Attorney: CARES Act to help banks help borrowers

Expert highlights legislation’s consumer protections, provisions for banks to modify loans during crisis.
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Under the CARES Act, banks may not initiate court foreclosure proceedings or execute foreclosure-related evictions or sales during the COVID-19 national emergency. Photo by iStock

In addition to providing emergency financial assistance for Americans affected by COVID-19, the $2 trillion stimulus package passed by Congress in March has certain provisions that will better position banks to help borrowers survive this time, a local financial services attorney said.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act), a two-part legislative package negotiated by the House and Senate last month and signed into law March 27 by President Donald Trump, has garnered headlines for many of its aspects providing relief to workers, families and businesses, including:

  • The Paycheck Protection Program that provides $349 billion for small businesses to retain jobs and continue paying operating expenses.
  • Loan forgiveness for small businesses with covered loans.
  • The extension of an additional $600 in weekly unemployment insurance (UI) payments to Americans who are jobless as a result of COVID-19, as well as extending UI benefits to those who are self-employed, independent contractors, caregivers for a loved one, have a limited work history and more.
  • Recovery rebates of $1,200 for individuals, $2,400 for joint taxpayers and $500 per child within certain income brackets.
  • Provisions that support the health care system via ensuring supply chain security for medical supplies and devices, and also promote access to health care coverage for COVID-19 patients.

A lesser-discussed section of the legislation is Division A, Title IV, “Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy,” the fourth of six sections of the CARES Act.

Division B focuses solely on the appropriations being made to fund the stimulus provisions.

Jeff Ott, a financial services and corporate attorney with Warner Norcross + Judd in Grand Rapids, said Division A, Title IV will give banks greater ability to help borrowers and will include many consumer protections, as well.

The week leading up to passage of the CARES Act, financial regulatory agencies including the Federal Reserve, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation and the National Credit Union Administration put out a March 22 interagency statement saying they would “not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs).”

Troubled debt restructurings occur when a creditor for economic or legal reasons related to its debtor’s financial difficulties “grants a concession to the borrower that it would not other consider,” according to the Financial Accounting Standards Board (FASB).

Due to many creditors’ past “unscrupulous” practices in modifying loans multiple times leading up to the financial crisis, FASB put in place the requirement that banks carry TDR loans separately on their financial statements, test them periodically for impairment and possibly accrue a reserve for a potential loss on the loan after it is modified, Ott said.

“So what that does effectively is it … hurts their earnings,” Ott said, adding such a reporting requirement unintentionally acts as a penalty for modifying a loan during a short-term crisis such as COVID-19. 

The new interagency guidance would have removed the TDR reporting requirement for a loan modification as long as a borrower applied for a concession when their loan was not more than 30 days past due, and as long as the concession was short term.

The CARES Act, however, overrode those guidelines and is providing broader relief by allowing financial institutions to make loan modifications at their discretion for any borrower whose loan was current or not more than 30 days past due as of Dec. 31, 2019 — as long as the modification was made during the “applicable period … beginning March 1, 2020 and ending on the earlier of Dec. 31, 2020, or the date that is 60 days after the date” on which the national emergency concerning COVID-19 is terminated, according to Sec. 4013 of Divisoin A, Title IV of the CARES Act.

“If (the federal government) were to say that the national emergency is up around June 30, that means that (banks) could make modifications up until Aug. 30,” Ott said.

In addition to removing barriers to banks modifying loans for those affected by COVID-19, Ott said Division A, Title IV of the legislation also does not require that the modifications be short term.

Division A, Title IV of the CARES Act also includes several consumer protections:

  • Amending the Fair Credit Reporting Act so that a bank that agreed to make a loan modification for a consumer affected by COVID-19 during the pandemic is to report the loan as current so it does not adversely affect the borrower’s credit (Sec. 4021).
  • The borrower has the right to request forbearance on federally backed mortgage loans regardless of delinquency status, and such forbearance shall be granted for up to 180 days, with an additional 180-day extension under certain circumstances (Sec. 4022).
  • A moratorium on foreclosures and evictions of occupied properties shall be in place for “not less than the 60-day period beginning March 18, 2020” (Sec. 4022).
  • Holders of multi-family home mortgages, i.e. landlords, affected by the pandemic may request forbearance, and loan servicers shall provide the forbearance for up to 30 days and two additional 30-day extensions as long as the requests are made during the covered period (Sec. 4023).
  • Landlords may not evict tenants or charge late fees or penalties for the duration of the forbearance they are receiving (Sec. 4023).

The CARES Act is available in its entirety at bit.ly/CARESAct_fulltext.

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