On September 30, the Board of Governors of the Federal Reserve System (Federal Reserve) announced it would extend for the fourth quarter of 2020 prohibitions on share repurchases and caps on dividends by large banks having more than $100 billion in total assets. Although the most recent stress tests affirmed large banks were sufficiently capitalized, the Federal Reserve appears to be focused on continuing to preserve banks’ capital levels amid economic uncertainty caused by the pandemic.
On October 1, the Federal Reserve also announced it would extend additional temporary actions it had taken in April until March 31, 2021 that had otherwise been set to expire on September 30 of this year, including 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), and suspending 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).
On September 30, the Federal Reserve invited public comment on a proposal that would update its capital planning and stress testing requirements to be consistent with other Federal Reserve rules that were recently modified. In 2019, the Federal Reserve finalized a framework that sorts large banks into different categories based on their risks, with rules that are tailored to the risks of each category. The proposal updates the Federal Reserve’s capital planning requirements—which help ensure that firms plan for and determine their capital needs under a range of different scenarios—to reflect that new framework. In particular, firms in the lowest risk category are on a two-year stress test cycle and not subject to company-run stress test requirements and the proposal reflects those changes. The proposal also seeks comment on the Federal Reserve’s existing capital planning guidance applicable to all firms. The proposal would not change firms' capital requirements. Comments will be accepted until November 20, 2020.
On September 30, the Federal Reserve posted FAQs on its recently adopted control rule (Control Rule). The FAQs cover the calculation of issuer’s shareholders’ equity under the Control Rule, actions to be taken if an investment previously considered to be noncontrolling triggers one or more of the presumptions of control in the Control Rule, and whether certain contractual provisions would be considered limiting contractual rights under the Control Rule.
On June 5, the Office of the Comptroller of the Currency (OCC) announced the issuance of a compliance guide for small banks to support implementation of its new Community Reinvestment Act (CRA) rule. The compliance guide summarizes the final rule, including: (1) compliance dates; (2) the types of activities that qualify for CRA consideration; (3) the process for confirming CRA qualifying activities; (4) assessment area delineations; and (5) data collection requirements for small banks. Along with the compliance guide, the OCC also issued an initial illustrative list of qualifying activities and a form to request consideration of items to be added to the list of qualifying activities.
On October 1, the OCC released its Fiscal Year 2021 Bank Supervision Operating Plan, which establishes the policy initiatives and supervisory strategies that will be applied to individual national banks, federal savings associations, federal branches, federal agencies and technology service providers. The OCC’s top ten areas of focus in Fiscal Year 2021 include: (1) credit risk management, commercial and residential real estate concentration risk management, allowances for loan and lease losses, and allowances for credit losses; (2) cybersecurity and operational resilience; (3) BSA/AML compliance management; (4) compliance risk management associated with 2020 pandemic-related bank activities; (5) CRA performance; (6) fair lending examinations and risk assessments; (7) the impact of a low-rate environment and preparation for the phaseout of LIBOR; (8) proper oversight of significant third-party relationships; (9) change management over significant operational changes; and (10) payment systems products and services. Updates to the OCC’s supervisory priorities will be communicated through its fall and spring Semiannual Risk Perspectives.
On October 1, the Consumer Financial Protection Bureau (CFPB) published a report assessing the Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure Rule (TRID Rule) and summarizing public comments for modifying, expanding or eliminating the TRID Rule. The report concluded that the TRID Rule:
- Improved consumers’ ability to find key information, compare terms and costs between initial disclosures and final disclosures, compare terms and costs across mortgage offers, and likely improved consumer understanding of forms;
- Changed, for a relatively short amount of time, if at all, potential effects on a range of market outcomes (e.g., interest rates and origination volumes) around the TRID Rule’s effective date; and
- Resulted in sizeable implementation costs for companies and, possibly, increases in ongoing costs.
The CFPB also released a Data Point of 50,000 mortgages, concluding (1) almost 90% of mortgage loans involved at least one revision; (2) 62% received at least one revised Loan Estimate; (3) 49% received at least one corrected Closing Disclosure; (4) the prevalence of changes in loan terms between the first Loan Estimate and the last Closing Disclosure varied greatly across loan terms; (5) APR changes occurred in more than 40% of mortgages; (6) the loan amount and loan-to-value ratio changed in almost 25% of mortgages; and (7) the interest rate changed for 8% of mortgages.
On October 1, the OCC, Federal Reserve and Federal Deposit Insurance Corporation (Agencies) published a final rule (Final Rule) that delays the estimated impact on regulatory capital stemming from the implementation of Accounting Standards Update No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (“CECL”) by bank organizations.
In March, the Agencies issued an interim final rule (Interim Rule) that permitted banking organizations that were required under U.S. GAAP to implement CECL before the end of 2020 to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.
The Final Rule (1) adopts the Interim Rule in full; (2) permits all banking organizations that adopt CECL in 2020 the option to use the new transition in the Interim Rule, even if not required to adopt CECL under U.S. GAAP in 2020; and (3) clarifies that a banking organization is not required to use the transition in quarters in which it would not generate a regulatory capital benefit. The Final Rule applies to community banks that adopt CECL in 2020 under U.S. GAAP, though most community banks are not required to adopt CECL until 2023.
On October 2, the Small Business Administration (SBA) issued a Procedural Notice providing information concerning the required procedures for changes of ownership of an entity that has received a Paycheck Protection Program (PPP) loan. For purposes of the PPP, a “change of ownership” will be considered to have occurred when, in one or more transactions, (1) at least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, including to an affiliate or an existing owner of the entity, (2) the PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), or (3) a PPP borrower is merged with or into another entity. A PPP borrower must notify its PPP lender in writing prior to the closing of any covered change in ownership.
If a change in ownership is structured as a sale or transfer of common stock or other ownership interest or a merger, the PPP lender may approve the change in ownership without prior SBA approval provided that either (1) the transfer or sale is 50% or less of the ownership interest or (2) the PPP borrower submits a PPP loan forgiveness application and escrows funds to pay any unforgiven PPP loan balance. In addition, if a change in ownership is structured as an asset sale, the PPP lender may approve the change in ownership without prior SBA approval provided that (1) the transfer or sale of assets is for 50% or less of the total assets of the PPP borrower and (2) the PPP borrower submits a PPP loan forgiveness application and escrows funds to pay any unforgiven PPP loan balance. In all other cases, the PPP lender must submit a request for SBA approval to the appropriate SBA Loan Servicing Center. SBA approval “will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.”
The SEC has approved an extension of the waiver of certain shareholder approval requirements for the issuance of equity securities by NYSE-listed companies under Section 312.03 of the NYSE Listed Company Manual. The waivers allow NYSE-listed companies to access capital without shareholder approval on terms similar to those available to Nasdaq-listed companies, and are intended to facilitate access to capital that might not be available to listed companies in public equity or credit markets due to market volatility and disruptions resulting from the COVID-19 pandemic. Read the client alert to learn more about the NYSE’s extended relief waivers.
Litigation and Enforcement
On October 5, the CFPB issued a policy statement permitting an entity (not an individual) to file with the CFPB an application for early termination of an active administrative consent order issued under the CFPB’s authority to conduct administrative adjudication proceedings. The application can be filed one year after the entry of the order or six months after all compliance and redress plans required under the order have been fully implemented, whichever is later. The application must demonstrate the entity’s full compliance with the terms and conditions of the consent order and that the entity’s compliance management system for the institutional product line or compliance area for which the order was issued is “satisfactory” or the equivalent of a “2” rating under the Uniform Interagency Consumer Compliance Rating System. An entity is ineligible to apply for early termination of settlements approved and ordered by a court or consent orders that impose a ban on participating in a certain industry or that involve violations of an earlier CFPB order or criminal action related to violations found in the consent order.
An entity’s early termination application should be submitted to the CFPB point of contact identified in the “Notices” section of the consent order, after the entity obtains additional guidance on the form of the request from that contact. The CFPB will review applications, generally within six months of receiving what it deems to be a completed application, and will recommend to the Director, who retains complete discretion and sole authority to terminate consent orders, whether early termination should be granted. The Director’s decision will be posted on the CFPB’s online administrative docket and distributed to the entity.
On September 17, the Eleventh Circuit Court of Appeals (Eleventh Circuit) issued an important decision in Johnson v. NPAS Solutions, LLC regarding incentive payments in class-action settlements in Telephone Consumer Protection Act (TCPA) cases. The Eleventh Circuit held that incentive payments to class representatives that compensate them for their time and rewards them for bringing a lawsuit are prohibited by the precedent of the Supreme Court of the United States, which changes the commonly held principles of modern class-action litigation. Read the LenderLaw Watch blog to learn more about this significant decision.
Goodwin’s latest webinar series “Financial Services Forward Focus,” presented by a cross-discipline team of Goodwin lawyers, explores the topics that are most relevant for the financial services industry in a challenging market. From changing regulatory guidelines to fintech, mergers and acquisitions and corporate social responsibility, Goodwin will take attendees through these topics and provide guidance to help you navigate the current market conditions. Please visit the web page for more information and to access recordings and resources from previous sessions.