Weekly RoundUp
August 12, 2021

SEC Approves Nasdaq Board Diversity Rules

In This Weekly Roundup Issue. The Consumer Financial Protection Bureau (CFPB) released an interpretative rule on Regulation Z timing requirements for Juneteenth; the Small Business Administration (SBA) recently issued a bulletin that identifies the risks faced by banks that engage in the SBA’s guaranteed lending programs; the California Department of Financial Protection and Innovation signed a landmark agreement with a New York-based income share agreements (ISA) servicer in a move that represents a significant first step toward providing greater oversight of the ISA industry; Federal Reserve Board Governor Christopher Waller gave a speech regarding his views on Federal Reserve issuance of a central bank digital currency; and the U.S. Securities and Exchange Commission (SEC) approved Nasdaq’s Board Diversity Rules. These and other developments are discussed in more detail below.

Regulatory Developments

CFPB Issues Interpretive Rule on Regulation Z Timing Requirements for Juneteenth 2021

On August 5, the CFPB released an interpretive rule, clarifying whether the mortgage industry should treat June 19, 2021 as a federal holiday or business day for purposes of compliance with certain time-sensitive borrower protections under Regulation Z, including when borrowers must receive certain disclosures and when borrowers have the right to cancel some mortgages. The existing commentary to Regulation Z explains that, when a federal holiday falls on a Saturday, the day of federal observance is considered a business day for time-sensitive consumer protections. So, Friday, June 18, the day of federal observance for the 2021 Juneteenth holiday, was considered a business day. The new interpretive rule clarifies that, if the relevant time period began on or before June 17, 2021 (when legislation declared June 19 a federal holiday), then June 19 was a business day for purposes of determining whether a consumer has a recission right or the date by which certain disclosures must be obtained, but if the relevant time period began after June 17, 2021, then June 19 was a federal holiday for these purposes. The CFPB also provided reassurance that creditors may provide longer time periods than required to allow recissions or provide required disclosures.

SBA Lending: Risk Management Principles

On August, 5, the Office of the Comptroller of the Currency (OCC) issued a bulletin identifying the risks faced by banks that engage in the SBA’s guaranteed lending programs. Primary risks associated with SBA lending include credit, operational, compliance, liquidity, price and strategic risks.

  • Credit Risks: If an SBA guaranteed loan does not comply with the agency’s standards, the SBA may refuse to provide guarantee payments in the event of default. An SBA guaranty termination may pose risk to a bank, resulting in a loan balance in excess of the bank’s legal lending limit under 12 CFR 32.
  • Operational and Compliance Risks: To ensure that the SBA will honor its guaranty, banks must engage in significant and ongoing documentation and administration efforts to demonstrate compliance with the SBA’s standards.
  • Liquidity, Price and Strategic Risks: Market and price fluctuations may pose risks to SBA lenders, especially those that engage in the secondary market for SBA guaranteed loans. Banks are exposed to strategic risk when engaging in new, expanded, or modified SBA lending activities. Changes in market demand for SBA-guaranteed loan portions could make the activity no longer economical, as the benefits may not justify the risk in the retained unguaranteed portion.

Each bank that engages in the SBA’s guaranteed lending programs should adopt appropriate risk management practices and policies, taking into consideration the bank’s overall business plans, strategies and risk appetite. Those policies and practices should provide for, among other requirements, adequate training of personnel, quality control mechanisms, appropriate methodology for credit loss allowance, stress testing, adequate capital to support overall SBA exposures, and accounting and regulatory compliance.

California DFPI Enters Groundbreaking Consent Order with NY-Based ISA Servicer

On August 5, the California Department of Financial Protection and Innovation (DFPI) entered into a consent order with Meratas, a fintech company, to treat income-share agreements (ISAs) as student loans. It is believed to be the first agreement subjecting ISAs to state regulation. In the press release announcing the agreement, the DFPI signaled that it expects to issue more regulations for ISA providers and servicers.

Federal Reserve Board Governor’s Views on a Central Bank Digital Currency

On August 5, Federal Reserve Board Governor Christopher Waller gave a speech via webcast at the American Enterprise Institute regarding his views on Federal Reserve issuance of a central bank digital currency (CBDC). In recognition of the widespread interest in a federal CBDC, Mr. Waller stated that he does not think the Federal Reserve should issue a CBDC, as a CBDC would not solve any existing problem in the current commercial banking system. Mr. Waller clarified that the introduction of a Federal Reserve issued CBDC would directly connect the federal government with individuals, allowing for unprecedented federal access into individual’s financial transactions, which are currently moderated by private sector commercial banks as intermediaries. Mr. Waller addressed various arguments in favor of a Federal Reserve CBDC, including the arguments that it would: (1) speed up existing payment systems, (2) increase access to banks to those who do not currently use commercial banks, (3) spur payment system innovation or (4) decrease the use of untraceable crypto-assets, noting that he believes the private sector handles and is able to address those concerns adequately.

“After exploring many possible problems that a CBDC could solve, I am left with the conclusion that a CBDC remains a solution in search of a problem.”
Federal Reserve Governor Christopher Waller on central bank digital currency

SEC Approves Nasdaq Board Diversity Rules

On August 6, the SEC approved Nasdaq’s Board Diversity Rules (the Rules). The Rules require Nasdaq-listed companies to have or explain why they do not have at least two diverse directors. Companies are also required to annually disclose statistical information on board diversity using a standardized board diversity matrix.

The Rules apply to nearly all Nasdaq-listed companies, including Smaller Reporting Companies and, with some accommodations for home country requirements, Foreign Private Issuers. The requirement to have or explain the lack of diverse directors will become effective in two steps that will affect proxy statements for annual meetings of calendar year-end companies in 2024 and 2026 (2024 and 2027 for companies listed on The Nasdaq Capital Market). The requirement to disclose board diversity factors using the Nasdaq matrix will apply to proxy statements for annual meetings of calendar year-end companies starting in 2023.

Read the client alert for key takeaways for Nasdaq-listed companies and further background on the issue of board diversity.

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Josh Burlingham