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03.27.2020 | Legal Update

Headlines

1. Non-Essential Businesses Closed in Massachusetts by Order of the Governor
2. Banks Expected to Make Accommodations for Customers Affected by COVID-19
3. Federal Guidance Issued to Banks on CRA Activities in Response to COVID-19
4. Banking Agencies Issue Guidance on Capital Buffer Use in Response to COVID-19
5. Other Developments: Foreclosures, Medical Leaves, and Industrial Banks

1. Non-Essential Businesses Closed in Massachusetts by Order of the Governor

Massachusetts Governor Charlie Baker has issued an emergency order closing the physical workplaces and facilities of all businesses and organizations that do not provide “COVID-19 Essential Services,” which does not apply to insured depository institutions chartered and licensed by the Massachusetts Division of Banks, and certain other businesses. The March 23 order became effective as of Tuesday, March 24 at noon and requires that non-essential businesses remain closed until Tuesday, April 7 at noon. Banks and other businesses that provide COVID-19 Essential Services are not required to remain open, but are encouraged to continue operations during the pandemic state of emergency declared by Governor Baker on March 10, and to practice social distancing consistent with the guidance issued by the Massachusetts Department of Public Health. Non-essential businesses that are required to close their physical locations are encouraged by Governor Baker to continue operations remotely, if possible. The order also prohibits all gatherings of more than 10 people in any confined indoor or outdoor space throughout Massachusetts, other than gatherings by those businesses and organizations providing COVID-19 Essential Services. Click here for a copy of Governor Baker’s order, and here for the complete list of categories of COVID-19 Essential Services.

Nutter Notes: Federal law and Massachusetts law permit a bank to close any office if the bank’s officers determine that conditions exist which pose an existing or imminent threat to the safety or security of bank personnel or property at the affected office. A temporary branch closing does not have to be reported to or approved by the Division of Banks or a federal banking agency, but should be duly recorded in the records of the next meeting of the bank’s board with the reasons for, and time of, the closing. It is advisable to notify federal and state examiners informally of any planned branch closure or any other pandemic response action that would limit customers’ access to banking services, such as the closure of the lobby of a branch office to the public. A bank that closes a branch or takes any other action that limits customers’ access to banking services should make reasonable efforts to notify the public, such as posting notice on the bank’s website and at each affected office and recording messages on telephone-answering devices notifying callers of the closing. According to Division of Banks Regulatory Bulletin 2.1-105, Emergency Temporary Closing of Banking Offices, it is the policy of the Division of Banks that only the office(s) affected should be closed and that banks have an obligation to remain open during their normal hours of operation if at all possible without jeopardizing the health and safety of the staff and customers.

2. Banks Expected to Make Accommodations for Customers Affected by COVID-19

The Massachusetts Division of Banks and the federal banking agencies have issued various statements encouraging banks to provide accommodations to customers and communities affected by the COVID-19 pandemic, including guidance on loan modifications for affected borrowers. In particular, the Division issued a statement on March 25 indicating that the Division expects state-chartered financial institutions, including banks and licensed mortgage lenders, to “implement all reasonable and necessary change to provide relief to those adversely impacted borrowers during this state of emergency,” including postponing foreclosures for 60 days, forbearing on mortgage payments for 60 days or more, and waiving late payment fees and online payment fees for 60 days. The statement also indicates that the Division expects banks and other lenders to refrain from reporting late payments to credit rating agencies for 60 days, to offer borrowers an additional 60-day grace period to complete trial loan modifications, and to ensure that late payments during the COVID-19 pandemic do not affect the ability of borrowers to obtain permanent loan modifications. The Division’s statement emphasizes that examiners will not criticize “reasonable and prudent efforts” by banks and other lenders to assist borrowers affected by the COVID-19 pandemic, consistent with safe and sound banking principles and the public interest. Click here for a copy of the Division’s statement.

Nutter Notes: The federal banking agencies have issued additional guidance about the measures they have encouraged banks to take to accommodate customers and communities affected by the COVID-19 pandemic. The FDIC issued answers to frequently asked questions for financial institutions on March 19 that address a variety of issues that may arise as financial institutions work with borrowers affected by COVID-19, including issues related to payment accommodations such as deferred or skipped loan payments. The federal banking agencies on March 22 published the Interagency Statement on Loan Modifications and Reporting by Financial Institutions Working with Customers Affected by the Coronavirus to encourage banks to work with borrowers impacted by COVID-19 and provide additional information about loan modifications. According to the interagency statement, the agencies have confirmed with the Financial Accounting Standards Board staff that short-term modifications made in response to COVID-19 to borrowers who are current (i.e., less than 30 days past due) on loan payments do not have to be classified as troubled debt restructurings, or TDRs, under U.S. GAAP. Such short-term (six months or less) modifications include payment deferrals, fee waivers, extensions of repayment terms, and other delays in payment that are insignificant. Five federal financial regulatory agencies, including the FDIC, OCC, and Federal Reserve, issued a joint statement on March 26 encouraging insured depository institutions to offer responsible small-dollar loans to consumers and small businesses affected by COVID-19. Click here for a copy of the FDIC’s answers to frequently asked questions for financial institutions, click here for a copy of the interagency statement on loan modifications, and here for a copy of the joint statement on small-dollar loans.

3. Federal Guidance Issued to Banks on CRA Activities in Response to COVID-19

The federal banking agencies have issued a joint statement describing how they will give favorable Community Reinvestment Act (“CRA”) consideration for retail banking services, retail lending activities, and community development activities that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by the COVID-19 pandemic, consistent with safe and sound banking principles. According to the joint statement published on March 19, the agencies will give CRA consideration for community development activities located in a broader statewide or regional area that includes, but is not limited to, a bank’s CRA assessment area and that help to stabilize communities affected by COVID-19. The agencies may also give CRA consideration for easing terms on new loans to affected low- and moderate-income customers, small businesses, and small farms, consistent with prudent banking practices, according to the joint statement. Examiners will still expect banks to be responsive to the community development needs that exist within their assessment areas, according to the joint statement. The joint statement will be effective through the six-month period after the national emergency declaration is lifted, unless extended further by the federal banking agencies. Click here for a copy of the joint statement.

Nutter Notes: According to the agencies’ joint statement, the types of retail banking services and retail lending activities in a bank’s CRA assessment area that will earn favorable CRA consideration include the same types of customer accommodations described in earlier guidance that the federal banking agencies and the Division of Banks are encouraging banks to take to support those affected by COVID-19, such as waiving certain fees, easing restrictions on check-cashing, and expanding the availability of short-term credit. The types of community development activities that will qualify for favorable CRA consideration include loans, investments, or services that support digital access for low- and moderate-income individuals or communities and investment or service activities that support provision of food supplies and services for low- and moderate-income individuals or communities. According to the joint statement, favorable community development CRA consideration will also be provided for economic development activities that sustain small business operations, particularly in low- and moderate-income communities, and loans, investments, or services that support access to health care, particularly for low- and moderate-income individuals or communities.  

4. Banking Agencies Issue Guidance on Capital Buffer Use in Response to COVID-19

The federal banking agencies have jointly issued guidance in the form of questions and answers about the agencies’ joint statement encouraging banks and their holding companies to use their capital and liquidity buffers as they respond to the challenges presented by the effects of COVID-19-related issues. According to the guidance issued on March 19, the term “liquidity buffer” used in the March 17 joint statement refers to “the stock of liquid assets that a banking organization manages to enable it to meet expected and unexpected cash flows and collateral needs without adversely affecting the banking organization’s daily operations.” The federal banking agencies are encouraging banking organizations to make use of their liquidity buffers in order to continue to meet obligations to creditors and other counterparties while also continuing to support households and businesses during the COVID-19 pandemic, consistent with safety and soundness principles. The term “capital buffer,” according to the guidance, refers to capital held above minimum regulatory requirements. According to the guidance, the federal banking agencies deem it appropriate for banking organizations to use their buffers to lend and undertake other actions that support the economy in a safe and sound manner. Click here for a copy of the joint guidance.

Nutter Notes: The guidance reminds banking organizations that restrictions on capital distributions and discretionary bonus payments are imposed by federal regulatory capital rules when a banking organization’s regulatory capital ratios fall below their capital buffer requirements. According to the guidance, these restrictions are meant to encourage banking organizations to conserve capital as they lend to households and businesses and as their capital levels approach minimum regulatory capital requirements. While the March 17 joint statement did not modify the levels or distribution restrictions associated with the capital buffers or change the agencies’ prompt corrective action regulations, the agencies have modified the buffer restrictions by revising the definition of eligible retained income through an interim final rule to ensure the automatic restrictions apply more gradually. According to the guidance, the agencies intend that, by increasing the amount of retained income available for capital distributions and discretionary bonus payments under the interim final rule, banking organizations will be in a better position to use their capital buffers to continue lending without facing abrupt regulatory restrictions.

5. Other Developments: Foreclosures, Medical Leaves, and Industrial Banks

• Fannie Mae and Freddie Mac Directed to Suspend Foreclosures and Evictions

The Federal Housing Finance Agency (“FHFA”) announced on March 18 that it has directed Fannie Mae and Freddie Mac to suspend foreclosures and evictions for at least 60 days due to the COVID-19 national emergency. The foreclosure and eviction suspension applies to any homeowner with a single-family mortgage backed by Fannie Mae or Freddie Mac. Click here for a copy of the announcement on foreclosures and evictions.

Nutter Notes: The FHFA announced on March 10 that Fannie Mae and Freddie Mac would provide payment forbearance to borrowers impacted by the COVID-19 pandemic. The forbearance option allows for a mortgage payment to be suspended for up to 12 months due to hardship caused by the coronavirus. Click here for a copy of the announcement on forbearance.

• New Federal Law Temporarily Expands Emergency Medical Leave and Paid Sick Leave

President Donald Trump signed into law the Families First Coronavirus Response Act (“FFCRA”) on March 18. The most immediate impact of the FFCRA for employers, including banks, will be the law’s provisions expanding emergency family and medical leave and emergency paid sick leave, which will take effect no later than by April 2, 2020, and both will expire on December 31, 2020.

Nutter Notes: The emergency family and medical leave and the emergency paid sick leave provisions of the FFCRA both include refundable tax credits of up to 100% to employers that are required to provide these benefits. It is important to note that this tax credit is a refundable tax credit. Thus, if the tax credit amount for which an employer (or self-employed taxpayer) is eligible exceeds the amount of Social Security and Railroad Retirement payroll taxes owed, the taxpayer will be entitled to a refund of the excess amount. Click here for the U.S. Department of Labor’s guidance on the FFCRA.

• FDIC Proposes New Rule to Ensure Safety and Soundness of Industrial Banks 

The FDIC has issued a proposed rule that would require an industrial bank or industrial loan company (together, “Industrial Banks”) whose parent company is not subject to consolidated supervision by the Federal Reserve to obtain the FDIC’s approval or non-objection to certain applications or notices by the ILC. The proposed rule issued on March 17 would require a covered parent company to enter into written agreements with the FDIC and the Industrial Bank to require capital and liquidity support from the parent to the Industrial Bank, among other things. Comments on the proposed rule will be due within 60 days after it is published in the Federal Register, which is expected shortly.

Nutter Notes: Industrial Banks, which are state-chartered depository institutions, are eligible for FDIC deposit insurance coverage, but federal law excludes their parent companies from Bank Holding Company Act regulation and supervision. The proposed rule would apply to deposit insurance, change in bank control, and merger filings that involve Industrial Banks. Click here for a copy of the proposed rule.

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 Liam T. O’Connell and Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry tcurry@nutter.com Tel: (617) 439-2087

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

Michael K. Krebs mkrebs@nutter.com Tel: (617) 439-2288

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.