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Financial Services Law Insights and Observations


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  • Fed extends PPP Liquidity Facility for a final time

    Federal Issues

    On June 25, the Federal Reserve Board announced the extension of the Paycheck Protection Program Liquidity Facility (PPPLF) for a final time to July 30. As previously covered by InfoBytes, the PPPLF was rolled out last year to provide liquidity to banks making loans to small businesses pursuant to the SBA’s Paycheck Protection Program at the start of the Covid-19 pandemic. In March, the Fed extended the PPPLF to June 30 (covered by InfoBytes here). The Fed noted that the most recent extension is being made as an “operational accommodation” for banks, community development financial institutions, and other financial institutions.

    Federal Issues Federal Reserve SBA Covid-19 Bank Regulatory

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  • FinCEN recognizes law enforcement agencies for use of BSA data

    Financial Crimes

    On June 24, the Financial Crimes Enforcement Network (FinCEN) honored the recipients of its 2021 Law Enforcement Awards Program, which recognizes agencies that use Bank Secrecy Act (BSA) data provided by financial institutions to successfully pursue and prosecute criminal investigations. The awards were presented in eight different categories related to: (i) Covid-19 fraud; (ii) cyber threats; (iii) transnational organized crime; (iv) transnational security threats; (v) state and local law enforcement; (vi) third-party money launderers; (vii) a suspicious activity review team; and (viii) significant fraud. Awards work included investigation into Paycheck Protection Program fraud that resulted in the seizure of case over $3 million, seizure of over $47 million dollars in narcotics proceeds, and seizure of 300 cryptocurrency accounts, among other work. FinCEN acting Director Michael Mosier stated that “[t]he law enforcement work that we recognize today highlights both the importance of an effective partnership between FinCEN, financial institutions, and our law enforcement agencies, and the value of BSA reporting in protecting the American people from fraud, cybercrime, and the illicit finance threats confronting our nation.”

    Financial Crimes FinCEN Of Interest to Non-US Persons Bank Secrecy Act Enforcement Investigations Anti-Money Laundering Covid-19 SBA Cryptocurrency Fraud

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  • SBA updates PPP FAQs

    Federal Issues

    On June 8, the SBA updated its Paycheck Protection Program (PPP) frequently asked questions to clarify certain conditions related to whether a nonprofit organization that has received approval of an application for tax exemption from the Puerto Rico Departamento de Hacienda qualifies as a “nonprofit organization” under section 7(a)(36)(A)(vii) of the Small Business Act. The FAQ discusses exemption criteria for certain nonprofit organizations, and specifies that SBA will treat a nonprofit organization that has obtained approval of its application for tax exemption from the Puerto Rico Departamento de Hacienda as meeting the definition of “nonprofit organization” under section 7(a)(36)(A)(vii) of the Small Business Act “if the nonprofit organization reasonably determines, in a written record maintained by the nonprofit organization, that it would be an organization described in section 501(c)(3) of the Internal Revenue Code (without regard to the notification requirement in section 508(a) of the Internal Revenue Code) and is therefore within a category of organizations that are eligible to be exempt from taxation under section 501(a), regardless of whether the nonprofit organization has applied for recognition from the Internal Revenue Service.” However, these nonprofit organizations must meet all other applicable eligibility criteria in order to receive a PPP loan and loan forgiveness, SBA emphasizes.

    As previously covered by InfoBytes, the SBA stopped accepting new PPP loan guarantee applications on June 1.

    Federal Issues SBA Covid-19 Small Business Lending

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  • 6th Circuit: SBA can’t prioritize race or sex for Covid relief


    On May 27, the majority of the U.S. Court of Appeals for the Sixth Circuit held that the Small Business Administration (SBA) cannot allocate limited Covid-19 relief funds based on the race and sex of the applicants. The plaintiff filed a lawsuit claiming the SBA’s practice of giving priority to certain Restaurant Revitalization Fund applicants (i.e. restaurants owned and controlled at least 51 percent by women, veterans, or the “socially and economically disadvantaged”) during the first 21 days violates the U.S. Constitution’s equal protection clause by impermissibly granting priority based on race and gender classifications. The plaintiff applied for funding on the first day the application period opened, but because the restaurant he co-owned 50/50 with his Hispanic wife was not owned 51 percent by a woman or a veteran, he faced an added evidentiary burden to show he qualified as “socially and economically disadvantaged” to get priority status. The plaintiff requested a temporary restraining order and a preliminary injunction to prohibit the SBA from granting funds unless it did so in a manner that ignored race and sex. The district court denied the request, as well as subsequent requests made by the plaintiff, ruling that he was unlikely to succeed on the merits of his claims.

    On appeal, the majority of the Sixth Circuit disagreed, concluding that the district court should have issued an injunction pending appeal since the SBA “failed to justify its discriminatory policy.” According to the majority, the SBA “injected explicit racial and ethnic preferences into the priority process” by “presume[ing] certain applicants are socially disadvantaged based solely on their race or ethnicity.” Additionally, the majority stated that the “added evidentiary burden faced by white men and other non-presumptively disadvantaged groups stands in marked contrast with lenient evidentiary standards set by the American Rescue Plan Act,” and pointed out that “broad statistical disparities cited by the government are not nearly enough” to suggest intentional discrimination. Because “an effort to alleviate the effects of societal discrimination is not a compelling interest,” the majority stated, “the government’s policy is not permissible.” The majority also rejected the SBA’s argument that the issue was moot because the priority period for the program has ended, commenting that race and sex preferences continue to factor in whether an applicant receives funds before the program’s money runs out.

    The dissenting judge argued, however, that the “Constitution permits the government to use race-based classifications to remediate past discrimination,” and added that the plaintiff has not demonstrated that he will be irreparably harmed by the way the program’s funds are distributed.

    Courts Appellate Sixth Circuit Covid-19 SBA

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  • PPP closes to new applications

    Federal Issues

    On June 1, the Small Business Administration (SBA) issued an announcement on the closure of the Paycheck Protection Program (PPP) to new loan guaranty applications. The PPP has provided over $798 billion in economic relief to over 8.5 million small businesses and nonprofits across the nation, and was among the first Covid-19 economic disaster relief programs to provide small businesses affected by the pandemic with emergency funds. According to the announcement, the PPP supported the “smallest of small businesses with 32 percent of the loans going to Low-and-Moderate Income (LMI) communities.” Additionally, Community Financial Institutions played a role in PPP lending to underserved communities by providing 1.5 million loans, which totaled around $30 billion. SBA Administrator Isabella Casillas Guzman pointed out, “in 2021, 96 percent of PPP loans went to small businesses with fewer than 20 employees. Moving forward, [the SBA] will continue to prioritize equity in all SBA programs and services.”

    Federal Issues Department of Treasury SBA Small Business Lending CARES Act Covid-19

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  • House subcommittee explores fintech companies’ role in PPP loan processing


    On May 27, the House Select Subcommittee on the Coronavirus Crisis sent letters to two banks and two fintech companies seeking information on the companies’ handling of loan applications under the Paycheck Protection Program (PPP). According to a press release announcing the launch of the subcommittee’s investigation, the letters (available here, here, here, and here) were sent to four companies that facilitated PPP loans but may have allegedly failed to adequately screen PPP loan applications for fraud. The subcommittee notes that recent reports lend “credence to reports that criminal actors sought out [fintechs] for fraudulent PPP loans because of the speed with which the [fintech] companies processed the loans—which in some cases could be approved in ‘as little as an hour’—and the fact that the [fintech] loan application process appeared to include very little scrutiny of its applicants.” The letters request documents and information to assist the Subcommittee in understanding the fraud controls and compliance systems that the companies applied to their PPP loan programs.

    Fintech U.S. House SBA CARES Act Small Business Lending Covid-19

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  • OCC examines effects of Covid-19 on federal banking system

    Federal Issues

    On May 18, the OCC released its Semiannual Risk Perspective for Spring 2021, which reports on key risk areas posing a threat to the safety and soundness of national banks and federal savings associations. While, overall, banks maintained sound capital and liquidity levels throughout 2020, the OCC noted that bank profitability remains stressed as a result of low interest rates and low loan demand.

    Key risk themes identified in the report include:

    • Credit risk. The OCC reported that credit risk is evolving a year into the Covid-19 pandemic, specifically as the economic downturn continues to affect some borrowers’ ability to service debts and government assistance programs start to expire.
    • Strategic risk. Strategic risk associated with how bank manage net interest margin compressions and earnings is elevated. The OCC suggested that banks attempting to improve earnings could implement various measures, including cost cutting and increasing credit risk.
    • Operational risk. Elevated operational risk can be attributed to complex operating environments and increased cybersecurity threats. A flexible, risk-based approach, including surveillance, reporting, and managing third-party risk, is important for banks to be operationally resilient, the OCC stated.
    • Compliance risk. Compliance risk is also elevated due to the expedited implementation of a number of Covid-19-related assistance programs, including the CARES Act Paycheck Protection Program and federal, state, and bank-initiated forbearance and deferred payment programs. These programs, the OCC noted, require “increased compliance responsibilities, high transaction volumes, and new fraud typologies, at a time when banks continue to respond to a changing operating environment.”

    Federal Issues OCC Covid-19 SBA Compliance Risk Management Fintech Net Interest Margin Bank Regulatory

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  • Federal regulators discuss Covid-19 responses and priorities

    Federal Issues

    On May 19, the House Financial Services Committee held a hearing entitled “Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions.” Committee Chairwoman Maxine Waters (D-CA) opened the hearing by expressing her concerns about the “harmful deregulatory actions” taken by the previous administration’s appointees to “roll back key Dodd-Frank reforms and other consumer protections.” She noted, however, that she was pleased that the Senate is moving forward to reverse the OCC’s true lender rule and commented that she has asked House leadership to address the related Congressional Review Act resolution as soon as possible.

    Fed Vice Chair for Supervision Randal K. Quarles provided an update on the Fed’s Covid-19 regulatory and supervisory efforts, noting that the Fed has “worked to align [the Fed’s] emergency actions with other relief efforts as the economic situation improves” and is maintaining or extending some measures to promote continued access to credit. When Congresswoman Velazquez inquired how government programs like the Paycheck Protection Program helped to stabilize businesses and improve the overall economy, Quarles answered, “We would have experienced a much deeper and more durable economic contraction, and would have had more lasting economic scarring with closed businesses and defaulting obligations [] had those programs not been put in place.”

    OCC Comptroller Michael Hsu discussed the agency’s increasing coordination with other federal and state regulators on fintech policy, in addition to OCC efforts to strengthen Community Reinvestment Act (CRA) regulations and address climate change. The OCC has been encouraging innovation, Hsu said, but added that his “broader concern is that these initiatives were not done in full coordination with all stakeholders. Nor do they appear to have been part of a broader strategy related to the regulatory perimeter.” In his written testimony, Hsu emphasized his concerns with providing charters to fintechs, noting that in doing so, it would “convey the benefits of banking without its responsibilities,” but also “that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators.” Hsu expressed in his oral statement the importance of finding “a way to consider how fintechs and payment platforms fit into the banking system” and emphasized that it must be done in coordination with the FDIC, Fed, and the states. He also explained that “the regulatory community is taking a fragmented agency-by-agency approach to the technology-driven changes taking place today. At the OCC, the focus has been on encouraging responsible innovation. For instance, we updated the framework for chartering national banks and trust companies and interpreted crypto custody services as part of the business of banking.” When Congressman Bill Huizenga (R-MI) asked how the OCC planned to address the “true lender” rule, which would soften the regulations for national banks to sell loans to third parties, Hsu stated that the OCC originally intended to review the rule, but that after the Senate passed S.J.Res. 15 to invoke the Congressional Review Act and provide for congressional disapproval and invalidation of the rule (covered by InfoBytes here), the agency decided to leave it up to congressional deliberation and will monitor it instead.

    FDIC Chairman Jelena McWilliams discussed, among other things, the FDIC’s policy of granting industrial loan company charters. As previously covered by Infobytes, the agency approved a final rule in December 2020 establishing certain conditions and supervisory standards for the parent companies of industrial banks and ILCs. McWilliams defended the FDIC’s new rule during the hearing, stating it “ensures that the parent company serves as a source of financial strength for the ILC while providing clarity about the FDIC's supervisory expectations of both the ILC and its parent company.”

    NCUA Chairman Todd Harper also outlined agency measures taken in response to the pandemic. Among other things, Harper noted that the NCUA is supporting low-income credit unions through the Community Development Revolving Loan Fund and that the agency is working to strengthen its Consumer Financial Protection Program (CFPP) to ensure fair and equitable access to credit. During the hearing, Harper stated, “there is an increased emphasis on fair lending compliance, and agency staff are studying methods for improving consumer financial protection supervision for the largest credit unions not primarily supervised by the CFPP.”

    Federal Issues House Financial Services Committee OCC CRA Fintech Dodd-Frank FDIC Federal Reserve NCUA SBA Covid-19 True Lender Congressional Review Act Bank Regulatory

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  • Fed continues to allow bank insiders access to PPP loans

    Federal Issues

    On May 14, the Federal Reserve Board announced the third extension of a temporary exception from the requirements of section 22(h) of the Federal Reserve Act and corresponding provisions of Regulation O to allow certain bank directors and shareholders to apply for Small Business Administration (SBA) Paycheck Protection Program (PPP) loans from their affiliated banks. The extension is effective immediately and applies to PPP loans made from March 31 through June 30. If the PPP is extended, the rule change will ultimately end on March 31, 2022. The Fed reiterated that any PPP loans extended to bank directors and shareholders must be consistent with SBA’s PPP lending restrictions and done without favoritism from the bank. The original extension was announced on April 17 (covered by InfoBytes here).

    Federal Issues Federal Reserve SBA Covid-19 Agency Rule-Making & Guidance CARES Act Regulation O Bank Regulatory

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  • SBA extends PPP whole loan sales guidance

    Federal Issues

    On April 30, the Small Business Administration (SBA) issued a procedural notice, effective immediately, extending guidance on whole loan sales applicable to lender merger and acquisition transactions where a lender has Paycheck Protection Program (PPP) loans in its portfolio. The guidance, which was set to expire May 1, will allow lenders participating in the PPP to continue to sell all of their interest in PPP loans to other participating lenders without obtaining SBA’s prior written consent. The new guidance outlines purchasing requirements and provides, among other things, that the purchasing lender “will be the party responsible to SBA with respect to all servicing actions, including requests for loan forgiveness, and will be the party eligible for the guarantee purchase of a PPP loan.”

    Federal Issues SBA Covid-19 Small Dollar Lending

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