The CARES Act: Temporary Help for Community Banks

1. CECL Delay. The CARES Act allows financial institutions to delay the implementation of the current expected credit loss (“CECL”) methodology to the earlier of (i) the termination of the COVID-19 national emergency or (ii) December 31, 2020. Ideally regulatory authorities would provide some greater definition to the end date. Moreover, for entities that choose the deferral, guidance would be helpful regarding the transition out of such optional deferral.

The TDR exception does not apply if circumstances that give rise to the modification are unrelated to COVID-19. Accordingly, financial institutions should document that the reasons giving rise to the forbearance related to COVID-19 in their loan records.

In this regard, the CARES Act covers much of the same ground as the interagency pronouncement of March 22, 2020. Specifically, the regulators provided that if a borrower is experiencing short term cash flow difficulties from COVID-19, then a “prudent” modification (thought to be six months) would not be deemed a TDR. Moreover, the regulators determined that modifications or deferral programs required by state governments, such as the New York State Department of Financial Services, would also not be considered TDRs.

The summary above describes the provisions of the CARES Act impacting community banks, many of which will not be effective until bank regulatory agencies issue rules and guidance on how the programs will be implemented. We anticipate that these will be fast-tracked in order to provide the necessary details for banks and businesses to act on and benefit from the programs.