By Anne Coughlin and Jason Rader
The U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP) successfully processed $525 billion in loans by the Aug. 8 program deadline. Most of these loans are expected to be forgiven if certain criteria are met. Due to the program’s size, the finalization of loan forgiveness details has been slower than expected.
The lender forgiveness portal opened on Aug. 10, and the SBA began its approval process and remitting forgiveness payments on Oct. 2. As of the end of the second quarter, banks held $482 billion in PPP loans. Financial institutions may have also participated in other Federal Reserve relief programs. As a result, some banks have crossed certain thresholds that, absent regulatory relief, would result in a material increase in compliance costs.
To avoid the operational challenges and compliance costs from COVID-19-related temporary asset growth, the FDIC proposed an interim final rule (IFR) that temporarily “freezes” an insured depository institution’s (IDI) total consolidated assets when determining if the IDI is subject to the requirements of Part 363 of the FDIC regulations, “Annual Independent Audits and Reporting Requirements,” for fiscal years ending in 2021. Currently, an IDI becomes subject to these requirements for any fiscal year in which its consolidated assets as of the beginning of the fiscal year are $500 million or more.
An IDI with consolidated total assets of $1 billion or more also must provide management’s assessment of, and an independent public accountant must audit, the effectiveness of internal control over financial reporting. Total asset size also determines the requirement for, and composition of, an institution’s independent audit committee.
The IFR provides that an IDI can calculate consolidated total assets for any fiscal year ending in 2021 based on the lesser of consolidated total assets as of Dec. 31, 2019, or as of the beginning of their fiscal years ending in 2021.
An IDI with a fiscal year beginning July 1, 2020, and ending June 30, 2021, would normally determine Part 363 compliance requirements as of its fiscal year ended June 30, 2020. Under the IFR, an IDI experiencing growth would instead use its consolidated total assets as of Dec. 31, 2019, to determine its Part 363 compliance requirements. In this example, if the IDI’s consolidated total assets were less than $500 million as of Dec. 31, 2019, it would not become subject to Part 363 for its fiscal year beginning July 1, 2020, and ending June 30, 2021, even if its total consolidated total assets were $500 million or more as of June 30, 2020.
IDIs continue to be subject to all other otherwise applicable statutory and regulatory audit and reporting requirements. To prevent abuse of this relief, the FDIC reserves the authority to require an IDI to comply with these regulations if the FDIC determines that the asset growth was related to a merger or acquisition.
The IFR is effective immediately and comments will be accepted for 30 days after publication in the Federal Register. The relief will remain in effect through Dec. 31, 2020, unless extended by the FDIC.
The FDIC is actively considering similar targeted adjustments to further mitigate unintended consequences resulting from pandemic-related government programs.
Anne Coughlin is a director at BKD CPAs and Advisors and serves as a firmwide technical writer.
Jason Rader is a partner at BKD CPAs and Advisors and is the national industry partner for BKD’s Financial Services Group.