Weekly RoundUp April 29, 2020

Financial Services Weekly Roundup: PPP Borrowers and Lenders Under the Microscope

Editor's Note

In This Issue. The U.S. Securities and Exchange Commission (SEC) proposed a new rule that would establish a revised framework for the fair value determination for purposes of the Investment Company Act of 1940 and have specific requirements for satisfying a fund board’s obligation.  The Small Business Administration (SBA) released new guidance amid the re-launch of the Paycheck Protection Program (PPP); the Board of Governors of the Federal Reserve System (Federal Reserve) took steps to encourage financial institutions to utilize intraday credit from Federal Reserve Banks; and the Consumer Financial Protection Bureau (CFPB) offered a roadmap of best practices for residential mortgage servicers to promote a well-functioning and seamless mortgage transfer process void of consumer harm. 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 Treasury’s announcement that it will conduct a “full audit” of all PPP loans over $2 million before offering loan forgiveness, four areas where future litigation and government actions are likely to result from the COVID-19 crisis and uptick in federal funding, fair lending considerations for banks making PPP loans, recent class action lawsuits claiming that lenders unfairly implemented the PPP and, in each case, how to mitigate the risks associated with these developments. The Knowledge Center also discusses practical steps to reduce cybersecurity risks during the COVID-19 pandemic.

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

Regulatory Developments

SEC Proposes New Rule to Change Regulatory Framework for Fund Boards in Making Good Faith Determinations of Fair Value

On April 21, the SEC voted to propose new Rule 2a-5 (the Proposed Rule) under the Investment Company Act of 1940 (the 1940 Act) that, if adopted, would establish a revised framework governing the role of the board of directors (the board) of each registered investment company and business development company (each, a fund) with respect to the fair value of the fund’s investments. The Proposed Rule would establish specific requirements for satisfying a fund board’s obligation to determine fair value in good faith for purposes of the 1940 Act. Read the client alert for a deep dive into the Proposed Rule including background information, key components and considerations, various circumstances and alternatives that the SEC considered in deciding to issue the Proposed Rule.

SBA Releases New Guidance Amid Re-Launch of Paycheck Protection Program

On April 24, President Trump signed legislation, discussed in last week’s Roundup, providing $484 billion in additional funding to combat the COVID-19 pandemic, including approximately $311 billion to provide additional funding for the PPP, which was re-launched at 10:30 am on Monday, April 27. In connection with the re-launch, the SBA has announced several actions designed to clarify both substantive and procedural elements of the PPP, including:

  • Announcing that it will cap the maximum dollar amount of funding authority that any one institution may receive to 10% of total PPP funding authority ($660 billion), exclusive of the $60 billion set aside for lenders with assets under $50 billion;
  • Issuing guidance to help borrowers and lenders calculate and document the maximum PPP loan amount for which a business may be eligible, noting that “borrowers and lenders may rely on the guidance provided in this document as SBA’s interpretation of the CARES Act and of the Paycheck Protection Program Interim Final Rules” and adding that the “U.S. government will not challenge lender PPP actions that conform to this guidance and to the PPP Interim Final Rules and any subsequent rulemaking in effect at the time.”
  • Updating the PPP’s FAQs to emphasize that companies seeking PPP funding must provide a good-faith certification of their economic need, noting that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, for the basis of its certification”;
  • Releasing an interim final rule clarifying eligibility requirements for certain borrowers and establishing a limited safe harbor with respect to the required borrower certification of its need for PPP funds if the loan is repaid by May 7, 2020;
  • Issuing an interim final rule exercising its authority to address the needs of certain potential borrowers that are seasonal employers;
  • Issuing an interim final rule clarifying that lenders must make a full, one-time disbursement of PPP loan funds within 10 calendar days of the loan being approved (defined as the date on which a PPP loan is assigned an SBA loan number);
  • Clarifying, in the same interim final rule, that lenders must fully disburse the loan and file the yet-to-be-released SBA Form 1502 within 20 calendar days after the loan is approved in order to receive their processing fee; and
  • Announcing (as discussed in more detail below) that it will conduct a “full audit” of all PPP loans over $2 million before offering loan forgiveness.

Immediately upon re-launch, participating lenders began reporting significant difficulties accessing the SBA’s E-Tran system, prompting the SBA to lower the PPP bulk submission threshold from 15,000 to 5,000 loans and to restrict the use of robotic processing automation to enter PPP loan applications. Despite these difficulties, the SBA indicated that, as of 1:00 p.m. on Tuesday, April 28, it had approved more than 475,000 PPP loan applications submitted by more than 5,100 lenders for a total of more than $52 billion since the program has reopened.

Fed Encourages Institutions to Use Intraday Credit from Reserve Banks

On April 23, as part of its response to the spread of the COVID-19 virus, the Federal Reserve announced temporary actions adjusting the manner in which Reserve Banks administer Part II of the Federal Reserve’s Policy on Payment System Risk, so as to encourage institutions to use collateralized and uncollateralized intraday credit from Reserve Banks to facilitate liquidity risk management and support lending. The temporary actions include suspending uncollateralized intraday credit limits (net debit caps) and waiving overdraft fees for institutions that are eligible for the primary credit program, along with permitting a streamlined procedure for secondary credit institutions to request collateralized intraday credit (max caps). The Federal Reserve also suspended the collection of information under the Annual Daylight Overdraft Capital Report for U.S. Branches and Agencies of Foreign Banks (FR 2225) and the Annual Report of Net Debit Cap (FR 2226). These temporary actions are effective from April 24 through September 30, 2020, unless the Federal Reserve communicates otherwise.

CFPB Outlines Mortgage Loan Transfer Process to Prevent Consumer Harm

On April 24, the CFPB released a Compliance Bulletin and Policy Guidance offering a roadmap of best practices for residential mortgage servicers to promote a well-functioning and seamless mortgage transfer process void of consumer harm. Such practices include:

  • developing and maintaining servicing transfer policies and procedures reasonably designed to transfer all of the information and documents in possession or control of the servicer relating to a transferred mortgage loan;
  • developing and maintaining a servicing transfer plan that includes a communications plan, testing plan (for system conversion), a timeline with key milestones and an escalation plan for potential problems;
  • determining servicing responsibilities for legacy accounts, including tax reporting, credit bureau reporting and other questions that may arise;
  • engaging in quality control work after a transfer of preliminary data to validate that the data on the transferee's system matches the data submitted by the transferor;
  • conducting a post-transfer review or de-brief to determine the effectiveness of the transfer plan and whether any gaps have arisen that require resolution;
  • monitoring consumer complaints and loss mitigation performance metrics, as well as post-transfer monitoring to ensure that transferred data is complete, accurate and functional for the transferee; and
  • identifying any loans in default, active foreclosure and bankruptcy or any forbearance agreements entered in with the borrower, including loss mitigation activity for each loan like status and notes pertaining to the loss mitigation action, as applicable.

The CFPB noted that if a servicing transfer is requested or required by a federal regulator or by the security issuer of “Government Loans,” it intends to consider and be sensitive to challenges resulting from the current pandemic in any supervisory feedback, as long as the servicer can demonstrate good-faith efforts designed to transfer servicing without adverse impact to consumers.

CFPB Issues Statement Emphasizing the Importance of Fair and Equitable Access to Credit for Minority and Women-Owned Businesses

On April 27, the CFPB issued a statement recognizing small businesses, including minority and women-owned businesses, as the cornerstone of the American economy and to remind lenders that anti-discrimination laws, like the federal Equal Credit Opportunity Act, apply to both new and existing customers (including depository customers) seeking loans at financial institutions, including smaller depository institutions, credit unions and community financial institutions offering Small Business Administration (SBA) Paycheck Protection Program loans under the CARES Act. The CFPB offered examples of lending discrimination warning signs, which can include: refusal of an available loan or workout option even though a customer qualifies for it based on advertised requirements; offering credit or workout options with a higher rate or worse terms than those applied for, even when the customer qualifies for a lower rate; discouragement from applying for credit by a lender because of a protected characteristic; denial of credit without reason as to why or how to find out why; or negative comments about any protected status. The CFPB offered reassurance that it is working with the SBA to advance access to credit for minority, women-owned and small businesses, and encouraged small business owners who believe they have been discriminated against based on a protected category to submit a lending discrimination complaint online. The CFPB concluded its announcement with a broad reminder that it takes complaint information into account in its supervisory and enforcement work.

FHFA Confirms that FHLBs May Accept PPP Loans as Collateral for Advances, Subject to Certain Conditions

On April 23, the Federal Housing Finance Agency (FHFA) issued a supervisory letter confirming that that Federal Home Loan Banks (FHLBs) may accept PPP loans as collateral when making advances to their member banks. However, for prudential reasons, the FHFA established a series of conditions under which the FHLBs may accept PPP loans as collateral. The conditions, which are set forth in detail in the supervisory letter, focus on (1) the financial condition and regulatory profile of the member bank seeking to pledge the PPP loans and (2) discounts, caps, and dollar limits on pledges by member banks.

Massachusetts Formalizes Moratorium on Evictions and Foreclosures During the COVID-19 Emergency

On April 20, Massachusetts Governor Baker signed into law Chapter 65 of the Acts of 2020 (Chapter 65), An Act Providing for a Moratorium on Evictions and Foreclosures During the COVID-19 Emergency. Chapter 65, which became effective immediately, provides for the following:

  • establishes a temporary moratorium on foreclosures on a 1-4 family owner-occupied residential property in Massachusetts;
  • provides residential mortgage borrowers that have experienced a financial impact from COVID-19 with a right to obtain a forbearance on their mortgage payments for up to 180 days; and
  • amends the in-person counseling requirements for prospective reverse mortgage loan borrowers in response to the Governor’s declaration of a state of emergency due to COVID-19 on March 10, 2020.

Chapter 65 also includes additional provisions relating to a moratorium on nonessential evictions for residential dwellings and small business premises units. In connection with the passage of Chapter 65, the Massachusetts Division of Banks posted frequently asked questions regarding Chapter 65, as well as industry guidance relating to compliance with the reverse mortgage counseling requirements of Chapter 65.

Contact Tracing Apps in the UK, EU and U.S.: Privacy Implications

Contact tracing has become the new reality as the world fights against the COVID-19 health crisis. On a global scale, countries like South Korea and Singapore have already implemented tracing solutions to track patients, while the UK, Italian, French and German governments have announced their development of contact tracing apps. Now, the U.S. is starting to roll out contact tracing initiatives in an effort to collect information so that health authorities can interrupt transmission chains on a far greater scale than manual contact tracing. Read the client alert for guidance on contact tracing technologies and how companies can embrace these efforts while abiding by privacy and data protection laws.

Enforcement & Litigation

Recent Events Underscore Likelihood of PPP Loan Scrutiny in the U.S.
Recent statements by U.S. government officials indicate greatly increased odds that recipients of PPP loans will face scrutiny and potential government action. Building on the SBA’s recent guidance to borrowers on determining whether or not the loan request is necessary given their current economic state, U.S. Treasury Secretary Steven Mnuchin announced in a CNBC interview that the SBA will conduct a “full audit” of all PPP loans over $2 million before offering loan forgiveness. Read the client alert to learn more.

COVID-19 Litigation and Government Investigations in the U.S.: What We Are Seeing Now, and What the Future Holds

As various industries continue to adapt and change their business models in the wake of the pandemic, litigation and government activity has increased and is likely to accelerate. Goodwin has provided information about matters the firm is currently involved with, as well as other sources, to analyze existing litigation and government investigations and has identified four areas where future litigation and government actions are likely to result from the COVID-19 crisis and uptick in federal funding: Business & Contract Disputes, Consumer and Securities Class Actions, Employment Litigation, and Government Investigations and Enforcement Actions. Read the client alert for guidance on whether or not these areas may potentially apply to your organization and how to minimize risk.

Fair Lending Considerations in a COVID-19 World: U.S. Paycheck Protection Program Issues

The first wave of class actions relating to the COVID-19 pandemic has arrived, and subsequent ones may come as the industry’s responses to the pandemic are undergoing heightened scrutiny. Financial institutions should be aware of these lawsuits and evaluate their filing practices as they prepare to process and fund a new round of PPP applications. Read the client alert to learn more about the increase in fair lending issues in this rapidly and changing business and compliance environment, and how to mitigate these risks in real time.

Trends in U.S. PPP Class Actions

Small businesses grow more frustrated as they are increasingly affected by the COVID-19 shutdown and struggle to secure PPP loans, leading to more litigation and several class action law suits claiming that lenders unfairly implemented the PPP. Read the client alert for Goodwin’s take on the basis of these lawsuits and what categories existing PPP class action lawsuits fall under.

This week’s Roundup contributors: Josh Burlingham, Alex Callen and Andrew Zutz.