On May 29, the OCC issued a final rule (Rule) affirming long-held understandings and market practices regarding the transferability of interest terms of loans that were valid when made, which were shaken by the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC. In Madden, the court held that a provision of the National Bank Act that permits national banks to charge interest at the rate permissible for the most favored lender in the state where the bank is located does not protect a nonbank assignee of a loan from state usury claims. If the interest rate on the loan exceeds the rate permitted by applicable state law, then a purchaser of a loan made to a borrower in a state where Madden is controlling may not be able to enforce its rights under the loan agreement or may even be required to disgorge amounts paid by the borrower. Under the Rule, which was adopted as proposed, federal regulations would provide that, when a national bank or savings association sells, assigns or otherwise transfers a loan, interest permissible before the transfer continues to be permissible after the transfer. The Rule does not purport to address which person is the “true lender” in such cases.
Multiple state attorneys general commented on the Rule, arguing that the Rule is inconsistent with the OCC’s authority under the National Bank Act. Therefore, the Rule may be subject to legal challenge, either through state governmental action or private litigation.
The Rule becomes effective 60 days after publication in the Federal Register.
On May 27, the staff of the SEC’s Division of Investment Management (Staff) withdrew a Staff letter – more commonly known as the “Boulder Letter” – that took the position that opting into a state control share acquisition statute would be “inconsistent with the requirement in [section 18(i) of the Investment Company Act of 1940 (1940 Act)] that every share of stock issued by an investment company have ‘equal voting rights’ with every other outstanding voting stock.” The Staff also stated that it would not recommend enforcement action against a closed-end fund under section 18(i) of the 1940 Act for opting into and triggering a control share acquisition statute, if the decision to do so by the board of the fund “was taken with reasonable care on a basis consistent with other applicable duties and laws and the duty to the fund and its shareholders generally.”
A closed-end fund’s ability to opt into and trigger a control share acquisition statute may prove valuable in stifling activist campaigns, as such statutes generally provide closed-end funds the right to prevent or restrict certain changes in corporate control by altering or removing voting rights when a shareholder acquires, directly or indirectly, the ownership of, or the power to direct the vote of, shares of stock that are equal to or exceed specified percentages of the fund’s total voting power (i.e., control shares). Once holders of control shares lose their voting rights, such holders cannot vote their control shares unless the fund’s shareholders vote to approve the restoration of voting rights by an affirmative vote of a specific proportion (e.g., two-thirds of the votes entitled to be cast at a special meeting called for such purposes, excluding “all interested parties”).
On May 29, the U.S. House of Representatives, in a bipartisan vote of 417-1, passed H.R. 7010, or the Paycheck Protection Program Flexibility Act of 2020, which would amend the PPP in order to make PPP loans more accessible and usable to the small businesses that need it most. Specifically, H.R. 7010 would:
- Extend the “covered period” to incur costs that measure the amount of indebtedness that qualifies for loan forgiveness from eight weeks to the earlier of 24 weeks or until the end of calendar year 2020;
- Reduce the minimum portion of a PPP loan that is required to be spent on payroll costs for the loan to be eligible for forgiveness from 75% to 60%;
- Extend the deferral period and the minimum period for repayment of PPP loans – the latter would increase to five years from two years;
- Permit the loan forgiveness amount to be determined without regard to a proportional reduction in the number of full-time equivalent employees if such employer is able to document an inability to (a) re-hire an individual who was an employee prior to February 15, 2020 (b) to hire similarly qualified employees on or before December 31, 2020, or (c) return to the same level of business activity prior to February 15, 2020 due to compliance with requirements established or guidance issued by the Secretary of HHS, the Director of the CDC, or OSHA during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID–19; and
- Eliminate the current requirement in Section 2302(a)(3) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that an employer is not eligible to claim the deferral of employment taxes if it has had a PPP loan forgiven.
The U.S. Senate is expected to consider the bill this week.
On May 22, the SBA issued long-awaited interim final rules describing the PPP loan forgiveness process and lenders’ and borrowers’ responsibilities under the PPP. Under the interim final rule on lender responsibilities, in order for a PPP loan to be forgiven, the lender must (1) confirm that it received the borrower certifications in the loan forgiveness application form and the borrower documentation required by the form and (2) confirm the borrower’s calculations on the forgiveness application. According to the SBA, “Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness.” Minimal review of calculations based on a payroll processor’s report would be sufficient to meet this standard. Lenders must report their decisions on forgiveness applications to SBA within 60 days of receiving a complete application and must provide supporting documentation for their decisions. The interim final rule on the loan forgiveness process includes details on several technical questions related to employee status, payroll calculations and forgiveness-eligible non-payroll expenses. The interim final rules became effective upon publication in the Federal Register on May 28, 2020.
On May 27, the Federal Reserve announced additional changes to the Main Street Lending Program (MSLP), while also providing additional guidance through an updated FAQ and posting documents for MSLP to the Federal Reserve Bank of Boston’s website, available here. Read the client alert to access our chart, created by Goodwin lawyers, that highlights these updates as well as describes the effects of any such changes (and non-changes) and guidance on borrowers. For a summary of the changes to MSLP that were made on April 30, please see Goodwin’s May 2 client alert here.
On May 26, the New York Fed released updated frequently asked questions for the Commercial Paper Funding Facility, the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility and TALF 2020. On the same date, the New York Fed also published an updated Form of Issuer and Sponsor Certification for TALF 2020.
On May 21, the SEC staff issued a no-action letter reaffirming its relief from certain 1940 Act provisions to allow investment companies to participate in TALF 2020. The SEC staff noted that on March 23, 2020, the Federal Reserve, with the approval of the Secretary of the U.S. Department of the Treasury (Treasury), established TALF 2020 in response to the impact of the COVID-19 pandemic on global financial markets. To the extent that investment companies registered under the 1940 Act are considering participating in TALF 2020, the SEC staff highlighted two no-action letters that it issued in 2009, one to Franklin Templeton Investments and one to T. Rowe Price Associates, Inc. (the 2009 Letters), relating to TALF established by the Treasury and the Federal Reserve in response to the financial crisis of 2008 (TALF 2008). In the SEC staff’s view, the terms and conditions of TALF 2020 are substantially similar to those of TALF 2008 for purposes of the staff no-action positions taken in the 2009 Letters. Accordingly, the SEC staff reaffirmed its no-action positions in the 2009 Letters as they may relate to registered investment companies’ participation in TALF 2020. The SEC staff further extended its relief in its T. Rowe Price Letter in two ways. First, the no-action position in the T. Rowe Price Letter is now available to third parties. Second, the SEC staff stated that its no-action position with respect to section 57(a) of the 1940 Act extends to business development companies.
On May 21, the Department of Labor (DOL) announced publication of a final rule that provides a new optional safe harbor method for compliance with ERISA’s general standard for delivery of disclosures to retirement plan participants. The final rule allows retirement plan sponsors to satisfy applicable disclosure requirement by either posting disclosures on a website with appropriate participant notification (i.e., the “notice-and-access” method), or emailing disclosures directly to participants. Note, however, that plan participants retain the right to elect to receive paper copies of the disclosures. The final rule only applies to retirement plans, and it does not cover health and welfare plan disclosures. The final rule seeks to make plan disclosures easier to understand and more useful for participants, while reducing plan administrative costs and burdens associated with the distribution of disclosures. The DOL anticipates that the final rule will save plans approximately $3.2 billion over the next decade. The final rule is effective on July 27, 2020.
On May 20, the Federal Reserve, OCC, Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration issued guidance (Guidance) encouraging banks and credit unions to offer responsible small-dollar loans. Small-dollar loans can provide liquidity lifelines to those facing cash-flow imbalances; unexpected expenses, emergencies, or disasters; or disruptions in work or income, such as those arising from the COVID-19 pandemic. The Guidance continues the shift in recent years away from prior policies aimed at curtailing access to predatory small-dollar loans, and it follows on the heels of similar encouragements issued by federal banking agencies during recent months. For information on how fintech companies can assist banks in offering small-dollar loans, please read the client alert issued by Goodwin’s Fintech practice.
The CFPB had previously issued a revised Policy on No-Action Letters, pursuant to which companies that provide consumer financial products and services can secure a template that can serve as the foundation for “No-Action Letter” (NAL) applications. A NAL is a statement that the CFPB will not take supervisory or enforcement action against a company for providing a product or service under certain facts and circumstances, which can promote the development of innovative products and services with the potential to benefit consumers.
Recognizing the potential to improve the loss mitigation application process through digitalization, the CFPB, on May 22, approved the first NAL template to enable mortgage servicers to apply for their own NAL and to implement loss-mitigation efforts for their borrowers through the use of an online version of the Fannie Mae Form 710. Additionally, to promote robust competition in the small-dollar lending space that facilitates access to credit – especially in light of the COVID-19 pandemic, which is causing an increase in temporary cash-flow imbalances, unexpected expenses and income disruptions – the CFPB approved a NAL template for insured depository institutions to apply for a NAL covering their small-dollar credit products.
On June 2, the CFPB released a compliance aid providing COVID-19 pandemic related guidance related to the Remittance Transfer Rule. The compliance aid includes three FAQs that discuss the responsibilities of a remittance transfer provider when the remittance fails to arrive by the disclosed date due to a government mandated shutdown of commercial activity in the relevant intermediary or recipient countries in response to COVID-19. In the compliance aid, the CFPB indicated that the remittance provider’s failure to deliver funds by the disclosed date would not be considered an error under the Remittance Transfer Rule if the remittance provider could not have reasonably anticipated the closure, and provided several examples of the application of this guidance.
On May 20, the Federal Housing Finance Agency (FHFA) released a notice of proposed rulemaking (the 2020 Proposal), which would establish a new regulatory capital framework for Fannie Mae and Freddie Mac (Enterprises). The 2020 Proposal is a re-proposal of the FHFA’s notice of proposed rulemaking published in July 2018 (2018 Proposal). The Enterprises’ statutory capital classifications and regulatory capital requirements were suspended when the Enterprises were placed in conservatorship. The 2018 Proposal sought comments on a new capital framework for the Enterprises based on the conservatorship capital framework that had been developed by the FHFA in 2017. The 2020 Proposal would establish a post-conservatorship regulatory capital framework to ensure that each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory obligations to provide stability and assistance to the secondary mortgage market. The 2020 Proposal maintains the mortgage-risk sensitive capital framework of the 2018 Proposal with “enhancements” related to the quality of capital, quantity of capital, pro-cyclicality of the aggregate capital requirements and other advanced approaches regarding the Enterprises’ ability to assess their own credit, market and operation risks. In addition, each Enterprise would be required to satisfy certain leverage ratios based on its core capital and Tier 1 capital. The FHFA also provided a fact sheet with additional information on the 2020 Proposal. Comments are due 60 days after publication in the Federal Register.
On May 28, the FHFA announced the launch of LIBOR transition websites by each of Fannie Mae and Freddie Mac that provide key resources for lenders and investors as the Enterprises transition away from the London Interbank Offered Rate (LIBOR). These websites contain information about resources and products, including the Enterprises’ jointly published LIBOR Transition Playbook and Frequently Asked Questions (FAQs). The LIBOR Transition Playbook describes key transition milestones and recommended actions for stakeholders to consider as they manage the upcoming transition away from LIBOR. According to the FHFA, the LIBOR Transition Playbook and the accompanying FAQs are designed to help participants plan and adapt business policies, procedures, and processes to support products linked to alternative reference rates, discontinue most LIBOR-indexed products by the end of 2020, and prepare for discontinuing the use of LIBOR as an index.
On May 16, the OCC issued an interim final rule that amends 12 CFR Sections 5 and 7 to clarify that national banks and federal savings associations (FSAs) (collectively, banks) may permit telephonic and electronic participation at all board of directors, shareholder and, as applicable, member meetings. The interim final rule:
- permits banks to provide for telephonic or electronic participation of members and shareholders, as applicable, at both annual and special meetings;
- requires banks that permit telephonic and electronic participation at member or shareholder meetings to have procedures for this remote participation and provides banks with a choice of procedures to follow based on elected state corporate governance procedures, the Delaware General Corporation Law, or the Model Business Corporation Act;
- codifies an OCC interpretation that permits national banks to provide for telephonic or electronic participation at board of directors meetings; and
- updates OCC rules to clarify that all FSAs may provide for telephonic or electronic participation at board of directors meetings.
Concurrent with the issuance of the interim final rule, the OCC published optional model bylaw provisions for FSAs that permit telephonic and electronic participation as provided in the interim final rule. The interim final rule became effective on May 28, 2020. Comments on the interim final rule must be received no later than July 13, 2020.
On May 27, the FDIC extended the public comment period for its proposed rule regarding industrial banks and industrial loan companies (industrial banks) by 30 days to July 1, 2020. On March 17, 2020, the FDIC Board of Directors approved for publication a proposed rule regarding the organization or acquisition of an industrial bank by companies not supervised by the Board of Governors of the Federal Reserve System. The proposed rule would formalize a supervisory framework that will ensure the safe and sound operation of the industrial bank. An extension of the comment period will allow interested parties additional time to analyze the issues and to prepare comments to address the questions posed by the FDIC. For additional information regarding the proposed rule, please read the client alert issued by Goodwin’s Banking practice.
In response to the sudden financial impact of the COVID-19 pandemic on consumers, the CARES Act, mortgage-related guidance from Government Sponsored Entities (GSEs) and emergency regulations issued by the federal government and by state governments have provided temporary or permanent relief for borrowers who are unable to continue making loan payments. While many lenders and servicers have implemented mandated options and created programs for borrower relief, the volume of consumer demand may give rise to concerns about fair lending compliance and whether the monitoring necessary for such compliance can be implemented in a timely and effective manner. Read the client alert to learn more about the fair lending issues that may arise in connection with consumer loan and asset servicing during the pandemic, as well as advice on things to consider in mitigating those risks in real time. This is the second article in a series of client alerts highlighting fair lending issues that may arise in this rapidly changing business and compliance environment.
Enforcement & Litigation
On May 14, the CFPB announced that it had entered into a proposed stipulated judgment and final order with a California-based mortgage lender and several affiliated individuals and companies (collectively, the lender) resolving allegations that the lender had obtained consumer credit reports for an improper purpose. Under the proposed stipulated judgement, based off the allegation that the lender’s president and its co-founder jointly created a scheme to use the mortgage lender’s account to obtain consumer reports for their associated student loan debt relief companies, the mortgage lender would pay $18 million in consumer redress, as well as ban the mortgage lender, its president and co-founder from the debt-relief industry, and would impose $450,001 in civil money penalties. Read the Consumer Finance Enforcement Watch blog to learn more about the CFPB’s complaint.
On May 19, the Federal Trade Commission announced that it had reached a $40.2 million settlement with a payment processing company and one of its executives after the company allegedly failed to monitor and heed warnings that the executive was processing payments and laundering for fraudulent companies. Read the Consumer Finance Enforcement Watch blog to learn more about how the settlement was reached.
On May 19, a coalition of 34 state attorneys general announced a settlement of over $550 million with an auto financing company. The settlement is the result of a five year, multi-state investigation into the company’s subprime lending practices from the allegation that the company used a sophisticated credit scoring model to identify populations of consumers that were predicted to have a high likelihood of default and then placing them into risky auto loans. Read the Consumer Finance Enforcement Watch blog for more information about the settlement.
On May 22, the CFPB and Massachusetts Attorney General’s Office (Mass AG) announced that they had filed a complaint against a credit repair company and the owner of the company in the U.S. District Court for the District of Massachusetts, alleging that they had engaged in deceptive acts or practices under the Consumer Financial Protection Act and the Massachusetts unfair and deceptive acts and practices statute, as well as abusive telemarketing acts and practices under the Telemarketing Sales Rule. Read the Consumer Finance Enforcement Watch blog for more information about the complaint.