Weekly RoundUp
April 15, 2020

Financial Services Weekly Roundup: Priming the Pump – Additional Actions to Combat COVID-19

Priming the Pump. As the COVID-19 outbreak continues, the Board of Governors of the Federal Reserve System (Federal Reserve), consistent with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), took additional actions to provide up to $2.3 trillion in loans to support the economy. The Federal Reserve’s actions will:

  • Bolster the effectiveness of the Small Business Administration's (SBA) Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses through the new Paycheck Protection Program Liquidity Facility (PPPLF). The PPPLF will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
  • Ensure credit flows to small- and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Treasury Department, using funding from the CARES Act, will provide $75 billion in equity to the facility;
  • Increase the flow of credit to households and businesses through capital markets by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF), as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury; and
  • Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. The Treasury Department will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.

The federal banking regulators also provided regulatory capital relief for depository institutions borrowing under the PPPLF, and the Treasury Department and the SBA continued to provide updated guidance on the PPP. Additional details regarding these actions, as well as other developments, including the staff of the Securities and Exchange Commission’s (SEC) Division of Investment Management’s release of responses to frequently asked questions (FAQs) about funds and advisers affected by COVID-19, the Division of Investment Management’s statement to emphasize the ongoing importance of updating and delivering required information to investors in a timely manner consistent with investment companies’ disclosure obligations and the SEC’s adoption of offering reforms for business development companies and registered closed-end funds, are discussed below.

We also invite you to visit Goodwin’s Coronavirus Knowledge Center and Consumer Financial Services Industry COVID-19 Hub, which are updated regularly, to learn how cross-industry teams at Goodwin are helping clients fully understand and assess the ramifications of COVID-19 and navigate the potential effects of the outbreak on their businesses. The Knowledge Center includes new thought leadership, some of which is reproduced below, on topics such as recent developments affecting insurance coverage for COVID-19 related losses, SEC statements on COVID-19 related first quarter disclosures and updated SEC guidance on delays in the printing and mailing of proxy materials due to the COVID-19 outbreak.

Regulatory Developments

Federal Reserve Establishes Main Street Lending Program

On April 9, the Federal Reserve released additional details about its previously announced Main Street Lending Program, which is comprised of the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF) (together, the Facilities). The term sheet for the MSNLF can be found here. The term sheet for the MSELF can be found here.

Under the MSNLF, Eligible Lenders, defined as U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies, will make Eligible Loans (defined below) to Eligible Borrowers, defined as businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues that are created or organized in the United States or under the laws of the United States and which have significant operations in and a majority of  employees based in the United States. An Eligible Loan is an unsecured term loan made by an Eligible Lender to an Eligible Borrower that was originated on or after April 8, 2020 with the following features:

  • 4 year maturity;
  • Amortization of principal and interest deferred for one year (no loan forgiveness);
  • Adjustable rate of SOFR + 250-400 basis points;
  • Prepayment without penalty; and
  • A minimum loan size of $1 million and a maximum loan size that is the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA).

The terms and conditions of the MSELF are similar to those of the MSNLF. However, for the MSELF, an Eligible Loan is a term loan made by an Eligible Lender to an Eligible Borrower that was originated prior to April 8, 2020, provided that the upsized tranche of the loan has a maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the Eligible Borrower’s 2019 EBITDA. MSELF loans may be secured, and any collateral securing an Eligible Loan, whether such collateral was pledged under the original terms of the Eligible Loan or at the time of upsizing, will secure the loan participation on a pro rata basis.  

Eligible Borrowers seeking loans under the Facilities must commit to make reasonable efforts to maintain payroll and retain workers and agree to certain other limitations on use of proceeds. Borrowers must also follow compensation, stock repurchase and dividend restrictions that apply to direct loan programs under the CARES Act. Firms that have borrowed money under the PPP may also borrow funds under the Facilities. Eligible Borrowers under the Facilities may also not participate in the Primary Market Corporate Credit Facility (PMCCF), which is a backstop funding facility to purchase investment grade corporate bonds of eligible issuers.

Under the Facilities, a special purpose vehicle (SPV) established by the Treasury Department will purchase 95% pari passu participation interests in Eligible Loans at par value. Eligible Lenders would retain 5% of each Eligible Loan. Eligible Borrowers will pay an origination fee of 100 basis points of the principal amount of the Eligible Loan, and Eligible Lenders under the Facilities will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The SPV will pay Eligible Lenders 25 basis points of the principal amount of its participation in the Eligible Loan per annum for loan servicing.

Federal Reserve Establishes Paycheck Protection Program Lending Facility

On April 9, the Federal Reserve established the Paycheck Protection Program Lending Facility (PPPLF) pursuant to its emergency powers under Section 13(3) of the Federal Reserve Act.  The PPPLF is intended to facilitate lending by eligible borrowers to small businesses under the SBA’s Paycheck Protection Program (PPP) established pursuant to the CARES Act. Under the PPPLF, eligible borrowers, defined as depository institutions that originate PPP loans, may borrow from the Federal Reserve Bank in whose district the eligible borrower is located on a non-recourse basis taking PPP loans as collateral under the following terms and conditions:

  • Extensions of credit will be made at a rate of 35 basis points.
  • There are no fees associated with participation in the PPPLF.
  • PPP loans pledged as collateral to secure extensions of credit will be valued at the principal amount of the PPP loan.
  • The principal amount of an extension of credit will be equal to the principal amount of the PPP loan pledged as collateral to secure the extension of credit.
  • The maturity date of an extension of credit will equal the maturity date of the PPP loan pledged to secure the extension of credit. This maturity date will be accelerated (1) if the underlying PPP loan goes into default and the eligible borrower sells the PPP loan to the SBA to realize on the SBA guarantee or (2) to the extent of any loan forgiveness reimbursement received by the eligible borrower from the SBA.

Federal Reserve Banks will begin making PPPLF loans to eligible depository institutions during the week of April 13, 2020.  No new extensions of credit will be made under the PPPLF after September 30, 2020, unless the Federal Reserve and Treasury Department extend the facility.

The Federal Reserve also released frequently asked questions (FAQs) about the PPPLF.  Among other topics, the FAQs address the documentation required to participate in the PPPLF, the ability of institutions that do not have a master account at the Federal Reserve to borrow from the PPPLF through a correspondent bank, the differences between borrowing under the PPPLF and utilizing the Federal Reserve’s Discount Window, initiating an extension of credit from a Federal Reserve Bank, the use of electronic signatures and public disclosure of a loan from the PPPLF.

Federal Banking Agencies Modify Capital Rules to Support the Paycheck Protection Program

On April 9, the Federal Reserve, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) issued an interim final rule (Rule) that modifies their capital rules to encourage small business lending. The Rule neutralizes the regulatory capital effects of a banking organization’s participation in the PPPLF by excluding exposures pledged as collateral to the PPPLF from a banking organization’s total leverage exposure, average total consolidated assets, advanced approaches-total risk-weighted assets and standardized total risk-weighted assets, as applicable. Accordingly, the Rule provides relief with respect to a participating organization’s risk-based and leverage capital ratios, including the community bank leverage ratio. The Rule also clarifies that a zero percent risk weight applies to loans covered by the PPP, consistent with Section 1102 of the CARES Act. The Rule is effective immediately, and public comments on the Rule will be accepted for 30 days after its publication in the Federal Register.

SBA Releases Additional Guidance on PPP Loans

Developments regarding the SBA’s Paycheck Protection Program (PPP) continue to come fast and furious. Since last week’s Roundup, the Treasury Department and the SBA have issued an interim final rule clarifying:

  • the eligibility and application processes for independent contractors and the self-employed applying for PPP loans;
  • that SBA rules precluding a bank from making loans to companies owned by one of its directors do not apply to otherwise eligible businesses owned in whole or part by outside bank directors or those holding a less-than-30% equity interest in the PPP lender, provided that the eligible business follows the same process as any similarly situated customer or account holder and does not receive favoritism;
  • that a business that is otherwise eligible for a PPP loan is not rendered ineligible due to its receipt of legal gaming revenues if the legal gaming revenue of such business did not exceed both $1 million and 50% of total business revenue in 2019; and
  • that a pledge of PPP loans to a Federal Reserve Bank or Federal Home Loan Bank does not require the SBA’s prior written consent or notice to SBA.

The Treasury Department and the SBA have also updated the PPP FAQs several times to clarify terms of the program, including that lenders:

  • may use their own promissory note or the SBA form of note posted on the SBA website;
  • may include in their promissory notes for PPP loans any terms and conditions, including relating to amortization and disclosure, that are not inconsistent with Sections 1102 and 1106 of the CARES Act, the PPP Interim Final Rule and guidance, and SBA Form 2484 (the lender application for the SBA guaranty on the loan);
  • do not need a separate SBA authorization document prior to funding a PPP loan but may fund a PPP loan after executing and submitting the SBA Form 2484;
  • must fund a PPP loan no later than ten calendar days after the loan is approved; and
  • must have collected borrower certifications and reviewed borrowers’ payroll cost calculations and documentation before submitting the loan in the SBA’s E-Tran system. Lenders who did not complete steps in this order do not need to withdraw applications submitted before April 14 but must fulfill their duties on those applications “as soon as practicable and no later than loan closing.”

The Treasury Department and the SBA also posted the non-lender form of application to participate in the PPP.

We will continue to track PPP-related developments and share them with you on a real time basis.

SEC’s Division of Investment Management Releases COVID-19 Response FAQs

On April 14, the staff of the SEC’s Division of Investment Management released responses to frequently asked questions (FAQs) about funds and advisers affected by COVID-19. The staff’s responses to FAQs covered the following topics: (i) how a fund or adviser may contact the Division of Investment Management staff to ask questions or express concerns related to impacts of COVID-19 on its operations or compliance; (ii) regulatory relief provided by the SEC and guidance provided by the Division of Investment Management staff for investment advisers affected by COVID-19; (iii) the staff’s view confirming that an adviser’s reliance on the temporary relief provided in response to COVID-19 will not be a risk factor utilized in determining whether the Office of Compliance Inspections and Examinations commences an examination; (iv) SEC relief and staff assistance provided to investment companies and business development companies (BDCs) affected by COVID-19, including relief from in-person meeting requirements (which also covers approvals for new auditors and advisory contracts) and certain filing, transmittal and delivery obligations; and (v) certain matters specific to closed-end funds.

SEC’s Division of Investment Management Issues Statement Regarding the Importance of Delivering Timely and Material Information to Investment Company Investors

On April 14, the staff of the SEC’s Division of Investment Management issued a statement to emphasize the ongoing importance of updating and delivering required information to investors in a timely manner consistent with investment companies’ disclosure obligations, even during this challenging operational period as a result of investment companies’ shift to remote business operations in light of the COVID-19 outbreak. 

Updating Prospectuses and Financial Statements. The staff reminded investment companies of their obligations under section 10(a)(3) of the Securities Act of 1933 to update the information in their prospectuses, including the required underlying certified financial statements. The staff also encouraged investment companies to consider whether their disclosures, including risk disclosures, should be revised based on how COVID-19-related events may affect the investment company and its investments.

Delivering Information to Fund Investors. As part of its COVID-19 response efforts, the SEC stated that it would not recommend enforcement action if an investment company does not physically deliver to existing investors the current prospectus of the investment company where the prospectus is not able to be timely delivered because of circumstances related to COVID-19, as long as certain conditions are met. With respect to sales of investment company shares to new purchasers, however, the staff stated that investment companies must continue to deliver the fund’s prospectus or summary prospectus in a timely manner, based on the delivery preferences that have been expressed by the investor (e.g., in paper form unless an investor consents to electronic delivery). The staff encouraged investment companies to communicate with investors about their delivery preferences.

The staff concluded its statement by inviting investment companies to engage with the Division of Investment Management to the extent that an investment company is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19.

SEC Adopts Rule Amendments Allowing Business Development Companies and Registered Closed-End Funds to Use Offering Methods that Have Long Been Available to Operating Companies

On April 8, the SEC announced that it adopted amendments harmonizing the disclosure and regulatory framework for BDCs and registered closed-end funds with that of operating companies. The amendments include changes that allow BDCs and closed-end funds to, among other things:

  • Use a short-form registration statement to sell securities “off the shelf”;
  • Qualify as well-known seasoned issuers;
  • Take advantage of final prospectus delivery reforms and increased flexibility in their communications without violating the gun jumping provisions;
  • Make certain changes to registration statements on an immediately-effective basis or on an automatically effective basis set for after filing; and
  • Expand their use of incorporation by reference during the registration process.

In addition to those changes above, the SEC also tailored the disclosure and regulatory framework for BDCs and closed-end funds in light of the amendments. And, although the above represents most of the amendments in the proposing release, the SEC did not adopt the proposed amendments that would have (1) required closed-end funds to promptly report certain events on Form 8-K or (2) mandated that BDCs and closed-end funds report material changes to investment strategy or the value of significant investments.

Similar to how the existing rules have nuances in the way they treat different categories of operating companies, the amendments will treat categories of BDCs and closed-end funds differently based on certain requirements explained in the adopting release. Most of the amendments will become effective on August 1, 2020, but certain exceptions, related to registration fee payments by interval funds and certain exchange-traded products, as set forth in the adopting release, do not become effective until August 1, 2021.

Federal Banking Agencies Defer Appraisals and Evaluations for Real Estate Transactions Affected by COVID-19

On April 14, the Federal Reserve, OCC and FDIC issued an interim final rule that permits insured depository institutions to temporarily defer real estate-related appraisals and evaluations for up to 120 days after closing of certain residential or commercial real estate loan transactions. Transactions involving acquisition, development, and construction of real estate are excluded from the interim final rule. These temporary provisions will expire on December 31, 2020, unless extended by the federal banking agencies. The National Credit Union Administration (NCUA) will consider a similar proposal on Thursday, April 16. The interim final rule is effective immediately. Public comments on the interim final rule will be accepted until 45 days after its publication in the Federal Register.

Also on April 14, the Federal Reserve, OCC and FDIC, together with NCUA and the Consumer Financial Protection Bureau (CFPB) and in consultation with the Conference of State Bank Supervisors, issued a joint statement to address challenges relating to appraisals and evaluations for real estate-related financial transactions affected by COVID-19. The joint statement outlines other flexibilities in industry appraisal standards and in the agencies' appraisal regulations and describes temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during this challenging time.

CFPB Announces Guidance on Remittance Transfers During COVID-19 Pandemic

On April 10, the CFPB issued a policy statement about its supervision and enforcement of the Remittance Transfer Rule (Subpart B of Regulation E) implementing the Electronic Fund Transfer Act (EFTA) during the COVID-19 pandemic. Currently, a temporary exception, which is set to expire on July 21, 2020, allows insured depository institutions to disclose estimated exchange rates and third-party costs of remittance transfers, rather than exact costs. To mitigate challenges of compliance during the pandemic, the CFPB does not intend to cite in an examination or initiate an enforcement action against any insured institution that continues to provide estimated disclosures that would have been allowed under the temporary exception, for remittance transfers between July 21, 2020 and January 1, 2021. The CFPB also expects to finalize two proposed permanent exceptions by May 2020, which would mitigate compliance challenges for insured depository institutions after the temporary exception expires.  

CFPB Paves Way for Consumers to Receive Economic Impact Payments Quicker

Under normal circumstances, the EFTA and its implementing Regulation E prohibit government agencies from requiring any consumer to establish an account for receipt of electronic fund transfers with a particular financial institution as a condition of receipt of a government benefit. However, in an effort to ensure pandemic-relief payments and other economic impact payments authorized in the CARES Act can be received by consumers in as fast, secure, and efficient a manner as possible, and recognizing that the disbursement of funds via a newly-issued prepaid account, rather than by paper check, may be faster, more secure, more convenient, and less expensive for both government agencies and consumers, on April 13, the CFPB issued an interpretive rule that “government benefits” do not include payments from federal, state, or local governments, if those payments are: (1) made to provide assistance to consumers in response to the COVID-19 pandemic or its economic impacts; (2) not part of an already-established government benefit program; (3) made on a one-time or otherwise limited basis; and (4) distributed without a general requirement that consumers apply to the agency to receive funds.

COVID-19’s Impact on the Credit Card Industry

Despite its efforts to stimulate the economy, the CARES Act does not address or provide relief for credit card debt, leaving the credit card industry in a compromised position from COVID-19’s impact. As the situation and regulations evolve, credit card providers should be aware of the changing landscape including guidelines advanced by state and federal regulators, and changes made by many major credit card issuers, to soften the economic blow to consumers. Read the LenderLaw Watch blog post to learn more about these new guidelines and proposed regulations.

SEC Updates Guidance on Delays in Printing and Mailing Proxy Materials Due to COVID-19 Impacts

The staff (Staff) of the SEC’s Division of Corporation Finance has updated its guidance on the conduct of shareholder meetings in light of COVID-19 concerns (March 13, 2020), which was described in Goodwin’s March 13, 2020 client alert. The new and most significant change relates to delays in printing and mailing “full set” paper proxy materials and how companies may either need to delay a shareholder meeting in order to provide shareholders with necessary material information or may be able to use the “notice and access” model for distribution of its proxy materials despite the inability to satisfy all of the timing requirements. Read the client alert for more information about the updated guidance and clarification on the earlier guidance.

Recent Legal Developments in the U.S. Affecting Insurance Coverage for COVID-19 Related Losses

The COVID-19 outbreak’s broad implications on the global economy have resulted in the legal landscape continually changing and adjusting, with insurance being no exception. As the situation evolves, insured parties are faced with evaluating their policies to determine whether or not coverage for COVID-19 exists. Read the client alert to learn more about the legal and legislative developments that insureds may need to consider in order to preserve their right to potential recovery that may be available now, or in the future.

SEC Highlights Challenges Companies Face as They Prepare First Quarter Disclosures

Recent statements by the Chair and the Directors of the Division of Corporation Finance and the Division of Enforcement of the U.S. Securities and Exchange Commission (SEC) highlight the challenges that companies face as they prepare disclosure materials for the quarter ended March 31, 2020 that take account of COVID-19 impacts on their business and their recent and near-term future financial condition and results of operations. For this quarter, the still-developing effects of the COVID-19 pandemic and governmental and private sector responses present a perfect storm of disclosure updating issues, including:

  • forward-looking statements;
  • selective disclosure prohibitions;
  • general disclosure updates;
  • risk factors;
  • ·non-GAAP financial measures;
  • disclosure of known trends;
  • uncertainties, and;
  • forward-looking statement disclaimers.

Read the client alert to learn more about the SEC guidance on these topics, as well as related disclosure topics that companies should consider for their upcoming earnings releases, calls with investors and analysts, and Form 10-Q reports.

Enforcement & Litigation

Court Rules Against Plaintiff Challenging Implementation of Paycheck Protection Program

Two financial institutions have now been sued in separate putative class action lawsuits concerning their implementation of the CARES Act’s Paycheck Protection Program (PPP). Plaintiffs in both lawsuits allege that the financial institutions are unlawfully restricting PPP loans. The first case was filed against Bank of America claiming that the plaintiff was unlawfully excluded from the program because it is only a depository customer without a pre-existing debt relationship with the Bank. The second case, filed against Wells Fargo, similarly alleges that Wells Fargo is only providing access to PPP loans to existing customers with a business checking account that had been active as of February 2020. On April 13, the court in the Bank of America matter denied the named plaintiffs’ request for a temporary restraining order and preliminary injunction in a thoughtful, well-reasoned opinion. Read the LenderLaw Watch blog post to learn more the court’s decision and its potential impact on the Wells Fargo matter.

This week’s Roundup contributors: Josh Burlingham, Alex Callen, Will Lane.