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  • FinCEN issues FAQs on PPP

    Federal Issues

    On January 12, FinCEN and the SBA issued FAQs on the Paycheck Protection Program (“PPP”), established under the CARES Act, to assist borrowers and lenders in interpreting the CARES act and the PPP Interim Final Rule. Among the issues addressed in the FAQs, FinCEN and the SBA provided guidance regarding whether under the CDD Rule, lenders are required to collect, certify, or verify beneficial ownership information for existing customers, stating that it is not necessary to re-verify “[i]f the PPP loan is being made to an existing customer, and the existing customer and the necessary information was previously verified. Additionally, FinCEN and the SBA addressed the question of whether a lender’s collection of the information required with respect to owners of 20% or greater interest in PPP applicants is sufficient to satisfy a lender’s obligation to collect beneficial ownership information under the Bank Secrecy Act. FinCEN and the SBA stated that for lenders with existing customers the lender does not need to reverify beneficial ownership information for owners that hold ownership interests of at least 20 percent, and with respect to new customers with the same ownership interest, all natural persons will need to provide the same information in order to satisfy BSA requirements. FinCEN also answered more FAQs on its April 2020 FAQs regarding the PPP on Second Draw PPP Loans, on BSA/AML compliances, and on SBA Procedural Notice 5000-835955, the last stating that a “PPP lender may reveal the existence of a SAR to the SBA when requesting a guaranty purchase (without charge-off) from the SBA.” 

    Federal Issues SBA FinCEN Department of Treasury PPP CARES Act Bank Secrecy Act Anti-Money Laundering Act of 2020

  • FinCEN, IRS issue alert on Covid-19 employee retention credit fraud schemes

    Financial Crimes

    On November 22, FinCEN and the IRS issued an alert to financial institutions regarding Covid-19 Employee Retention Credit (ERC)-related fraud schemes. Authorized by the CARES Act, the ERC is a tax credit aimed at incentivizing businesses to retain employees on payroll during the Covid-19 pandemic, through which fraud and scams have been carried out, FinCEN explained. The alert offers insights into typologies linked to ERC fraud and scams, emphasizes specific warning signs to aid financial institutions in detecting and reporting suspicious activities, and reinforces these institutions' obligations to report under the Bank Secrecy Act (BSA).

    According to the alert, “[d]uring the 2023 tax season, the IRS noted various scammers appeared throughout the [U.S.] using the false pretense of being tax credit experts to convince businesses to file for the ERC.” Third-party ERC promoters misled taxpayers about eligibility, aiming to profit from filing ERC claims without verifying qualifications, FinCEN added. As a result, the alert mentioned that victims risk claim denial or repayment, while scammers profit regardless of the claim's outcome, involving both willing and unaware businesses in these schemes. FinCEN added that businesses must meet specific ERC requirements, and those who received PPP loans cannot use the same wages counted in the PPP loan for the ERC application. Despite this, some may file amended tax returns misrepresenting their eligibility for the ERC by falsifying staff wages or claiming their operations were partially or fully suspended during the pandemic. FinCEN listed “red flags” indicative of ERC fraud that financial institutions should be cognizant of, including, among others, (i) a business account that receives multiple ERC check deposits over several days; (ii) small business accounts that receive ERC check deposits disproportionate to their size, employee count, and transaction volume; and (iii) a new account for an established business that only receives ERC deposits, suggesting possible identity theft using the business as a front for fraudulent claims. The alert also reminds financial institutions of their obligation to file suspicious activity reports and to keep a copy of the reports for five years from the date of the filing. 

    Financial Crimes FinCEN PPP Consumer Finance Loans CARES Act Patriot Act Bank Secrecy Act IRS Covid-19

  • SBA clarifies PPP eligibility of payroll costs

    Federal Issues

    On June 13, the SBA added question #72 to its Paycheck Protection Program (PPP) Frequently Asked Questions clarifying whether “the amounts paid by a borrower to a third-party payer for the third-party payer’s employees to operate the borrower considered eligible payroll expenses for the purpose of calculating the maximum loan amount.” Previous guidance released in 2020 (FAQ #10) relayed that “payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation.” However, because FAQ #10 was issued three days after the PPP began accepting applications and there have been conflicting interpretations of the guidance, the SBA administrator determined additional clarification was necessary.

    After reviewing a September 2022 decision issued by the SBA Office of Hearings and Appeals, the administrator published FAQ #72, stating “payroll costs paid by a borrower to a third-party payer for the third-party’s employees to operate the borrower are eligible payroll costs for the purpose of calculating the borrower’s maximum loan amount, as long as the employees were not otherwise counted towards payroll costs on a PPP loan received by the third-party payer.” The administrator further explained that “payroll cost documentation which shows that a borrower paid a third-party payer for the employees of the third-party to operate the borrower will be permitted to support eligible payroll costs for the purpose of calculating the maximum loan amount as long as the employees were not otherwise counted towards payroll costs on another PPP loan, and all other PPP requirements are met, including the submission of payroll documentation that indicates the amount of wages and payroll taxes reported to the IRS by the third-party payer.”

    Federal Issues SBA Covid-19 CARES Act Small Business Lending

  • CFPB issues fall supervisory highlights

    Federal Issues

    On November 15, the CFPB released its fall 2022 Supervisory Highlights, which summarizes its supervisory and enforcement actions between January and June 2022 in the areas of auto servicing, consumer reporting, credit card account management, debt collection, deposits, mortgage origination, mortgage servicing, and payday lending. Highlights of the findings include:

    • Auto Servicing. Bureau examiners identified instances of servicers engaging in unfair, deceptive, or abusive acts or practices connected to add-on product charges, loan modifications, double billing, use of devices that interfered with driving, collection tactics, and payment allocation. For instance, examiners identified occurrences where consumers paid off their loans early, but servicers failed to ensure consumers received refunds for unearned fees related to add-on products.
    • Consumer Reporting. The Bureau found deficiencies in credit reporting companies’ (CRCs) compliance with FCRA dispute investigation requirements and furnishers’ compliance with FCRA and Regulation V accuracy and dispute investigation requirements. Examples include: (i) NCRCs that failed to report the outcome of complaint reviews to the Bureau; (ii) furnishers that failed to send updated information to CRCs following a determination that the information reported was not complete or accurate; and (iii) furnishers’ policies and procedures that contained deficiencies related to the accuracy and integrity of furnished information.
    • Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) conduct reasonable investigations into billing error notices due to human errors and system weaknesses; and (iii) provide explanations to consumers after determining that no billing error occurred or that a different billing error occurred from that asserted. Examiners also identified Regulation Z violations where credit card issuers improperly mixed original factors and acquisition factors when reevaluating accounts subject to a rate increase, and identified deceptive acts or practices related to credit card issuers’ advertising practices.
    • Debt Collection. The Bureau found instances of FDCPA violations where debt collectors engaged in conduct that harassed, oppressed, or abused the person with whom they were communicating. The report findings also discussed instances where debt collectors communicated with a person other than the consumer about the consumer’s debt when the person had a name similar or identical to the consumer, in violation of the FDCPA.
    • Deposits. The Bureau discussed how it conducted prioritized assessments to evaluate how financial institutions handled pandemic relief benefits deposited into consumer accounts. Examiners identified unfairness risks at multiple institutions due to policies and procedures that may have resulted in, among other things, (i) garnishing protected economic impact payments funds in violation of the Consolidated Appropriations Act of 2021; or (ii) failing to apply the appropriate state exemptions to certain consumers’ deposit accounts after receiving garnishment notice.
    • Mortgage Origination. Bureau examiners identified Regulation Z violations and deceptive acts or practices prohibited by the CFPA. An example of this is when the settlement service had been performed and the loan originator knew the actual costs of those service, but entered a cost that was completely unrelated to the actual charges that the loan originator knew had been incurred, resulting in information being entered that was not consistent with the best information reasonably available. The Bureau also found that the waiver language in some loan security agreements was misleading, and that a reasonable consumer could understand the provision to waive their right to bring a class action on any claim in federal court.
    • Mortgage Servicing. Bureau examiners identified instances where servicers engaged in abusive acts or practices by charging sizable fees for phone payments when consumers were unaware of those fees. Examiners also identified unfair acts or practices and Regulation X policy and procedure violations regarding failure to provide consumers with CARES Act forbearances.
    • Payday Lending. Examiners found lenders failed to maintain records of call recordings necessary to demonstrate full compliance with conduct provisions in consent orders generally prohibiting certain misrepresentations.

    Federal Issues CFPB Supervision Examination UDAAP Auto Lending CFPA Consumer Finance Consumer Reporting Credit Report FCRA Regulation V Credit Furnishing Credit Cards Regulation Z Debt Collection FDCPA Mortgages Deposits Prepaid Accounts Covid-19 CARES Act

  • CFPB’s Supervisory Highlights targets student loan servicers

    Federal Issues

    On September 29, the CFPB released a special edition of its Supervisory Highlights focusing on recent examination findings related to practices by student loan servicers and schools that directly lend to students. Highlights of the supervisory findings include:

    • Transcript withholding. The Bureau found several instances where in-house lenders (i.e., where the schools themselves are the lender) are withholding transcripts as a debt collection practice. According to the Bureau, many post-secondary institutions choose to withhold official transcripts from borrowers as an attempt to collect education-related debts. The Supervisory Highlights states the position that the blanket withholding of transcripts to coerce borrowers into making payments is an “abusive” practice under the Consumer Financial Protection Act.
    • Supervision of federal student loan transfers. The Bureau identified certain consumer risks linked to the transfer of nine million borrower account records to different servicers after two student loan servicers ended their contracts with the Department of Education (DOE). The review, which was handled in partnership with the DOE and other state regulators, identified several concerns, such as (i) the information received during the transfer was insufficient to accurately service the loan; (ii) transferee and transferor servicers reported different numbers of total payments that count toward income-driven repayment forgiveness for some borrowers; (iii) information inaccurately stated the borrower’s next due date; (iv) certain accounts were placed into transfer-related forbearances following the transfer, instead of in more advantageous CARES Act forbearances; and (v) multiple servicers experienced significant operational challenges.
    • Payment relief programs. The Bureau found occurrences where federal student loan servicers allegedly engaged in unfair acts or practices when they improperly denied a borrower’s application for loan cancellation through Teacher Loan Forgiveness or Public Service Loan Forgiveness. The Bureau claimed that many servicers “illegally misrepresented borrowers’ eligibility dates and the number of payments the borrower needed to make to qualify for relief,” and “provided misinformation about borrowers’ entitlement to progress toward loan forgiveness during the pandemic payment suspension.” The Bureau said it will continue to monitor servicers’ practices to ensure borrowers receive the relief for which they are entitled, and directed servicers to address consumer harm caused by these actions.

    The Bureau issued a reminder that it will continue to supervise student loan servicers and lenders within its supervisory jurisdiction regardless of institution type. Student loan servicers, originators, and loan holders are advised to review the supervisory findings and take any necessary measures to ensure their operations address these risks.

    Federal Issues CFPB Supervision Examination Student Lending Student Loan Servicer Debt Collection UDAAP CFPA Consumer Finance CARES Act

  • DOJ fines bank in "first-ever" FCA settlement over PPP loan

    Federal Issues

    On September 13, the U.S. Attorney’s Office for the Southern District of Texas announced an agreement with a bank to pay approximately $18,600 to resolve allegations that it violated the False Claims Act (FCA). This “is believed to be the nation’s first settlement with a Paycheck Protection Program (PPP) lender pursuant to the [FCA],” the announcement said. As previously covered by a Buckley Special Alert, in March 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, which provided a host of relief measures for small businesses, including $349 billion for Small Business Administration loan forgiveness, guarantees, and subsidies. According to the announcement, the bank approved and processed a $213,400 PPP loan for a clinic, despite knowing that the sole owner of the clinic was facing criminal charges arising from his practice of prescribing opioids and was therefore ineligible to apply for the PPP loan. The announcement noted that “the bank processed the application anyway and falsely granted the money to [the sole owner].” The bank received a 5 percent processing fee from the government, including $10,670 to which it was not entitled. The owner of the clinic entered a $523,000 settlement in November 2021, resolving allegations that he used false statements on his PPP application and allegedly submitted false claims for the placement of electroacupuncture devices. In 2022, the owner also repaid the PPP loan in full. According to the announcement, the settlement reflects the bank’s “efforts to cooperate with the government’s investigation and provide relevant facts along with its implementation of additional compliance measures.”

    Federal Issues DOJ CARES Act FCA Covid-19 Enforcement

  • WA Superior Court: Insurance commissioner overstepped in banning credit scoring in underwriting

    State Issues

    On August 29, the Washington State Superior Court entered a final order declaring that the Washington Insurance Commissioner exceeded his authority when he issued an emergency rule earlier this year banning the use of credit-based insurance scores in the rating and underwriting of insurance for a three-year period. As previously covered by InfoBytes, several industry groups led by the American Property Casualty Insurance Association (APCIA) sued to stop the rule from taking effect. The rule was intended to prevent discriminatory pricing in private auto, renters, and homeowners insurance in anticipation of the end of the CARES Act, and specifically prohibited insurers from “us[ing] credit history to place insurance coverage with a particular affiliated insurer or insurer within an overall group of affiliated insurance companies.” The rule applied to all new policies effective, and existing policies processed for renewal, on or after June 20, 2021. Industry groups countered that the rule would harm insured consumers in the state who pay less for auto, homeowners, and renters insurance because of the use of credit-based insurance scores to predict risk and set rates.

    According to a press release issued by APCIA, earlier this year the superior court issued a bench decision granting the trade group’s petition for a declaratory judgment and invalidating the rule. The superior court “held that the Commissioner could not rely on the more general rating standard statute that prohibited “excessive, inadequate, or unfairly discriminatory” rates to “eliminate all meaning from the more specific credit history statutes by which the legislature had authorized its use.” Calling the final order “an important victory for Washington consumers, particularly lower risk senior policyholders who were forced to pay more to subsidize higher risk policyholders because the rule eliminated the use of credit,” the trade groups said they were pleased that the court agreed with their position that the Commissioner “exceeded his authority when he acted contrary to the longstanding statute that authorized the use of credit in the property and casualty insurance space.”

    State Issues Courts Insurance Consumer Finance Credit Report Covid-19 Credit Scores Underwriting CARES Act

  • District Court dismisses EFTA claims over prepaid debit card fraud

    Courts

    On August 11, the U.S. District Court for the District of Maryland dismissed a putative class action alleging violations of the EFTA and state privacy and consumer protection laws brought against a national bank on behalf of consumers who were issued prepaid debit cards providing pandemic unemployment benefits. The named plaintiff—a self-employed individual who did not qualify for state unemployment insurance but who was eligible to receive temporary Pandemic Unemployment Assistance (PUA) benefits—alleged that he lost nearly $15,000 when an unauthorized user fraudulently used a prepaid debit card containing PUA funds that were intended for him. The court dismissed the class claims with respect to the EFTA and Regulation E, finding that the Covid-19 pandemic was a “qualified disaster” under applicable law and regulations (i.e. PUA payments were “qualified disaster relief payments”), and that as such, the payments satisfied the CFPB’s official interpretation of Regulation E and were excluded from the definition of a “prepaid account.” The court further explained that while relevant CFPB regulations define an “account” to include a prepaid account, Regulation E excludes “any ‘account that is directly or indirectly established through a third party and loaded only with qualified disaster relief payments.’” Because the prepaid debit card in question was established through a third party and was loaded only with PUA funds, it did not meet the definition of a “prepaid account” and therefore fell outside the EFTA’s definition of a covered account. The court also disagreed with the plaintiff’s contention that PUA payments were authorized by Congress in the CARES Act due to the public health emergency rather than a disaster.

    Courts EFTA Regulation E Prepaid Cards Consumer Finance Class Action Covid-19 CFPB CARES Act Fraud

  • Biden signs bills providing 10-year SOL on PPP and EIDL fraud

    Federal Issues

    On August 5, President Biden signed the Paycheck Protection Program and Bank Fraud Enforcement Harmonization Act (see H.R. 7352) and the COVID-19 Economic Injury Disaster Loan Fraud Statute of Limitations Act (see H.R. 7334). H.R. 7352 provides a 10-year statute of limitations for fraud by borrowers under the SBA’s Paycheck Protection Program, while H.R. 7334 establishes a 10-year statute of limitations for fraud by borrowers under the SBA’s Covid-19 Economic Injury Disaster Loan programs.

    Federal Issues Federal Legislation SBA CARES Act Covid-19 Small Business Lending Biden

  • SBA says larger nonprofits eligible for PPP loan forgiveness

    Federal Issues

    On July 8, the SBA added question #71 to its Paycheck Protection Program (PPP) frequently asked questions clarifying whether 501(c)(3) nonprofit organizations with more than 500 employees are eligible for PPP loan forgiveness. SBA explained that while the CARES Act generally provided that “501(c)(3) nonprofit organizations with a total of 500 or fewer employees were eligible to receive a First Draw PPP Loan,” the American Rescue Plan Act (ARPA) later “increased the size eligibility standard for 501(c)(3) nonprofit organizations for First Draw PPP Loans from a total of 500 or fewer employees to no more than 500 employees per physical location of the 501(c)(3) nonprofit organization.” On March 22, 2021, SBA published an interim final rule (IFR) implementing recent PPP changes that were included in the ARPA enacted on March 11, 2021 (covered by InfoBytes here).

    Exercising her broad authority under the PPP, and in light of litigation earlier this year, on July 8 the SBA administrator announced that “any 501(c)(3) nonprofit organization that received a loan before March 11, 2021, but submits a forgiveness application on or after March 11, 2021, will not be ineligible for forgiveness on the basis that they have more than 500 employees in multiple physical locations” provided it has otherwise complied with all applicable PPP rules.

    Federal Issues SBA CARES Act Covid-19 Small Business Lending

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