Financial Institution Regulations to Encourage Lending – The National Law Review

In recent weeks, regulators of U.S. financial institutions have heeded calls to relax or provide temporary relief from a wide array of regulations that are viewed as impediments to lending in the current crisis environment. Some of these actions were mandated (or reinforced) by provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Many of the relevant regulations were enacted following the 2008/2009 financial crisis with the goal of strengthening the capital and liquidity positions of financial institutions and limiting their risk taking. The current economic and credit crisis has brought into clear relief the tensions between protecting and limiting risk-taking of financial institutions, and ensuring that those financial institutions have the capacity to lend to support the economy in a crisis, and the changes below make clear that market participants and regulators are increasingly concerned that certain regulations may limit flexibility and credit formation in a crisis like the COVID-19 pandemic. Below we present a summary of some of the most significant recent changes that have been enacted by regulators or via statute. If you have questions about what these changes mean for your business or a financial institution you transact with, please reach out to the listed authors or your regular Polsinelli contacts.

Regulatory Streamlining Changes That Have Been Recently Adopted:

  • Changes to Financial Institution Capital Requirements in Connection with Paycheck Protection Program Lending Facility and Paycheck Protection Program (PPP): Existing capital requirements may constrain lending by increasing the amount of equity or other capital that banks must have to support expanded lending, particularly loans that would be assigned a higher risk weighting under existing capital rules. Additionally, the Federal Reserve’s PPP Lending Facility operates by lending to banks against PPP loans they have originated, which would also have a regulatory capital impact to participating institutions. To provide liquidity to small business lenders and relief to small businesses, a provision in the CARES Act , as implemented with a joint interim final rule issued by the Federal Reserve and other banking regulators [2], (1) provides that PPP loans guaranteed by the Small Business Administration (SBA) will be assigned a zero risk weight under the risk-based capital rules and (2) effects changes to the regulatory capital treatment of utilizing the PPP Lending Facility, which, together, should neutralize the regulatory capital effect of banks increasing lending under the PPP and financing those loans via the Federal Reserve’s PPP Lending Facility.

  • Limiting Troubled Debt Restructurings (TDRs) Determinations: Generally, under U.S. GAAP, lenders are required to treat loans modified due to borrower financial distress as TDRs, which triggers additional reporting obligations and accounting requirements. Federal and State bank regulators have acted to collectively encourage financial institution to work with borrowers have indicated that they and will not direct supervised institutions to automatically categorize COVID-19 related loan modifications as troubled debt restructurings (TDRs). [3] Additionally, the CARES Act allows lenders to suspend such determinations, with certain limitations, with respect to loan modifications from March 1, 2020 through the earlier of December 1, 2020 and 60 days after the end of the declared public health emergency. [4]

  • Delay of Application of Current Expected Credit Loss (“CECL”) to Financial Institutions: FASB auditing standards require that financial institutions recognize the inherent losses in their loan and lease portfolios.CECL is a new methodology for measuring the inherent losses, and requires lenders to estimate and report expected credit losses at origination of a loan, rather than when a loan becomes distressed.The Federal Reserve and other banking agencies issued a joint interim final rule authorizing an extension in the transition period for implementing the full effects of CECL, which is intended to delay any impact that CECL might have on regulatory capital (and therefore lending). [5] Additionally, the CARES Act specifies that insured depository institutions, bank holding companies and affiliates would not be required to adopt the standard prior to the earlier of December 31, 2020 and the termination of the declaration of national emergency—however market participants have raised questions about whether that would still require them to comply for the 2020 reporting period. [6] Separate adoption dates apply for smaller financial institutions, and have also been delayed.

  • Temporary Change to Federal Reserve Supplementary Leverage Ratio Rule: The Supplementary Leverage Ratio applies to large financial institutions to limit their total leverage exposure.The change would exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation until March 31, 2021, and would therefore allow those institutions to expand their balance sheets and potentially provide additional credit to households and businesses. [7]

  • Temporary Change to Community Bank Leverage Ratio: Under existing law, qualifying community banking organizations have the option to adopt a simplified 9% leverage ratio in lieu of complying with the full panoply of BASEL III capital rules (those financial institutions meeting the leverage ratio requirement are generally deemed to be well capitalized for prompt corrective action purposes).A provision of the CARES Act, [8] as implemented by interim final rules of the Federal Reserve and other banking regulators, temporarily reduces the applicable leverage ratio to 8% (with a graduated transition to 8.5 % in 2021 and back to 9% thereafter) and provides for a grace period for covered institutions whose leverage ratios fall below the applicable requirement. [9]

  • Technical Changes to Total Loss Absorbing Capital Rules (“TLAC”): TLAC rules require global systemically-important banks to maintain loss-absorbing long term debt and other tier 1 capital at specified levels. The Federal Reserve System revised the definition of eligible retained income for purposes of the TLAC rules. This technical change allows covered companies to continue to lend and utilize their capital buffers in a gradual manner without severely constraining their ability to distribute capital. [10]

  • Deferral of Appraisals and Evaluations for Real Estate Transactions Affected by COVID-19: The federal banking agencies have issued a final interim rule [11] allowing lenders to defer certain appraisals and evaluations for up to 120 days after closing of residential or commercial real estate loan transactions to provide temporary relief by enabling regulated institutions to continue to close loans even if they are unable to arrange an appraisal/evaluation ahead of closing. [12] Real estate transaction involving acquisitions, development and constructions are excluded from the scope of the interim final rule. The temporary relief provisions will expire on December 31, 2020, unless extended. The National Credit Union Administration (NCUA) will consider a similar proposal on April 16, 2020. [13] The federal agencies along with NCUA and the Consumer Financial Protection Bureau have issued a joint statement offering guidance and describing temporary changes to Fannie Mae and Freddie Mac appraisal standards to provide assistance to lenders. [14]

  • Federal Reserve Regulatory Reporting Relief for Small Institutions: The Federal Reserve will not take action against a financial institution with $5 billion or less in total assets for submitting its March 31, 2020, Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) or Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies (FR Y-11) after the official filing deadline, as long as the applicable report is submitted within 30 days of the official filing due date. [15]The federal financial institution regulators and state regulators also offer similar relief to financial institutions affected by COVID-19. [16]

  • Temporary Modification to Wells Fargo Growth Restriction Order: One of the consequences of the Wells Fargo account opening scandal was a 2018 Consent Order that, among other things, restricted Wells Fargo’s asset growth until it met certain requirements.In light of the extraordinary events related to the COVID-19 pandemic, the Federal Reserve amended that order to temporarily lift the asset restriction to allow Wells Fargo to continue lending without violating the limits in the order. [17]

  • Six-Month Delay o f the Federal Reserve’s Revised Control Framework: The Revised Control Framework would have changed the determination of “control” for purposes of the Bank Holding Company Act and therefore the application of certain bank regulatory requirements. The delay moves the effective date to September 30, 2020 to give additional time for implementation as well as for institutions to consult with the Federal Reserve on the effect of the change. [18]

  • Early adoption of Standardized Approach for Measuring Counterparty Credit Risk Rule (“SA-CCR”): SA-CCR is a new methodology for measuring counterparty credit risk of derivatives contracts for regulatory capital purposes,The Federal Reserve and other banking regulators issued a joint notification allowing the companies early adoption of SA-CCR by banks and bank holding companies, with the intent that the early adoption could reduce regulatory capital requirements and therefore encourage lending. [19]

26 U.S.C. §1102.

[2] Federal Reserve, Interim Final Rule, Regulatory Capital Rule: Paycheck Protection Program Lending Facility and Paycheck Protection Program Loans (amending Sections 32 and 131 of the capital rule) See, 12 CFR 3.2, 12 CFR 3.32(a)(1)(iii), 12 CFR 3.131(e)(3)(viii) and 3.305 (OCC); 12 CFR 217.2, 12 CFR 217.32(a)(1)(iii), 12 CFR 217.131(e)(3)(viii) and 12 CFR 217.305 (Federal Reserve); 12 CFR 324.2, 12 CFR 324.32(a)(1)(iii), 12 CFR 324.131(e)(3)(viii) and 12 CFR 324.304 (FDIC).

[3] Federal Reserve et al. Press Release, Agencies Provide Additional Information to Encourage Financial Institutions to Work with Borrowers Affected by COVID-19 (March 22, 2020) See, also, Federal Reserve et al. Press Release, Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (March 22, 2020); Federal Reserve et al. Press Release, Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised) (April 7, 2020)

[4] 26 U.S.C. §4013.

[5] Federal Register, Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances (March 31, 2020)

[6] 26 U.S.C. §4014.

[7] Federal Reserve Press Release, Federal Reserve Board announces temporary change to its supplementary leverage ratio rule to ease strains in the Treasury market resulting from the coronavirus and increase banking organizations’ ability to provide credit to households and businesses (April 1, 2020)

[8] 26 U.S.C. §4012.

[9] Federal Reserve, Interim Final Rule, Regulatory Capital Rule: Temporary Changes to the Community Bank Leverage Ratio Framework, (amending 12 CFR Chapters I, II and III),; Federal Reserve, Interim Final Rule, Regulatory Capital Rule: Transition for the Community Bank Leverage Ratio Framework, (amending 12 CFR Chapter I, II and III),

[10] Federal Register, Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations: Eligible Retained Income (March 26, 2020)

[11] Federal Reserve, Interim Final Rule, Real Estate Appraisals (amending 12 CFR 34, 12 CFR 225 and 12 CFR 323), See, 12 CFR 34.43 (OCC); 12 CFR 225.63 (Federal Reserve); 12 CFR 323.3 (FDIC).

[12] Federal Reserve et al., Press Release, Federal Banking Agencies to Defer Appraisals and Evaluations for Real Estate Transactions Affected by COVID-19 (April 14, 2020)

[13] Id.

[14] Federal Reserve et al., Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus (April 14, 2020)

[15] Federal Reserve Press Release, Federal Reserve offers regulatory reporting relief to small financial institutions affected by the coronavirus (March 26, 2020)

[16] FFIEC Press Release, Financial Regulators Highlight Coordination and Collaboration of Efforts to Address COVID-19 (March 25, 2020)

[17] Consent Order, In the matter of Wells Fargo & Company, Docket No. 20-007-B-HC, United States of America before the Board of Governors of the Federal Reserve System Washington, D.C., filed April 8, 2020,

[18] Federal Reserve Press Release, Federal Reserve Board announces it will delay by six months the effective date for its revised control framework (March 31, 2020)

[19] Federal Register, Standardized Approach for Calculating the Exposure Amount of Derivatives Contracts (March 31, 2020)

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 108

Interest Rate Hedges for Real Estate and Other Loan Borrowers – The National Law Review

Borrowers under variable rate commercial loans commonly enter into interest rate hedge agreements to eliminate or reduce their exposure to the interest rate risk of their variable debt service obligations. While much recent commentary has been devoted to modifications, waiver and defaults under commercial mortgages and other commercial loans, careful attention should also be paid to how any contemplated action under the loan affects the hedge agreement and whether any corollary action needs to occur with respect to the hedge. The following are some issues to bear in mind with respect to interest rate hedges in the current market environment, particularly if the borrower and lender are considering any waiver or modification to the loan agreement or if a loan event of default may be triggered.

Types of Hedge Agreements

There are generally two categories of hedge agreements that borrowers utilize in this context. The first is an interest rate cap, which is technically a series of interest rate options that correspond to the payment dates under the loan. The borrower pays a premium up front and receives a payment if interest rates are above the strike or cap rate at the time of determination, with any such payment offsetting the borrower’s debt service payment in excess of the cap. The second is a fixed for floating interest rate swap, where the borrower pays a periodic fixed rate in exchange for receiving a floating rate payment aligned with its variable rate under the loan. Because interest rate caps are fully paid up front, they generally do not involve the hedge provider having credit exposure to the purchaser, whereas interest rate swaps involve the potential for bilateral credit exposure. That distinction becomes important in contexts of loan default or a waiver or modification that may require a modification of the hedge. Since interest rate swaps involve credit exposure, the hedge provider (who is usually also the lender or one of the lenders) typically takes a pro rata security interest in the loan collateral and may require any guaranty of the loan to be extended to the interest rate swap.

Separate Legal Agreements

Borrowers may think of their variable rate loan plus hedge agreement as an integrated capped interest rate obligation (in the case of a hedge that is an interest rate cap) or as a synthetic fixed interest rate obligation (in the case of a hedge that is an interest rate swap). However, the documents governing these transactions are generally explicit that the loan and the hedge are separate and distinct legal agreements. While the borrower may in practice make a single payment reflecting its net debt service and hedge obligation, the borrower has two sets of legal contracts with two sets of rules that govern how the instruments may perform in extraordinary circumstances.

Issues to Consider When Contemplating Waivers or Modifications of the Related Loan

  • Since the hedge agreement and loan are separate legal contracts, any waiver or modification to the loan will not automatically pass through to the hedge agreement and the borrower and lender will naturally be most focused on the loan and loan documentation. Parties should review the hedge agreement in the context of any such waiver or modification and specifically reference the contemplated effect on the hedge in the written agreement related to any such waiver or modification.

  • If the modification changes the economic terms of the loan, consider whether the economic terms of the hedge will need to be modified as well. Interest rate caps and fixed for floating interest rate swaps are generally tailored to match the loan being hedged and hedge providers should be able to restructure the hedge to match any contemplated modification to the loan. In fact, in loan agreements that require the existence of a hedge agreement and mandate certain criteria that hedge must meet, modification to the hedge agreement may be required to stay in compliance with loan requirements. However, any restructuring of the hedge agreement may require an out of pocket payment by the borrower even if there is not a corresponding cost to restructure the loan.

  • For loans that are intended to go into forbearance for some period, the parties may wish to restructure the hedge to similarly toll payment requirements for the forbearance period. This may not be relevant for interest rate caps, since they are not likely to pay out during this period due to recent decreases in market interest rates. However for interest rate swaps, this may mean restructuring the swap to lower or eliminate the current fixed payments of the borrower and correspondingly increasing the payments that the borrower would make in later periods of the swap. Note that any such change would increase the credit risk that the hedge provider is taking to the borrower and in addition to a cost related to the restructuring, the hedge provider may require additional collateral, guaranty or other credit protection.

  • As always, in connection with any modification to the hedge agreement, it is wise to consult tax and accounting advisors to consider any tax or accounting implications that such a modification may have on the borrower.

Issues to Consider in Potential Loan Defaults

  • Many agreements governing interest rate swaps in this context provide that an event of default under the loan or related documents becomes a termination event under the hedge agreement—even if the lender waives or does not exercise remedies in respect of that event of default. While we would not expect a hedge provider (usually in this case the lender or one of the lenders) to exercise its right to terminate the hedge agreement while it is waiving or not exercising similar rights under the loan agreement, borrowers should be aware of this potential and seek, where possible, to have the effect of a contemplated loan default and/or waiver on the hedge agreement memorialized in writing to limit the possibility of later disputes.

  • Similar to the prior bullet, many such interest rate swap agreements provide that a sale of the loan by the lender becomes a termination event under the hedge agreement. If the distressed nature of the loan makes it more likely that the loan would be sold to another lender, borrowers should be aware of the potential that their hedge agreement may be subject to termination in connection with any such sale.

  • In each of the contexts above, note that termination of an interest rate swap ordinarily involves a termination payment that is a function of the current market rates relative to the fixed rate in the agreement, as well as the remaining maturity and other terms. For borrowers that entered into interest rate swaps before the recent period of lower market interest rates, their interest rate swap likely has significant negative value that they would be required to pay in connection with an early termination.

Hedge Agreement Provisions Applicable to Extraordinary Circumstances

Interest rate hedge agreements are typically documented under an International Swaps and Derivatives Association (ISDA) Master Agreement, including a termination event for “Illegality” and, for the 2002 version of the ISDA Master Agreement, a termination event for “Force Majeure”. In interest rate hedge agreements, the primary performance obligation is the exchange of payments rather than the performance of any physical obligations that are more likely to be impeded by the current pandemic or related governmental stay at home orders. While we do not believe the current situation in the U.S. would be viewed as rising to the level of these provisions for interest rate hedge agreements, it would be possible in more severe disruption scenarios that communication or payment mechanisms would be interrupted in a way that could potentially give rise to these events under the Master Agreement. In that event, one or both parties may be entitled to terminate the hedge agreement.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 101

‘We’re a damn big deal’ KC is an underground fintech hub says Zach Pettet – Startland News

Editor’s note: Zach Pettet is the Fintech Strategist at nbkc bank, with which Startland News has partnered on an upcoming Innovation Exchange event. Opinions expressed in this commentary are the author’s alone.

Kansas City is the United States’ underground financial center.

‘We’re a damn big deal’ KC is an underground fintech hub says Zach Pettet – Startland News


Over the years, many financial juggernauts have been born and grown up in Kansas City. From H&R Block to DST Global to American Century, these firms have made hay over the past century.

But as investor Marc Andreessen said, software is eating the world. Not only is Kansas City ready for this shift towards technology, but our humble Midwestern city is at the forefront of fintech innovation.

After EyeVerify (now Zoloz) sold to Ant Financial for more than $100 million, I vividly remember Jeff Shackelford of Digital Sandbox stepping on stage at 1 Million Cups to rally the troops around Kansas City being a “fintech hub.” He wasn’t scheduled to present, he just asked for the mic and hopped on the stage. He outlined the public and private resources available for fintech companies in Kansas City and went on a rampage naming all the promising upstarts in the space. C2FO had established itself as one of the best-funded fintech leaders in the nation, blooom had just raised a Series B investment round, and a number of other firms were starting up.

At this point, I was working at blooom and I was a bit confused as to why Jeff really needed to say this to the crowd. It seemed clear to me — from my vantage point inside of a venture-backed startup — that we had a lot to be proud of as a city.

So why isn’t Kansas City nationally known for its fintech prowess?

Call it, “Kansas City nice.” Call us humble Midwesterners. Call us whatever you want, but I contend that we aren’t loud enough as a city about our successes. When we talk about large fintech exits in town, most folks bring up EyeVerify’s recent sale to Ant Financial, but there are others.

For example, started as a skunkworks project inside nbkc bank. Two entrepreneurs approached the bank in the early 2000s with an idea to do second mortgage home loans online. The entrepreneurs had floated the idea to a few local banks, but the perceived risk profile of “something new” was just too much for the established players to stomach. It didn’t fit inside the box that the bankers had deemed acceptable, so the idea was cast aside.

nbkc bank looked at the opportunity a bit differently and supported the firm. The bet paid off, as was profitable in its second month and ended up selling to Capital One for more than $145 million five years later.

Despite it being a wildly successful story, most of Kansas City has never heard of Despite the talent and capital resources we have in Kansas City’s financial technology sector, we rarely hear the success stories. Startland has detailed our humble and kind nature as a city, but that doesn’t mean we shouldn’t occasionally stand proudly on a rooftop and scream, “This is Kansas City and we’re a big damn deal!” That’s right — exclaim it!

We’ve self-imposed the moniker of “most entrepreneurial city in America,” and we’ve grown into it in many ways. But now, it’s time to narrow our brand position. Kansas City has the resources, support system, and cost of living to make it the easiest city in the United States to build a fintech company.

Why? Well, there are several reasons.

Cost of living.

Someone making $50,000 in Kansas City would need to make $94,637 to maintain their quality of live in San Francisco, as an example.

Cost of talent.

The average web developer salary in Kansas City is $81,946, according to Indeed. Whereas, the average salary for the same job in San Francisco is $103,297. This doesn’t take into account other variables like turnover and how often bay area companies have to train and retrain new hires.

Cost and access to experienced management talent.

With the likes of Cerner, Sprint, Garmin, and the steady increase of native Kansas Citians returning to Kansas City for the second act of their career, the cost of top-flight operations and management talent is lower here than anywhere on either coast. Joe McConnell from blooom and Spencer Hardwick returning to join Teach For America Kansas City are both examples.

Midwest bias is gone. The old story of venture capitalists on Sand Hill Road that only invest in companies that they can bike to is disappearing. The smart investors are looking for alpha in new places — the smart ones are realizing that the Midwest is one of the most important “emerging markets” to pay attention to. Most well-funded startups in Kansas City have a number of Bay Area and NYC investors on their cap table by this point.

Corporate support.

There are 68 banks chartered in the Kansas City region alone – that’s more than the entire state of Arizona. Between the banks and the sheer volume of large corporate organizations, the potential for strategic partnerships and basic vendor relationships never ceases to grow.

The case for Kansas City’s fintech future is strong, but there’s still work to be done. If we can focus-in and rally around fintech as a point of dominance for Kansas City’s entrepreneurial ecosystem, then we will set ourselves apart from the crowd and start drawing financial startups from around the world.

Kansas City is America’s underground financial center — our next step is to move above ground and plant the flag as the United States’ primary fintech hub.

If you’d like to chat, ask or argue about any of this, register here for the coming Innovation Exchange at nbkc bank.


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3 Tips to Better Handle Your Business Finances – Entrepreneur

Here are some tips to make handling your business finances easier.

Many small business owners and freelancers might be excellent at their craft. They offer great products and services. They may even be able to sell them well too. However, when it comes to the most basic financial aspects of their business, they sometimes fall short. Here are some tips to make handling your business finances easier.

1. Let your bank do the heavy lifting

Tom Diem, CFP® and President of Diem Wealth Management believes how you set up your banking is key when it comes to staying organized. He keeps a separate credit card and checking account for business expenses. He says, “I am able to track my spending for whatever period of time I choose and can save PDF files in cloud storage.”  If you prefer a physical copy, you can print out what you need as well. Diem adds that it’s all accessible through your bank. If you’re not sure how to go about getting the information, many banks have people to guide you through the process.

2. Capture receipts

When it comes to staying on top of business expenses and saving receipts, President and Wealth Advisor Peter Huminski of believes Shoeboxed is great for storing and keeping track of them. It helps you stay on top of business expenses and saves receipts in a digital format. He explains, “When it comes time to reconcile the books in Quickbooks, it can be done quickly and with relative ease.” Hub Doc is another option for capturing receipts as well as recurring bills and expenses. It syncs to Quickbooks online and Xero accounting programs.

3. Tips for entering receipts

There are variety of ways to automate your expenses and receipts directly into your accounting software. Clint Haynes of Kansas City Financial Planner and President of Nextgen Wealth says, “One solution is to use an American Express credit card that will directly link up your debit or credit cards using Quicken and Expensify.” However, if you’re utilizing a spreadsheet that isn’t connected to accounts, you’ll have to manually enter receipts. If this is the case, he recommends entering them on a weekly basis rather than a monthly or quarterly one. Devote 30 minutes or so a week to take care of this. While it might seem hard at first, if you keep at it. It can become a well-oiled routine in no time.

The Bottom Line

While bookkeeping and handling other financial aspects of your business may not be the most glamorous part of your work, use the tips above to make it a little easier. This will help you streamline your bookkeeping, help your business run smoothly and you never know, it could bring out the inner financial geek in you.

(By Karen Cordaway)

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