Weekly RoundUp
May 13, 2020

Financial Services Weekly Roundup: SBA Provides Guidance on Borrower’s Good Faith Certification

In This Issue. The Small Business Administration (SBA) provided guidance on a borrower’s good faith certification on the necessity of Paycheck Protection Program (PPP) loan requests, announcing a safe harbor regarding this “necessity” certification for PPP loans of less than $2 million. The Board of Governors of the Federal Reserve System (Federal Reserve) released additional information regarding borrower and collateral eligibility criteria for the Term Asset-Backed Securities Loan Facility (TALF) and outlined the information that it will publicly disclose for TALF and the Paycheck Protection Program Liquidity Facility (PPPLF) on a monthly basis. The Federal Deposit Insurance Corporation (FDIC) proposed a rule that would mitigate the deposit insurance assessment effects of participating in the PPP established by the SBA and the PPPLF and Money Market Mutual Fund Liquidity Facility (MMLF) established by the Federal Reserve. Meanwhile, the Consumer Financial Protection Bureau (CFPB) issued an FAQ answering three questions about the obligations of a creditor under the Equal Credit Opportunity Act’s (ECOA) implementing Regulation B in responding to PPP loan applications and finalized its rule on international remittance transfers. These and other developments are discussed in more detail 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 the appropriation of $100 billion for public health use in the recently enacted U.S. Paycheck Protection Program and Health Care Enhancement Act.

Regulatory Developments

SBA Provides Guidance on Borrower’s Good Faith Certification on the Necessity of PPP Loan Requests, Announcing a Safe Harbor for PPP Loans of Less Than $2 Million

On May 13, the SBA updated its PPP FAQs to provide guidance on the good faith certification concerning the necessity of the loan request required for borrowers requesting PPP loans. The FAQs create a safe harbor for a borrower’s “necessity” certification for PPP loans with an original principal amount of less than $2 million. Specifically, FAQ # 46 provides that any borrower, together with its affiliates (as defined by the interim final rule on affiliates), that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. The FAQ also stated that “borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.”  However, these borrowers will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form.  If the SBA determines in the course of its review that a borrower of $2 million or more lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving such a notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. The SBA also reiterated that its determination concerning the certification regarding the necessity of the loan request will not affect the loan guarantee.

Fed Publishes Updates to the Term Sheet for TALF and Announces That Information Will Be Disclosed Monthly for the TALF and PPPLF

On May 12, the Federal Reserve released additional information, in the form of a revised term sheet and FAQs, regarding borrower and collateral eligibility criteria for TALF. The facility was announced on March 23 as part of an initiative to support the flow of credit to U.S. consumers and businesses. To help ensure that U.S. consumers and businesses remain able to access credit at affordable terms, TALF initially will make up to $100 billion of loans available.

On the same day, the Federal Reserve outlined the information that it will publicly disclose for TALF and the PPPLF on a monthly basis. Specifically, the Federal Reserve will disclose:

  • the name of each participant in both facilities;
  • the amounts borrowed, interest rate charged, and value of pledged collateral; and
  • the overall costs, revenues, and fees for each facility.

The disclosures are similar to those announced in April for the Federal Reserve’s other financing  facilities that utilize funds appropriated by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

FDIC Issues Proposed Rule to Mitigate the Deposit Insurance Assessment Effect of Participation in the PPP, the PPPLF and MMLF

On May 12, the FDIC approved a notice of proposed rulemaking that would mitigate the deposit insurance assessment effects of participating in the PPP established by the SBA, and the PPPLF and MMLF established by the Federal Reserve.

The PPP, PPPLF and MMLF were put in place to provide financing to small businesses and liquidity to small business lenders and the broader credit markets, and to help stabilize the financial system in a time of significant economic strain. PPP loans are fully guaranteed by the SBA, and transactions made with the PPPLF and MMLF are conducted with the Federal Reserve on a non-recourse basis. The proposed rule ensures that banks will not be subject to significantly higher deposit insurance assessments for participating in these programs. The proposed rule determines an effective date by June 30, 2020, and an application date of April 1, 2020, which would ensure that the changes to deposit insurance assessments are applied to assessments starting in the second quarter of 2020 and provide certainty to insured depository institutions regarding the assessment effects of these programs. Comments on the proposed rule will be accepted for seven days after publication in the Federal Register.

CFPB Issues Clarifications to Support Small Businesses Applying for PPP Loans

On May 6, the CFPB issued an FAQ, answering three questions about the obligations of a creditor under the ECOA’s implementing Regulation B in responding to PPP loan applications. In the FAQs, the CFPB affirmed that:

  • A PPP application is not “complete” – and the normal 30-day timeline that a creditor has to notify an applicant of the creditor’s decision does not begin – until the creditor receives either a loan number from the SBA guaranteeing the loan or a response about the availability of funds.
  • A creditor that receives and refuses to grant a PPP loan application without ever submitting the PPP loan to the SBA must still provide an ECOA-compliant adverse action notification to the applicant within 30 days of there being sufficient data for a credit decision to be made.
  • A creditor lacking a loan number from the SBA or a response about the availability of funds is not an acceptable basis for issuing a notice of incompleteness to the applicant or for denying an applicant’s loan for incompleteness. Rather, in order to deny an application for incompleteness, the application must be incomplete regarding information that the applicant can provide.

CFPB Issues Final Remittance Rule

On May 11, the CFPB issued a final rule for international remittance transfers. First, the CFPB narrowed the scope of its definition of a “remittance transfer provider” by increasing the normal course of business safe harbor threshold from 100 to 500 or fewer transfers annually in the current and prior calendar years.

In addition, in order to ease compliance challenges on insured institutions upon the July 21, 2020 expiration of current statutory exceptions regarding the disclosure of estimates to consumers of the exchange rate and covered third-party fees, the CFPB is adopting new, permanent exceptions that permit insured institutions to estimate for a remittance transfer (1) the exchange rate to a particular country if, among other things, the designated recipient will receive funds in the country’s local currency and the insured institution made 1,000 or fewer remittance transfers in the prior calendar year to that country when the designated recipients received funds in the country’s local currency; and (2) covered third-party fees to a designated recipient’s institution if, among other things, the insured institution made 500 or fewer remittance transfers to that designated recipient’s institution in the prior calendar year.

The CFPB further established a transition period for remittance transfers occurring on or after July 21, 2020 and before January 1, 2021, during which time the CFPB does not intend to cite in an examination or initiate an enforcement action over the continued disclosure of estimated exchange rates or third-party fees by any insured institution that will be newly required to disclose exact fees or rates.

Lastly, the CFPB noted its adoption of technical corrections in § 1005.32(c)(4) and existing commentary for §§ 1005.31(b)(1)(viii) and 1005.32(b)(1) that do not alter the meaning of the existing regulatory text or commentary.

Federal Banking Agencies Issue Policy Statement on Allowances for Credit Losses and Guidance on Credit Risk Review Systems

On May 8, the Federal Reserve, FDIC, Office of the Comptroller of the Currency and National Credit Union Administration (Agencies) issued a policy statement on allowances for credit losses (ACLs), which is intended to promote consistency in the interpretation and application of the current expected credit losses (CECL) methodology under the Financial Accounting Standards Board’s credit losses accounting standard, ASC Topic 326, applicable to banks, savings associations, credit unions and their holding companies that file regulatory reports for which the reporting requirements conform to GAAP. The policy statement describes the measurement of expected credit losses using the CECL methodology and the accounting for impairment on available-for-sale debt securities; the design, documentation and validation of expected credit loss estimation processes, including internal controls; the maintenance of ACLs; the responsibilities of management and boards of directors; and examiner reviews of ACLs. The policy statement becomes applicable to a financial institution upon its adoption of ASC Topic 326. Once ASC Topic 326 is effective for all institutions, the Agencies plan to rescind certain prior policy statements on Allowance for Loan and Lease Losses.

The Agencies also issued guidance on credit risk review systems, including management of credit risk; a system of independent, ongoing credit review; and appropriate communication regarding the performance of the institution’s loan portfolio to its management and board of directors. The guidance is intended to be flexible, and it provides a broad set of practices that a financial institution should consider in developing and maintaining credit risk review systems. The guidance replaces Attachment 1 to the Agencies’ 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, which will be rescinded upon publication of the guidance in the Federal Register.

U.S. PPP and Health Care Enhancement Act Adds $100 Billion to the Public Health and Social Services Emergency Fund

On April 24, President Trump signed the U.S. Paycheck Protection Program and Health Care Enhancement Act (PPP Enhancement Act), approving an additional $100 billion for the Public Health and Social Services Emergency Fund (Provider Relief Fund) established under the CARES Act. Read the client alert for our summary of how these funds will be distributed, specifically for eligible healthcare providers and COVID-19 testing.

This week’s Roundup contributors: Josh Burlingham and Alex Callen