Weekly RoundUp
June 17, 2020

Financial Services Weekly Roundup: Treasury and SBA Codify Changes to PPP Flexibility Act

In This Issue. The U.S. Department of the Treasury (Treasury) and the Small Business Administration (SBA) released an interim final rule to reflect changes made by H.R. 7010, the Paycheck Protection Program Flexibility Act, signed into law by the President on June 5. The SBA also published updated application forms for borrowers and lenders for Paycheck Protection Program (PPP) loans made on or after June 5, 2020 and posted new streamlined, borrower-friendly PPP loan forgiveness applications. The Board of Governors of the Federal Reserve System (Federal Reserve) announced that its Main Street Lending Program (MSLP) is open for lender registration and sought comment on a proposal to expand the program to provide access to credit for nonprofit organizations. The Federal Reserve also released a revised term sheet and updated frequently asked questions (FAQ) for the Secondary Market Corporate Credit Facility (SMCCF). On the same day, the Federal Reserve announced that it would resume examination activities for all banks after announcing in March a reduced focus on exam activity in light of the coronavirus pandemic. The Consumer Financial Protection Bureau (CFPB) published updated FAQs regarding its previous statement about financial institutions’ reporting obligations under the Fair Credit Reporting Act during the COVID-19 pandemic. Finally, the U.S. Court of Appeals for the D.C. Circuit overturned the Securities and Exchange Commission’s (SEC) transaction fee pilot, marking a big win for stock exchanges. 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 to fully understand and assess the ramifications of COVID-19, navigate the potential effects of the outbreak on their businesses and evaluate whether and how to safely reopen.

Regulatory Developments

Treasury and SBA Issue Interim Final Rule Codifying PPP Changes Made By the Paycheck Protection Program Flexibility Act

On June 10, the Treasury and the SBA released an interim final rule to codify changes made by H.R. 7010, the Paycheck Protection Program Flexibility Act (Flexibility Act), to the PPP. The interim final rule revises the previous interim final rule posted on April 2, 2020, by changing key provisions, such as the loan maturity, deferral of loan payments, and forgiveness provisions, to conform to the Flexibility Act. The interim final rule also makes conforming amendments to the use of PPP loan proceeds for consistency with amendments made in the Flexibility Act. Specifically, the interim final rule:

  • Extends the end date of the “covered period” to incur costs that measure the amount of indebtedness that qualifies for loan forgiveness from June 30, 2020 to December 31, 2020;
  • Provides for a minimum maturity of five years for PPP loans made on or after June 5, 2020, while providing an option to extend the maturity of PPP loans made before that date from two years to five years upon the mutual agreement of the borrower and lender;
  • Clarifies that, if a borrower submits its forgiveness application within 10 months of the end of the loan forgiveness period, the borrower will not have to make any payments on the loan before the date on which the SBA remits the loan forgiveness amount to the lender;
  • Interprets the provision of the Flexibility Act requiring a borrower to use at least 60% of PPP loan proceeds on payroll in order to be eligible for loan forgiveness as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness (meaning that borrowers using less than 60% of their PPP loan amount for payroll costs during the forgiveness covered period will be eligible for partial loan forgiveness); and
  • Extends the loan forgiveness period from eight weeks to 24 weeks, while permitting borrowers on PPP loans made prior to June 5, 2020 to elect to keep an eight-week forgiveness period.

The SBA also indicated in the interim final rule that it will be issuing revisions to its interim final rules on loan forgiveness and loan review procedures to address amendments the Flexibility Act made to the loan forgiveness requirements and will also be issuing additional guidance on advance purchases of PPP loans, which will include any effect of the amendments made to the loan forgiveness requirements.

In conjunction with the interim final rule, the SBA published updated application forms for borrowers and lenders for PPP loans made on or after June 5, 2020.

For additional information about the changes made to the PPP by the Flexibility Act, read the recent Goodwin client alert.

SBA and Treasury Announce New EZ and Revised Full Forgiveness Applications for the Paycheck Protection Program

On June 17, the SBA and Treasury posted a revised, borrower-friendly PPP loan full forgiveness application implementing the changes made by the Flexibility Act. In addition to revising the full forgiveness application, the SBA also published a new, streamlined EZ forgiveness application that applies to borrowers who:

  • Are self-employed and have no employees;
  • Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
  • Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

The EZ application requires fewer calculations and less documentation for eligible borrowers. Details regarding the applicability of these provisions are available in the instructions to the new EZ application form.

Both applications give borrowers the option of using the original eight-week covered period (if their loan was made before June 5, 2020) or an extended 24-week covered period. According to the SBA, these changes will result in a more efficient process and make it easier for businesses to realize full forgiveness of their PPP loan.

Fed Opens Main Street Lending Program for Lender Registration

On June 15, the Federal Reserve announced that its Main Street Lending Program (MSLP) is open for lender registration. Lenders can find the necessary registration documents on the program site. The Federal Reserve is encouraging lenders to begin making Main Street program loans immediately. Eligible lenders can now register through the program’s lender portal, through which lenders will provide relevant identifying information, and sign and submit required registration forms and agreements. For additional information regarding the MSLP, please visit bostonfed.org/mslp. For information about the recent changes to the MSLP, read the recent Goodwin client alert.

Fed Seeks Comment on Proposal to Expand Main Street Lending Program to Provide Access to Credit for Nonprofit Organizations

On June 15, the Federal Reserve announced that it is seeking comment on a proposal to expand the MSLP to provide access to credit for nonprofit organizations. Loan terms under the proposed Main Street nonprofit loans, including the interest rate, deferral of principal and interest payments, and five-year term, are the same as for Main Street business loans. The minimum loan size is $250,000 while the maximum loan size is $300 million. Principal payments would be fully deferred for the first two years of the loan, and interest payments would be deferred for one year. Two loan options would be offered under the proposal. Borrower eligibility requirements for the proposed nonprofit facilities would be modified from the for-profit facilities to reflect the operational and accounting practices of the nonprofit sector and include:

  • Minimum of 50 and maximum of 15,000 employees;
  • Financial thresholds based on operating performance, liquidity and ability to repay debt;
  • An operational history of at least five years; and
  • A limit on endowments of no more than $3 billion.

Additionally, each organization must be a tax-exempt organization under section 501(c)(3) or 501(c)(19) of the Internal Revenue Code.

The proposal included proposed term sheets for two facilities: the Nonprofit Organization New Loan Facility (NONLF) and the Nonprofit Organization Expanded Loan Facility (NOELF). Comments on the proposed NONLF and NOELF term sheets will be accepted through June 22, 2020, via this feedback form.

Fed Releases Updates to Secondary Market Corporate Credit Facility

On June 15, the Federal Reserve released updates to the Secondary Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers. As detailed in a revised term sheet and updated FAQs, the SMCCF will purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility's minimum rating, maximum maturity and other criteria. This indexing approach is designed to complement the facility's current purchases of exchange-traded funds.

Fed Announces It Will Resume Bank Examination Activities

On June 15, the Federal Reserve announced that it will resume examination activities for all banks, after previously announcing a reduced focus on exam activity in light of the coronavirus pandemic. In March, the Federal Reserve announced that it would temporarily reduce its examination activity and focus on monitoring response efforts during the period of uncertainty caused by the coronavirus pandemic, with the greatest reduction in examination activity for smaller banks with less than $100 billion in total consolidated assets. Since then, banks have had time to implement contingency operating plans and adapt their operations, therefore, the Federal Reserve intends to resume its examination activity. The Federal Reserve anticipates that exams will continue to be conducted offsite until conditions improve and will continue to work with banks to understand any specific issues they may be facing.

CFPB Publishes Updated FAQs on Credit Reporting During the COVID-19 Pandemic

On June 16, the CFPB published updated frequently asked questions regarding its April 1, 2020 statement regarding financial institutions’ reporting obligations under the Fair Credit Reporting Act during the COVID-19 pandemic.

U.S. SEC Chairman Confirms June 30 Deadline and Areas of Focus for Regulation Best Interest and Form CRS

In a public statement issued on June 15, SEC Chairman Clayton confirmed the June 30 deadlines for compliance with Regulation Best Interest (Reg. BI) and the Form CRS requirements, echoing his statements from April that the implementation of Reg. BI and Form CRS requirements is necessary to protect investors, especially in the midst of COVID-19. As broker-dealers and investment advisers are well aware, the SEC adopted Reg. BI and Form CRS last year to enhance the quality and transparency of relationships with retail investors, which the SEC believes is more important than ever in times of market volatility. In the time since adoption, the SEC has continued to engage with broker-dealers, investment advisers, and market participants about these new requirements, including by providing answers to various FAQs. For additional information, read the Goodwin client alert.

U.S. PPP Lenders: Risks of False Claims Act Enforcement Actions

Congress has recently updated the PPP to stabilize the economy in response to the troubling economic impact of the COVID-19 pandemic. As of June 10, 5,456 lenders have participated in the program, issuing loans totaling $511.5 billion. Lenders should be aware that the federal government’s efforts to provide loans to small businesses in the wake of the pandemic may also result in increased litigation risk for lenders. Read the client alert to learn more about PPP for lenders and the potential for False Claims Act enforcement.

Mitigating Risks After Reopening in the U.S.: What to Do When an Employee Who Has Returned to the Workplace Has Symptoms of, Tests Positive For or Has Been Exposed to COVID-19

Although state and local stay-at-home orders are being lifted as the country begins to reopen, the COVID-19 pandemic continues. In light of this, employers need to be prepared to properly and safely respond to employees who are in the workplace or have recently been in the workplace that (i) have COVID-19 symptoms, (ii) test positive for COVID-19, or (iii) have been exposed to COVID-19. Read the client alert for considerations and steps that employers may want to take in conjunction with guidance and directives issued by the Centers for Disease Control and Prevention, the Occupational Safety and Health Administration, the Equal Employment Opportunity Commission and state and local authorities.

Enforcement & Litigation

Big Win for Stock Exchanges as DC Circuit Court Grounds SEC Transaction Fee Pilot

On June 16, the United States Court of Appeals for the D.C. Circuit dealt a blow to the SEC by overturning the agency’s “Transaction Fee Pilot.” The court ruled that the SEC’s adoption of the Pilot “was an unprecedented action that clearly exceeded the SEC’s authority under the Exchange Act.”

Analyzing transaction fees that exchanges charge their members is one of several “market structure” initiatives the SEC has attempted to tackle under the leadership of Chairman Clayton along with Trading and Markets Director Redfearn. At the end of 2018, the SEC adopted a temporary “Pilot Program” (as Rule 610T) that was designed “to gather data” on transaction fees. As the SEC stated at that time, “[t]he pilot is designed to generate data that will help the [SEC] analyze the effects of exchange transaction fee and rebate pricing models on order routing behavior, execution quality, and market quality generally.” The SEC intended to use the data “to facilitate an empirical evaluation of whether the exchange transaction-based fee and rebate structure is operating effectively to further statutory goals and whether there is a need for any potential regulatory action in this area.”

Several exchanges sued the SEC to prevent the Pilot from getting off the ground. The SEC paused the launch of the Pilot while the suit was pending. It now appears that the Pilot will stay grounded.

The court ruled that the SEC acted without the proper authority when it adopted the Pilot. The opinion was quite harsh, referencing that the “Pilot Program emanates from an aimless ‘one-off’ regulation, i.e., a rule that imposes significant, costly, and disparate regulatory requirements on affected parties merely to allow the Commission to collect data to determine whether there might be a problem worthy of regulation.” The opinion also referenced that the SEC “did not identify any problems with existing regulatory requirements or propose rules that might rectify any perceived issues,” instead, the SEC “acted solely to ‘shock the market’ to collect data so that it might ponder the ‘fundamental disagreements’ between parties affected by [SEC] rules and then consider whether to regulate in the future.”

This marks the second big win for the exchanges this month. On June 5, 2020, the same court overturned prior SEC action relating to market data fees the exchanges charge.