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Yellen addresses “digital divide”
On February 9 and 10, the U.S. Treasury Department hosted its U.S. Financial Sector Innovation Policy Roundtable, which convened public and private sector experts “to exchange views for collaborating on policy issues and innovative technologies that support global financial integrity, while fostering economic recovery, competitiveness, and financial inclusion.” Treasury Secretary Yellen delivered the opening remarks touching on the enactment of the Anti-Money Laundering Act, which was included in the National Defense Authorization Act (NDAA) for Fiscal Year 2021 (covered by InfoBytes here), noting that the law is timely as “we’re living amidst an explosion of risk related to fraud, money laundering, terrorist financing, and data privacy.” Moreover, due to the Covid-19 pandemic, the world has seen “more sophisticated” cyberattacks. Yellen asserts that the pandemic has highlighted the “digital divide” in the country and that “millions of people remain disconnected from the financial system.” Similar to broadband deserts, there are “financial services deserts,” as shown the Paycheck Protection Program’s issues with reaching small businesses in communities of color. Yellen concluded that “just as much as we need responsible innovation, we also need equitable innovation; tools that can help bring the benefits of the financial system and modern IT to more people.”
SBA addresses PPP loan error codes
On February 10, the Small Business Administration (SBA) issued an updated procedural notice providing instructions for lenders addressing Paycheck Protection Program (PPP) loan error codes. The notice, which revises guidance provided in a previously issued procedural notice (covered by InfoBytes here), addresses (i) Second Draw PPP loan guaranty applications where there is a hold code on the borrower’s First Draw PPP loan, as well as (ii) First Draw PPP loan guaranty applications and Second Draw PPP loan guaranty applications with compliance check error messages. SBA provides lenders with several methods for resolving hold codes and compliance check error messages, including resolution through lender certification or resolution through SBA review. The notice also addresses how SBA handles duplicate loans, loans with multiple DUNS numbers, and other hold codes that cannot be resolved by these processes. The same day, SBA also announced plans to take additional steps to improve the PPP, including (i) enabling “lenders to directly certify eligibility of borrowers for First Draw and Second Draw PPP loan applications with validation errors to ensure businesses who need funds and are eligible receive them as quickly as possible”; (ii) allowing “lenders to upload supporting documentation of borrowers with validation errors during the forgiveness process”; and (iii) creating “additional communication channels with lenders to assure [SBA is] constantly improving equity, speed, and integrity of the program, including an immediate national lender call to brief them on the Platform’s added capabilities.”
SBA updates PPP processing fee guidance
On February 8, the Small Business Administration (SBA) issued an updated procedural notice addressing changes to the Paycheck Protection Program (PPP) processing fees and reporting process. The notice covers the breakdown of fees for first-draw PPP loans made after December 27, 2020 and for second-draw PPP loans. The notice notes that “all processing fees are based on the balance of the PPP loan outstanding at the time of full disbursement of the loan.” The SBA states that lenders may request payment of processing fees after the lender successfully reports that the loan has been fully disbursed by using Form 1502. Moreover, the SBA states that it will remit Economic Injury Disaster Loan (EIDL) reconciliation payments from February 9 through February 19. As previously covered by InfoBytes, SBA is no longer deducting EIDL advances from PPP forgiveness payments, and for any forgiveness payments that were already reduced by an EIDL advance, the SBA will automatically remit a reconciliation payment to the PPP lender that will include the advance amount plus interest through the remittance date.
Fed further extends temporary exception to allow bank insiders access to PPP
On February 9, the Federal Reserve Board announced the second 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 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 goes through March 31. 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 and already extended once (covered by InfoBytes here).
Court dismisses PPP discrimination claims against national bank
On February 1, the U.S. District Court for the District of New Jersey issued an opinion letter granting defendants’ motion to dismiss for failure to state a claim in a matter concerning whether a national bank retaliated against minority- and women-owned businesses when they stopped honoring checks and electronic payments related to the businesses’ involvement with the Paycheck Protection Program (PPP). The plaintiffs (who operate companies that “provide ‘cash flow and investment opportunities to small and diverse businesses and individuals’”) obtained approval from the Small Business Administration to issue PPP loans to minority-owned businesses and deposited approximately $100 million into one of their business accounts at the defendant bank. The plaintiffs alleged discrimination and retaliation claims under 42 U.S.C. § 1981 and the New Jersey Law Against Discrimination and the New Jersey Civil Rights Act, claiming the bank began refusing to honor checks or electronic payments drawn from the account. In addition, the plaintiffs claimed the bank notified them that it was unable to support their efforts to participate in the PPP program but “‘never provided a legitimate, lawful or non-discriminatory reason’” for refusing to honor the plaintiffs’ checks and electronic payments. The plaintiffs claimed that they are members of a racial minority, and alleged, among other things, that the bank later froze and closed their business and personal accounts. The court disagreed, concluding the plaintiffs “fail[ed] to plead facts that show that Defendants intended to discriminate against them because of their race.” According to the court, the plaintiffs “do not plead that they were treated differently than any other individuals or businesses who are not members of a protected class. Rather, they conclude, without support, that [the bank’s] decision to decline Plaintiffs’ PPP Loan transactions was motivated solely by discriminatory intent. This is insufficient.” Because the federal claim was dismissed, the court declined to exercise jurisdiction over the plaintiffs’ state law claims of breach of contract.
SBA addresses BSA compliance obligations in updated PPP FAQs
On January 29, the Small Business Administration (SBA) updated its Paycheck Protection Program (PPP) frequently asked questions to further address borrower and lender questions. Among other things, the updated FAQs clarify that FinCEN’s April 2020 PPP FAQs are applicable to Second Draw PPP loans. In addition, for purposes of Bank Secrecy Act (BSA)/anti-money laundering compliance, SBA states that PPP lenders can rely on the same information received from a borrower during a First Draw loan application for a Second Draw PPP loan provided the borrower is an existing customer. Accordingly, FinCEN, as administrator of the BSA, published updates to its FAQs to include SBA’s newest clarifications. Additionally, SBA notes that FAQs 1-53 are currently being revised and do not reflect changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act enacted on December 27, 2020 (covered by InfoBytes here).
SBA guidance addresses unresolved First Draw PPP loans
Recently, the Small Business Administration (SBA) issued a procedural notice informing lenders that the Paycheck Protection Program (PPP) platform will begin processing new Second Draw PPP loan guarantee applications for borrowers who still have unresolved issues related to their First Draw loans. Second Draw submissions for unresolved borrowers will automatically be moved to a “research status,” providing opportunities for lenders to submit necessary documentation to support the resolution of outstanding First Draw issues. Information concerning the unresolved issues and resolution assistance will also be provided by SBA. Once outstanding First Draw issues are resolved, Second Draw loan applications will automatically be submitted into the next processing stage and will not require re-entry by the lender. However, if an outstanding First Draw issue cannot be resolved, lenders should withdraw a borrower’s Second Draw application from the platform. SBA notes that if a Second Draw application submitted before January 27 was rejected due to an unresolved First Draw issue, the lender should resubmit the application. SBA also issued several other procedural notices related to provisions under the Economic Aid Act (covered by InfoBytes here) that address, among other things, modifications to SBA’s 7(a) loan program, the elimination of certain 504 loan program fees, and a notice to lenders that SBA has informed eligible borrowers of available Section 1112 CARES Act assistance.
SBA issues Covid-19 guidance for various loans
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.
SBA addresses PPP loan review issues
On January 26, the Small Business Administration (SBA) announced that it is “taking steps to improve the First Draw Paycheck Protection Program [PPP] loan review” in order to give small businesses more time to access PPP funds. SBA acknowledged that it identified “anomalies” in approximately 4.7 percent of lender-submitted data for the first round of PPP loans, primarily data mismatches and eligibility issues. SBA is encouraging lenders and borrowers to work together to resolve the issues so that affected borrowers can access a second round of loans, and the SBA has stated its commitment to “automatically move favorable decisions to approval.” Moreover, the SBA is addressing issues with the Second Draw PPP loan applications by (i) briefing lenders on a national call with respect to the first draw loan review and the potential impacts on second draw application approvals; (ii) training the SBA’s lender relations specialists to support lenders and borrowers with issues; and (iii) providing additional guidance to PPP lenders on the review and resolution process.
CFPB issues Covid-19 supervisory highlights
On January 19, the CFPB released a special edition of Supervisory Highlights detailing the agency’s Covid-19 prioritized assessment (PA) observations. Since May 2020, the Bureau has conducted PAs in response to the pandemic in order to obtain real-time information from supervised entities operating in markets that pose an elevated risk of pandemic-related consumer harm. According to the Bureau, the PAs are not designed to identify federal consumer financial law violations, but are intended to spot and assess risks in order to prevent consumer harm. Targeted information requests were sent to entities seeking information on, among other things, ways entities are assisting and communicating with consumers, Covid-19-related institutional challenges, compliance management system changes made in response to the pandemic, and service provider data. Highlights of the Bureau’s findings include:
- Mortgage servicing. The CARES Act established certain forbearance protections for homeowners. The Bureau pointed out that many servicers faced significant challenges, including operational constraints, resource burdens, and service interruptions. Consumer risks were also present, with several servicers (i) providing incomplete or inaccurate information regarding CARES Act forbearances, failing to timely process forbearance requests, or enrolling borrowers in unwanted or automatic forbearances; (ii) sending collection and default notices, assessing late fees, and initiating foreclosures for borrowers in forbearance; (iii) inaccurately handling borrowers’ preauthorized electronic funds transfers; and (iv) failing to take appropriate loss mitigation steps.
- Auto loan servicing. The Bureau noted that many auto loan servicers provided insufficient information to borrowers about the impact of interest accrual during deferment periods, while other servicers continued to withdraw funds for monthly payments even after agreeing to deferments. Additionally, certain borrowers received repossession notices even though servicers had suspended repossession operations during this time.
- Student loan servicing. The CARES Act established protections for certain student loan borrowers, including reduced interest rates and suspended monthly payments for most federal loans owned by the Department of Education. Many private student loan holders also offered payment relief options. The Bureau noted however that servicers faced significant challenges in implementing these protections. For certain servicers, these challenges led to issues which raised the risk of consumer harm, including (i) provision of incorrect or incomplete payment relief options; (ii) failing to maintain regular call center hours; (iii) failing to respond to forbearance extension requests; and (iv) allowing certain payment allocation errors and preauthorized electronic funds transfers.
- Small business lending. The Bureau discussed the Small Business Administration’s Paycheck Protection Program (PPP), noting that when “implementing the PPP, multiple lenders adopted a policy that restricted access to PPP loans beyond the eligibility requirements of the CARES Act and rules and orders issued by the SBA.” The Bureau encouraged lenders to consider and address any fair lending risks associated with PPP lending.
The Supervisory Highlights also examined areas related to credit card accounts, consumer reporting and furnishing, debt collection, deposits, prepaid accounts, and small business lending.