Weekly RoundUp April 01, 2020

Financial Services Weekly Roundup: Regulators Continue to Take Action in the Wake of the COVID-19 Outbreak

Editor's Note

In This Issue. Federal and state regulators continued to take action in the wake of the ongoing global outbreak of the coronavirus (COVID-19). As discussed in several Goodwin client alerts, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the economic stimulus legislation designed to provide emergency assistance to individuals, families and businesses affected by the COVID-19 pandemic. In addition, Massachusetts Governor Baker issued an executive order permitting Massachusetts-incorporated public companies to hold shareholder meetings solely by remote communication; the U.S. Department of the Treasury issued guidance on the Small Business Administration’s (SBA) Paycheck Protection Program established by the CARES Act; the Board of Governors of the Federal Reserve System (Federal Reserve) delayed the effective date of its recently finalized revised control framework; the Consumer Financial Protection Bureau (CFPB) provided flexibility in its data collection, supervision and enforcement activities to allow financial companies to focus their resources on working with consumers in need during the COVID-19 pandemic; and federal banking regulators delayed the implementation of the “current expected credit loss,” or CECL, accounting standard for up to two years, allowed early adoption of a new methodology on how to measure counterparty credit risk derivatives contracts, encouraged responsible small dollar lending in response to COVID-19 and offered a 30-day grace period for first quarter call reports. These and other developments are covered in more detail below.

The flow of new orders, rules, laws and guidance impacting the financial services industry is constant, and a challenge to monitor. Goodwin’s Consumer Financial Services team has established the Consumer Financial Services Industry COVID-19 Hub to help. This hub is updated daily and to serve as the first resource you can check every morning to know the latest announcements from federal and state governments, financial institutions, and industry trade groups that affect the mortgage, student lending, credit card, debt collection, credit reporting, personal loan, banking and consumer lending industries.

We also invite you to visit Goodwin’s Coronavirus Knowledge Center, which is 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 what the CARES Act means for banks; how to navigate the litany of new consumer financial services related orders, rules, laws, and guidance from federal and state leaders, agencies and courts; SEC filing relief and updated guidance on COVID-19 related disclosures; and business and individual income tax provisions of the CARES Act.

Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

Massachusetts Governor Baker Issues Executive Order Permitting Public Companies To Hold Shareholder Meetings Solely By Means of Remote Communication

The Massachusetts Business Corporation Act provides that shareholder meetings may be held solely by means of remote communication, unless the corporation is a public company, in which case shareholder meetings must be in person. On March 30, however, Massachusetts Governor Baker issued an executive order (Order) permitting public companies incorporated in Massachusetts to hold annual or special shareholder meetings solely by means of remote communication, until 60 days after the end of the state of emergency. The Order also provides that if a public company has already distributed written notice to its shareholders of an annual or special meeting to be held in a physical location, the company may notify its shareholders that the shareholder meeting will be held solely through remote communication without mailing another notice, provided the company issues a press release, sends email notice where possible and takes other reasonable steps to notify its shareholders of the change. Goodwin, working closely with its clients and the Office of the Governor, was a strong advocate of the Order and greatly appreciates the Governor’s action amid these challenging times.

Treasury Issues Guidance On SBA Paycheck Protection Program

On March 31, the U.S. Department of the Treasury issued guidance on the implementation of the Paycheck Protection Program established by the CARES Act. The CARES Act appropriates $349 billion for “paycheck protection loans” through the U.S. Small Business Administration’s (SBA) 7(a) Loan Guaranty Program. Paycheck protection loans, which will be made by banks, credit unions and other lenders, are designed to fund payroll costs, interest on mortgage payments, rent obligations and utilities, and will be 100% guaranteed by SBA. The guidance consists of a top line overview of the Paycheck Protection Program, an Information Sheet for Lenders, an Information Sheet for Borrowers and a two-page Application Form for Borrowers. Applications will be accepted beginning on April 3, 2020.

Fed Delays Effective Date Of Revised Control Framework

On March 31, the Federal Reserve announced that it will delay the effective date for its revised control framework by six months in order to reduce operational burden and allow institutions to focus on current economic conditions. In January, the Federal Reserve finalized a revised framework that simplifies and increases the transparency of its rules for determining when one company controls another company for purposes of the Bank Holding Company Act and Home Owners' Loan Act. The six-month delay will move the effective date to September 30, 2020 from the original date of April 1, 2020. No changes were made to the framework itself.

CFPB Provides Flexibility During COVID-19 Pandemic

The CFPB announced that it is providing flexibility in its data collection, supervision and enforcement activities to allow financial companies to focus their resources on working with consumers in need during the COVID-19 pandemic. Until further notice, the CFPB will not expect financial institutions to make quarterly HMDA data submissions, except for the fourth quarter. The CFPB will also not expect reporting of information related to credit cards and prepaid accounts under the Truth in Lending Act and Electronic Fund Transfer Act. The CFPB’s collection of data relating to two surveys of financial institutions seeking information on the cost of compliance with a pending rulemaking on Section 1071 of the Dodd-Frank Act, and of financial institutions providing Property Assessed Clean Energy financing to consumers, have been postponed. To the extent that submission of this information is required by law, the CFPB does not intend to cite in an examination, or initiate an enforcement action, against any financial institution for failure to submit this information until further notice. Financial institutions are expected to continue collecting and maintaining records of this information in anticipation of resuming reporting at a later date. The CFPB is also working with financial institutions to reschedule some examinations and considering the impact of COVID-19 when conducting supervisory and enforcement activities.

CFPB Issues Credit Reporting Guidance In Light of the CARES Act

On April 1, the CFPB released a Policy Statement to highlight furnishers’ responsibilities under the CARES Act and to inform consumer reporting agencies and furnishers of the CFPB’s flexible supervisory and enforcement approach during the COVID-19 pandemic regarding compliance with the Fair Credit Reporting Act (FCRA) and Regulation V. The statement encourages lenders to continue providing payment relief to consumers and to continue reporting accurate information related to this relief to credit bureaus, as required by the CARES Act, which instructs furnishers to report as current credit obligations for which furnishers make payment accommodations to consumers affected by COVID-19 who have sought such accommodations from their lenders. The statement also expresses the CFPB’s intention neither to cite in an examination nor to bring an enforcement action against furnishers who provide payment relief and furnish information to consumer reporting agencies that accurately reflects the payment relief measures they are employing, or against furnishers that exceed the deadlines to investigate disputes, as long as the firms make good faith efforts during the pandemic to do so as quickly as possible.

Federal Banking Agencies Postpone CECL Implementation For Up To Two Years

On March 27, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) issued an interim final rule that allows banking organizations to mitigate the effects of the “current expected credit loss,” or CECL, accounting standard in their regulatory capital. Banking organizations that are required under U.S. accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two years. This is in addition to the three-year transition period already in place. Alternatively, banking organizations can follow the capital transition rule issued by the banking agencies in February 2019. The changes will be effective immediately and the agencies will accept comments on the CECL interim final rule for 45 days.

On March 31, the agencies issued a joint statement on the interaction of the interim final rule with the provisions of the CARES Act delaying CECL implementation through December 31, 2020 for purposes of regulatory capital requirements.

Federal Banking Agencies Allow Early Adoption of Standardized Approach for Calculating the Exposure Amount of Derivative Contracts

On March 27, the Federal Reserve, FDIC and OCC issued a notice (Notice) to allow depository institutions and depository institution holding companies to adopt a new methodology on how certain banking organizations are required to measure counterparty credit risk derivatives contracts on a voluntary “best efforts” basis one quarter early, for the reporting period that ended on March 31, 2020. The "standardized approach for measuring counterparty credit risk" rule, also known as SA-CCR, was finalized by the agencies in November 2019, with an effective date of April 1. It reflects improvements made to the derivatives market since the 2007-2008 financial crisis, such as central clearing and margin requirements. By allowing early adoption of the SA-CCR rule, the Notice allows banking organizations to implement the SA-CCR methodology’s more risk-sensitive measurement of the exposure amounts of derivative contracts one quarter earlier than the SA-CCR rule provided in order to improve current market liquidity and smooth disruptions.

Agencies Release Statement Encouraging Responsible Small-Dollar Lending To Consumers and Small Businesses in Response to COVID-19

On March 26, the Federal Reserve, FDIC, OCC, CFPB and National Credit Union Administration (Agencies) issued a joint statement encouraging banks, savings associations and credit unions to offer responsible small-dollar loans to consumers and small businesses to combat the potentially adverse effects of COVID-19 on financial institution customers. The Agencies stressed that while these loans may be offered through a variety of structures, including open-end lines of credit, closed-end installment loans or structured single payment loans, these products must be offered in compliance with all applicable laws and regulations, fair lending, and safe and sound practices. The Agencies are working jointly on future guidance to assist financial institutions in offering responsible small-dollar loans.

Federal Banking Agencies Grant 30-Day Grace Period For First Quarter Call Reports
On March 25, the Federal Financial Institutions Examination Council announced that its member federal banking agencies will not take action against any institution for submitting its March 31, 2020 Reports of Condition and Income (Call Reports) after the applicable official filing date, as long as the report is submitted within 30 days of that date. This action acknowledges that institutions may need the additional time due to disruptions caused by COVID-19. An institution should contact its primary federal regulator if it anticipates a delayed submission.

FDIC To Continue Off-Site Exams Through April 12

On March 27, the FDIC issued a Financial Institutions Letter which, among other things, announced that supervisory examinations and other FDIC activities at financial institutions will be conducted off-site for an additional two weeks through April 12. The letter indicated that the FDIC will evaluate the necessity of continuing off-site work as April 12 approaches. The FDIC also reiterated its previous statement that the FDIC “recognizes that institutions may have operational or staffing challenges associated with the pandemic that limit the ability of management to respond to normal supervisory requests. Institutions faced with these challenges should contact their Examiner-in-Charge or Regional Director to coordinate the timing of any response so it does not inhibit critical operations at the institution at this difficult time.”

Temporary Alternative Procedures For Sending Supervision-Related Mail And Email To The FDIC

On March 26, the FDIC encouraged financial institutions and other parties to use alternative procedures to send the agency official mail related to supervisory matters and to use secure email to send official supervisory correspondence. Any parties that would normally send hardcopy mail for official business purposes related to supervisory matters to an FDIC facility are encouraged to instead send an electronic communication through the FDIC's Secure Email portal or Enterprise File Exchange within FDICconnect. To use the FDIC’s Secure Email portal, a financial institution will need to register at https://securemail.fdic.gov. Information about how to use Secure Email and FAQs about the service can be found here.

Federal Reserve Bank Of New York Issues FAQs On New Commercial Paper Funding Facility

Effective March 25, the Federal Reserve Bank of New York (FRBNY) issued a set of frequently asked questions (FAQs) to address questions pertaining to the Commercial Paper Funding Facility (CPFF). The CPFF, which is meant to ensure the flow of liquidity in the commercial paper market, will become operational in the first half of April 2020. According to the FAQs, the CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle. The FAQs address eligibility of issuers to sell commercial paper and limits thereto, types of commercial paper that will be eligible for purchase, as well as the terms of any purchases.

Fannie Mae And Freddie Mac Announce Mortgage Payment Deferral Option For Eligible Borrowers

On March 25, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac, and collectively with Fannie Mae, the Enterprises) informed mortgage servicers of a new home retention workout option to assist eligible borrowers who have resolved a temporary hardship and resumed their monthly contractual payments, but cannot afford either a full reinstatement or repayment plan to bring the loan current. The Enterprises’ communications (see here for Fannie Mae and here for Freddie Mac) listed the necessary criteria for borrowers seeking payment deferrals, including:

  • the mortgage loan must be a conventional first lien mortgage loan, and may be a fixed-rate, a step-rate or an ARM;
  • as of the date of evaluation, the mortgage loan must be 30- or 60-days delinquent and such delinquency status must have remained unchanged for at least three consecutive months, including the month of the evaluation;
  • the mortgage loan must have been originated at least 12 months prior to the evaluation date for a payment deferral;
  • the mortgage loan must not have received a previous payment deferral;
  • the borrower must not have failed a non-disaster related mortgage loan modification Trial Period Plan within 12 months of being evaluated for eligibility for a payment deferral; and
  • the mortgage loan must not have been modified with a non-disaster related mortgage loan modification within the previous 12 months of being evaluated for eligibility for a payment deferral.

The Enterprises’ communications also include how mortgage servicers can determine payment deferral terms, the processing of payment deferral for various loan types, fees and more. Mortgage servicers may begin evaluating borrowers for payment deferrals on or after July 1, 2020.

ARRC Releases Draft LIBOR Transition Language For Variable-Rate Private Student Loans

On March 27, the Alternative Reference Rates Committee released a consultation on fallback contract language for new variable rate private student loans. This consultation outlines draft language for new contracts that reference USD LIBOR to minimize risks in the event that LIBOR is no longer usable. Feedback should be submitted no later than May 15, 2020.

SEC Staff Grants Temporary No-Action Relief For Affiliate Purchases Of Debt Securities Held By Certain Mutual Funds

On March 26, the staff of the SEC issued a no-action letter providing that it would not recommend enforcement action under Section 17(a) of the Investment Company Act of 1940 (the 1940 Act) against any registered open-end investment company (excluding money market funds and exchange-traded funds) (each, a Fund), if an affiliated person that is not a registered investment company purchases debt securities from the Fund, in general accordance with the requirements of Rule 17a-9 under the 1940 Act (the Relief).; An investment adviser, which would be an affiliated person of a Fund, may wish to purchase debt securities from a Fund, in light of current volatile market conditions, to enhance the Fund’s liquidity and to facilitate shareholder redemptions, but would be unable to do so in reliance on Rule 17a-9. While Rule 17a-9 exempts affiliate purchases of certain securities held by money market funds from the prohibition against affiliated transactions contained in Section 17(a), the Relief temporarily expands the Rule 17a-9 relief to the Funds, subject to a number of conditions set forth in the no-action letter, including:

  1. The purchase price is paid in cash.
  2. The price of the purchased debt security is its fair market value under Section 2(a)(41) of the 1940 Act, provided that this price is not materially different from the fair market value of the security indicated by a reliable third-party pricing service (the Purchase Price).
  3. If the purchaser resells the purchase security for a higher price than the Purchase Price paid to the Fund, the purchaser must promptly pay to the Fund the amount by which the subsequent sale price exceeds the purchase price paid to the Fund. If the purchaser is subject to Sections 23A and 23B of the Federal Reserve Act, this condition does not apply to the extent that it would otherwise conflict with (i) applicable banking regulations or (ii) any applicable exemption from such regulations issued by the Board of Governors of the Federal Reserve System.
  4. Within one business day of the purchase of the security, the Fund must publicly post on its website and inform the staff via email to IM‑EmergencyRelief@sec.gov stating the name of the Fund, the name of the purchaser, the security(s) purchased (including a legal identifier if available), the amount purchased, and the Purchase Price paid.

The Relief will remain in effect on a temporary basis in response to the national emergency concerning the COVID-19 outbreak and will terminate upon notice from the SEC staff. The Relief follows a March 19, 2020 no-action letter relaxing the conditions of Rule 17a-9 under the 1940 Act for bank purchases of securities from affiliated money market funds discussed in last week’s Roundup available here.

SEC Issues Compliance And Disclosure Interpretations Regarding Relief For Late Filings Due to COVID-19

On March 31, the staff of the SEC Division of Corporation Finance published two new Compliance and Disclosure Interpretations (C&DIs) in the section for Exchange Act Rules to provide guidance on application of the SEC’s recent order providing relief for companies and other persons unable to make certain filings on a timely basis due to the impacts of COVID-19. The C&DIs clarify the relationship between the SEC order and Rule 12b-25 for companies unable to make specified filings on or before the applicable due date. According to the C&DIs, if a company expects to be unable to file a report on a timely basis due to the impacts of COVID-19 and is eligible for the relief provided by the SEC COVID-19 order, the company should furnish a Form 8-K (or Form 6-K, if applicable) containing the required statements and comply with the other conditions of the SEC COVID-19 Order, rather than filing a Form 12b-25 (assuming the conditions of Rule 12b-25 would be satisfied) unless the company is certain that it can file the report within the time period provided by Rule 12b-25.

The CARES Act: What Banks Need To Know

On March 27th, President Trump signed the “Coronavirus Aid Relief and Economic Security Act” or “CARES Act” following approval from the U.S. Senate, discussed in a previous Goodwin client alert, and the U.S. House of Representatives, which makes $349 billion in “paycheck protection loans” through the U.S. Small Business Administration’s 7(a) Loan Guaranty Program and $10 billion in economic injury disaster loan grants available to small businesses.

Recognizing the critical role that banks and other financial institutions play in providing capital and liquidity to American businesses and consumers, the CARES Act provides for the following:

  • Expanded SBA lending through the Paycheck Protection Program, with banks as a primary delivery channel;
  • Temporary relief from troubled debt restructurings;
  • Delay in compliance with the current expected credit losses methodology for estimating allowances for credit losses;
  • Temporary reduction of the Community Bank Leverage Ratio;
  • Revival of the Bank Debt Guarantee Program;
  • Removal of limits on national bank lending to nonbank financial firms; and
  • Support for liquidity programs established by the Treasury Department and the Federal Reserve, with banks as potential lenders and servicers under these programs

For additional information, read the client alert issued by Goodwin’s Banking practice.

SEC Extends COVID-19 Relief For Filing And Proxy Statement Requirements And Issues Updated Disclosure Guidance

On March 25, the SEC announced that it has issued an order that extends the filing periods covered by its earlier order providing conditional relief for certain filing obligations and obligations to furnish proxy and information statements for public companies and other persons. The new order covers the period starting March 1 and ending July 1, subject to conditions similar to those required by the earlier order described in a Goodwin client alert. The order restates the earlier guidance that a company relying on the order would not need to file a Form 12b-25 so long as the report, schedule or form is filed within the time period prescribed by the order.

The staff of the SEC Division of Corporation Finance also issued CF Disclosure Guidance Topic No. 9, “Coronavirus (COVID-19),” to provide important guidance on its views concerning disclosure considerations in light of the COVID-19 crisis. The SEC announcement also confirms the SEC’s earlier statement concerning the impact of reliance upon the order for purposes of eligibility to use Forms S-3, S-8 and F-3, the current public information requirement of Rule 144(c), and reliance on Rule 12b-25. The SEC may extend the time period for the relief provided by the order as necessary. Read the client alert to learn more about conditional relief, public company disclosure guidance and the impact on SEC form eligibility and related matters.

Guidance On Potential Eligibility Of “Friendly Professional Corporations” For SBA Loans Under The CARES Act

On March 27, President Trump signed the CARES Act, which will make available to small businesses $349 billion in “paycheck protection loans” and $10 billion in “economic injury disaster loans” through the U.S. Small Business Administration (SBA). In order to qualify as a “small business concern” and be eligible for these loans, however, a business must meet certain existing SBA requirements. Read the client alert for guidance on the potential eligibility under the CARES Act.

Enforcement & Litigation

COVID-19 And Consumer Financial Services: Navigating New U.S. And State Orders, Rules, Laws, Guidance, And Pleas

Amidst a slew of new orders, rules, laws, guidance and requests from federal and state leaders, agencies, and courts, it is crucial that financial institutions stay abreast of COVID-19-related issues as they develop and consider the potential risks of failing to comply to both aspirational and mandatory requirements. While some rules and guidance may not necessarily apply to all businesses, their existence paves the way for potential private litigation or state or federal enforcement actions if they are not followed, making it important for participants to be mindful of the consumer financial laws at hand. For additional information, read the client alert issued by Goodwin’s Consumer Financial Services practice.

COVID-19 Effects On NY Court Closures, Filings, And Statutes of Limitations

In response to the continuing outbreak of COVID-19 in New York and across the nation, access to courthouses and courts’ availability to accept filings have been limited. Read the client alert to learn more about the impact of COVID-19-related measures on court accessibility, filings, and statutes of limitations according to recent guidance issued by New York Governor Andrew Cuomo, federal courts sitting in New York, including the Southern and Eastern Districts of New York, and the Second Circuit Court of Appeals, and New York state courts, including the Commercial Division, New York County.

SEC Wins Injunctive Relief To Prevent Telegram’s Distribution Of $1.7 Billion Worth Of Cryptocurrency

The United States District Court for the Southern District of New York granted a motion for a preliminary injunction by the United States Securities and Exchange Commission (“SEC”) in Securities and Exchange Commission v. Telegram Group Inc. and TON Issuer Inc., thereby preventing the distribution to purchasers of $1.7 billion worth of cryptocurrency. This much-anticipated decision resulted from the court’s conclusion that “Grams,” the cryptocurrency sold by Telegram Group Inc. (“Telegram”), were proven to be a security by the SEC under the test articulated in SEC v. Howey, 328 U.S. 293 (1946), which triggered the requirement for Telegram to file a registration statement under the federal securities laws. Telegram responded to the ruling by filing a notice of interlocutory appeal seeking reversal by the Second Circuit, making the future unclear for Grams purchasers other than the entitlement to a refund of any remaining sales proceeds if the Grams are not distributed by April 20, 2020. Read the client alert to learn more about the key takeaways of this case.

Goodwin News

Building Blocks: A Year in Review in Digital Currency + Blockchain

Goodwin’s Digital Currency + Blockchain Technology practice recently published its year in review, which outlines the significant regulatory and legal developments that took place in 2019 throughout the industry. Read “Building Blocks: Recent U.S. Regulatory and Legal Developments in Digital Currency + Blockchain” to learn more.

Will Coronavirus Lead to More Cyber Attacks?

As the COVID-19 global pandemic continues to disrupt how companies operate with a majority of employees working remotely, cybercriminals are poised to take advantage of this crisis. Brenda R. Sharton, a senior litigation partner at Goodwin and the global Chair of Goodwin’s Chambers And Legal 500 ranked Privacy & Cybersecurity practice, offers tools and tips for employers and employees to keep in mind to help protect themselves as well as confidential company information. Read the article to learn more about how to minimize cybersecurity risks and see Law360's GC Cheat Sheet for additional insights.

This week’s Roundup contributors: Josh Burlingham, Jessica Craig, William McCurdy, Matthew Riffee and Andrew Zutz