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On May 12, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Oversight of the Financial Regulators,” which primarily focused on responses by the Federal Reserve Board (Fed), FDIC, OCC, and NCUA to the Covid-19 pandemic. Committee Chairman Mike Crapo (R-ID) opened the hearing by thanking the regulators for crafting regulatory responses to assist financial institutions in meeting the needs of affected borrowers, and encouraged the regulators to find ways to provide flexibility for financial institutions that lend to households and businesses. Crapo also stressed the importance of making sure the Fed’s Main Street Lending Program (covered by a Buckley Special Alert) and the Municipal Liquidity Facility (coved by InfoBytes here) are “up and running quickly,” and expressed continued concerns that the “inclusion of population thresholds for cities and states that were not a part of the CARES Act will still impede access to smaller and rural communities.” Ranking Member Sherrod Brown (D-OH) argued, however, that the regulators’ relief measures have not favored consumers.
Fed Vice Chair for Supervision Randal K. Quarles provided an update on the Fed’s Covid-19 regulatory and supervisory efforts. When asked during the hearing when the Main Street Lending Program would be operational, he declined to give an exact date but emphasized it is the Fed’s “top priority,” and that he did not anticipate it will take months. When questioned about whether the Fed is taking measures to “ensure businesses are getting equitable access to the [lending] facilities,” Quarles stated that the Fed relies on banks to do the underwriting, but will supervise the banks to make sure the underwriting is done “safely and fairly.”
OCC Comptroller Joseph M. Otting also discussed a range of actions taken by the agency in response to the pandemic and outlined additional OCC priorities and objectives, including its proposal to modernize the Community Reinvestment Act (CRA). Senator Menendez (D-NJ) asked whether the OCC should revisit the proposed CRA rewrite, citing the inability of some small businesses—particularly minority-owned businesses—to obtain relief under the Payroll Protection Program (PPP). In response, Otting argued that the rewrite (done in conjunction with the FDIC—see InfoBytes CRA coverage here) should actually be accelerated “because it will drive more dollars into low and moderate income communities” impacted by the pandemic. However, several Democrats on the Committee disagreed and called for a separate hearing to discuss the CRA proposal.
FDIC Chairman Jelena McWilliams also addressed actions undertaken to maintain stability and to provide flexibility to both banks and consumers. Among other things, McWilliams stated that banks should rely on borrowers’ statements certifying that their economic need is legitimate when making PPP loans. “Our instruction to banks has been to make sure these loans are not being traditionally underwritten [and] to take a look at the certification that the borrower is providing,” McWilliams said during the hearing. She also emphasized that all banks must comply with fair lending laws when making PPP loans, whether or not specific guidance has been issued.
NCUA Chairman Rodney E. Hood also outlined agency measures in response to the pandemic. Among other things, Hood noted that the NCUA has issued guidance to support credit union industry participation in the PPP and approved several regulatory changes concerning the classification of PPP loans for regulatory capital and commercial underwriting purposes.
The following day, the House Subcommittee on Consumer Protection and Financial Institutions also held a roundtable with the federal regulators to discuss Covid-19 responses.
On May 12, the CFPB, the Federal Housing Finance Agency (FHFA), and the Department of Housing and Urban Development (HUD) announced a new mortgage and housing assistance website, which consolidates the CARES Act mortgage and rent relief protections, tips to avoid Covid-19 related scams, and tools for homeowners and renters to determine if their property is federally backed. The release details the steps the CFPB has taken in response to the Covid-19 pandemic, including informing consumers of their protections under newly created programs and releasing a policy statement concerning the responsibilities of credit reporting companies and furnishers. The release also outlines efforts that FHFA’s regulated entities and HUD have taken to address the national emergency, including forbearance options for homeowners and eviction protections for renters who live in multifamily properties that are backed by Fannie Mae or Freddie Mac.
Special Alert: California Assembly to introduce legislation for Covid-19-related relief for mortgage loans, vehicle-secured credit, PACE financing, and deferred deposit transactions
We understand that the California State Assembly will shortly propose amendments to Assembly Bill No. 2501 to create the “COVID-19 Homeowner, Tenant, and Consumer Relief Law of 2020.” As of posting of this Alert, the proposed legislation is not available on California’s legislative service website. The proposed law would provide relief to homeowners, tenants, and vehicle owners by prohibiting creditors and loan servicers from taking specified actions, including initiating foreclosures or repossessions, during the period from the date of enactment of the proposed law through the 180-day period following the date that California Governor Gavin Newsom declares the emergency related to Covid-19 has ended. Additionally, the proposed law would require servicers to place certain loans that become delinquent into automatic forbearance for a period of at least six months.
The proposed law appears similar to portions of an appropriations bill, “Take Responsibility for Workers and Families Act,” which was introduced in the U.S. House of Representatives on March 23, 2020, prior to the enactment of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and failed to pass. We understand that the proposed law is scheduled to be heard before the California State Assembly Banking Committee on May 19.
On May 11, the U.S. District Court for the Eastern District of Michigan granted a preliminary injunction against the enforcement of the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) Ineligibility Rule, concluding that the rule—which excludes “banks, political lobbying firms, certain private clubs with restrictive admissions practices, and sexually oriented businesses that present entertainment or sell products of a ‘prurient’ (but not unlawful) nature” from PPP loan eligibility—contravenes the purpose of the PPP. According to the opinion, a group of businesses that “provide lawful ‘clothed, semi-nude, and/or nude performance entertainment’” filed suit against the SBA seeking a preliminary injunction against the enforcement of the PPP Ineligibility Rule, after they were prevented from obtaining the loans and/or participating in the PPP because their businesses were deemed to be “of a ‘prurient sexual nature.’” The SBA argued that Congress could not have intended to support businesses that the SBA has historically denied financing, saying it would lead to “absurd results.” The court rejected this argument, stating, “these are no ordinary times, and the PPP is no ordinary legislation.” The court reasoned that because the intent of the CARES Act, which houses the PPP, is to protect workers in need, it is “not absurd to conclude” that in order to support workers from all businesses, Congress would temporarily permit SBA financial assistance to previously excluded business types. Finding that the Rule is in conflict with the Congressional purpose of the PPP, the court granted the preliminary injunction barring the SBA from enforcing the Rule.
The Federal Housing Administration, the Department of Veterans Affairs, and the Rural Housing Service have jointly issued fact sheets for servicers and for consumers outlining certain requirements and obligations under CARES Act mortgage payment forbearance. The fact sheet for servicers provides guidance for assisting and educating borrowers and explains that loss mitigation options will vary based on the program under which the loan is insured or guaranteed. The fact sheet for consumers provides guidance on requesting forbearance and information on the forbearance program.
During the week ending May 8, the Small Business Administration (SBA) in consultation with the Treasury Department (Treasury) updated the Paycheck Protection Program (PPP) Frequently Asked Questions (FAQs) to, among other things, provide guidance on the PPP safe harbor and counting a small business’s employees for the 500 or fewer employee requirement. As previously covered by InfoBytes, the SBA will deem that the borrower certification on a loan application was made in good faith if a recipient of a PPP loan prior to April 24 determines it may have other forms of liquidity and repays the loan by the safe harbor deadline of May 7. SBA extended the safe harbor for repayment from May 7 to May 14. The FAQs also provide that a small business must include foreign affiliate employees when calculating how many people it employs for purposes of determining if the business meets the PPP eligibility requirement of 500 or fewer employees. Additionally, the updated FAQs also explain that a PPP loan recipient that makes a good faith attempt, in writing, to rehire a furloughed employee, will not be penalized by a reduction in loan forgiveness it receives if that employee rejects the offer. New FAQs also cover how to calculate maximum PPP loan amounts for seasonal employers and whether nonprofit hospitals qualify for PPP loans.
In April, Senator Mike Crapo (R-ID), Chairman of the Senate Banking Committee, received replies to an April 8 letter he sent to the Federal Reserve (Fed), OCC, NCUA, and FDIC, which urged the regulators to “strengthen the Paycheck Protection Program” (PPP) and requested that they provide recommendations to assist the market as well as lenders and borrowers affected by Covid-19.
The Fed highlighted how it has strengthened the PPP, stating it: (i) eased “leverage requirements for community banks”; (ii) “published rules delaying the impact on regulatory capital of new loan-loss accounting standards”; (iii) created a new lending facility for the PPP; (iv) jointly with the FDIC, and OCC, “issued an interim final rule to clarify that a zero percent risk weight applies to PPP loans and to neutralize the regulatory capital effects of participating in the new PPP lending facility, helping preserve the flow of credit to small businesses”; (v) “encouraged institutions to use their capital buffers for their primary purpose: to support safe and sound lending throughout the credit cycle”; and (vi) provided suggestions for “congressional action to improve regulatory flexibility.”
The OCC’s replied that it has taken the following actions, among others, to support the PPP: (i) “encouraged banks to work with customers affected by” the pandemic; (ii) “encouraged banks to use the [Fed’s] discount window”; (iii) encouraged use of capital and liquidity buffers by banks; (iv) issued a joint statement with five regulatory agencies promoting “responsible small-dollar loans to consumers and small businesses”; (v) jointly issued interim final rules regarding regulatory capital and deferral of real estate appraisals; and (vi) coordinated listening sessions on the PPP.
The FDIC stated it is working to provide “necessary flexibility to both banks and their customers.” The agency’s response also enumerated several other actions it has taken to promote the PPP, including that it: (i) created a PPP information page on their website; (ii) shared bank questions and concerns with the Small Business Administration (SBA); (iii) created bank frequently asked questions; (iv) issued a financial institution letter referencing resources from the SBA and the Treasury; (v) continues to “provid[e]…resources to our examination teams so they” can better answer questions from regulated institutions; and (vi) jointly with other regulatory agencies, issued guidance on current expected credit losses methodology and community bank leverage ratio. The FDIC also reported possible supplementary and tier 1 leverage ratio changes.
On May 5, the Federal Reserve Board, the OCC, and the FDIC announced an interim final rule that modifies the agencies’ Liquidity Coverage Ratio (LCR) rule to support participation in the Federal Reserve's Money Market Mutual Fund Liquidity Facility and the Paycheck Protection Program Liquidity Facility (previously covered by InfoBytes here and here). The LCR rule requires large banks to hold a certain amount of “high-quality liquid assets” in order to meet their short-term liquidity needs. The interim final rule modifies the agencies’ capital rules to neutralize the effects of participation. The rule is effective immediately and comments will be accepted within 30 days of publication in the Federal Register.
On May 4, the Minnesota governor issued an executive order that classifies recovery rebates under the CARES Act as “government assistance based on need” under Minnesota Statutes 2019, section 550.37, subdivision 14. As a result, such recovery rebates are exempt from all claims by creditors, except claims for domestic support obligations. Additionally, for purposes other than domestic support obligations, state, local, and tribal government payments issued to relieve consumers of the adverse economic impact caused by Covid-19 are also considered government aid and, thus, exempt from claims by creditors. The order also suspends the provisions that permit: (i) service of a garnishment summons on a consumer debtor of consumer garnishee; (ii) prejudgment garnishment on a consumer debtor, and (iii) a judgment creditor to obtain information about a consumer debtor’s assets, liabilities, and personal earnings. The order will remain in effect until the peacetime emergency declared in Executive Order 20-01 is terminated or until the order is rescinded.
On May 4, the Maryland governor’s Office of Legal Counsel provided interpretive guidance for financial institutions regarding a previous executive order prohibiting garnishment of CARES Act recovery rebates. The office recommended enforcement action not be taken against a financial institution in a number of situations, including if it subjected a customer’s CARES Act rebate to garnishment and sent the proceeds to a judgment creditor prior to receiving notice of the order or being reasonably able to act on it. The office also clarified that application of a CARES Act recovery rebate to the negative balance in an overdrawn account is not considered to be the exercise of a lien or right of setoff for purposes of the executive order.
- Daniel R. Alonso to discuss "When can trial lawyers take their case to the public? The Harvey Weinstein case and beyond" at a New York City Bar Association webcast
- Jonice Gray Tucker to discuss "Fair servicing in wake of Covid-19" at an American Bar Association webinar
- APPROVED Webcast: Maximizing vendor value
- Daniel P. Stipano to discuss "Cram for the exam: Best prep strategies for a regulatory examination" at an ACAMS webinar
- Melissa Klimkiewicz to discuss "Flood insurance basics" at the NAFCU Virtual Regulatory Compliance School
- Sasha Leonhardt to discuss "Privacy laws clarified" at the National Settlement Services Summit (NS3)