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NCUA issues additional guidance on working with borrowers impacted by Covid-19
On April 30, the National Credit Union Administration issued guidance describing strategies for working with negatively impacted borrowers while taking measures to limit the negative financial impact of those strategies on the credit union and its ability to serve all members. The guidance describes strategies for providing new funds to borrowers, temporary loan modifications, and permanent loan modifications. It also states that credit unions should maintain policies to manage the risks of workout strategies, including clearly defined eligibility criteria, aggregate program limits, and controls to ensure workout actions are structured appropriately.
PPP loan application agent files suit against lenders for compensation
On April 30, an Illinois financial advising and consulting services business (company) filed a putative class action in the U.S. District Court for the Northern District of Illinois against several financial institutions (defendants) claiming that the defendants owe the business certain fees for assisting Paycheck Protection Program (PPP) loan applicants with applying for PPP loans under the CARES Act. The complaint alleges that the PPP SBA regulations specify that the lender must provide compensation of between one quarter of a percent and one percent of a loan’s value to an agent—which includes loan brokers, applicant representatives, consultants, accountants, and attorneys—for preparing PPP loan applications for small business applicants. Additionally, the company states that the PPP regulations prohibit it from collecting application fees directly from small business applicants that it assists. The company alleges that the defendants, in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, failed to compensate it for assisting with the preparation of applications submitted to the defendants for processing. The company seeks certification of the class, disgorgement, and punitive damages, among other things.
Fed expands Main Street Lending Program
On April 30, the Federal Reserve (Fed) announced plans to expand the Main Street Lending Program in order to “help credit flow to small and medium-sized businesses that were in sound financial condition before the pandemic.” As previously covered by a Special Alert, the Main Street Loan Program was established pursuant to the CARES Act to support small and medium-sized businesses by extending four-year loans with deferred principal and interest payments for the first year. Loan amounts started at $1 million and businesses with up to 10,000 employees or up to $2.5 billion in annual revenues could apply, with the majority of the loans then sold to a Main Street facility, while the lenders retained a 5 percent share of the loans. The Main Street Lending Program utilized a Main Street New Loan Facility (MSNLF) to provide an option for new loans, and a Main Street Expanded Loan Facility (MSELF) to provide a second option for increasing the amount of existing loans. After the Main Street Lending Program was introduced, the Fed received a large amount of feedback, which it used to make a number of modifications to the program. The modifications include:
- Increasing the size of eligible businesses to those with up to 15,000 employees or up to $5 billion in annual revenues for 2019;
- Adding a third loan option called priority, which increases “risk sharing by lenders for borrowers with greater leverage”;
- Increasing the percentage share of loans that lenders retain in the priority loan option to 15 percent; and
- Lowering the starting loan amount to $500,000 for the new loan and priority loan options.
Additional information can be found in the announcement and in the Main Street Lending Program Frequently Asked Questions here. See term sheets for the New Loan Facility here, Priority Loan Facility here, and the Expanded Loan Facility here.
SBA to limit maximum PPP loans to $20 million for corporate groups
On April 30, the Small Business Administration (SBA) issued an Interim Final Rule (IFR) prohibiting a “single corporate group” from receiving more than $20 million in the aggregate from the Paycheck Protection Program (PPP). Businesses are considered to be a part of a single corporate group “if they are majority owned, directly or indirectly, by a common parent.” Small businesses must adhere to this loan cap by withdrawing or cancelling any PPP loan application or approval above $20 million for any loan that is not fully disbursed as of April 30. Failure to follow the IFR, will make such loans ineligible for loan forgiveness. The IFR assures lenders that they are not responsible for a small business’s compliance with this rule, and further, that the IFR does not alter lender obligations required to procure an SBA loan guarantee. In addition, the IFR allows a non-bank lender to be a PPP lender, subject to certain criteria, if the non-bank lender is “either a community development financial institution…or a majority minority, women, or veteran/military owned lender.” The IFR is effective as of May 4, and comments must be received by June 3.
Fed permits SBA-approved non-depository PPP lenders to utilize liquidity facility
On April 30, the Federal Reserve (Fed) announced that expanded access to the Paycheck Protection Program Liquidity Facility (PPPLF) beyond depository institutions to include all Small Business Administration (SBA) approved PPP lenders. Non-depository lenders, “includ[ing] banks, credit unions, Community Development Financial Institutions, members of the Farm Credit System, small business lending companies licensed by the SBA, and some financial technology firms” are now eligible to borrow from the PPPLF using PPP loans as collateral. In addition, the Fed announced that, in addition to using originated PPP loans as collateral, eligible borrowers can also use purchased whole PPP loans as collateral for credit extended by the Federal Reserve Banks under the facility “at a rate of 35 basis points.” The Fed’s announcement clearly states that an eligible borrower that pledges a purchased PPP loan must provide SBA documentation to prove that the lender “is the beneficiary of the SBA guarantee for the loan.” The announcement includes a PPPLF Term Sheet and a link to PPPLF frequently asked questions for additional details.
VA announces new reporting code for Covid-19 forbearance requests
On April 29, the Department of Veterans Affairs announced a new reason for default which will assist the VA in identifying borrowers impacted by Covid-19. The VA replaced the reason “Energy/Environmental Cost” with “National Emergency Declaration” in the Electronic Default Notice (EDN). Servicers should use this new reason for default when reporting the EDN. Effective June 1, 2020, this new reason for default will be accepted prior to the 61st day of delinquency.
NCUA to seek information about emerging credit risks
On April 29, the National Credit Union Administration announced that it expanded its Covid-19 outreach to federally-insured credit unions to identify emerging credit risks. The NCUA notified regulated entities that examiners will contact them between May 4 and May 18 to discuss a list of questions concerning operating status, status of cash reserves and withdrawals, liquidity status, loans in forbearance, and balance of loans with outstanding balances.
SBA, Treasury discuss borrower eligibility for PPP loans
On April 29, the Small Business Administration (SBA), in consultation with the Department of Treasury (Treasury) released two new frequently asked questions (FAQs) regarding the Paycheck Protection Program (PPP). The new guidance states that businesses in operation as of February 15, 2020 are eligible to apply for PPP loans, even if the business changes ownership after that date, as long as all other criteria are met. The SBA also plans to review each PPP loan of $2 million or more after the lender submits the small business borrower’s application for forgiveness, and states that as long as lenders follow the PPP lender requirements, all loans will retain the SBA guarantee no matter what the SBA review concludes. A joint Treasury and SBA statement suggests that because a “large number of companies” returned their PPP loans after the SBA issued guidance on PPP borrower loan certification (covered by InfoBytes here), the review of loans $2 million and above will “ensure PPP loans are limited to eligible borrowers.”
Earlier in the week, Treasury and the SBA added additional guidance in the FAQs addressing various other eligibility questions. These include:
- Borrowers should refer to FAQ #31 (covered by InfoBytes here) to determine whether a small business “owned by large companies with adequate sources of liquidity to support the business’s ongoing operations” would be eligible to apply for a PPP loan;
- Housing stipends or housing allowances to employees are compensation and should be included in the employer’s calculation of payroll costs;
- To determine an employee’s principal place of residence, lenders and borrowers should consult IRS regulations (26 CFR §1.121-1(b)(2));
- Agricultural producers, farmers, and ranchers can apply for PPP loans as long as the individual or entity meets certain criteria, including that it has 500 or fewer employees or $1 million or less in annual receipts;
- Agricultural cooperatives and other cooperatives may apply for PPP loans as long as they meet all PPP requirements; and
- Small business PPP loan applicants must count all employees—full-time and part-time—when calculating whether the small business has 500 or fewer employees.
On April 24, the SBA issued an interim final rule stating, among other things, that hedge funds and private equity firms are not eligible to apply for PPP loans, and that companies in private equity portfolios should consider whether they can make the required good faith certification of need for the PPP loans. In addition, small businesses in bankruptcy proceedings are not eligible to apply for PPP loans.
CFPB issues TRID interpretive rule, ECOA FAQ
On April 29, the CFPB issued an interpretive rule (IR) “clarifying that consumers can exercise their rights to modify or waive certain required waiting periods” in order to allow borrowers impacted by Covid-19 to access mortgage credit faster. The IR states that if, as a result of the Covid-19 pandemic, a mortgage borrower determines that a mortgage transaction must be completed prior to the end of the waiting period for either the TRID Rule or the Regulation Z right of rescission rule, the borrower may waive the waiting period. Further, the IR asserts that the Covid-19 pandemic qualifies as a “changed circumstance” for purposes of certain TRID Rule provisions, permitting the use of revised estimates of settlement charges. In addition, the Bureau issued a frequently asked question that addresses the Equal Credit Opportunity Act Valuations Rule, which states that a first-lien loan borrower may also waive the requirement that a lender provide the borrower with appraisals and valuations at or before settlement of the loan.
UK FCA extends LIBOR benchmark deadline
On April 29, the United Kingdom’s Financial Conduct Authority (FCA) issued a follow-up statement that allows firms the ability to use the LIBOR interest rate benchmark in new sterling LIBOR linked loans for an addition six months due to the Covid-19 pandemic. The FCA acknowledges that due to challenges presented by the current operating environment, it is not feasible for lenders to complete the transition from LIBOR across all new sterling LIBOR linked loans before the original Q3 2020 target end date. The FCA provides several recommendations including: (i) lenders should be in a position to offer non-LIBOR linked products by the end of Q3; (ii) from Q3 onward, lenders and borrowers should agree on a process to facilitate conversion to an alternative rate prior to the end of 2021; and (iii) all new issuances of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021. The announcement also reiterates the FCA’s previously stated position that the central assumption that firms cannot rely on LIBOR being published after the end of 2021 remains unchanged (covered by InfoBytes here).
Find continuing InfoBytes coverage on LIBOR here.