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CFPB charges online lender with MLA violations
On December 4, the CFPB announced it filed a complaint in the U.S. District Court for the Northern District of California against a California-based online lender alleging violations of the Military Lending Act (MLA). According to the CFPB, the “action is part of a broader Bureau sweep of investigations of multiple lenders that may be violating the MLA,” which provides protections connected to extensions of consumer credit for active-duty servicemembers and their dependents. The complaint alleges that since October 2016 the lender, among other things, made more than 4,000 single-payment or installment loans to over 1,200 covered borrowers in violation of the MLA. Specifically, the Bureau claims that these violations include (i) extending loans with Military Annual Percentage Rates (MAPR) exceeding the MLA’s 36 percent cap; (ii) requiring borrowers to submit to arbitration in loan agreements; and (iii) failing to make certain required loan disclosures, including a statement of the applicable MAPR, before or at the time of the transaction. The complaint seeks an injunction against the lender that would require the lender to “correct inaccurate information furnished to consumer reporting agencies concerning loans that were void ab initio,” and would prohibit it from collecting on those loans and require it to rescind the credit agreements on those loans. The complaint also seeks damages, redress, disgorgement of ill-gotten gains, and civil money penalties.
FSOC annual report highlights Covid-19 impact on financial stability
On December 3, the Financial Stability Oversight Council (FSOC) released its 2020 annual report. The report reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. The report also highlights the impact of Covid-19 on the economy and the financial system. The report notes that although “policy actions to minimize the effects of the pandemic have been effective at improving market conditions, risks to U.S. financial stability remain elevated compared to last year” and that “the global outlook for economic recovery is uncertain, depending on the severity and the duration of the ongoing pandemic.” Highlights include:
- Nonbank mortgage origination and servicing. FSOC notes that disruptions in mortgage payments due to the pandemic have focused attention on the nonbank sector. In particular, FSOC states that due to a surge in refinancing due to low rates, nonbank servicers have an additional source of liquidity to help sustain operations. However, FSOC cautions that “an increase in forbearance and default rates . . . has the potential to impose significant strains on nonbank servicers.” FSOC recommends federal and state regulators coordinate and share data and information, identify and address potential risks, and strengthen oversight of nonbank companies originating and servicing residential mortgages.
- Alternative Reference Rates. FSOC recommends that the Alternative Reference Rates Committee continue to work to facilitate an orderly transition to alternative reference rates following the anticipated cessation of LIBOR at the end of 2021, and encourages federal and state regulators to “determine whether further guidance or regulatory relief is required to encourage market participants to address legacy LIBOR portfolios.”
- Cybersecurity. FSOC “recommends that federal and state agencies continue to monitor cybersecurity risks and conduct cybersecurity examinations of financial institutions and financial infrastructures to ensure, among other things, robust and comprehensive cybersecurity monitoring, especially in light of new risks posed by the pandemic.” FSOC also supports “efforts to increase the efficiency and effectiveness of cybersecurity examinations across the regulatory authorities.”
- Large bank holding companies. FSOC recommends that financial regulators “continue to monitor and assess the impact of rules on financial institutions and financial markets—including, for example, on market liquidity and capital—and ensure that [bank holding companies] are appropriately monitored based on their size, risk, concentration of activities, and offerings of new products and services.”
Additional topics also addressed include short-term wholesale funding markets, nonfinancial business borrowing, and commercial real estate asset valuations.
OFAC sanctions supporter of Iranian chemical weapons research
On December 3, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against a subordinate to the Iranian Organization of Defensive Innovation and Research and its director for its involvement in Iran’s chemical weapons research. The government made the sanctions designations pursuant to Executive Order 13382, which aims to freeze the assets of proliferators of weapons of mass destruction along with their supporters. As a result, all property and interests in property belonging to, or owned by, the designated persons subject to U.S. jurisdiction are blocked, and U.S. persons are also generally prohibited from engaging in transactions with them. OFAC further warned foreign financial institutions that knowingly facilitating significant transactions or providing significant support to the designated persons may subject them to U.S. sanctions.
Additionally, OFAC updated and issued several Iran-related FAQs.
SEC issues whistleblower awards totaling nearly $3 million
On December 7, the SEC announced whistleblower awards to five individuals totaling nearly $3 million for information provided in three different enforcement actions. According to the first redacted order, the SEC awarded a whistleblower nearly $1.8 million for voluntarily providing original information to the Commission leading to a successful enforcement action. The whistleblower, a company insider, provided detailed information that would have been difficult to detect in the absence of the tip and “provided extraordinary assistance” to Commission staff, which resulted in the return of money to harmed investors.
In the second redacted order, the SEC awarded two whistleblowers a total of approximately $750,000. The first whistleblower received a roughly $500,000 award for providing “credible [and] high quality” information directly to enforcement staff, which prompted the opening of an investigation and resulted in a successful enforcement action. The second whistleblower received approximately $250,000 for providing new information towards the end of the investigation “that resulted in the inclusion of additional allegations in the Covered Action.” The SEC noted that both whistleblowers provided substantial assistance in the investigation, including participating in interviews and providing explanations and clarity on complex issues.
In the third redacted order, two whistleblowers were jointly awarded nearly $400,000 for providing information that prompted the opening of an investigation leading to a successful enforcement action. The SEC stated that the whistleblowers also “provided substantial and continuing assistance to [e]nforcement staff during the course of the investigation.”
The SEC has now paid approximately $731 million to 123 individuals since the inception of the program.
VA proposes partial claim payment program
On December 9, the Department of Veterans Affairs (VA) published a proposed rule in the Federal Register, which would establish a temporary program to help veterans return to making normal loan payments on VA-guaranteed loans after exiting a Coronavirus Aid, Relief, and Economic Security Act (CARES Act) forbearance period, known as “the COVID–19 Veterans Assistance Partial Claim Payment program” (PCP). The proposal would allow the VA to assist a veteran exiting a CARES Act forbearance by purchasing the amount of the veteran’s CARES Act indebtedness needed to bring the loan current, known as a “partial claim payment.” In exchange for the VA’s partial claim payment, the veteran would have to agree to repay the VA the amount of the PCP.
In order to qualify for the PCP, servicers must first evaluate the borrower for loss-mitigation options already available in the VA program. For a loan to qualify for a PCP, among other things, (i) the guaranteed loan must have been either current or less than 30 days past due on March 1, 2020; (ii) the borrower must have received a CARES Act forbearance and missed at least one scheduled monthly payment; and (iii) there remains at least one unpaid monthly payment that the veteran did not make while under a CARES Act forbearance. Moreover, the amount of the partial claim payment cannot exceed 15 percent of the unpaid principal balance of the guaranteed loan on the date the borrower entered into the CARES Act forbearance. The PCP would have an annual interest rate fixed at 1 percent, with an automatic 60-month deferment period while interest accrues, and a total term of 120 months.
The proposal does not include an effective date, but the VA requests comments on how a final rule that is not effective for 30 or 60 days following publication might negatively impact veterans, servicers, and other stakeholders. Additionally, the VA asks whether there would be enough time for industry implementation of the partial claim payment program if the final rule is effective 7 days after publication.
Comments on the proposal are due by January 8, 2021.
SBA addresses Loan Necessity Questionnaire review process
On December 9, the Small Business Administration (SBA), in consultation with the U.S. Treasury Department updated the PPP FAQs to include a question covering the SBA’s Loan Necessity Questionnaire (for-profit here, non-profit here). Specifically, the SBA has sent a Loan Necessity Questionnaire to lenders to be provided to PPP borrowers that received loans of $2 million or more in order to perform a review for eligibility, fraud or abuse, and compliance with loan forgiveness requirements. The FAQs emphasize that being asked to complete a questionnaire “does not mean that SBA is challenging a borrower’s certification that is required by the CARES Act.” Moreover, after a borrower submits its completed questionnaire, the FAQs note that the SBA may request additional information, if necessary, to complete its review. At this point, the SBA states that borrowers will have an opportunity to provide a narrative response explaining the circumstances that provided the basis for their good-faith loan necessity certification. The SBA intends to “take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application.”
Fannie and Freddie issue Covid-19 servicing updates
On December 9, Fannie Mae and Freddie Mac issued Covid-19 servicing updates (Lender Letter 2020-02 here, and Bulletin 2020-46 here), which, among other things, address the extension of the foreclosure moratorium and update the requirements of borrower-requested cancellation of mortgage insurance. Specifically, the servicing updates address the extension of the moratorium on single-family foreclosures and real estate owned (REO) evictions from December 31 until at least January 31, 2021 (previously covered by InfoBytes here). Additionally, the servicing updates include new payment-history requirements when a borrower requests the cancellation of mortgage insurance post-Covid-19-related hardship. In order to request cancellation, the borrower’s payment history must not have a payment 30 days or more past due in the preceding 12 months (and/or 60 or more days past due in the preceding 24 months) except when as a direct result of a Covid-19-related hardship and, following the hardship, a transition to a workout option to cure the delinquency. For mortgages restored to current status under the Covid-19 Payment Deferral, the borrower is required to have made three consecutive payments following the settlement of the deferral to meet the requirements.
Energy firm's U.S. affiliate agrees to pay $135 million to settle FCPA violations with CFTC and DOJ
On December 3, the DOJ announced it had entered into a deferred prosecution agreement with the U.S. affiliate of one of the largest energy trading firms in the world, in which the company agreed to pay a combined $135 million in criminal penalties related to two counts of conspiracy to violate the anti-bribery provisions of the FCPA. The agreement also resolves a parallel investigation in Brazil. According to the DOJ, between 2005 and 2014, the company paid millions of dollars in bribes to public officials in Brazil, Ecuador, and Mexico “‘to obtain improper competitive advantages that resulted in significant illicit profits for the company.’” Specifically, the company and its co-conspirators paid more than $8 million in bribes to at least four officials at Brazil’s state-owned and controlled oil company, Petróleo Brasileiro S.A. – Petrobras (Petrobras), “in exchange for receiving confidential Petrobras pricing and competitor information.” The company concealed the bribery scheme “through the use of intermediaries and a fictitious company that facilitated the payments to offshore accounts and, ultimately, to the Petrobras officials.” In another instance, the company bribed at least five additional Petrobras officials in order to receive confidential pricing information used to win fuel oil contracts, whereby “a consultant acting on behalf of [the company] engaged in back-channel negotiations with a Houston-based Petrobras official,” and “ultimately settl[ed] on the pre-arranged price that allowed for bribes to be paid from [the company] to the Petrobras officials.”
Between 2015 and July 2020, the company also engaged in a second bribery conspiracy by offering and paying government officials in Ecuador and Mexico more than $2 million in exchange for business opportunities connected to the purchase and sale of oil products. The company and its co-conspirators—who knew the funds, at least in part, were going towards the bribes—“entered into sham consulting agreements, set up shell companies, created fake invoices for purported consulting services and used alias email accounts to transfer funds to offshore companies involved in the conspiracy.”
DOJ is crediting $45 million of the total criminal penalty against the amount the company will pay to resolve the Brazilian Ministério Público Federal’s investigation into conduct related to the company’s bribery scheme in Brazil. The company and another entity within its group of energy trading firms have also agreed to continue to cooperate with the DOJ in ongoing criminal investigations and prosecutions, and will make enhancements to their compliance programs and report on their implementation for a three-year period.
In a related matter, the company also agreed to disgorge more than $12.7 million and pay an $83 million civil money penalty related to manipulative and deceptive trading activity not covered by the DOJ’s deferred prosecution agreement. Under the order, the civil money penalty will be recognized and offset up to $67 million by the amount paid to the DOJ as part of the deferred prosecution agreement. The CFTC noted that the company’s “fraudulent and manipulative conduct—including conduct relating to foreign corruption—defrauded its counterparties, harmed other market participants, and undermined the integrity of the U.S. and global physical and derivatives oil markets.” This case is the first foreign corruption action brought by the CFTC.
Georgia executive order requires telework, virtual conduct of business
On December 8, the governor of Georgia issued an executive order requiring businesses considered to be “Critical Infrastructure” to implement measures to mitigate the spread of Covid-19, including telework for all possible workers and delivering intangible services remotely. The order authorizes the Georgia Department of Economic Development to issue further guidance to persons considered to be Critical Infrastructure, which includes the financial services sector.
SBA issues tax guidance for Section 1112 of CARES Act
On December 8, the Small Business Administration (SBA) released a guidance document covering tax issues relating to payments made on behalf of borrowers under Section 1112 of the CARES Act. Specifically, Section 1112 of the CARES Act authorizes the SBA to cover, for a six-month period, the principal, interest, and any associated fees that small businesses owe on 7(a) loans, 504 loans, and microloans. The guidance states, among other things, that lenders are responsible for issuing Form 1099-MISC for 7(a) loans that have not been purchased by SBA, and for 7(a) loans that have been purchased by SBA and are serviced by the lender. Additionally, Microloan Intermediaries are responsible for issuing Form 1099-MISC for the microloans serviced by the intermediaries. However, the SBA is responsible for issuing Form 1099-MISC for (i) 7(a) loans that have been purchased, and are serviced, by SBA; (ii) microloans that are serviced by SBA; and (iii) all 504 loans.