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OCC issues bulletin to community banks on SBA lending activities
On August 5, the OCC issued Bulletin 2021-34 to inform banks and examiners on risk management principles consistent with safe and sound banking practices when engaging in SBA guaranteed lending programs. According to the OCC, “[a] bank’s SBA lending activities, including purchasing investments backed by SBA-guaranteed loans, should be consistent with the bank’s overall business plans, strategies, risk appetite, and sound risk management.” The bulletin notes that primary risk areas associated with SBA lending activities are credit, operational, compliance, liquidity, price, and strategic risks. The bulletin also highlights sound risk management principles, such as strategic planning, policies and processes, personnel, and control systems, and highlights that the bank’s board “should have satisfactory knowledge of and engage in sound oversight of SBA lending.”
OCC outlines EFTA remittance transfer examination procedures
On August 2, the OCC issued Bulletin 2021-33, which outlines supplemental examination procedures on remittance transfers used by OCC examiners and rescinds certain related booklets and bulletins. The examination procedures supplement EFTA procedures issued by the Federal Financial Institutions Examination Council that were adopted by the OCC in 2019 and address several provisions for implementing Regulation E’s requirement to disclose the exact cost of remittance transfers. These include: (i) a safe harbor threshold increase, which “excludes certain banks from the requirements for a bank that provides remittance transfers for consumers in the normal course of the bank’s business,” and (ii) certain allowable exchange rate and third-party fee disclosure exceptions. The bulletin also provides a summary of the CFPB’s Regulation E amendments concerning remittance transfers that took effect July 2020 (covered by InfoBytes here).
CFPB confirms final debt collection rules still set to take effect November 30
On July 30, the CFPB officially announced that the agency’s two final debt collection rules, which implement the FDCPA, will take effect as scheduled on November 30. Earlier in April, the Bureau proposed delaying the effective date by 60 days to provide affected parties additional time to comply due to the ongoing Covid-19 pandemic (covered by InfoBytes here). However, the Bureau determined that an extension is unnecessary and will publish a formal notice in the Federal Register withdrawing the April notice of proposed rulemaking. According to the Bureau, “public comments generally did not support an extension. Most industry commenters stated that they would be prepared to comply with the final rules by November 30, 2021.” The Bureau pointed out that while “consumer advocate commenters generally supported extending the effective date, they did not focus on whether additional time is needed to implement the rules.” Rather, the “alternative basis for an extension that many commenters urged, a reconsideration of the rules, was beyond the scope of the NPRM and could raise concerns under the Administrative Procedure Act,” the Bureau stated, adding that the decision does not preclude the Bureau from reconsidering the debt collection rules at a later date.
As previously covered by InfoBytes, the first debt collection rule, issued in October 2020, addressed debt collection communications and prohibitions on harassment or abuse, false or misleading representations, and unfair practices. The second debt collection rule, issued in December 2020, clarified the information debt collectors must provide to consumers at the outset of collection communications and provided a model validation notice containing such information (covered by InfoBytes here).
Agencies clarify LIBOR transition on regulatory capital instruments
On July 29, the FDIC, Federal Reserve Board, and OCC (see FDIC FIL-54-2021, Fed SR 21-12, and OCC Bulletin 2021-32) provided answers to frequently asked questions (FAQs) about the impact on regulatory capital instruments under 12 CFR 324 when transitioning from LIBOR to another reference rate. Among other things, the agencies clarified that “such a transition would not change the capital treatment of the instrument, provided the alternative rate is economically equivalent with the LIBOR-based rate.” Specifically, the FAQs clarify that the agencies do “not consider the replacement or amendment of a capital instrument that solely replaces a reference rate linked to LIBOR with another reference rate or rate structure to constitute an issuance of a new capital instrument for purposes of the capital rule.” Additionally, such a replacement or amendment would not create an incentive to redeem, provided “there are no substantial differences from the original instrument from an economic perspective.” Supervised financial institutions should conduct an appropriate analysis demonstrating that the replacement or amended instrument is not substantially different from the original instrument from an economic perspective and may be asked to provide the analysis to the agencies. “Considerations for determining that a replacement or amended capital instrument is not substantially different from the original instrument from an economic perspective could include, but are not limited to, whether the replacement or amended instrument has amended terms beyond those relevant to implementing the new reference rate or rate structure,” the FAQs state.
Find continuing InfoBytes coverage on LIBOR here.
DoD releases MLA report
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.”
SBA to open PPP direct borrower forgiveness platform
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.
FINRA to require filing of retail communications for private placement offerings
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.
FDIC argues “valid-when-made rule” fills statutory gaps
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.’”
OCC to rescind CRA final rule as agencies signal joint overhaul
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.