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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.
FTC comments on application of ECOA, Regulation B in response to CFPB RFI
Recently, FTC staff submitted a comment letter in response to the CFPB’s request for information (RFI) seeking input on ways to provide additional clarity under the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. As previously covered by InfoBytes, the CFPB issued the RFI last July requesting comments on ways to create a regulatory environment that expands credit access and ensures consumers and communities are protected from discrimination with respect to any aspect of a credit transaction. Included in the RFI was a request for input on whether “the Bureau should provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Regulation B.” Citing to legislative history, the FTC noted that Regulation B explicitly incorporates disparate impact, and stressed that “[a]rticulating a single approach to disparate impact analysis that covers diverse sets of present and future facts and circumstances of discrimination could be difficult and could risk being both over and under inclusive.” The FTC suggested that if the Bureau chooses to provide additional detail regarding its approach to disparate impact analysis, a disclaimer should be included that such information is not intended to “bless” any violations of ECOA and Regulation B, but is rather “intended to provide examples of how the agency might approach a fair lending matter.”
In response to the Bureau’s request for information about ways it might support efforts to meet the credit needs of small businesses, the FTC highlighted recent enforcement actions involving small businesses, including actions involving deceptively advertised financial products and unfair billing and collection practices, particularly with respect to merchant cash advances. The FTC also urged the Bureau to remind entities offering credit to small businesses that ECOA and Regulation B apply and that entities cannot avoid application of these statutes based solely on how they characterize a transaction or the benefits they claim to provide. The FTC further stressed that collecting small business lending demographic data could aid in enforcement efforts, as would encouraging small businesses to report misconduct and refer complaints to the FTC and the states. In addition, the FTC highlighted the importance of educating small businesses about different products and terms, as well as potential law violations, which could assist small businesses in comparing products resulting in less expensive financing options.
NY bill requires licensing for all commercial financing under $500K
On January 6, a member of the New York Senate introduced S1061, which would update the New York Banking Law (the “Law”) to require a license for persons or entities engaging in the business of making or soliciting a “commercial financing product” in New York. The legislation defines a commercial financing product as “any advance of funds to a commercial or business enterprise made for the purpose of assisting the business with its capital needs,” including (i) loans made to a commercial enterprise of $500,000 or less; (ii) asset-based financing in the amount of $500,000 or less; and (iii) leasing transactions in the amount of $500,000 or less.
“Making or soliciting” includes:
- Providing commercial financing products to small businesses;
- Marketing commercial financing products for providers of commercial financing products;
- Receiving compensation from a provider of a commercial financing product in exchange for a referral; and
- An entity that partners with a federal or state banking organization originator and the entity: (i) acquires a participation interest in the commercial financing product, if the entity either (a) receives compensation from the originator or (b) services the commercial financing product; or (ii) provides indemnity or loss protection to the originator for losses the originator may incur based on the performance of the commercial financing product.
The legislation would exempt banking organizations as defined by the Law (all banks, trust companies, private bankers, savings banks, safe deposit companies, savings and loan associations, credit unions and investment companies), any lender who makes or solicits five or fewer commercial financing products within a 12-month period, and check casher licensees, among others. Notably, the legislation does not currently contemplate any changes to existing Section 340, Article 9 of the Law, which generally requires licensure to originate commercial-purpose loans in New York of $50,000 or less with a rate above 16 percent.
New York enacts commercial lending disclosure requirements
On December 23, the New York governor signed S5470, which establishes consumer-style disclosure requirements for certain commercial transactions. For open and closed-end commercial financing transactions, the legislation requires that the disclosures include, among other things, (i) the amount financed or the maximum credit line; (ii) the total cost of the financing; (iii) the annual percentage rate; (iv) payment amounts; (v) a description of all other potential fees and charges; and (vi) prepayment charges. Violations are subject to a civil penalty no greater than $2,000 per violation. Notably, the legislation exempts (i) financial institutions (defined as a chartered or licensed bank, trust company, industrial loan company, savings and loan association, or federal credit union, authorized to do business in New York); (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) technology service providers; (v) lenders who make no more than five applicable transactions in New York in a 12-month period; and (vi) any individual commercial financing transaction over $500,000. The legislation is effective 180 days after enactment.
As previously covered by InfoBytes, California is currently finalizing proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018), which was enacted in September 2018. The California Department of Financial Protection and Innovation previously signaled its intent to finalize the regulations by January 2021.
CFPB report anticipates data collection on small-business lending
On December 15, the CFPB released a report detailing the results of the panel convened pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA), which discussed the Bureau’s pending rulemaking to implement Section 1071 Dodd-Frank Act. Section 1071 requires the Bureau to engage in a rulemaking to collect and disclose data on lending to both women-owned and minority-owned small businesses. In September, the Bureau released a detailed outline describing the proposals under consideration for Section 1071 implementation, including factors such as scope, covered lenders, covered products, data points, and privacy (details covered by InfoBytes here). The October panel was comprised of a representative from the Bureau, the Chief Counsel for Advocacy of the Small Business Administration, and a representative from the Office of Information and Regulatory Affairs in the Office of Management and Budget. The panel consulted with small entity representatives (SERs)—those who would likely be directly affected by the Section 1071 rulemaking—to discuss the economic impacts of compliance with the outline’s proposals, as well as regulatory alternatives to the proposals.
The report includes, among other things, the feedback and recommendations made by the SERs, and the findings and recommendations of the panel. Generally, the SERs were supportive of the proposal with “many expressly support[ing] broad coverage of both financial institutions and products in the 1071 rulemaking.” The SERs backed data transparency and simple regulations but expressed significant concern that the rulemaking would cause smaller financial institutions to “incur disproportionate compliance cost compared to large [financial institutions]” and would ultimately either decrease lending or increase costs for small businesses. The SERs also recommended that the Bureau take into account different types of financial institutions operating in the small business lending market, including non-depository institutions. The report also details specific recommendations by the panel, including that the Bureau issue compliance materials in connection with the rulemaking and consider providing sample disclosure language related to the collection of race, sex, and ethnicity information for principal owners as well as women-owned and minority-owned business status.
SBA issues notice on PPP loan ownership changes
On October 2, the Small Business Administration issued a procedural notice providing guidance for Paycheck Protection Program (PPP) lenders when a recipient of a PPP loan experiences a change in ownership. According to the guidance, a “change of ownership” occurs when (i) at least 20 percent of common stock or other ownership interest of a PPP borrower is sold or transferred; (ii) the PPP borrower sells or transfers at least 50 percent of its assets; or (iii) the PPP borrower merges with or into another entity. Borrowers must notify their PPP lenders in writing before the closing of any change in ownership. The guidance specifies that, regardless of the change of ownership circumstances, the loan terms still apply and PPP lenders are “required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.” Among other things, the guidance explains that the PPP borrower remains responsible for performing all PPP loan obligations and PPP-related certifications (including the certification of economic necessity), as well as complying with all other applicable PPP requirements. Additionally, PPP borrowers are still required to obtain, prepare, retain, and provide all required documentation to their PPP lender or lender responsible for servicing the PPP loan or to the SBA upon request.
FTC settles with company posing as SBA lender
On September 25, the FTC announced a settlement with a Rhode Island-based company and its owner (defendants), resolving allegations that the defendants violated the FTC Act by claiming to be an approved lender for the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) even though the defendants are neither affiliated with the SBA nor an SBA-authorized lender. As previously covered by InfoBytes, the FTC filed an action against the defendants in April, alleging that the defendants made deceptive statements on their websites, such as “WE ARE A DIRECT LENDER FOR THE PPP PROGRAM!,” and directly contacted small businesses claiming to represent the SBA in order to solicit loan applications on behalf of the businesses’ banks. The settlement prohibits the defendants from engaging in the conduct subject to the action, including misrepresenting that they are affiliated with the SBA and that they are authorized to accept or process applications on behalf of the SBA. Moreover, the defendants are prohibited from disclosing or benefitting from consumer information obtained prior to the settlement without express, informed consent from the consumer, and are subject to certain reporting and recordkeeping requirements.
CFPB outlines plan to disclose data on small-business lending
On September 15, the CFPB released its “Outline of Proposals Under Consideration and Alternatives Considered” (Outline) for implementing the requirements of Section 1071 of the Dodd-Frank Act, which instructs the Bureau to collect and disclose data on lending to women and minority-owned small businesses. The detailed Outline describes the proposals under consideration and discusses other relevant laws, the regulatory process, and potential economic impacts. The Bureau also released a high-level summary of the Outline. Highlights of the proposals include:
- Scope. The Bureau is considering proposing that the data collection and reporting requirements would apply only to applications for credit by a small business. Financial institutions would not be required to collect and report data for women- and minority-owned businesses that are not considered “small,” as defined by the Small Business Act and the Small Business Administration’s (SBA) implementing regulations.
- Covered Lenders. The Bureau is considering proposing a broad definition of “financial institution” that would apply to a variety of entities engaged in small business lending, but is also considering proposing exemptions based on either a size-based (examples include $100 million or $200 million in assets), or activity-based threshold (examples range from 25 loans or $2.5 million to 100 loans or $10 million), or both.
- Covered Products. The Bureau is considering proposing exemptions from the definition of “credit” to include consumer-designated credit, leases, factoring, trade credit, and merchant cash advances.
- Application. Because an “application” would trigger requirements under Section 1071, the Bureau is considering proposing a definition that is largely consistent with Regulation B; however, the Bureau is also considering “clarifying circumstances,” such as inquiries/prequalifications, that would not be reportable.
- Data Points. The Bureau is considering a range of data points for collection, including, in addition to the mandatory data points required by Section 1071, “discretionary data points” to aid in fulfilling the purposes of Section 1071: “pricing, time in business, North American Industry Classification System (NAICS) code, and number of employees.”
- Privacy. The Bureau is considering using a “balancing test” for public disclosure of the data. Specifically, data “would be modified or deleted if its disclosure in unmodified form would pose risks to privacy interests that are not justified by the benefits of public disclosure.”
Additionally, the Bureau will convene a panel, as required by the Small Business Regulatory Enforcement Fairness Act (SBREFA), in October 2020 to “consult small entities regarding the potential impact of the proposals under consideration.” Feedback on the proposals is due no later than December 14.