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CFPB issue semi-annual report to Congress
On January 21, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1 to September 30, 2020. The report, which is required by Dodd-Frank, addresses, among other things, the effects of the Covid-19 pandemic on consumer credit, significant rules and orders adopted by the Bureau, consumer complaints, and various supervisory and enforcement actions taken by the Bureau. In her opening letter, former Director Kathy Kraninger discusses the Bureau’s response to the Covid-19 pandemic, including measures taken to educate consumers on how to navigate relief options offered through the CARES Act and related pandemic-relief laws, as well as Paycheck Protection Program (PPP) guidance provided to small businesses. Kraninger also notes that in 2020, “the Bureau filed the second-highest number of actions in the Bureau’s history, secured approximately $875 million dollars in customer relief and penalties, and opened investigations of banks and nonbanks in all of the Bureau’s markets.”
Among other topics, the report highlights two reports published by the Bureau on the effects of Covid-19: one focusing on credit applications and credit inquires (covered by InfoBytes here), and another focusing on consumer credit outcomes (covered by InfoBytes here). Results from the Bureau’s Making Ends Meet Survey (conducted prior to the pandemic) are also discussed, as are the Bureau’s efforts to understand financial challenges facing older adults. In addition to these areas of focus, the report notes the issuance of several significant notices of proposed rulemaking related to remittance transfers, debt collection practices, the transition from LIBOR, and qualified mortgage definitions under TILA. Multiple final rules were also issued concerning HMDA reporting thresholds (of which there were two final rules); remittance transfers; and payday, vehicle, title, and certain high-cost installment loans. Several other rules and initiatives undertaken during the reporting period are also discussed.
SBA releases PPP guidance as portal reopens
On January 19, the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) loan portal re-opened to all participating lenders (covered by InfoBytes here). To assist lenders, the SBA released an interim final rule, consolidating prior rules related to PPP loan forgiveness and incorporating changes made by the Economic Aid Act. The interim final rule also addresses conflict of interest provisions and related disclosure requirements, and applies to PPP loans for which loan forgiveness payments have not been remitted by the SBA as of December 27, 2020. To assist lenders, the SBA also issued a set of frequently asked questions addressing how to calculate revenue reduction and maximum loan amounts for Second Draw PPP loans, as well as documents borrowers must provide to substantiate their calculations. The SBA reiterated that borrowers and lenders may rely on this guidance as the agency’s interpretation of the CARES Act, the Economic Aid Act and the PPP interim final rules (covered by InfoBytes here), emphasizing that the “government will not challenge lender PPP actions that conform to this guidance and to the PPP interim final rules and any subsequent rulemaking in effect at the time the action is taken.”
In preparation for the re-opening, the SBA also released guidance for lenders on calculating the maximum amount for First Draw PPP loans. The guidance outlines documentation requirements for different types of businesses, and advises lenders handling second-draw loans to make sure the loan number for a borrower’s first-draw PPP loan is included on the second-draw application. The SBA also released two procedural notices. The first notice informs PPP lenders of the process for borrower resubmission of loan forgiveness applications (see SBA Form 3508S, SBA Form 3508EZ, and PPP Loan Forgiveness Calculation Form, all revised January 19), as well as lender responsibilities for notifying borrowers of lender and SBA decisions to approve or deny forgiveness in full or in part. The notice also discusses the process for remitting any portion of the loan forgiveness amount by the SBA to the lender, along with offsets of remittances to lenders to cover a lender’s outstanding debts. The second notice addresses PPP excess loan amount errors, and clarifies that borrowers may not receive forgiveness for excess loan amounts, even if “the excess loan amount was caused by borrower error or lender error.”
PPP portal to re-open to all lenders on January 19
On January 13, the Small Business Administration (SBA) announced that the Paycheck Protection Program (PPP) loan portal will open to all eligible lenders with $1 billion or less in assets for First and Second Draw applications on January 15, with the portal fully opening on January 19 to all participating lenders. As previously covered by InfoBytes, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) provides an additional $284 billion for the PPP, extending the authority to make PPP loans through March 31, amending certain aspects of the program, and allowing for certain businesses to take second loans. The PPP portal initially reopened on January 11 to community financial institutions only in order to reach underserved and minority small businesses.
In conjunction with the announcement, SBA also issued Procedural Notice 5000-20076 related to First Draw PPP loan increases following the enactment of the Economic Aid Act.
SBA releases PPP guidance and expansion rules
On January 8, the Small Business Administration (SBA) announced the Paycheck Protection Program (PPP) will re-open the week of January 11, with only community financial institutions able to make “First Draw” PPP loans on Monday, January 11, and “Second Draw” PPP loans on Wednesday, January 13 (re-opening to all participating lenders “shortly thereafter”). The SBA also released two interim final rules and associated guidance relating to the relaunch of the PPP, as dictated by the Consolidated Appropriations Act, 2021 (HR133). The Act, which was signed by President Trump on December 27, extends certain emergency authorities and temporary regulatory relief contained in the CARES Act, including an extension of the eviction moratorium until January 31. Under a section titled, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), the legislation also provides an additional $284 billion for the PPP, extending the authority to make PPP loans through March 31, amending certain aspects of the program, and allowing for certain businesses to take second loans. The SBA notes that the new issuances satisfy the Economic Aid Act’s requirement that the agency promulgate rules to carry out the PPP provisions within 10 days of enactment:
- SBA Guidance. The guidance covers access to capital for minority, underserved, veteran, and women-owned business concerns and details the set-asides for loans issued by community development financial institutions, minority depository institutions, and certain small depository institutions. Most notably, the guidance states that the SBA will only accept PPP loan applications from community financial institutions for at least the first two days when the PPP loan portal re-opens.
- First Interim Final Rule. The interim final rule incorporates the Economic Aid Act’s amendments required to be implemented by regulation within 10 days of enactment. It also consolidates and restates SBA’s previous interim final rules and guidance covering the PPP (such as those governing borrower eligibility, lender eligibility, and PPP application and origination, and loan forgiveness). The interim final rule implements the various changes to the PPP made by the Economic Aid Act, including:
- Allowing additional expenses and forgivable uses for PPP funds, including certain operational expenditures, certain costs related to property damage due to public disturbances that occurred during 2020, certain supplier costs, and certain protective equipment expenditures. The expanded forgivable expenses may be utilized by borrowers who obtained PPP loans before the enactment of the Act so long as they have not already had their loans forgiven.
- Provisions stating that lenders (i) may rely on any certification or documentation submitted by applicants for both initial and second PPP loans, and (ii) may not be subject to enforcement action or penalties relating to loan origination or forgiveness, so long as (a) the lender acts in good faith relating to loan origination or forgiveness, and (b) all relevant federal, state, local and other statutory and regulatory requirements are satisfied.
- Certain streamlined conditions for loans of up to $150,000, including simplified loan forgiveness application and simplified certification of revenue for second loans.
- Second Interim Final Rule- PPP Second Draw. The interim final rule implements the key provisions of section 311 of the Economic Aid Act, allowing for a second PPP draw. Specifically, the Economic Aid Act allows for certain businesses to take a second loan under the PPP with a maximum draw amount of $2 million. In order to qualify, businesses must generally: (i) employ no more than 300 employees; (ii) have used or will use the full amount of their first PPP loan; and (iii) demonstrate at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same quarter in 2019. Applications submitted after January 1, 2021 can utilize gross receipts from the fourth quarter of 2020. Additionally, the Economic Aid Act includes restrictions on types of eligible businesses, including entities involved in political and lobbying activities. Qualified borrowers may receive a loan amount of up to 2.5X the average monthly payroll costs during the 1-year period prior to the date of the loan or in calendar year 2019.
Additionally, in response to the Consolidated Appropriations Act, the Federal Reserve Board extended the termination date of the Main Street Lending Program facilities to January 8, in order to allow more time to process and fund loans that were submitted to the portal on or before December 14, 2020. The SBA also extended the deadline to apply for the Economic Injury Disaster Loan (EIDL) program to December 31, pending the availability of funds.
SBA issues notice detailing remittance of EIDL advances
On January 8, the Small Business Administration (SBA) issued a procedural notice discussing the repeal of Section 1110(e)(6) of the CARES Act, which required the SBA to deduct the amount of any Economic Injury Disaster Loan (EIDL) advance received by a Paycheck Protection Program (PPP) borrower from the PPP forgiveness payment from the SBA to the PPP lender. According to the notice, effective immediately, the SBA will no longer deduct EIDL advances from PPP forgiveness payments and will apply this change to any SBA forgiveness payments that were confirmed by December 29, 2020 or later.
Additionally, 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. The SBA notes that the PPP lender does not need to request the reconciliation payment, but must notify the borrower of the payment, re-amortize the loan, and notify the borrower of the next payment amount or whether the loan has been paid in full.
Another court dismisses PPP agent fees suit
On January 6, the U.S. District Court for the Central District of California issued an order dismissing a putative class action against two national banks alleging that the banks owe fees to agents that helped businesses file applications for the Paycheck Protection Program (PPP). The named plaintiff, a consulting company that aided borrowers in applying for federally guaranteed loans through the PPP, argued that its agents were entitled to fees from the banks that provided PPP loans. The court disagreed, finding that the CARES Act and its implementing regulations do not require lenders to pay agent fees absent an express agreement between an agent and the lender. The court further found that “nothing behind language in the CARES Act suggests that Congress intended to create an implied private right of action.”
The court’s decision follows rulings issued by other federal courts, which have also dismissed similar agent fee actions (covered by InfoBytes here, here, here, and here).
Court: Lender does not owe PPP fees to law firm
On December 15, the U.S. District Court for the District of Arizona issued an order dismissing an action against a California bank over whether a law firm is entitled to a portion of the fees paid by the Small Business Administration (SBA) to lenders making loans under the Paycheck Protection Program (PPP). According to the order, the law firm argued that it assisted a borrower in applying for a PPP loan from the bank and was therefore entitled to collect an agent fee. The court was unpersuaded and dismissed the action, concluding that the CARES Act—which created the PPP—“undermines, rather than supports” the law firm’s position. While “the statute affirmatively obligates the SBA Administrator to pay processing fees to lenders that make PPP loans,” it “does not create an affirmative obligation on the part of the SBA Administrator, or anybody else, to pay a fee to agents who assist borrowers in applying for PPP loans,” the court ruled. Instead, the statute “‘merely establishes that there can be a ceiling on the amount of such fees if they are collected.’” The court’s decision follows rulings issued by other federal courts, which have also dismissed similar agent fee actions (covered by InfoBytes here, here, and here). The order states that to date, every court that has addressed this question has concluded that PPP lenders do not have a mandatory obligation to pay fees to agents assisting borrowers with their PPP loan applications.
Bipartisan Covid-19 legislation includes new PPP funding
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.
SBA addresses Loan Necessity Questionnaire review process
On December 9, the Small Business Administration (SBA), in consultation with the U.S. Treasury Department updated the PPP FAQs to include a question covering the SBA’s Loan Necessity Questionnaire (for-profit here, non-profit here). Specifically, the SBA has sent a Loan Necessity Questionnaire to lenders to be provided to PPP borrowers that received loans of $2 million or more in order to perform a review for eligibility, fraud or abuse, and compliance with loan forgiveness requirements. The FAQs emphasize that being asked to complete a questionnaire “does not mean that SBA is challenging a borrower’s certification that is required by the CARES Act.” Moreover, after a borrower submits its completed questionnaire, the FAQs note that the SBA may request additional information, if necessary, to complete its review. At this point, the SBA states that borrowers will have an opportunity to provide a narrative response explaining the circumstances that provided the basis for their good-faith loan necessity certification. The SBA intends to “take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application.”
SBA issues tax guidance for Section 1112 of CARES Act
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.