Title IV– Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy
April 3, 2020
Early in the morning on Thursday, March 26, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On Friday, March 27, 2020, the House of Representatives also passed the CARES Act and President Trump quickly signed it into law the same day.
In this continuing series of blogs by lawyers at Forrest Firm, P.C., we will examine the most important, relevant, and impactful provisions of the CARES Act. Our goal is not to provide you with a granular level examination of each provision of the CARES Act, but rather to provide a macro view of the CARES Act in clear, concise, and understandable language that will enable readers to move forward with their businesses and lives with confidence. These are trying times, and here at Forrest Firm we want these articles to support our clients, positively impact our communities, and be available to help you with questions and concerns raised by the CARES Act.
Subtitle A – Coronavirus Economic Stabilization Act of 2020
Subtitle A of Title IV of the CARES Act, titled as the Coronavirus Economic Stabilization Act of 2020, includes provisions for making loans and loan guarantees to eliminate some of the regulatory oversight created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Economic Stabilization Act of 2008, and other Federal statutes. Highlights include a large loan/loan guarantee provision for the airline and other industries, a mid-sized direct loan program, which will allow for the issuance of loans to businesses of 500-10,000 employees at a 2.00% annual interest rate, and a number of consumer protections, including credit protection, residential mortgage forbearance, and a moratorium on foreclosures and evictions.
Emergency Relief and Taxpayer Protections. Section 4003 establishes a fund of $500 billion overseen by the Department of Treasury to “provide liquidity to eligible businesses, States, and municipalities related to losses incurred as a result of coronavirus.” This low-interest loan funding is split into various tranches for different categories of recipients, including (1) loans and guarantees to passenger air carriers and other air-related businesses ($25 billion); (2) loans and guarantees to cargo air carriers ($4 billion); (3) loans and guarantees to “businesses critical to maintaining national security” ($17 billion); and (4) loans, guarantees and investments in programs and facilities established by the Federal Reserve to provide liquidity into the financial system ($454 billion).
Air-related business, cargo air carrier, businesses critical to maintaining national security
- They must certify that:
- They will not pay dividends or buy back their own stock until twelve months after they have repaid the loan;
- They will not, until September 30, 2020, reduce their March 24, 2020 employment levels, to the extent practicable, and in any case will not reduce their March 24, 2020 employment levels by more than 10%;
- They will not outsource or offshore jobs during the loan period or two years thereafter;
- They will not abrogate existing collective bargaining agreements with labor unions;
- They will remain neutral regarding current or future union organizing activity;
- They are created or organized in the United States or under the laws of the United States
- They have significant operations in and a majority of its employees in the United States; and
- They have or are expected to have losses such that the continued operation of the business is jeopardized.
In addition before a loan is issued, the Treasury Department must receive warrants or equity (in a publicly-traded eligible business) or both a warrant or equity interest and a senior debt instrument issued by the business (for a business that is not publicly-traded). These interests will allow the government’s interest to appreciate or for a debt instrument with a reasonable interest premium. The Treasury Department will not exercise voting power, but will have the right to sell, exercise, or surrender a warrant or senior debt instrument. Finally, the principal amount of any obligation issued by a business, State, or municipality may not be reduced through any loan forgiveness.
Loans, guarantees, and investments in Federal Reserve programs/facilities
The interest rate on these loans will be no higher than 2% per year, and these loans will require no repayment for at least six months.
In addition, a loan recipient must also certify that:
- The uncertainty of economic conditions at the date of application make the loan request necessary to support operations;
- The funds received will be used to retain at least 90% of its workforce, at full compensation and benefits, until September 30, 2020;
- It intends to restore not less than 90 percent of its February 1, 2020 workforce, and to restore compensation and benefits within four months after the coronavirus emergency ends.
- It is domiciled in the United States with significant operations and employees in the United States;
- It is not a bankruptcy debtor;
- It is created or organized in the United States and has significant operations and a majority of its employees in the United States;The uncertainty of economic conditions at the date of application make the loan request necessary to support operations;
- It will issue no dividends while the loan is outstanding;
- It will not outsource or offshore jobs for the term of the loan and two years after payments are completed;
- It will not abrogate existing collective bargaining agreements for the term of the loan and for 2 years after; and
- It will remain neutral in any union organizing effort for the term of the loan.
Limitation on Certain Employee Compensation. Section 4004 of the CARES Act limits, for the period of the loan and for one year after, the total compensation of officers and employees of air carriers and other air-related businesses, cargo air carriers, and businesses critical to maintaining national security who receive a loan under Section 4003 of the CARES Act.
Any officer or employee whose total compensation exceeded $425,000 in 2019 (other than collectively bargained compensation) will be capped at that 2019 total compensation for each 12 month period during the loan and one year thereafter, and any severance packages are limited to no more than twice the 2019 compensation. Any officer or employee whose total compensation exceeded $3,000,000 in 2019 is limited to compensation of $3,000,000 plus 50% of the excess over $3,000,000 earned in 2019 for each 12 month period during the loan and one year thereafter. “Total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by the eligible business to the employee or officer.
Continuation of Certain Air Service. Section 4005 of the CARES Act provides that the Department of Transportation may require an air carrier receiving loans or loan guarantees under Section 4003 to continue necessary air service, including those to small and remote communities and those necessary to insure well-functioning healthcare and pharmaceutical supply chains, to any destination the carrier served before March 1, 2020. This authority expires on March 1, 2022.
Suspension of Certain Aviation Excise Taxes. Section 4005 of the CARES Act suspends certain aviation excise taxes though December 31, 2020.
Debt Guarantee Authority – Section 4008 of the CARES Act amends the Dodd-Frank Wall Street Reform and Consumer Protection Act to allow the FDIC to establish a program to insure depository institutions.
Temporary Government in the Sunshine Act Relief. If the coronavirus emergency continues, Section 4009 of the CARES Act allows the Federal Reserve Board to conduct meetings between through December 31, 2020 without regard to sunshine act requirements. The Federal Reserve Board, however, must maintain a record of all votes and the reasons for such votes.
Temporary Hiring Flexibility. Section 4010 of the CARES Act provides authority for the Department of Housing and Urban Development, the Securities and Exchange Commission, and the Commodity Futures Trading Commission to fill temporary and term positions without regard to certain hiring provisions in the United States Code. This authority ends at the earlier of the end of the coronavirus emergency or December 31, 2020.
Temporary Lending Limit Waiver. Section 4011 of the CARES Act provides that the Comptroller of the Currency may exempt any transaction or series of transactions from statutory lending limits which limit total loans to any one entity to certain percentages of the unimpaired capital of the financial institution making the loans. This authority ends at the earlier of the end of the coronavirus emergency or December 31, 2020.
Temporary Relief for Community Banks. Section 4012 of the CARES Act temporarily authorizes the Federal Banking agencies to change the required Community Bank Leverage Ratio to 8% and to provide a grace period for community banks falling below this threshold to satisfy the leverage requirement. This temporary change ends at the earlier of the end of the coronavirus emergency or December 31, 2020.
Temporary Relief from Troubled Debt Restructurings. Section 4013 of the CARES Act allows financial institutions to temporarily suspend GAAP requirements and loan determinations related to loan modifications which would be categorized as a troubled debt restructuring, if the loan modifications and determinations are related to the coronavirus emergency. The suspensions cannot be applied to loans that were more than 30 days past due as of December 31, 2019 and do not apply to credit of the borrower that is not related to the coronavirus emergency.
Optional Temporary Relief from Current Credit Losses. Section 4014 of the CARES Act allows financial institutions temporary relief, through the earlier of the end of the coronavirus emergency or December 31, 2020, from compliance with the Financial Accounting Standards Board’s rules regarding the “Measurement of Credit Losses on Financial Instruments” during the covered period.
Non-applicability of Restrictions on Economic Stabilization Funds During National Emergency. Section 4015 of the CARES Act allows the Treasury Department to use Economic Stabilization Funds to guarantee, through no later than December 31, 2020, money market accounts under certain conditions.
Temporary Credit Union Provisions. Section 4016 of the CARES Act amends the Federal Credit Union Act to allow for a temporary loosening of the requirements for credit facilities for federal credit unions and sunsets those provisions on December 31, 2020.
Increasing Access to Materials Necessary for National Security and Pandemic Recovery. Section 4017 of the CARES Act provides Congressional authorization under the Defense Procurement Act to waive certain requirements and exceed certain loan thresholds established in the Defense Procurement Act.
- Until March 27, 2022, the government may take any action to correct a “shortfall” in “industrial resources” without regard to the current threshold of $50 million.
- Until March 27, 2022, the government may exceed the $750,000,000 allowed in the fund authorized by the Defense Production Act.
- Until March 27, 2021 (not 2022), the government may exceed the $50 million limit on government loans to correct industrial shortfalls.
Special Inspector General for Pandemic Recovery. Section 4018 of the CARES Act establishes an Inspector General, appointed by the President subject to confirmation by the Senate, to conduct, supervise, and coordinate audits and investigations in the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Department of Treasury under any program established under the CARES Act. The Inspector General has the authority to require reports by the Department of Treasury of the categories of transactions, the recipients, the reasons why the Department of Treasury believed the loans appropriate, biographical data of each person hired to manage or service such loans and investments, and a current estimate of total amount outstanding, fees incurred and received, the type of collateral, and losses or gains recorded on each loan or investment. The Inspector General must report to Congress every 90 days.
As part of the President’s signing statement when signing the CARES Act, the President excepted this provision of the Act.
Conflicts of Interest. Section 4019 of the CARES Act prohibits any transaction under Section 4003 with any entity in which (a) the President, Vice President, head of an Executive Department or a Member of Congress, or (b) the spouse, child, son-in-law, or daughter-in-law of any such official (or any two or more such individuals combined) directly or indirectly holds over 20% of the voting stock.
Congressional Oversight Commission. Section 4020 of the CARES Act establishes a Congressional Oversight Commission, determines who serves on it, and the types of experts it may hire, and requires periodic reports to Congress of actions. The Commission has authority to obtain data from Executive branch agencies in order to complete its oversight. The authority of the Congressional Oversight Commission expires on September 30, 2025.
Credit Protection During COVID-19. Section 4021 of the CARES Act amends the Fair Credit Reporting Act to require that a consumer’s credit file be listed as “current” if a creditor enters into an accommodation with a borrower to defer one or more payments, make a partial payment, forbear on delinquencies, modify a loan or contract, or provide any other assistance or relief to a consumer affected by the coronavirus pandemic between January 31, 2020 and the later of June 25, 2020 or 120 days after the coronavirus emergency terminates. If a consumer’s account was delinquent before the accommodation and the borrower brings the obligation current during the coronavirus emergency, the consumer’s credit file must report this account as current. Notably, these requirements do not apply to a charged off account.
Foreclosure Moratorium and Consumer Right to Request Forbearance. Section 4022 of the CARES Act allows a borrower with a Federally backed mortgage loan secured by residential real property who is experiencing a financial hardship due, directly or indirectly, to the coronavirus emergency to request forbearance, regardless of delinquency status by (1) submitting a request to their mortgage servicer and (2) affirming that the borrower is experiencing financial hardship during the coronavirus emergency.
Upon request, the mortgage servicer is required to grant this forbearance for up to 180 days and must extend the forbearance for up to an additional 180 days at the request of the borrower, provided that, at the borrower’s request, either period may be shortened. While in forbearance, the account may not accrue any fees, penalties, or interest beyond the amounts scheduled or calculated as if payments were being made on time and in full.
Moreover, with the exception of vacant or abandoned property, the servicer of a Federally-backed mortgage loan may not initiate any judicial or non-judicial foreclosure process, move for a judgment or order of sale, or execute a foreclosure-related eviction until at least May 17, 2020.
Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans. Section 4023 of the CARES Act establishes forbearance rights for owners of multifamily properties who face difficulty because of the coronavirus emergency.
A multifamily borrower (the debtor on a residential mortgage loan secured by a lien against property having five or more dwelling units) with a Federally-backed multifamily mortgage that was current as of February 1, 2020, may submit an oral or written request for forbearance to its mortgage servicer affirming that the borrower is experiencing financial hardship during the coronavirus emergency. Upon receipt of the request, the mortgage servicer is required to document the financial hardship, provide forbearance for up to 30 days, and extend the forbearance for up to two additional 30 day periods at the request of the borrower, provided that the request comes before the earlier of the coronavirus emergency or December 31, 2020 and at least 15 days before the prior forbearance period expires. A multifamily borrower may discontinue the forbearance at any time. A multifamily borrower receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period.
Temporary Moratorium on Eviction Filings. Section 4024 of the CARES Act provides that landlords may not initiate any legal action to recover possession of a rental unit or to charge fees, penalties, or other charges to the tenant related to such nonpayment of rent where the landlord’s mortgage on that property is insured, guaranteed, supplemented, protected, or assisted in any way by HUD, Fannie Mae, Freddie Mac, the rural housing voucher program, or the Violence Against Women Act of 1994.
Section 4025 – Protection of Collective Bargaining Agreement. Section 4025 of the CARES Act prohibits conditioning a loan under Section 4003 on engaging in collective bargaining beginning on the date of the loan or guarantee and ending one year after the loan or guarantee is no longer outstanding.
Reports. Section 4026 of the CARES Act requires the Department o Treasury to publish a plain language description of each transaction authorized by the Cares Act within 72 hours of the closing of the transaction.
Subtitle B – Air Carrier Worker Support
The CARES Act also includes provisions that provide financial assistance to companies in the aviation industry and their employees.
Industry Funding. Section 4112 of the CARES Act provides $32 billion in funding for passenger and cargo air carriers and airline industry contractors to continue to pay their employees’ wages and salaries. Passenger air carriers will receive $25 billion, cargo air carriers will receive $4 billion, and industry contractors will receive $3 billion.
Calculation of Industry Funding. Section 4113 of the CARES Act explains how the assistance provided to each air carrier and contractor is calculated, based on the wages, salaries, benefits, and other compensation paid to employees from April 1, 2019 through September 30, 2019. It also directs the Treasury Department to publish procedures for submitting requests for assistance, and directs the Treasury Department to make initial payments by April 6.
Requirements to Receive Funding. Section 4114 of the CARES Act set forth certain requirements that carriers and contractors must agree to in order to receive funding:
- They must agree to refrain from involuntarily furloughing employees or reducing their pay rates and benefits until September 30, 2020;
- They must agree that, through September 30, 2021, neither they nor any of their affiliates will engage in a stock buy-back.
- They must agree that, through September 30, 2021, they will not pay stock dividends or other capital distributions.
This provision of the CARES Act also permits the Department of Transportation, until March 1, 2022, to require air carriers receiving financial assistance to maintain scheduled service to any place they served before March 1, 2020; the Department of Transportation is to consider the needs of small and remote communities and the need to maintain well-functioning healthcare and pharmaceutical supply chains in making those decisions.
Protection of Collective Bargaining. Section 4115 of the CARES Act prohibits the government from conditioning financial assistance on collective bargaining negotiations.
Limitation on Employee Compensation. Section 4116 of the CARES Act requires air carriers and contractors that receive assistance to agree to specific limitations on compensation paid to certain officers and employees. Specifically, officers and/or employees whose salary, bonuses, awards, and other financial benefits exceeded $425,000 in 2019 which were not determined through collective bargaining:
- May not receive total compensation exceeding that officer or employee’s 2019 compensation during any 12-month period between March 24, 2020 and March 24, 2022; and
- May not receive severance pay or termination benefits exceeding twice the compensation received in 2019.
There are also additional restrictions for compensating officers and employees whose 2019 compensation exceeded $3 million.
If you have any questions, please do not hesitate to contact Brian Bernhardt for more information.