Pub. 10 2020 Issue 2

21 PUB. 10 2020 ISSUE 2 Interest Rate Swaps and Loan Modifications With COVID-19 terms of the account agreement. Additionally, even if not suspending enforcement of the restrictions, it is common to cite Reg. D as a source of the restrictions, which is no longer the case anymore. Either of these is- sues could cause compliance issues for a depository institution and, there- fore, should be taken into consideration in determining how to proceed. Lastly, it initially appeared that the Reg. D amendments had caused an unintended consequence concerning Regulation CC. Because Reg. CC defines “account” by referencing Reg. D’s amended definition of “transaction account,” it appeared that this had caused a conflict with- in Reg. CC and presented a question of whether saving deposit ac- counts were now subject to Reg. CC. The Board clarified the impact of the Reg. D amendments on Reg. CC in a recent FAQ. The Board provided that because Reg. CC continues to exclude savings accounts from Reg. CC’s “account” definition, the amendments did not result in savings deposits now being covered by Reg. CC. While banks still have to decide whether they will suspend enforce- ment of the restrictions as well as tackle compliance considerations either way, ultimately, the elimination of the convenient transfer restriction will relieve banks choosing to suspend enforcement the burden of having to monitor for excessive transactions. Additionally, for the bank’s opting to suspend enforcement, the changes will benefit account holders by providing greater accessibility to funds. While there will be effort and resources required in implementing these changes, overall, it appears the Reg. D changes have the potential of providing a net benefit to banks and account holders alike. w Michael presently serves as Associate General Counsel for Compliance Alliance. He holds a bachelor’s degree in Business Administration in Finance from the University of Texas McCombs School of Business. While attending Baylor Law School, he further pursued his interest in finance by taking a variety of courses that focused on transactional and business issues. After law school, Michael worked at a litigation firm with a specific focus on collection matters. T HE CORONAVIRUS HAS DEFINITELY changed things. One of the ways that it has changed life for business owners is that many need loan modifications quickly. If you are like many community banks, you are looking for nimble and diverse ways to help your customers with this need. Interest rate swaps give you a way to do this. While there are many different ways that interest rate swaps can be used, they are ultimately agreements between two differ- ent entities that trade one interest payment for another, for a pre-determined amount of time. Typically, interest rate swaps involve the exchange of a fixed-rate payment for a floating-rate payment, based on LIBOR (or another rate such as fed funds) plus an addi- tional percentage. Amid the uncertainty and business slowdown for many, it is crucial to provide the needed loan adjustments in a timely manner. While there are other options available, this may be the most effective and timely. Lenders are able to extend terms in order to minimize payment issues due to the current market en - vironment while mitigating risk by boarding a floating rate on their books. Not only can you help your business cus- tomers with their critical needs with interest rate swaps, but you also have the opportuni - ty to generate fees. You may not necessarily be thinking of fees right now. On the con- trary, you may be waiving some fees. But, if you have the option to make up for some of the lost fees or the contracted NIM spread, wouldn’t you? Even before the COVID-19 crisis, interest rate swap activity was increasing. In fact, in- dustry professionals believe that the volume of activity essentially doubled in 2019 from the previous year. The level of awareness has risen markedly in the past few weeks as more financial institutions have found this avenue for loan modifications. If you need another option when talking to your business customers, consider interest rate swaps. You may want to remember this as an opportunity when you are reviewing your loan portfolios too. Given the low level of interest rates, this may be the perfect time to modify an existing loan through an amend/extend structure while utilizing an interest rate swap. We hope we have provided you with a valuable option to discuss with your business customers as they seek loan modifications. To continue the discussion or for more infor- mation, please contact Jay Kenney. w Jay Kenney SVP, Regional Manager Phone: (213) 247-5096 jkenney@pcbb.com pcbb.com Dedicated to serving the needs of com- munity banks, PCBB’s comprehensive and robust set of solutions including cash management, international services, lending solutions, and risk management advisory services. By Jay Kenney, SVP, Regional Manager