CFPB to Revisit Trump-Era Qualified Mortgage Final Rules
On February 23, the CFPB issued a statement indicating that it (1) expects to propose a rule to delay the July 1, 2021 mandatory compliance date for its General QM Final Rule and (2) is considering whether to initiate a rulemaking to revisit the Seasoned QM Final Rule. As previously discussed in the Roundup, on December 10, 2020, the CFPB issued the two final rules relating to the QM definition under the Truth in Lending Act. Both final rules are scheduled to become effective on March 1, 2021, with a mandatory compliance date for the General QM Final Rule of July 1, 2021. The CFPB also stated that, if it elects to revisit the Seasoned QM Final Rule through rulemaking, the CFPB would consider whether any potential final rule amending or revoking the Seasoned QM Final Rule should apply to transactions where an application was received during the period from March 1, 2021 until the effective date of that final rule. In the statement, the CFPB also indicated that the Temporary Government Sponsored Enterprise (GSE) QM loan definition, commonly referred to as the “GSE Patch,” would remain in effect until the new mandatory compliance date, or until the GSEs exited conservatorship prior to that date.
Biden Administration Announces PPP Changes to “Promote Equitable Access to SBA Relief”
On February 22, the Biden Administration announced changes to the PPP to “promote equitable access to SBA relief.” Pursuant to the changes, the SBA will:
- Establish an exclusive 14-day window, starting Wednesday February 24, when only businesses with fewer than 20 employees may apply for PPP loans;
- Reserve $1 billion for PPP loans to sole proprietors, independent contractors and self-employed individuals in low-to-moderate-income areas and revise the loan calculation formula for these applicants;
- Eliminate a rule restricting businesses that are at least 20% owned by an individual who was arrested for or convicted of a felony related to financial assistance fraud in the previous five years or any other felony within the previous year (other than businesses at least 20% owned by individuals who are currently incarcerated) from receiving PPP loans;
- Eliminate a rule disqualifying businesses that are at least 20% owned by an individual who is delinquent on his or her student loans from receiving PPP loans; and
- Clarify that non-citizen small business owners who are lawful U.S. residents may apply for PPP loans by using Individual Taxpayer Identification Numbers.
Federal Reserve Expands Applicability of Regulation EE’s Netting Protections
On February 18, the Federal Reserve issued a final rule amending Regulation EE to include additional entities in the definition of “financial institution” for purposes of Section 402 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) so that they will be covered by FDICIA’s netting protections. These protections provide certainty that bilateral netting contracts among financial institutions and multilateral netting contracts among members of clearing organizations will be enforced, even if a party becomes insolvent. To determine whether an intermediary is a “financial institution,” Regulation EE currently includes an activities-based test focused upon the amount of financial contracts over the previous 15-month period. The rule adds to this test by specifying that the following persons also qualify as financial institutions: (1) swap dealers and major swap participants, security-based swap dealers and major security-based swap participants, certain derivatives clearing organizations and other clearing agencies; (2) financial market utilities designated by the Financial Stability Oversight Council (FSOC) as or likely to become systemically important; (3) qualifying central counterparties; and (4) nonbank financial companies determined by FSOC to be supervised by the Federal Reserve, foreign banks, bridge institutions, Federal Reserve Banks, foreign central banks, and the Bank for International Settlements. The rule also clarifies that, following a consolidation transaction, a survivor meets the activities-based test if, on a single day during the previous 15-month period, the applicable quantitative thresholds would have been met by the aggregate financial contracts of the consolidated persons.
The rule becomes effective 30 days after publication in the Federal Register.
FDIC Finalizes Rule to Address the Temporary Deposit Insurance Assessment Effects of CECL Accounting
On February 16, the FDIC adopted a final rule addressing the temporary deposit insurance assessment effects resulting from certain optional regulatory capital transition provisions relating to the implementation of the current expected credit losses (CECL) methodology. The final rule removes the double counting of a specified portion of the CECL transitional amount or the modified CECL transitional amount, as applicable, in the calculation of certain financial measures that are used to determine assessment rates for large or highly complex insured depository institutions.
SEC Staff Issues No-Action Letter Regarding Exclusion of Shareholder Proposal from Closed-End Fund Proxy Materials
On February 10, the staff of the SEC’s Division of Investment Management issued a no-action letter relating to a registered closed-end fund’s (Clearbridge CEF) exclusion of a proposal submitted by a shareholder from the ClearBridge CEF’s proxy materials for an upcoming annual meeting of shareholders. The SEC staff stated it would not recommend enforcement action if the Clearbridge CEF excluded the proposal from its proxy materials on the basis that the proposal was received by the Clearbridge CEF after the required deadline for submitting shareholder proposals. Rule 14a-8 under the Securities Exchange Act of 1934, which identifies the eligibility requirements and procedures that must be met in order for a shareholder to include its proposal on a closed-end fund’s proxy card, requires a proposal to be received by the fund not less than 120 calendar days before the date of the fund’s proxy statement released to shareholders in connection with the previous year’s annual meeting. The shareholder proposal in this matter, which would have requested the board of directors of the Clearbridge CEF to pursue a self-tender offer of at least 30% of the outstanding common shares, was received by the Clearbridge CEF approximately eleven weeks after the submission deadline, which provided a clear basis for the exclusion.
Given the increase in shareholder activism across the closed-end fund industry, this no-action letter is another helpful example of closed-end funds having success in refusing to present, at a shareholder meeting, proposals or nominees of shareholders that failed to comply with certain procedures under Rule 14a-8 or the funds’ organizational documents.
SEC Updates Regulatory Framework for Good Faith Determinations of Fair Value
On December 3, 2020, the SEC voted to adopt new Rule 2a-5 (Fair Value Rule) under the Investment Company Act of 1940 (1940 Act), which addresses the valuation practices of registered investment companies and business development companies (each, a fund). The Fair Value Rule establishes a specific framework and a standard of baseline practices across funds to determine fair value in good faith for purposes of the 1940 Act. For a detailed summary of the key provisions of the Fair Value Rule, including relevant guidance provided by the SEC and additional details on the SEC’s initial proposal, see our previous Client Alert from April 29, 2020.
Litigation and Enforcement
SEC Sues MBS Credit Rating Agency for Alleged Disclosure and Internal Control Violations
On February 16, the SEC filed a complaint against a New York-based nationally recognized statistical ratings organization (NRSRO) alleging that in 2015 and 2016, the NRSRO’s rating system for commercial mortgage-backed securities (CMBS) had insufficient internal controls and that analysts made undisclosed changes to the model used to determine CMBS ratings. The SEC’s complaint, filed in federal court in Manhattan, alleges that the NRSRO violated disclosure and control provisions of the federal securities laws. The complaint seeks disgorgement and civil penalties as well as to enjoin future violations.
Federal securities laws require credit rating agencies to (1) publicly and accurately describe the procedures and methodologies they use to determine credit ratings and (2) implement effective internal controls which ensure that they follow their methodologies. The SEC’s complaint alleges that the NRSRO failed to both (i) disclose that its analysts made “loan-specific” adjustments to its ratings model that were “overwhelmingly used to ease [the model’s] stresses [and] lower expected losses for many classes of CMBS certificates that [the NRSRO] rated” and (ii) implement an effective internal control structure to govern how the adjustments were employed.
Limiting SPAC-Related Litigation Risk: Disclosure and Process Considerations
2020 marked an incredible surge in the prevalence of Special Purpose Acquisition Company (SPAC) initial public offerings and business combinations (deSPAC transactions). This spectacular rise, and the related profits, has unsurprisingly garnered attention from both the SEC and plaintiffs’ law firms. Most recently, the SEC’s Division of Corporation Finance released guidance (SEC’s SPAC Guidance) concerning disclosure obligations for SPAC IPOs and deSPAC transactions, highlighting many process and disclosure-related issues that plaintiffs’ lawyers typically raise and have focused on in recent SPAC lawsuits. Read the client alert to learn more about this new guidance and why SPAC sponsors, their boards of directors, and the directors and officers of acquisition targets should all be focused on key steps to limit litigation risks and minimize costs associated with these risks.
2020 Year in Review: Consumer Finance
2020 was a year of uncertainty unlike any other in recent memory for the consumer finance industry and beyond. The COVID-19 pandemic had a profound effect on every segment of the industry — from credit reporting to mortgage lending — and every industry stakeholder — from financial services companies to consumers to regulators. Although pandemic relief took center stage, enforcement activity in the U.S. remained steady at both the state and federal level. 2020 even saw a significant uptick in enforcement activity by the CFPB, reversing a years’-long decline of publicly-announced enforcement actions.
To help our clients stay on the cutting edge in this developing legal landscape, we are pleased to present our 2020 Year in Review: Consumer Finance. Here, we use our detailed industry and regulatory knowledge to offer predictions on what the industry might expect in 2021 in the mortgage, fintech, TCPA, credit card, debt collection, payday lending, credit reporting, student lending, auto lending and appellate areas.
Financial Services Enforcement in 2021 Webinar
While it is early in the Biden administration, regulators are signaling that there will be a heightened focus on enforcement of consumer protection regulations. What should financial services companies expect in the year ahead in terms of government regulation and enforcement activity? During this webinar, Goodwin partners Tony Alexis (former CFPB), Bill Harrington (former prosecutor), Sabrina Rose-Smith, and Allison Schoenthal will discuss their observations of these signs and address some of the industry’s pressing questions.
Register for the webinar. One (1) general CLE credit is being offered for CA, NY, NJ, and PA.
2021 ICI Virtual Mutual Funds + Investment Management Conference
Goodwin is a sponsor at the Mutual Funds and Investment Management conference, sponsored by the Investment Company Institute and the Federal Bar Association and being held virtually on March 15, 17 and 19. Don’t miss the chance to learn from experts, earn CPE and CLE credits, and virtually network with peers.
Goodwin Financial Industry Blog Updates
Check out Goodwin’s latest thought leadership on finance industry happenings across our blogs.
FinReg + Policy Watch
- SEC Corporation Finance Staff Urges Specific Company Disclosures for Securities Offerings During Volatile Times
- SEC Enforcement Updates: Interim Director Named; Staff Investigative Powers Bolstered; “Bad Boy” Waivers Less Certain
Consumer Finance Insights
- California’s DFPI Launches Investigation and First Formal Enforcement Action
- FTC Announces $10.9 Million Settlement for Credit Card Laundering Scheme
- FTC Distributes $1.7 Million to Affected Consumers in Alleged Student Loan Debt Relief Scam
- Pennsylvania AG Sues Five Companies Involved in Alleged Mortgage Modification Scam
- FTC Announces $114 Million Settlement with Payday Lenders
This week’s Roundup contributors: Alex Callen and Andrew Zutz.