COVID-19 Supervisory and Regulatory FAQs
Answers to the most frequently asked questions (FAQs) about the Federal Reserve's supervisory and regulatory response to the COVID-19 pandemic are presented below. These FAQs will be updated periodically.
For further detail, institutions should refer to guidance and other communications released by the Federal Reserve, including those listed on the Supervisory and Regulatory Actions in Response to COVID-19 page. Information on the Federal Reserve facilities is available on the Board's Funding, Credit, and Loan Facilities page.
- Liquidity Issues
- Operational Issues
- Capital Issues
- Credit Issues
- Current Expected Credit Loss (CECL) Methodology
- Other Supervisory and Regulatory Matters
- Regulatory Capital
- Consumer Issues
Q: What sources of liquidity are available from the Federal Reserve?
A: Pre-existing facilities, such as the discount window, remain available for individual depository institutions and for the banking system as a whole. These facilities provide a reliable back-up source of funding. The federal bank regulatory agencies released a statement encouraging banks to use the discount window to continue their support of households and businesses. Information on eligible collateral and criteria for the discount window is available here. A March 15 announcement on discount window terms is available here.
The Federal Reserve has also encouraged depository institutions to utilize intraday credit extended by Reserve Banks, on both a collateralized and uncollateralized basis, to support the provision of liquidity to households and businesses and the general smooth functioning of payment systems.
In addition, the following emergency lending facilities have been established:
- the Primary Market Corporate Credit Facility, which is open to investment-grade companies and will provide bridge financing of up to four years;
- the Secondary Market Corporate Credit Facility, which purchases in the secondary market corporate bonds issued by investment-grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment-grade corporate bonds;
- the Term Asset-Backed Securities Loan Facility, which will provide non-recourse loans to holders of certain eligible asset-backed securities;
- the Money Market Mutual Fund Liquidity Facility, which makes loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds;
- the Commercial Paper Funding Facility, which purchases eligible three-month unsecured commercial paper and asset-backed commercial paper from eligible issuers;
- the Primary Dealer Credit Facility, which offers primary dealers overnight and term funding with maturities up to 90 days against a wide range of collateral;
- the Paycheck Protection Program Liquidity Facility, which supplies liquidity by extending non-recourse loans to eligible financial institutions that pledge loans covered under the Small Business Administration's Paycheck Protection Program;
- the Municipal Liquidity Facility, which purchases short-term notes directly from U.S. states (including the District of Columbia) and eligible U.S. counties, U.S. cities, and other eligible issuers;
- the Main Street Lending Program, which will purchase participations in loans made to eligible small and medium-sized business borrowers by eligible lenders;
- Central Bank Liquidity Swaps coordinated between the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. In addition, the Federal Reserve has established temporary dollar liquidity swap lines with several additional foreign central banks; and
- Temporary Foreign and International Monetary Authorities (FIMA) Repo Facility, which establishes a temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility) to help support the smooth functioning of financial markets, including the U.S. Treasury market, and thus maintain the supply of credit to U.S. households and businesses.
Additional information, including term sheets and facility-specific FAQs, is available at the above links.
Q: Where can I find more information about discount window access?
A: Contact and other information on the discount window, including an FAQ document, are available at http://www.frbdiscountwindow.org.
Q: What changes has the Federal Reserve implemented to reserve ratio requirements in response to COVID-19?
A: On March 15, the Board announced that it had reduced reserve requirement ratios to 0 percent effective on March 26, the beginning of the next reserve maintenance period. The Board took this action in light of the FOMC's announcement in 2019 that it intends to implement monetary policy in an ample reserves regime, where reserve requirements do not play a role. The Board's action will help support lending to households and businesses.
Further information, including a full set of FAQs and answers, is available here.
Q: What changes has the Board implemented to savings deposits in response to COVID-19?
A: On April 24, the Board announced an interim final rule to amend Regulation D (Reserve Requirements of Depository Institutions) to delete the six-per-month limit on convenient transfers from the "savings deposit" definition. The Board took this action in light of the elimination of reserve requirements on all transaction accounts, making the retention of a regulatory distinction in Regulation D between reservable "transaction accounts" and non reservable "savings deposits" unnecessary. In addition, financial disruptions arising in connection with COVID-19 have caused many depositors to have a more urgent need for access to their funds by remote means, particularly in light of the closure of many depository institution branches and other in-person facilities. The interim final rule was intended to allow depository institution customers more convenient access to their funds and to simplify account administration for depository institutions. Further information, including a full set of frequently asked questions and answers, is available here.
Q: Our institution plans to use a visitor questionnaire to screen customers for COVID-19 exposure risk prior to entrance to branch facilities. Is there any regulatory guidance restricting this process?
A: Although Federal Reserve regulations or guidance generally do not preclude such a practice, depending on the specifics of the questionnaire, it is possible that some restrictions might apply. However, the bank should confirm that any such steps do not violate any state, local, or other federal requirements before proceeding.
Q: If a firm were to close certain branches or modify the operations of certain branches to drive-thru-only service, would they need to get any sort of prior approval from the Federal Reserve?
A: No Federal Reserve approval is required if the bank is a state member bank, although, consistent with SR letter 13-6/CA letter 13-3, "Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency," the bank should advise the responsible Reserve Bank of any temporary changes. If the bank is a national bank or state nonmember bank, the primary federal regulator of the bank is the appropriate authority to determine if approval is necessary. We also encourage banks to notify their state regulator of any such changes. Banks are encouraged to consider the needs of the community when making decisions regarding the temporary closure or relocation of branches.
Q: May a state member bank temporarily close a (random) branch without any regulatory approval in order to use this branch as an alternate work site?
A: Prior approval of the Federal Reserve is not required and customer notices are not required to be given with respect to temporary branch closures. However, as a good business practice, we would encourage state member banks to try to inform customers of the temporary closure, including through email, notice on its website, notice at the branch, or other means. With respect to "temporary" closures, Board regulations do not define "temporary," so there is flexibility with respect to this determination. In general, however, closures lasting less than one year have been considered temporary. For closures that may extend longer than one year, banks should consult further with the responsible Reserve Bank and appropriate state regulator concerning whether any application or notice requirements would be required.
Q: Is a state-member-bank branch considered open if the drive-thru is open and the external ATM is available?
A: Yes, a branch is considered open if drive-thru service staffed with a bank employee is being provided. This would be considered a temporary change in service, not a temporary closure. Prior approval would not be required for the temporary change in service.
Q: What guidance, other than the Centers for Disease Control and Prevention (CDC) information for businesses/employers, is available to banks on re-opening branches closed due to COVID-19?
A: The Federal Reserve encourages state member banks that have curtailed or ceased branch operations or services because of the COVID-19 threat to restore such services and operations when it is safe to do so. State member banks should consult with appropriate state and local authorities, including their state banking regulator, in determining when and under what conditions it would be appropriate to re-open branches or restore full service operations.
Q: Does the Federal Reserve have any recommendations around customers coming into branches with masks?
A: State member banks should comply, and allow customers to comply, with state, local, and federal requirements and guidelines aimed at addressing risks to public health. State member banks should consult their security program and designated security officer for guidance, and if necessary, update their security program to address any newly identified risks from customers coming into branches wearing masks. For example, state member banks may wish to review their procedures to discourage robberies, burglaries, and larcenies, and to assist in the identification and prosecution of persons who commit such acts. See 12 CFR 208.61.
Q: How should a bank evaluate limits on large-scale withdrawals of cash when a bank does not have adequate cash levels on hand?
A: The commentary to Regulation CC 12 CFR 229.19(c), which governs funds availability, may be helpful in assessing such limits. It states: "Some small banks, particularly credit unions, due to lack of secure facilities, keep no cash on their premises and hence offer no cash withdrawal capability to their customers. Other banks limit the amount of cash on their premises due to bonding requirements or cost factors, and consequently reserve the right to limit the amount of cash each customer can withdraw over-the-counter on a given day. For example, some banks require advance notice for large cash withdrawals in order to limit the amount of cash needed to be maintained on hand at any time.
Nothing in the regulation is intended to prohibit a bank from limiting the amount of cash that may be withdrawn at a staffed teller station if the bank has a policy limiting the amount of cash that may be withdrawn, and if that policy is applied equally to all customers of the bank, is based on security, operating, or bonding requirements, and is not dependent on the length of time the funds have been in the customer's account (as long as the permissible hold has expired). The regulation, however, does not authorize such policies if they are otherwise prohibited by statutory, regulatory, or common law."
Q: In light of state shelter-in-place and similar orders, how should institutions proceed with loans in process? How do we continue with our loan process, while complying with the attorneys', appraisers', and other partners' need to comply with regulations to conduct business?
A: For questions relating to compliance with state orders, institutions should reach out to the state for further guidance.
Q: Are banks required to file Suspicious Activity Reports (SARs) on customers who make large cash withdrawals as a result of uncertainty during the coronavirus pandemic?
A: A large cash withdrawal on its own, without other indications of suspicious activity, would not require a bank to file a SAR. Banks are required to file SARs when there is a known or suspected violation of federal law, a suspicious transaction related to money laundering/terrorist financing, or a violation of the Bank Secrecy Act (BSA), such as structuring transactions to evade thresholds that trigger BSA reporting requirements. If there is a reasonable explanation or a legitimate business purpose for the large cash withdrawal (that is not a violation of federal law, related to money laundering, and not a violation of the BSA), then there is no need for the bank to file a SAR.
Q: What is the Federal Reserve's plan for Comprehensive Capital Analysis and Review (CCAR)?
A: With respect to the upcoming CCAR exercise, firms should submit the capital plans that they have developed by April 6, 2020. The plans will be used to monitor how firms are managing their capital in the current environment, planning for contingencies, and positioning themselves to continue lending to creditworthy households and businesses.
Q: What is the appropriate capital treatment of SBA PPP loans, both when financed via the Federal Reserve's Paycheck Protection Program Liquidity Facility (PPPLF) and otherwise?
A: As indicated in the interim final rule published by the Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation on April 13, 2020, (85 FR 20387), a banking organization may neutralize the regulatory capital effects of a PPP-covered loan that has been pledged as collateral for a non-recourse loan that is provided as part of the PPPLF. Under the terms of the PPPLF, a depository institution may pledge a PPP-covered loan it has originated (i.e., closed and funded) or purchased as collateral to secure an extension of credit under the PPPLF. Such PPP-covered loans are excluded from average total consolidated assets and total leverage exposure, and receive a 0 percent risk weight for purposes of standardized total risk-weighted assets and advanced approaches total risk-weighted assets, as applicable.
In addition, a Board-regulated institution must apply a 0 percent risk weight (for purposes of standardized total risk-weighted assets and advanced approaches total risk-weighted assets) to a PPP-covered loan that has not been pledged to the PPPLF, including a PPP-covered loan originated by the Board-regulated institution or purchased, as well as those pledged to the discount window for primary credit. However, the Board-regulated institution must include the on-balance-sheet carrying value of the PPP-covered loan in its average total consolidated assets and total leverage exposure.
Q: What are the key changes from the interim final rule on the supplementary leverage ratio issued by the Board on April 1, 2020?
A: The interim final rule excludes on a temporary basis U.S. Treasury securities ("Treasuries") and deposits at Federal Reserve Banks from the denominator of the supplementary leverage ratio. This change applies to bank holding companies, U.S. intermediate holding companies required to be formed under the Board's Regulation YY, and savings and loan holding companies that are subject to the supplementary leverage ratio; namely, global systemically important bank holding companies or holding companies that are subject to Category II or Category III standards. This exclusion will remain in effect until March 31, 2021.
Q: How does the provision of the interim final rule on the supplementary leverage ratio excluding deposits held at Federal Reserve Banks interact with the recently issued final rule to implement section 402 of the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA)?
A: Under the interim final rule, holding companies subject to the supplementary leverage ratio must exclude deposits at Federal Reserve Banks from total leverage exposure. Holding companies that are custodial banking organizations, as defined in the Board's rule implementing section 402 of Economic Growth, Regulatory Relief, and Consumer Protection Act, also must exclude the lesser of: (1) deposits at foreign qualifying central banks, and (2) the amount of funds in deposit accounts at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts at the custodial banking organization.
Q: Does the exclusion of Treasuries from the denominator of the supplementary leverage ratio apply to exposures to Treasuries that are not considered on-balance sheet?
A: No, under the interim final rule, a holding company only excludes Treasuries from the denominator of the supplementary leverage ratio if the Treasuries appear on the holding company's consolidated balance sheet.
Q: What will the community bank leverage ratio be for the period covered by the interim final rules?
A: Under the interim final rules, the community bank leverage ratio is 8 percent beginning in the second quarter of 2020 and for the remainder of calendar year 2020, is 8.5 percent for calendar year 2021, and then returns to 9 percent in 2022 and thereafter.
Q: Other than the temporary change in the threshold of the community bank leverage ratio, were the qualifying criteria changed by the interim final rules?
A: None of the other qualifying criteria for the community bank leverage ratio were changed by the final rules. Specifically, the trading activity, off-balance-sheet exposures, and size qualifying criteria continue to apply, consistent with the final rule issued in November 2019 and are not amended by the interim final rules. In addition, a subsidiary banking organization of an advanced approaches banking organization is not eligible to join the community bank leverage ratio framework.
Q: Do the interim final rules change the community bank leverage ratio framework's two-quarter grace period?
A: No, the grace period is not changed. The interim final rules maintain the two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percentage point below the applicable community bank leverage ratio or that fails to meet all of the other qualifying criteria.
Q: In specific cases of loan forbearance, how should financial institutions act with regard to loan documentation, given the difficulty of obtaining updated material?
A: Financial institutions should maintain appropriate documentation that reflects the borrowers' payment status prior to being affected by COVID-19, and borrowers' payment performance according to any changes in terms provided by payment accommodations. Documentation may also include the borrowers' recovery plans, sources of repayment, additional advances on existing or new loans, and value of the collateral.
Q: What is the appropriate practice for handling a payment deferral?
A: As previously announced in the April 7 interagency statement, the federal financial institution regulatory agencies and the state banking regulators encourage financial institutions to work with borrowers, will not criticize institutions for doing so in a safe and sound manner, and will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs).
The Board aims to give banking organizations latitude in addressing payment deferrals, without limiting it to, for example, (1) capitalization of deferred interest up-front and subsequent upward monthly payment adjustments; (2) capitalization of deferred interest on the backend; or (3) separating deferred interest into a separate note and amortizing accordingly, provided the collateral is adequate. The Financial Accounting Standards Board (FASB) has issued a tentative decision in a recent technical inquiry that speaks to this topic. For more information, see the decision from its April 8, 2020, board meeting.
The joint statement also notes that when working with borrowers, lenders and servicers should adhere to consumer protection requirements, including fair lending laws, to provide the opportunity for all borrowers to benefit from these arrangements. The statement notes that the agencies will take into account an institution's good-faith efforts demonstrably designed to support consumers and comply with consumer protection laws.
The individual facts and circumstances will have a significant bearing on how each bank addresses similar concerns. Each bank should continue to refer to the applicable regulatory reporting instructions, as well as its internal accounting policies, to determine if loans to stressed borrowers should be reported as nonaccrual assets in regulatory reports. Accordingly, if interest or principal has been deferred (i.e., no payments are required during the deferral period) but not waived, judgment should be used to determine whether the loan should be placed on nonaccrual status (e.g., by evaluating whether or not full payment of principal and interest is expected). State member banks should also feel free to contact their local Reserve Bank and state supervisory agency to address the bank's individual circumstances, as needed.
Q: What guidance can the Federal Reserve provide on the PPP administered by the Small Business Administration?
A: The Federal Reserve strongly encourages banks to work with their customers to help them deal with the impacts of COVID-19. Consistent with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus," examiners will not criticize banks' prudent use of the SBA programs to help their borrowers affected by COVID-19. Banks should contact the SBA with questions regarding the scope or operations of those programs.
The Federal Reserve System can address questions regarding regulatory treatment of SBA program loans under our regulatory and supervisory rules and expectations. Banks are advised to reach out to their local Reserve Bank with any specific questions for the Federal Reserve.
Q: Under what circumstances does Regulation O apply to the Small Business Administration's (SBA's) Paycheck Protection Program (PPP) loans to a bank insider or their related interest?
A: On April 17, 2020, the Board adopted an interim final rule to except some PPP loans from certain requirements of Regulation O (12 CFR part 215). The exception applies to PPP loans that are not prohibited by the insider lending restrictions established by the SBA. The SBA issued an interim final rule (PDF) that clarifies the application of its insider lending restrictions to PPP loans.
If a PPP loan would be prohibited by the insider lending restrictions established by the SBA, then Regulation O continues to apply to the loan. In general, PPP loans are not prohibited by the SBA insider lending restrictions and are not subject to Regulation O if they are made by a PPP lender to a business owned by (i) a PPP lender's director, (ii) a person that holds less than 30 percent of the stock or debt instruments of the PPP lender, or (iii) insiders of a PPP lender's affiliates. The Board provided the temporary exclusion in the interim final rule to allow banking organizations to make PPP loans to a broad range of small businesses within their communities, consistent with applicable law and safe and sound banking practices. The SBA explicitly has prohibited a banking organization from favoring in processing time or prioritization a PPP application of one of its directors or equity holders and the Board will administer the interim final rule accordingly. Only PPP loans made between February 15, 2020, and June 30, 2020, qualify for the Regulation O exception.
Q: How should banks reserve against Paycheck Protection Program (PPP) loans?
A: Unless the bank has a reason to believe the Small Business Administration (SBA) guarantee would be jeopardized, then no reserve would be expected on an SBA PPP loan for which SBA has issued and documented its guarantee.
Q: Will there be any specific regulatory relief related to appraisals similar to what was issued in the past for areas impacted by natural disasters (e.g. hurricanes)?
A: On April 14, 2020, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) issued an interim final rule (PDF) that temporarily defers real estate-related appraisals and evaluations under the agencies' interagency appraisal regulations. The rule defers the requirement to obtain an appraisal or evaluation for up to 120 days following the closing of a transaction booked through December 31, 2020, for certain residential and commercial real estate transactions, excluding transactions for acquisition, development, and construction of real estate. Additionally, on April 14, 2020, the Federal Reserve, OCC, FDIC, National Credit Union Administration, and Consumer Financial Protection Bureau issued an interagency statement (PDF) highlighting existing flexibility in the agencies' appraisal regulations to address challenges relating to appraisals and evaluations for real estate-related financial transactions affected by COVID-19.
Q: How can banks comply with appraisal regulations in the event an interior property inspection cannot be performed due to social distancing guidelines or other concerns about COVID-19?
A: Other than for certain higher-priced mortgage loans, the agencies' appraisal regulations do not require a property inspection. The agencies' appraisal regulations instead require that appraisals be conducted in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). The Appraisal Foundation's "2020-21 USPAP Q&A" issued March 17, 2020, notes that "[a]ppraisers and users of appraisal services should remember that USPAP does not require an inspection unless necessary to produce credible assignment results." The Q&A also notes that "[w]hen an interior inspection would customarily be part of the scope of work, a health or other emergency condition may require an appraiser to make an extraordinary assumption about the interior of a property. This is permitted by USPAP as long as the appraiser has a reasonable basis for the extraordinary assumption and as long as its use still results in a credible analysis."
For transactions requiring evaluations, interagency guidance (PDF) states that when an inspection is not performed, an institution should be able to demonstrate how property condition and market factors were determined.
Q: Can the agencies provide flexibility for the appraisal requirement on subsequent transactions, specifically loan extensions or modifications, if safety and soundness can be maintained?
A: A modification of an existing credit extension that involves a limited change(s) in the terms of the note or loan agreement and that does not adversely affect the institution's real estate collateral protection after the modification does not rise to the level of a new real estate-related financial transaction for purposes of the agencies' appraisal regulations. Therefore, an appraisal or an evaluation is not required. A loan modification that entails a decrease in the interest rate or a single extension of a limited or short-term nature would not be viewed as a subsequent transaction. See the "Interagency Appraisal and Evaluation Guidelines (PDF)." If the loan modification is substantive and rises to the level of a subsequent transaction, an appraisal or evaluation may be required, or the bank could validate an existing appraisal.
Q: For a banking organization that elects to delay its adoption of CECL per the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and then apply the CECL transitions interim final rule—which provides an optional extension of the regulatory capital transition for CECL—what date should the electing bank organization reference in order to determine its day-one transitional amount?
A: Section 4014 of the CARES Act allows banking organizations to delay adoption of CECL. In addition, the interim final rule, "Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances" (CECL transitions IFR) allows qualifying banking organizations to transition for up to five years an estimate of the effect of CECL on regulatory capital.
An electing banking organization that was required (as of January 1, 2020) to adopt CECL for accounting purposes under U.S. Generally Accepted Accounting Principles in 2020 must use January 1, 2020, (or the first day of the fiscal year beginning in 2020) for purposes of day-one transitional amounts. This is required even if the organization chooses to delay its adoption of CECL to a subsequent quarter, per section 4014 of the CARES Act.
For example, if an electing banking organization with a fiscal year-end that coincides with the calendar year-end (that is, December 31) delays its adoption of CECL until July 1, 2020, the organization must still use January 1, 2020, as the basis for its day-one transitional amounts. An institution may refer to SR letter 20-9, "Joint Statement on Interaction of the Regulatory Capital Rule: Revised Transition of the CECL Methodology for Allowances with Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act" for additional information.
Q: For a banking organization that experiences a day-one increase in retained earnings as a result of the CECL methodology and elects to apply the CECL transitions interim final rule issued on March 31, 2020, how should the banking organization calculate the day-one transitional amounts?
A: An electing banking organization with an increase in retained earnings upon adopting CECL would reflect the day-one CECL transitional amount as a negative value when calculating its modified CECL transitional amount.
For additional background, an electing banking organization must calculate transitional amounts for retained earnings, temporary difference deferred tax assets (DTAs), and credit loss allowances eligible for inclusion in regulatory capital.
For each of these items, the preamble to the interim final rule states that "the transitional amount is equal to the difference between the electing banking organization's closing balance sheet amount for the fiscal year-end immediately prior to its adoption of CECL (pre-CECL amount) and its balance sheet amount as of the beginning of the fiscal year in which it adopts CECL (post-CECL amount)."
An electing banking organization, therefore, reflects the actual day-one changes to the CECL transitional amount, DTA transitional amount, and adjusted allowances for credit losses (AACL) transitional amount, including when calculating the modified CECL transitional amount and modified AACL transitional amount. To the extent there is a day-one change for these items, an electing banking organization would calculate each transitional amount as a positive or negative number.
Q: How is the Federal Reserve handling examination activities?
A: To minimize disruption and burden on financial institutions and in consideration of the safety and well-being of bank employees and Federal Reserve staff, the Federal Reserve announced on June 15, 2020, that it anticipates examination activities will be conducted off-site until normal operations are resumed at the financial institutions and Reserve Banks. Financial institutions supervised by the Federal Reserve should work directly with their Reserve Bank and state banking agencies, as applicable, if they have questions on planned supervisory activities.
Q: How is the Federal Reserve addressing a supervised institution's remediation of existing supervisory findings?
A: At the onset of the pandemic (March 2020), the Federal Reserve temporarily extended the time periods for remediating non-critical existing supervisory findings by 90 days, unless the Federal Reserve notified a firm that a more timely remediation would aid the firm in addressing a heightened risk or help consumers. For instance, if a status update would have been due in 30 days, the due date would have been extended to 120 days. Supervisory findings include matters requiring attention, matters requiring immediate attention, and provisions in a formal or informal enforcement action. The Federal Reserve has not provided any subsequent timeframe extensions for remediating non-critical existing supervisory findings since the statement issued on March 24, 2020.
Q: Is the Federal Reserve granting an extension on FR Y quarterly filings?
A: On March 13, the Board published SR letter 20-4, "Supervisory Practices Regarding Financial Institutions Affected by Coronavirus," which encourages financial institutions to review SR letter 13-6, "Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency." The latter of these outlines supervisory practices that the Federal Reserve can employ when institutions are affected by an emergency.
The section discussing regulatory reporting (Submission of Regulatory Reports) states that the "Federal Reserve does not expect to take supervisory action against a banking organization that takes reasonable and prudent steps to comply with the Federal Reserve Board's reporting requirements but is unable to make timely filings due to a major disaster or emergency." Institutions having difficulty submitting accurate or timely data should contact the responsible Reserve Bank.
Q: Must directors sign the Call Report prior to submission, or is it permissible to attest to it after the fact within a reasonably short period of time?
A: In light of COVID-19 and the challenges banks may be facing, directors may generally attest to the Call Report after a reasonably short period of time. Please contact your Reserve Bank to request a reasonable extension for obtaining director attestations.
Q: The new SR letter (SR 20-4) references existing guidance for a natural disaster and emergency, which instructs Reserve Banks to communicate to firms regarding regulatory relief available when the President declares an emergency. Are there any further communications firms should expect to receive on this matter?
A: SR letter 13-6 / CA letter 13-3, "Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency," highlights the supervisory practices that the Federal Reserve expects to employ when banking organizations and their borrowers and other customers are affected by a major disaster or emergency. There are no plans at present to issue additional guidance. Nevertheless, we recognize that this is a rapidly evolving situation, which could necessitate additional guidance if circumstances warrant.
Q: How are regulatory agencies and state financial regulators encouraging mortgage servicers to work with struggling homeowners affected by COVID-19?
A: Federal and state financial institution regulators issued a joint policy statement informing mortgage servicers of the agencies' flexible supervisory and enforcement approach during the COVID-19 pandemic. This statement includes information on certain communications to consumers required by the mortgage servicing rules and will facilitate mortgage servicers' ability to place consumers in short-term payment forbearance programs such as the one established by the CARES Act.
Under the CARES Act, borrowers in a "federally backed mortgage loan" experiencing a financial hardship due, directly or indirectly, to the COVID-19 pandemic, may request forbearance by making a request to their mortgage servicer and affirming that they are experiencing a financial hardship. In response, mortgage servicers must provide a CARES Act forbearance that allows borrowers to defer their mortgage payments for up to 180 days and possibly longer.
The joint policy statement provides further detail on the agencies' approach to this issue during the pandemic, including treatment of certain early intervention and loss mitigation notice requirements. It also reminds mortgage servicers of flexibility existing in rules with respect to the content of current notices.
Q: What kinds of mortgage loans are eligible for CARES Act forbearance?
A: The CARES Act ensures that borrowers who have "federally backed mortgage loans" have access to forbearance programs, regardless of whether they are delinquent. The CARES Act defines a "federally backed mortgage loan" as any loan that is
- secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one-to-four families that is insured by the Federal Housing Administration under title II of the National Housing Act,
- insured under section 255 of the National Housing Act,
- guaranteed under section 184 or 184A of the Housing and Community Development Act of 1992,
- guaranteed or insured by the Department of Veterans Affairs,
- guaranteed or insured by the Department of Agriculture,
- made by the Department of Agriculture, or
- purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
Q: What forbearance options are available for mortgage loans not eligible for CARES Act forbearance?
A: The Federal Reserve understands that servicers of mortgages that are not "federally backed mortgage loans" under the CARES Act may be offering similar short-term forbearance programs to their borrowers. Such programs may be based on mortgage servicers' own programs or policy initiatives, or may be required by state or local laws.
Q: If a banking organizations reported in the first quarter of 2020 an increase in the number of backtesting exceptions, as part of its Pillar 3 disclosures for market risk, what are the capital implications under the market risk capital rule (12 CFR Part 3, subpart F; 12 CFR Part 217, subpart F; 12 CFR Part 324, subpart F)?
A: The market risk capital rule requires that a banking organization identify, once each quarter, the number of business days for which the actual daily net trading loss, if any, exceeds the corresponding daily VaR-based measure ("exceptions") that have occurred over the preceding 250 business days (12 CFR 3.204(b)(1); 12 CFR 217.204(b)(1); 12 CFR 324.204(b)(1)). A banking organization must then apply a multiplication factor that corresponds to the number of exceptions to determine its VaR-based and stressed VaR-based capital requirements for market risk, unless the banking organization's primary federal banking regulator notifies the banking organization in writing that a different adjustment or other action is appropriate. See 12 CFR 3.204(b)(2); 12 CFR 217.204(b)(2); 12 CFR 324.204(b)(2).
Concern about the impact of COVID-19 has led to a sudden and significant repricing of global financial markets, amid an increase in market volatility and deterioration in market liquidity. As a result, a banking organization may experience backtesting exceptions for this period that are caused by market volatility and that may not reflect market risk modeling deficiencies. Additional time may be required in order to evaluate the root cause of recent backtesting exceptions, which otherwise could result in a capital requirement for market risk that is not commensurate with the firm's covered positions.
When determining whether a different adjustment to a banking organization's VaR-based and stressed VaR-based capital requirements for market risk is appropriate, the primary federal banking regulator generally considers whether a regime shift, such as sudden abnormal changes in interest rates or exchange rates, major political events, or natural disasters, has occurred. During March and April of 2020, consistent with section 204(b)(2) of the market risk capital rule, affected banking organizations were notified that they may apply the multiplication factor that applied as of December 31, 2019, to determine VaR-based capital requirements for market risk and stressed VaR-based capital requirement for market risk through September 30, 2020, as a result of the impact of COVID-19 on financial markets.
Q: How does FEMA Bulletin W-20002 affect the force placement requirement under the Flood Disaster Protection Act and the implementing regulation?
A: On March 29, 2020, the Federal Emergency Management Agency (FEMA) announced in Bulletin W-20002 that the grace period to renew National Flood Insurance Program (NFIP) (PDF) policies that expire between February 13, 2020 and June 15, 2020 (FEMA emergency period) has been extended from 30 days to 120 days due to COVID-19. Based on Bulletin W-20002, a borrower will be covered by the NFIP policy if the flood insurance premium is paid before the 120-day grace period expires.
In accordance with the flood insurance force placement regulations, when a lender makes a determination that a designated loan is not covered by a sufficient amount of flood insurance, it must notify the borrower. If the borrower does not provide evidence of sufficient coverage within 45 days after notification, the lender must force place flood insurance in an amount that will satisfy the regulatory requirements. However, in light of Bulletin W-20002, for NFIP policies expiring during the FEMA emergency period:
- A lender may provide the required notice to the borrower after determining the policy has expired with an indication that the NFIP grace period has been extended for 120 days. Lenders may inform borrowers that, in light of Bulletin W-20002, force placement will not occur until after the end of the 120-day period.
- Alternatively, a lender may provide the required notice to the borrower at least 45 days before the end of the 120-day grace period.
- For either alternative, the lender must force place flood insurance on the borrower's behalf if the borrower does not pay the premium by the end of the 120-day grace period.
- Consistent with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (PDF)" dated April 7, the Federal Reserve does not expect to take supervisory or enforcement action against the lender for violating the flood insurance force placement requirements, provided that the circumstances were related to COVID-19, and that the lender has made good-faith efforts to support borrowers and comply with the flood insurance requirements, as well as responded to any needed corrective action.
- Lenders should be aware that if they force place flood insurance for NFIP policies that expire during the FEMA emergency period prior to the expiration of the 120-day grace period and the borrower pays the premium by the end of the 120-day grace period, consistent with the flood insurance regulatory requirements, the lender would be required to refund the borrower for any overlapping flood insurance coverage.
Q: If a bank works with its borrowers by extending maturities/payments or balloon payments due to COVID-19, would the bank be required to make a new flood zone determination and provide new notices of special flood hazards for the extended loan?
A: Under the federal flood statutes and the Federal Reserve's implementing regulation, flood insurance requirements are generally triggered upon the making, increasing, renewing, or extending of any designated loan. If a lender modifies a loan by extending the loan term, then this change is a triggering event, and flood insurance requirements would apply, provided no other existing exception to the requirements under the Federal Reserve's regulation is applicable. Such requirements may include establishing escrow for flood insurance payments and fees, making a flood zone determination on the property securing the loan, or providing the notice of special flood hazards to the borrower. The federal flood statutes and the Federal Reserve's implementing regulation do not provide for a waiver of these requirements in emergency situations.
However, consistent with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (PDF)" dated April 7, 2020, when exercising supervisory and enforcement responsibilities, the Federal Reserve will take into account the unique circumstances impacting borrowers and institutions resulting from COVID-19. The Federal Reserve will take into account an institution's good-faith efforts demonstrably designed to support consumers and comply with the flood insurance requirements. The Federal Reserve expects that supervisory feedback for institutions will be focused on identifying issues, correcting deficiencies, and ensuring appropriate remediation to consumers. The Federal Reserve does not expect to take a public enforcement action against an institution, provided that the circumstances were related to COVID-19 and that the institution made good-faith efforts to support borrowers and comply with the flood insurance requirements, as well as responded to any needed corrective action.
Q: The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) issued a Joint Statement on CRA Consideration for Activities in Response to COVID-19 on March 19, 2020. Have the agencies provided additional guidance related to the joint statement?
A: The agencies issued Community Reinvestment Act (CRA) Consideration for Activities in Response to the Coronavirus Frequently Asked Questions (FAQs) (PDF), that were distributed under CA letter 20-10, "Community Reinvestment Act (CRA) Consideration for Activities in Response to the Coronavirus," which provide additional clarification of the information included in the joint statement.