WASHINGTON — At the beginning of the coronavirus pandemic, Congress gave banks and credit unions relief from a number of regulations so that they would have flexibility to help commercial and retail customers weather the economic shock.

Those regulatory relief measures are set to expire Dec. 31, but with the virus still raging and many households and businesses still struggling, financial institutions are urging Congress and regulators to extend them into next year. And while it is unclear if regulators will act on their own to extend the relief, lawmakers from both parties have expressed support for continued pandemic relief.

Among other things, the Coronavirus Aid, Relief, and Economic Security Act relieved financial institutions from having to categorize loan modifications related to the pandemic as troubled debt restructurings until the end of 2020, and it it enabled them to delay compliance with the Financial Accounting Standards Board’s Current Expected Credit Losses standard until the end of the year. The legislation also eased community banks’ capital requirements by lowering the Community Bank Leverage Ration from 9% to 8% until 2021, and it authorized the Federal Deposit Insurance Corp. to revive its crisis-era program backstopping bank-issued debt and noninterest-bearing transaction deposits that exceed the FDIC’s $250,000 limit.

Troubled debt restructurings have been of particular concern for banks as they anticipate that their customers could need loan modifications long after the CARES Act relief expires.

Critics of troubled debt restructurings have argued that they reduce the incentive for banks to work out new loan agreements with struggling borrowers, since they require banks to set aside more in capital reserves and they create other administrative hassles. The American Bankers Association is asking that the exemption on troubled debt restructurings remain in place at least until January 2023 while the Independent Community Bankers of America asked Congress in a September letter to extend the relief until the end of 2021.

“We requested [an extension]…in large part because there will be debt restructurings and we don’t want the regulatory agencies in retrospect to look negatively at institutions and what they have done to help their customers through a difficult time,” said James Ballentine, executive vice president for political affairs and congressional relations at the American Bankers Association.

Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America, said that banks are worried that they will be penalized by their examiners if they change borrowers’ loan terms after the relief expires.

“Borrowers who are experiencing financial difficulty, banks can extend out the terms of the loan. … Really the regulators don’t like that,” Merski said. “That can be negative for your exam, for your bank for providing that kind of relief. It’s still better than canceling or foreclosing on a borrower.”

Jeff Naimon, a partner at Buckley, said bankers would likely be limited in their ability to assist borrowers if the troubled debt restructuring relief isn’t extended.

“The path of the virus is unpredictable, and it’s possible that the economy could roar back to life and then get crushed all over again by another wave,” Naimon said. “You can imagine borrowers who could be in and out of trouble and institutions will have less flexibility and fewer options if the loan is already considered a TDR.”

The CARES Act also allowed borrowers of federally-backed mortgages to request up to 12 months of forbearance if they have encountered financial hardship because of COVID-19. Naimon said that many banks could be in a crunch to get borrowers who received forbearance into loan modifications before the troubled debt restructuring relief expires.

“The bank would like the modification to occur within the period specified in the guidance, but it’s also good for the consumer that their modified loan isn’t considered a TDR because it preserves options for them down the line,” Naimon said

Bankers are also pushing to further dealy CECL, which they decried even before the pandemic. Even some lawmakers have suggested scrapping the standard altogether.

Publicly traded banks were required to begin compliance with the new accounting standard for loan losses at the beginning of 2020, but the CARES Act enabled them to delay compliance until 2021. Community banks, on the other hand, already had until 2023 to comply with CECL. ICBA has suggested that FASB could suspend implementation of CECL until 2025, while ABA has supported pushing back the compliance date for larger banks until 2023.

Ryan Donovan, the chief advocacy officer at the Credit Union National Association, said that financial institutions shouldn’t have to worry about complying with a complex new accounting standard during a pandemic.

“We’ve had concerns about the impact of a new expected credit loss accounting standard on credit unions for several years,” Donovan said. “You add a global pandemic and an economic crisis to the mix and you’ve really got a recipe for a disaster for lenders and borrowers alike. Right now is not the time to change how financial institutions, particularly community based financial institutions, model or forecast for expected credit loss.”

Jill Castilla, the CEO of the $317 million-asset Citizens Bank of Edmond in Oklahoma, said that many small banks don’t have the resources to devote to CECL because they are too busy working with customers affected by the pandemic.

“CECL requires substantial investment and data collection — as a small community bank activated to serve our community during this challenging time, no attention in 2020 has been available to allocate to this burdensome and expensive accounting change,” said Jill Castilla, CEO of the $317 million-asset Citizens Bank of Edmond in Oklahoma. “The labor and costs associated with CECL result in no value to small banks.”

Ballentine said that ABA has supported a uniform CECL compliance date for all banks.

“Since the community institutions have until 2023, which we are certainly supportive of, we would argue that the all institutions should have that extended until 2023,” Ballentine said. “One of the concerns we have had about CECL all along is how do you account for it in the worst of times? It’s simpler to do it in the best of times when everything is certainly clear. The future is as murky today as it may ever be. And that is one of the challenges with implementing CECL during this time.”

Christine Klimek, a spokesperson for FASB, did not rule out the possibility of allowing banks to delay compliance with CECL further.

“The FASB, through our Post-Implementation Review process, continues to engage with stakeholders to monitor the effects of the pandemic on financial reporting to determine what, if any, actions we should take,” Klimek said in an email to American Banker.

While support for extending CARES Act relief is industry-wide, Donovan said he is concerned that Congress has not agreed on any additional coronavirus relief legislation.

“I think our biggest obstacle on this frankly is how Congress is functioning right now,” Donovan said. “Put this up or down on a vote, it would probably pass both chambers. We won’t get that vote. That’s just now how Congress operates right now.”

But lawmakers have been receptive to concerns from banks and credit unions.

Senate Banking Committee Chairman Mike Crapo, R-Idaho, urged regulators in a July letter to allow banks to delay compliance with CECL until Jan. 1, 2023. And he suggested regulators extend the relief from troubled debt restructurings until Jan. 1, 2022.

At a virtual conference hosted by the National Association of Federally Insured Credit Unions, House Financial Services Committee Chairwoman Maxine Waters, D-Calif., said she understands financial institutions’ worries about relief from troubled debt restructurings expiring.

“I understand the concerns that credit unions have expressed about troubled debt restructurings … and the need for Congress to consider extended CARES Act provisions to help credit unions provide forbearance to their customers, while meeting their liquidity needs into 2021 as this crisis drags on,” Waters said Tuesday.





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