Weekly RoundUp July 23, 2020

Financial Services Weekly Roundup: The OCC’s True Lender Test Embraces A Simplified Solution

Editor's Note

In This Issue. The Office of the Comptroller of the Currency (OCC) proposed a rule that would establish that a national bank or federal savings association is the “true lender” of a loan if, as of the date of origination, the bank either is the named lender in the loan agreement or funds the loan; the Consumer Financial Protection Bureau (CFPB) announced new capabilities for its consumer complaint database and updated the Regulation Z dollar thresholds for 2021; and the Board of Governors of the Federal Reserve System (Federal Reserve) extended an interim final rule clarifying that Paycheck Protection Program (PPP) lenders can make PPP loans to businesses owned by their directors and certain shareholders, subject to certain limits, and modified the Main Street Lending Program to provide greater access to credit for nonprofit organizations such as educational institutions, hospitals and social service organizations. 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 to fully understand and assess the ramifications of COVID-19, navigate the potential effects of the outbreak on their businesses and evaluate whether and how to safely reopen.

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

Regulatory Developments

OCC Proposes Rule Simplifying True Lender Test

On July 20, the OCC issued a notice of proposed rulemaking that would establish that a national bank or federal savings association (bank) is the “true lender” of a loan if, as of the date of origination, the bank either is the named lender in the loan agreement or funds the loan.

State agencies and plaintiffs’ counsel have challenged some bank-nonbank lending relationships, including Fintech-bank lending partnerships, on “true lender” grounds, arguing that, under certain circumstances, the nonbank party that purchases from the bank loans or interests in the loans generated by the arrangement should itself be licensed as a lender and, as a result, should only be able to receive interest permitted to a licensee if licensed. The true lender doctrine can result in substantial expenses and uncertainty where a bank sells loans it originates to another party, as true lender determinations involve multifaceted, facts-and-circumstances analyses.

The proposed rule, if adopted, would dramatically simplify the true lender analysis by establishing that the bank is the true lender if, as of the date of origination, it is the named lender in the loan agreement or funds the loan. Consequently, the proposed rule could help reduce Fintech-bank lending partnerships’ susceptibility to enforcement actions or private litigation on true lender grounds, and could similarly help such partnerships thrive. However, the proposed rule has been criticized by consumer advocates and may be subject to legal challenge. Accordingly, until there is judicial precedent supporting the OCC’s position (assuming the proposal is adopted), Fintech companies may be well-advised to continue to take steps to address true lender concerns, even if they are originating loans through a national bank or federal savings association.

Comments on the proposed rule must be received on or before September 3, 2020.

CFPB Announces Enhancements and New Trends View for Its Consumer Complaint Database

On July 17, the CFPB announced enhancements to its Consumer Complaint Database (Database), including a new “trends view” capability. The Database is a collection of complaints regarding consumer financial products and services sent by the CFPB to various companies. The CFPB publishes complaints following a response from the respondent company confirming a commercial relationship with the consumer or after 15 days, whichever is sooner. The new “trends view” will allow users to view complaints over time, refine visualizations based on user selected criteria and aggregate complaints by various categories. Prior to this enhancement, users were, and still are, able to filter complaints by date, product, issue and company name. Since 2011, the CFPB has handled more than 2.3 million consumer complaints with more than 5,000 financial company responses.

CFPB Updates Regulation Z Dollar Thresholds for 2021

On July 17, the CFPB issued a final rule, effective January 1, 2021, updating various dollar amount thresholds in Regulation Z, based on the annual percentage change reflected in the Consumer Price Index that came into effect on June 1, 2020, as published by the Bureau of Labor Statistics.

For open-end consumer credit plans under the Truth in Lending Act (TILA) and the Credit Card Accountability Responsibility and Disclosure Act of 2009 amendments to TILA, there will be no change in 2021 to the threshold that triggers requirements to disclose minimum interest charges ($1.00), the dollar amount for the safe harbor for a first violation penalty fee ($29) or the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee ($40).

For HOEPA loans, the total points and fees threshold for high-cost mortgages will increase from $20,000 to $22,052, and the adjusted points-and-fees dollar trigger for high-cost mortgages will increase from $1,000 to $1,103.

Finally, for qualified mortgages, the maximum thresholds for total points and fees will also increase.

Federal Reserve Extends Rule Permitting Bank Directors and Shareholders to Receive PPP Loans from Their Banks

On July 15, the Federal Reserve extended its April 17, 2020 interim final rule excepting certain PPP loans made by June 30, 2020 from the requirements of the Federal Reserve Act and the corresponding provisions of the Federal Reserve’s Regulation O. The April interim final rule clarified that PPP lenders can make PPP loans to businesses owned by their directors and certain shareholders, subject to certain limits, and without favoritism. The extension will allow those individuals to apply for PPP loans, consistent with SBA's rules and restrictions, through August 8, 2020.

Federal Reserve Modifies Main Street Lending Program to Provide Greater Access to Credit for Nonprofit Organizations

On July 17, the Federal Reserve issued a press release announcing modifications to the Main Street Lending Program. These modifications are intended to provide greater access to credit for nonprofit organizations such as educational institutions, hospitals and social service organizations. The modifications include the two new loan options for nonprofit organizations that were in sound financial condition prior to the COVID-19 pandemic. The two new loan options for nonprofit organizations generally mirror those for Main Street Lending Program for-profit business loans, including the interest rate, principal and interest payment deferral, five-year term, and minimum and maximum loan sizes. Additional modifications include reducing the minimum employment threshold for nonprofits from 50 employees to 10, easing the limit on donation-based funding, and adjusting several financial eligibility criteria to accommodate a wider range of nonprofit operating models. To participate, each nonprofit organization must be a tax-exempt organization as described in section 501(c)(3) or 501(c)(19) of the Internal Revenue Code.

FDIC Seeks Input on Voluntary Certification Program to Promote New Technologies

On July 20, the Federal Deposit Insurance Corporation (FDIC) published a Request for Information seeking the public's input on the potential for a public/private standard-setting partnership and voluntary certification program to promote the efficient and effective adoption of innovative technologies at FDIC-supervised financial institutions. The Request for Information is part of the FDIC’s FDiTech Initiative to promote the adoption of innovative technologies across the financial services sector. The Request for Information asks whether the proposed system might help reduce the regulatory and operational uncertainty that may prevent financial institutions from deploying new technology or entering partnerships with technology firms, including “fintechs.” The FDIC believes that a voluntary certification program could help standardize due diligence practices and reduce associated costs for financial institutions and has the potential to help promote innovation across the banking sector and streamline what can be a costly and duplicative system for both banks and technology firms. Comments must be received within 60 days of publication in the Federal Register.

FINRA (Again) Encourages Members to Report Digital Asset Activities

U.S. broker-dealer activity involving digital assets could implicate various Financial Industry Regulatory Authority (FINRA) rules, in addition to federal and state securities laws and SEC rules. For the third July in a row, FINRA has asked its broker-dealer members to notify the SRO if they engage in digital asset activities. Whether these activities are of interest to or subject to the jurisdiction of U.S. securities regulators (both federal and state) largely depends on if the digital asset is a security. The security status of particular assets often is the subject of great debate and confusion, as we have seen play out in numerous SEC settlements and various litigation over the past several years. Read the Digital Currency + Blockchain Perspectives blog to learn more about FINRA regulations around digital asset activities.

Enforcement & Litigation

Déjà Vu All Over Again: EU High Court Invalidates Privacy Shield For EU–U.S. Data Transfers

On July 16, Europe’s highest court, the Court of Justice of the European Union (CJEU), in the case of Data Protection Commissioner v Facebook Ireland and Maximillian Schrems (Schrems II) invalidated the EU–U.S. Privacy Shield (Privacy Shield). The Court ruled that the Privacy Shield failed to offer adequate protections for EU personal data transferred to the U.S. The ruling is a stunning development for the thousands of companies that certified to the Privacy Shield over the past four years, sowing confusion about how to legally continue these transfers without exposure to significant legal risk, including potentially hefty General Data Protection Regulation (GDPR) fines. Read the client alert to learn more about the CJEU’s decision.

Goodwin News

What’s Next? A Path Forward in Uncertain Times

In light of the recent global pandemic, Goodwin’s interdisciplinary team of lawyers presents various types of financings and investment structures applicable in current market conditions in a new webinar series, “What’s Next? A Path Forward in Uncertain Times.” This multi-part series explores the financing transactions and topics that are most relevant for companies and investors at a time where valuations are uncertain and companies across industries need capital. Visit the website to learn more, register for upcoming webinars and access previous events.

This week’s Roundup contributors: Josh Burlingham, Alex Callen, Jessica Craig, Federica De Santis, Curtis McCluskey and Bill McCurdy.