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PPP closes to new applications
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.”
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.
OCC examines effects of Covid-19 on federal banking system
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 regulators discuss Covid-19 responses and priorities
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.”
Fed continues to allow bank insiders access to PPP loans
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).
SBA extends PPP whole loan sales guidance
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.”
SBA announces $5 billion in Covid-19 aid for small businesses
On April 23, the Small Business Administration (SBA) announced a new round of Economic Injury Disaster Loan (EIDL) assistance to provide $5 billion in additional assistance to small businesses and nonprofit organizations with 10 employees or fewer that have been severely affected by the Covid-19 pandemic. The Supplemental Targeted Advance program is the latest SBA relief program and follows recent SBA actions taken to increase EIDL assistance. As previously covered by InfoBytes, last month SBA raised the loan limit for Covid-19 disaster loans “from 6-months of economic injury with a maximum loan amount of $150,000 to up to 24-months of economic injury with a maximum loan amount of $500,000,” and extended the deferment period for all disaster loans, including Covid-19 EIDLs, until 2022 (covered by InfoBytes here).
SBA updates deadlines for first-draw PPP loans
On April 19, the Small Business Administration (SBA) issued an updated procedural notice to lenders related to Paycheck Protection Program (PPP) deadlines following the enactment of the PPP Extension Act of 2021 (covered by InfoBytes here). SBA reiterates that under the PPP Extension Act, “from June 1, 2021 through June 30, 2021, SBA shall not accept new PPP Loan guaranty applications from Lenders and shall only process PPP Loan guaranty applications submitted by Lenders to SBA before June 1, 2021.” The updated procedural notice modifies a previously issued notice concerning First Draw PPP loan increases (covered by InfoBytes here), and addresses (i) requests for increased first draws on unforgiven PPP loans approved before August 8, 2020, for eligible partnerships, seasonal employers, and farmers or ranchers; (ii) reapplications by eligible borrowers that fully repaid a first-draw PPP loan prior to December 27, 2020; (iii) re-disbursements to eligible borrowers that returned part of a first-draw PPP loan prior to December 27, 2020; (iv) increases for eligible borrowers that did not accept the full amount of a first-draw PPP loan approved on or before August 8, 2020; and (v) hold codes for unresolved borrowers.
SBA clarifies bankruptcy PPP eligibility
On April 6, the Small Business Administration (SBA) updated its Paycheck Protection Program (PPP) frequently asked questions to clarify when an applicant or owner is no longer considered to be “presently involved in any bankruptcy” for PPP loan eligibility purposes. In order to be eligible for a PPP loan, SBA requires all borrowers to certify on their applications that the applicant, as well as any owner of 20 percent or more of the applicant, is not “presently involved in any bankruptcy.” SBA’s FAQ provides that “[i]f an applicant or owner has filed a Chapter 7 bankruptcy petition, the applicant or owner is considered to be ‘presently involved in any bankruptcy’ for PPP eligibility purposes until the Bankruptcy Court has entered a discharge order in the case.” For Chapter 11, 12, or 13 bankruptcy petitions, the applicant or owner will be “considered to be ‘presently involved in any bankruptcy’ for PPP eligibility purposes until the Bankruptcy Court has entered an order confirming the plan in the case.” An applicant or owner will not be considered to be “presently involved in any bankruptcy” if the Bankruptcy Court has entered an order dismissing the case, regardless of the type of bankruptcy petition. SBA stipulates, however, that the order must be entered before the date of the PPP loan application.
The SBA also issued a procedural notice to lenders announcing it will shut down the PPP platform to new PPP loan guaranty applications at 12 a.m. EDT on June 1.
Biden extends PPP deadline
On March 30, President Biden signed the PPP Extension Act of 2021, extending the covered period for the Paycheck Protection Program from March 31 to June 30. However, new loan applications will not be accepted after May 31.