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Recently, the Department of Defense (DoD), in consultation with the Treasury Department, released a report to the House Committee on Armed Services in response to Title V of House Report 116-442 on the National Defense Authorization Act (NDAA) for Fiscal Year 202. The House Report requested a report regarding the Military Annual Percentage Rate (MAPR), which cannot exceed 36 percent as established under the Military Lending Act (MLA) and what impact lowering the MAPR to 30 percent would have on military readiness and servicemember retention. Some highlights of the report include, among other things: (i) “the MLA, in combination with the Department’s ongoing financial literacy education and financial counseling efforts, appears to be effective in deterring unfair credit practices”; (ii) the DoD does not take a position regarding the merit of any change to decrease the maximum MAPR rate below 30 percent; (iii) credit cards, auto loans, and personal loans are generally available at risk-based rates below the MAPR; (iv) almost a quarter of all active duty servicemembers in the U.S. are stationed in states that limit a 24 month, $2,000 loan to less than 30 percent; and (v) “a MAPR limit as low as 28 percent would likely have no impact on [servicemembers]’ access to credit cards, assuming credit card issuers meet exemptions for eligible bona fide fees when calculating the MAPR.” The report notes that the DoD “is committed to continue working with Congress to support the financial readiness of [servicemembers] and their families and is willing to provide comment on any such proposal when appropriate.”
On July 28, SBA announced the launch of a streamlined application program to allow borrowers with Paycheck Protection Program (PPP) loans of $150,000 or less to apply for direct forgiveness through SBA, thereby reducing the burden on participating lenders to service forgiveness applications. The new direct forgiveness platform will start accepting applications from borrowers on August 4. Under the interim final rule (IFR), lenders who choose to participate will be required to opt-in to the program and will be provided a single secure location for all of their borrowers with loans of $150,000 or less to apply for loan forgiveness using the electronic equivalent of SBA Form 3508S. When notice is received that a borrower has applied for forgiveness through the platform, lenders will review both the borrower’s loan forgiveness application and issue a forgiveness decision to SBA inside the platform. Additional procedural guidance will be released in the near future to provide information on (i) the opt-in process; (ii) how qualified borrowers can access the platform and submit loan applications; and (iii) how lenders can access and review forgiveness applications, issue forgiveness decisions, and request forgiveness payments from SBA. During the transition period after the launch of the platform, SBA expects lenders that opt-in “to complete the processing of any loan forgiveness applications that have already been submitted by borrowers to the lender and should inform such borrowers not to submit a duplicate loan forgiveness application through the [p]latform.”
The IFR also extends the loan deferment period for PPP loans in circumstances where a borrower timely files an appeal of a final SBA loan review decision with SBA’s Office of Hearings and Appeals. Additionally, the IFR permits lenders to use a “COVID Revenue Reduction Score” at the time of forgiveness in order to document the required revenue reduction for second draw PPP loans of $150,000 or less, exempting those borrowers from supplying required documentation demonstrating a 25 percent revenue reduction or more in at least one quarter of 2020 compared to the same quarter in 2019.
The IRF takes effect immediately.
On July 15, FINRA announced amendments to Rules 5122 and 5123 to require that members file retail communications that promote or recommend private placement offerings. Rule 5122 applies to private placements of unregistered securities issued by a member or a control entity, and requires that the member or control entity provide prospective investors with a private placement memorandum (PPM), term sheet, or other offering document that reveals the intended use of the offering proceeds and expenses, among other things. Rule 5123 requires that “members file with FINRA any PPM, term sheet or other offering document, including any material amended versions thereof, used in connection with a private placement of securities within 15 calendar days of the date of first sale.” According to FINRA, the amendments require a member to file retail communications with the FINRA Corporate Financing Department “no later than the date on which the member must file the private placement offering documents under Rules 5122 and 5123.” The amendments become effective on October 1.
On July 15, the FDIC filed a reply in support of its motion for summary judgment in a lawsuit challenging the agency’s “valid-when-made rule.” As previously covered by InfoBytes, last August state attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act],” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered that the AGs’ arguments “misconstrue” the rule because it “does not regulate non-banks, does not interpret state law, and does not preempt state law,” but rather clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority (covered by InfoBytes here).
The AGs disagreed, arguing, among other things, that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of [12 U.S.C.] § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” (Covered by InfoBytes here.) In its reply in support of the summary judgment motion, the FDIC’s arguments included that the rule is a “reasonable interpretation of §1831d” in that it filled two statutory gaps by determining that “the interest-rate term of a loan is determined at the time when the loan is made, and is not affected by subsequent events, such as a change in the law or the loan’s transfer.” The FDIC further claimed that the rule should be upheld under Chevron’s two-step framework, and that §1831d was enacted “to level the playing field between state and national banks, and to ‘assure that borrowers could obtain credit in states with low usury limits.’” Additionally, the FDIC refuted the AGs’ argument that the rule allows “non-bank loan buyers to enjoy § 1831d preemption without facing liability for violating the statute,” pointing out that “if a rate violates § 1831d when the loan is originated by the bank, loan buyers cannot charge that rate under the Final Rule because the validity of the interest is determined ‘when the loan is made.’”
On July 20, the OCC announced it will propose to rescind the agency’s May 2020 final rule overhauling the Community Reinvestment Act (CRA), signaling the OCC’s intention to collaborate with the Federal Reserve Board and the FDIC on a separate joint rulemaking. As previously covered by a Buckley Special Alert, the OCC’s final rule was intended to modernize the regulatory framework implementing the CRA by, among other things: (i) updating deposit-based assessment areas; (ii) mandating the inclusion of consumer loans in CRA evaluations; (iii) including quantitative metric-based benchmarks for determining a bank’s CRA rating; and (iv) including a non-exhaustive illustrative list of activities that qualify for CRA consideration.
The announcement follows the completion of a review undertaken by acting Comptroller Michael Hsu (covered by InfoBytes here). Hsu stated that although “the OCC deserves credit for taking action to modernize the CRA,” the adoption of the final rule was “a false start” in attempting to overhaul the regulation. According to Hsu, the OCC intends to work with the Fed and the FDIC to develop a joint Notice of Proposed Rulemaking and build on an Advance Notice of Proposed Rulemaking issued by the Fed last September (covered by InfoBytes here). The federal agencies issued an interagency statement noting that they have “broad authority and responsibility for implementing the CRA” and that “[j]oint agency action will best achieve a consistent, modernized framework across all banks to help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods.”
FDIC proposes changes to deposit insurance regulations for trust accounts and mortgage servicing accounts
On July 20, the FDIC published a notice of proposed rulemaking (NPRM) that would amend the deposit insurance regulations for trust accounts and mortgage servicing accounts. The changes are intended to clarify the deposit insurance rules for depositors and bankers, enable more timely insurance determinations for trust accounts in the circumstance of a bank failure, and increase consistency of insurance coverage for mortgage servicing account deposits. According to the FDIC, some highlights include, among other things, that: (i) a deposit owner’s trust deposits would be insured up to $250,000 per beneficiary, but must not exceed five beneficiaries, regardless of if a trust is revocable or irrevocable, and regardless of contingencies or the allocation of funds among the beneficiaries; (ii) a maximum amount of deposit insurance coverage would be $1.25 million per owner, per insured depository institution for trust deposits; and (iii) “mortgage servicers’ advances of principal and interest funds on behalf of mortgagors in a mortgage servicing account would be insured up to $250,000 per mortgagor, consistent with the coverage for payments of principal and interest collected directly from mortgagors.” Additionally, the FDIC published a Fact Sheet on the NPRM, which provides an overview of simplifying deposit insurance rules for trust accounts and enhancing consistency for mortgage servicing account deposits. FDIC Chairman Jelena McWilliams released a statement specifying that the NPRM would, “merge the revocable and irrevocable trust categories into one uniform trust accounts category with one set of rules; establish a simple formula for calculating deposit insurance based on the number of beneficiaries; and eliminate the ability for a trust account to be structured to obtain unlimited deposit insurance at a bank, which is the case today, and certainly contrary to the spirit of the Federal Deposit Insurance Act.” Comments on the NPRM will be due 60 days after publication in the Federal Register.
On July 16, the U.S. District Court for the Northern District of California issued an order setting September 30 as the deadline for the CFPB to issue a notice of proposed rulemaking (NPRM) on small business lending data. As previously covered by InfoBytes, the Bureau is obligated to issue an NPRM for implementing Section 1071 of the Dodd-Frank Act, which requires the agency to collect and disclose data on lending to women and minority-owned small businesses. The requirement was reached as part of a stipulated settlement reached in 2020 with a group of plaintiffs, including the California Reinvestment Coalition (CRC), that argued that the Bureau’s failure to implement Section 1071 violated two provisions of the Administrative Procedures Act, and has harmed the CRC’s ability to advocate for access to credit, advise organizations working with women and minority-owned small businesses, and work with lenders to arrange investment in low-income and communities of color (covered by InfoBytes here).
Find continuing Section 1071 coverage here.
On July 13, the Federal Reserve Board, FDIC, and OCC announced a request for public comments on proposed guidance designed to aid banking organizations manage risks related to third-party relationships, including relationships with financial technology-focused entities. The guidance also responds to industry feedback requesting alignment among the agencies with respect to third-party risk management guidance. The proposed guidance provides “a framework based on sound risk management principles for banking organizations to consider in developing risk management practices for all stages in the life cycle of third-party relationships that takes into account the level of risk, complexity, and size of the banking organization and the nature of the third-party relationship.” The proposal addresses key components of risk management, such as (i) planning, due diligence and third-party selection; (ii) contract negotiation; (iii) oversight and accountability; (iv) ongoing monitoring; and (v) termination. Comments on the proposal are due 60 days after publication in the Federal Register.
On July 14, the CFPB and FDIC announced enhancements to Money Smart for Older Adults, the agencies’ financial education program geared toward preventing elder financial exploitation. The enhanced version includes sections to help people avoid romance scams, which, according to data from the FTC, led to $304 million in losses in 2020. In addition, the agencies are also releasing an informational brochure on Covid-19 related scams. FDIC training materials and other resources for older adults are available from the CFPB here.
On July 9, President Biden issued a broad Executive Order (E.O.) that includes provisions related to the financial services industry.
- CFPB. The E.O. encourages the CFPB director to issue rules under Section 1033 of Dodd-Frank “to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products.” As previously covered by InfoBytes, last October, the Bureau issued an advanced notice of proposed rulemaking on Section 1033, seeking comments on questions related to consumers’ access to their financial records. The E.O. also instructs the Bureau to enforce Section 1031 of Dodd-Frank, which prohibits unfair, deceptive, or abusive acts or practices in consumer financial products or services, “to ensure that actors engaged in unlawful activities do not distort the proper functioning of the competitive process or obtain an unfair advantage over competitors who follow the law.”
- Treasury Department. The E.O. calls on Treasury to submit a report within 270 days on the effects on competition of large technology and other non-bank companies’ entry into the financial services space.
- FTC. The E.O. tasks the FTC with establishing rules to address concerns about “unfair data collection and surveillance practices that may damage competition, consumer autonomy, and consumer privacy.” The FTC already commenced that process on July 1, when it approved changes to its Rules of Practice to amend and simplify the agency’s procedures for initiating rulemaking proceedings. According to Commissioner Rebecca Kelly Slaughter, “[s]treamlined procedures for Section 18 rulemaking means that the Commission will have the ability to issue timely rules on issues ranging from data abuses to dark patterns to other unfair and deceptive practices widespread in our economy.”
- Bank Mergers. The E.O. encourages the Attorney General, in consultation with the Federal Reserve Board, FDIC, and OCC, to “review current practices and adopt a plan, not later than 180 days after the date of this order, for the revitalization of merger oversight under the Bank Merger Act and the Bank Holding Company Act of 1956.”
- Buckley Webcast: Best practices for incident-response planning in a dangerous and regulated world
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- APPROVED Webcast: California debt collection license requirement: Overview and analysis
- 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
- Jeffrey P. Naimon to discuss “Regulators are gearing up: Are you ready?” at HousingWire Annual
- Amanda R. Lawrence and Elizabeth E. McGinn discuss “U.S. state privacy legislation – Are you compliant?” at the Privacy+Security Forum
- 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
- Jeffrey P. Naimon to discuss "Truth in lending” at the American Bar Association National Institute on Consumer Financial Services Basics
- John R. Coleman and Amanda R. Lawrence to discuss “Consumer financial services government enforcement actions – The CFPB and beyond” at the Government Investigations & Civil Litigation Institute Annual Meeting
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek