to assess the appropriateness of a bank’s LIBOR transition plan, management’s execution of the LIBOR transition plan, and related oversight and reporting. The self-assessment tool is in the form of a questionnaire meant to help a bank’s management identify and mitigate the bank’s LIBOR transition risks. The OCC noted that not all sections or questions in the self-assessment tool will apply to all banks. The OCC also advised banks to tailor their LIBOR transition risk management process to the size and complexity of the bank’s LIBOR exposures, and to consider all applicable risks, including operational, compliance, strategic, and reputation risks, when scoping and completing LIBOR cessation preparedness assessments. Click here to access the LIBOR transition self-assessment tool.

Nutter Notes: The OCC advised banks that, in 2021, LIBOR exposure and risk assessments and cessation preparedness plans should be at least near completion with appropriate management oversight and reporting in place, and that most banks should be working toward resolving replacement rate issues while communicating with affected customers and third parties, as applicable. The federal banking agencies have previously announced that they expect banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. The LIBOR administrator, ICE Benchmark Administration Limited, has announced its intention to end the publication of the one week and two month USD LIBOR settings immediately after the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. The Alternative Reference Rates Committee—a group of private-market participants formed to help transition from LIBOR—has recommended the Secured Overnight Financing Rate (SOFR) as its preferred alternative for both cash and derivative transactions. The use of SOFR is voluntary and, according to the guidance from the federal banking agencies, the agencies’ examiners will not criticize banks solely for using a reference rate, including a credit sensitive rate, other than SOFR that the bank determines to be appropriate for its funding model and customer needs.

5. Other Developments: Fair Housing and Paycheck Protection Program

• HUD to Undertake Review of Disparate Impact Standards in Fair Housing Claims

President Biden on January 26 issued a memorandum directing HUD to undertake a review of the effects of the agency’s 2020 rule which revised the standard for bringing disparate impact claims under the Fair Housing Act. The memorandum also directed HUD to take steps to prevent housing practices that may have an unjustified discriminatory effect. Click here for a copy of the memorandum.

Nutter Notes: HUD also announced on February 11 that it will administer and enforce the Fair Housing Act to prohibit discrimination on the basis of sexual orientation and gender identity. The announcement stated that HUD interprets the Fair Housing Act to bar discrimination on those bases and that HUD offices and recipients of HUD funds have been directed to enforce or administer the act accordingly. Click here for a copy of HUD’s policy announcement.

• FinCEN Issues BSA Compliance Guidance for Paycheck Protection Program Lenders

The Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury has issued updated guidance in the form of answers to frequently asked questions (FAQs) regarding how banks can meet Bank Secrecy Act requirements when originating Paycheck Protection Program (PPP) loans. The FAQs address compliance with customer identification program requirements, including the beneficial ownership rules for business entity borrowers. Click here for a copy of the FAQs.

Nutter Notes: According to FinCEN, banks and other PPP lenders may rely on the FAQs as official interpretations by the Small Business Administration of the CARES Act and its interim final rule implementing the PPP. FinCEN announced that the U.S. government will not challenge actions by banks and other PPP lenders that conform to the FAQs and to the PPP interim final rule and any subsequent rulemaking in effect at the time.

Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at Chambers.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

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Kenneth F. Ehrlich kehrlich@nutter.com Tel: (617) 439-2989

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This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.