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On June 30, the Financial Crimes Enforcement Network (FinCEN) issued the first government-wide priorities for anti-money laundering and countering the financing of terrorism (AML/CFT) policy (AML/CFT Priorities) pursuant to the Anti-Money Laundering Act of 2020 (AML Act). The AML/CFT Priorities were established in consultation with the Treasury Department’s Office of Foreign Assets Control, SEC, CFTC, IRS, state financial regulators, law enforcement, and national security agencies, and highlight key threat trends as well as informational resources to assist covered institutions manage their risks and meet their obligations under laws and regulations designed to combat money laundering and counter terrorist financing. According to the AML/CFT Priorities, the most significant AML/CFT threats currently facing the U.S. (in no particular order) are corruption, cybercrime, domestic and international terrorist financing, fraud, transnational criminal organization activity, drug trafficking organization activity, human trafficking and human smuggling, and proliferation financing. FinCEN further noted it will update the AML/CFT Priorities to highlight new or evolving threats at least once every four years as required under the AML Act, and issued a separate statement providing additional clarification for covered institutions.
Separately, the Federal Reserve Board, FDIC, NCUA, OCC, state bank and credit union regulators, and FinCEN also issued a joint statement providing clarity for banks on the AML/CFT Priorities. The statement emphasized that the publication of the AML/CFT Priorities “does not create an immediate change to Bank Secrecy Act (BSA) requirements or supervisory expectations for banks.” Rather, within 180 days of the establishment of the AML/CFT Priorities, FinCEN will promulgate regulations, as appropriate, in consultation with the federal functional regulators and relevant state financial regulators. The federal banking agencies noted that they intend to revise their BSA regulations as needed to address how the AML/CFT priorities will be incorporated into BSA requirements for banks, adding that banks will not be required to incorporate the AML/CFT Priorities into their risk-based BSA compliance programs until the effective date of the final revised regulations. However, banks may choose to begin considering how they intend to incorporate the AML/CFT Priorities, “such as by assessing the potential related risks associated with the products and services they offer, the customers they serve, and the geographic areas in which they operate.” Moreover, the statement confirmed that federal and state examiners will not examine banks for the incorporation of the AML/CFT Priorities into their risk-based BSA programs until the final revised regulations take effect.
On January 28, the Small Business Association (SBA) issued an information notice providing an update on the tax treatment of payments related to certain 7(a) loans, 504 loans, and microloans under Section 1112 of the CARES Act. As previously covered by InfoBytes, in December 2020, the SBA released a guidance document covering the issuances of 1099-MISC forms for 7(a) loans, 504 loans, and microloans. However, due to Section 278(c) of the Covid-related Tax Relief Act of 2020, the SBA now states that lenders “are no longer required to file Form 1099-MISC, Miscellaneous Income, with the IRS or furnish this form to the small businesses on whose behalf the SBA made Section 1112 payments.” Moreover, the SBA issued procedural notices covering the use of electronic signatures for 7(a) loans and 504 loans and microloans through April 30. Additionally, the SBA issued an extension on the temporary procedures for microloan closings through April 30.
On December 14, congressional lawmakers released the details of bipartisan Covid-19 relief legislation (and accompanying memorandum), titled “the Emergency Coronavirus Relief Act of 2020,” which would provide $300 billion to the U.S. Small Business Administration to allow for second forgivable Paycheck Protection Program (PPP) loans to certain businesses after the program’s lending expired in August (covered by InfoBytes here). In addition to capping the maximum PPP loan amount at $2 million, the proposed legislation would limit eligibility of new PPP loans to (i) businesses with 300 or fewer employees that have sustained a 30 percent revenue loss in any quarter of 2020; and (ii) non-lobbying, tax-exempt organizations that have 150 employees or fewer. Additionally, the legislation clarifies that business expenses paid for with the proceeds of PPP loans are tax deductible, and simplifies the loan forgiveness process for loans $150,000 or less. Lastly, the legislation includes set-asides for (i) small businesses with 10 or fewer employees; (ii) loans made by small community lenders, including Community Development Financial Institutions, credit unions, Minority Depository Institutions; and (iii) the Minority Business Development Agency.
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.
On November 18, the U.S. Treasury Department and Internal Revenue Service (IRS) clarified the tax treatment of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year the loan was received. According to the IRS revenue ruling, businesses are not taxed on the proceeds of a forgiven PPP loan, thus the business expenses paid from those proceeds are not deductible. The revenue ruling illustrates multiple taxpayer scenarios, which conclude that if the PPP loan has not yet been forgiven by the end of 2020, but the business reasonably believes the loan will be forgiven in the future, the expenses are not deductible. This applies whether the business has filed for forgiveness yet or not. However, if a PPP loan was expected to be forgiven, and was not, the expenses are deductible.
On September 22, the IRS released Announcement 2020-12 notifying lenders that they should not report the amount of qualifying loan forgiveness for covered loans to qualifying small businesses made under the Paycheck Protection Program (PPP).The IRS code generally requires lenders to file a Form 1099-C for any discharge of indebtedness of at least $600. However, the IRS’ announcement specifies that when a portion or all of the principal is forgiven under the requirements of Section 1106 of the CARES Act, lenders, for federal income tax purposes only, should not “file a Form 1099-C information return with the IRS or provide a payee statement to the eligible recipient under section 6050P of the Code as a result of the qualifying forgiveness.”
On March 31, the Treasury Department and the Internal Revenue Service launched the Employee Retention Credit, a resource designed to encourage businesses to keep employees on their payroll during the Covid-19 outbreak. The resource is a refundable tax credit of 50 percent of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by Covid-19. Employers of all sizes, including tax-exempt organizations may qualify to receive the employee retention credit if either: (i) the employer’s business is fully or partially suspended by government order due to Covid-19 during the calendar quarter; or (ii) the employer’s gross receipts are below 50 percent of the comparable quarter in 2019. Once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019 they no longer qualify after the end of that quarter. State and local governments and their instrumentalities, and small businesses who take Small Business Loans are not eligible for the employee retention credit. The credit applies to wages paid after March 12, 2020 and before January 1, 2021, and cover both cash payments and a portion of the cost of employer provided health care.
On January 15, the U.S. District Court for the Southern District of California granted final approval of a class action settlement between homeowners and a mortgage company to resolve allegations that the company violated the Internal Revenue Code by failing to report deferred mortgage interest from certain consumers with adjustable rate mortgages (ARM), which allegedly prevented consumers from fully benefiting from the mortgage tax credit. According to the approval order, the plaintiffs contended that “even though the accrued interest is added back to principal, the negative amortization is still interest that should have been reported” to the IRS. However, the order notes that the court previously rejected this theory in part, finding that 26 U.S.C. § 6050H “is ambiguous as to ‘how, whether and when’ such interest must be reported.” Furthermore, the order notes that in 2016 the company began investigating and reporting the negative amortization on loans received via transfer from other companies that allegedly failed to include the negative amortization in their data. These transferred loans, the company asserted, were the only instances where it failed to report negative amortization. Under the terms of the settlement, the company is required to provide amended mortgage interest statements to homeowners whose capitalized interest was incorrectly reported to the IRS for the 2016 through 2018 tax years.
On September 24, the U.S. Court of Appeals for the 3rd Circuit reversed the district court’s dismissal of a putative class action alleging a debt collector violated the FDCPA by including a statement noting that debt forgiveness may be reported to the IRS. The case was centered on the plaintiffs’ claim that letters sent to collect on debts that were less than $600, which contained the language “[w]e are not obligated to renew this offer. We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is canceled or settled, and might not be required in your case,” were “false, deceptive and misleading” under the FDCPA because only discharged debts over $600 are required to be reported to the IRS. The district court dismissed the action, concluding the letters were not deceptive and the least sophisticated consumer would interpret the statement to mean in certain circumstances some discharges are reportable but not all are reportable.
Upon appeal, the 3rd Circuit disagreed with the district court, finding “the least sophisticated debtor could be left with the impression that reporting could occur,” notwithstanding the letter’s qualifying statement that reporting is not required every time a debt is canceled or settled, and therefore, the language could signal a potential FDCPA violation. Recognizing the industry’s regular use of form letters, the appeals court noted, “we must reinforce that convenience does not excuse a potential violation of the FDCPA.”
On February 22, the IRS issued a notice providing guidance to mortgage lenders on the reporting of mortgage insurance premiums (MIP) treated as qualified residence interest. The IRS emphasizes that MIP paid or accrued through December 31, 2017 will be deductible for eligible taxpayers and informs lenders to report MIP received in 2017 on Form 1098. If a lender has already filed Form 1098 and did not include the reportable MIP, the IRS requires lenders to file corrected forms by the filing due date and to furnish corrected statements to borrowers by March 15.
- Jeffrey P. Naimon to provide “Fair lending update” at the Colorado Mortgage Lenders Association Operational and Compliance Forum
- Jonice Gray Tucker to discuss “Justice for all: Achieving racial equity through fair lending” at CBA Live
- Warren W. Traiger to discuss “On the horizon for CRA modernization” at CBA Live
- APPROVED Webcast: Strategy & Technology: A dynamic duo for successful regulatory exams
- Daniel R. Alonso to discuss “Primer on cross-border prosecutions in Argentina, Brazil, Colombia, and Mexico for U.S. criminal lawyers” at a New York City Bar Association webinar
- Jonice Gray Tucker to discuss "Fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss “State law regulatory and enforcement trends” at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting
- H Joshua Kotin to discuss “Modifications and exiting forbearance” at the National Association of Federal Credit Unions Regulatory Compliance Seminar
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute