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Fed releases third quarter SLOOS survey on bank lending practices
On November 6, the Fed released its quarterly survey of Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices. The report is administered to mostly domestic banks but includes some international banks.
The findings are summarized based on each type of loan: commercial, real estate, and consumer. Regarding business loans, the Fed finds banks reported “tighter standards and weaker demand for commercial and industrial loans.” For commercial real estate loans, banks reported “tighter standards and weaker demand” as well. For household loans, banks reported that “lending standards tightened across all categories of residential real estate loans (other than government residential mortgages),” but demand weakened for all residential real estate loans. Similarly, but for HELOCs, banks reported “tighter standards and weaker demand.” For consumer loans, such as credit cards, and auto loans, among others, “standards reportedly tightened, and demand weakened on balance.”
The Fed also asked questions related to banks’ comfort level in approving applications based on FICO scores; the Fed found that banks were “less likely to approve such loans for borrowers with FICO scores of 620 and 680 in comparison with the beginning of the year, while they were… about as likely to approve auto loan applications for borrowers with FICO scores of 720 over this same period.” Finally, the Fed inquired about reasons why banks tightened their lending standards in the third quarter. Banks explained that economic conditions created a “reduced tolerance for risk; deterioration in the credit quality of loans and collateral values; and concerns about funding costs.”
CFPB reports on veterans’ financial hurdles despite legislative wins
On November 1, the CFPB published a broad summary of several findings regarding how financial institutions may not be doing all they can to help service members under federal legislation. For instance, in 2022, the CFPB found that service members were losing $10 million a year in savings in eligible auto and personal loans. Last month, the CFPB released a similar study on how credit card companies were also limited in giving all the benefits they could offer under the SCRA. Loans aside, military payroll allotments provide financial companies with a way to force automatic payments––something the CFPB acknowledges is “ripe for abuse.” The CFPB worked with the DOD to close loopholes that could exploit servicemembers. Additionally, military identity theft in 2023 is still an ongoing issue, as has been previously covered by InfoBytes here. But in October the CFPB found that Transunion had failed to provide crucial identity theft protection for thousands of individuals, including active-duty members of the military. There are also issues with supposed consulting services: “Earlier this year, the CFPB published a joint WARNO with the VA on unaccredited individuals and organizations and the CFPB is working closely with federal and state agencies to protect veterans’ benefits.”
The CFPB notes it will “continue to work with all our partners as the financial marketplace evolves so we can understand the unique needs and challenges of members of the military community. If you have a problem with a financial product or service, submit a complaint to us, and we’ll work to get you a response.”
SBA issues new SBLC licenses for the first time in 40 years
On November 1, the SBA announced that three new Small Business Lending Company (SBLC) licenses have been issued to lenders focused on underserved markets, which is notably the first expansion of the SBLC program in more than 40 years. An SBLC license permits lending institutions to leverage government guarantees during the process of approving small business loans, decreasing risk for the lender, and lowering costs for the borrower. Consequently, SBA noted, SBLCs can extend a greater number of loans to small businesses than would be feasible without government support. The announcement stated that SBA's current SBLCs surpass banks and credit unions in their ability to provide loans to minority-owned businesses.
In June, the SBA opened a window for new applications for lenders. In announcing the new licensees, SBA Administrator Isabel Guzman stated that “[w]ith the addition of three new Small Business License Companies, the SBA will be able to serve even more small business owners who need capital to start, operate, and grow their businesses.” The SBA highlighted that “[e]ach of the three new SBLC license holders will focus on historically underserved markets, including small businesses in Native, rural, and low-income communities.”
2nd Circuit affirms leveraged loans are not securities
On August 24, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s order dismissing plaintiff’s claim that a national bank’s nearly $1.8 billion syndicated loan for a drug testing company were securities. The drug testing company filed for bankruptcy subsequent to a $256 million global settlement with the DOJ in qui tam litigation involving the company’s billing practices.
Plaintiff, a trustee of the drug testing company, brought claims to the New York Supreme Court in 2017 against defendant for violations of (i) state securities laws; (ii) negligent misrepresentation; (iii) breach of fiduciary duty; (iv) breach of contract; and (v) breach of the implied contractual duty of good faith and fair dealing. Defendant filed a notice of removal to the U.S. District Court for the Southern District of New York, where the district court denied plaintiff’s motion to remand after concluding it had jurisdiction under the Edge Act, and later granted defendant’s motion to dismiss because plaintiff failed to plead facts plausibly suggesting the notes are securities.
The 2nd Circuit held that the district court had subject matter jurisdiction pursuant to the Edge Act. The court then applied a “family resemblance” test to determine whether a note is a security and examined four separate factors to help uncover the context of a note. In comparing the loan note to “judicially crafted” list of instruments that are not securities, the court found that the defendant’s note “‘bears a strong resemblance’” to one, therefore concluding that the note is not a security and affirming the district court’s earlier decision.
SBA offers disaster assistance to businesses and residents
On August 16, the Small Business Administration (SBA) announced the availability of low-interest disaster loans available to businesses and residents across the nation.
- Mississippi – In light of damage from severe storms, straight-line winds, and flooding that occurred between June 14-19, certain private non-profit businesses (PNP) that do not provide critical services of a governmental nature are eligible to apply for low-interest disaster loans. PNP organizations may borrow up to $2 million with an interest rate of 2.375% to repair or replace damage. SBA is also offering economic injury disaster loans to help meet the needs of PNP organizations. The filing deadline is Oct 11, and the deadline to submit economic injury applications is May 13, 2024.
- Illinois – Following the announcement of the presidential disaster declaration due to severe storms and flooding June 29-July 2, SBA is offering affected businesses and residents in Illinois low-interest loans. SBA detailed that disaster loans up to $500,000 are available to homeowners to replace or repair damage, and “[i]nterest rates are as low as 4% for businesses, 2.375% for nonprofit organizations, and 2.5% for homeowners and renters, with terms up to 30 years.” The filing deadline is Oct 16, and the deadline to submit economic injury applications is May 13, 2024.
- New Jersey – In light of damage from severe storms and flooding that occurred June 14-19, certain PNP organizations that do not provide critical services of a governmental nature are eligible to apply for low-interest disaster loans. PNP organizations may borrow up to $2 million with an interest rate of 2.375% with terms up of to 30 years to repair or replace damage. SBA is also offering economic injury disaster loans to help meet the needs of PNP organizations. The filing deadline is Oct 10, and the deadline to submit economic injury applications is May 13, 2024.
- Oklahoma – SBA is making low-interest federal disaster loans available for certain PNP organizations in certain counties following the announcement of the presidential disaster declaration. PNP organizations may borrow up to $2 million with an interest rate of 2.375% with terms of up to 30 years to repair or replace damage. “SBA can also lend additional funds to help with the cost of improvements to protect, prevent or minimize the same type of disaster damage from occurring in the future.”
OCC issues guidance regarding purchased loans
On August 8, the OCC issued new guidance regarding the applicability of the legal lending limit (LLL) to purchased loans. The guidance clarifies that “all loans and extensions of credit made by banks are subject to the LLL” and explains that “[w]hether a loan that a bank purchases is attributable to the seller under the LLL regulation depends on specific facts and circumstances.” The OCC then further explains, that in evaluating purchased loans, loans will be attributed to a seller if the bank has direct or indirect recourse to the seller, which can be explicit or implied. Explicit recourse is established through a written agreement and implied recourse can be established though the bank’s course of dealing with the seller. For example, the OCC noted that if a seller routinely “substituted or repurchased loans or refilled or replenished a reserve account even when the contract did not require those actions” that would be sufficient to establish implied recourse.
FTC settles with financial services company
On July 14, the FTC announced an $18 million settlement with a financial services company (defendant) over allegations that it deceived consumers. The FTC originally filed a complaint in 2018 claiming, among other things, that the defendant violated the FTC Act, the Privacy of Consumer Financial Information Rule, and the Gramm-Leach-Bliley Act, by falsely advertising loans with “no hidden fees” and misleading consumers with respect to whether their loan applications had been approved. The complaint also alleged that the defendant withdrew double payments from consumers’ accounts and continued to charge consumers who cancelled automatic payments or paid off their loan, leading to overdraft fees and preventing borrowers from making other payments. Under the terms of the stipulated final order, the defendant is permanently barred from (i) misrepresenting fee amounts, the status of an application, and other material facts concerning any extension of credit; and (ii) making any representation about a specific loan amount prior to accepting a loan application, without clear and conspicuous disclosure of the dollar amount of any prepaid, up-front, or origination fee or the total amount of funds that would be disbursed to the consumer.
CFPB releases TRID FAQs
On May 14, the CFPB released five new FAQs regarding housing assistance loans to assist with TILA-RESPA Integrated Disclosure Rule (TRID Rule) compliance. Highlights from the FAQs are listed below:
- The TRID Rule covers a loan if it: “[i] is made by a creditor as defined in § 1026.2(a)(17); [ii] is secured in full or in part by real property or a cooperative unit; [iii] is a closed-end, consumer credit (as defined in § 1026.2(a)(12)) transaction; [iv] is not exempt for any reason listed in § 1026.3; and [v] is not a reverse mortgage subject to § 1026.33.”
- Regulation Z exempts certain mortgage loans from the TRID disclosure requirements (i.e., providing the LE and CD) (the “Partial Exemption”). This exemption covers certain subordinate housing assistance loans. To qualify, “a transaction must meet all of the following criteria: [i] the transaction is secured by a subordinate-lien; [ii] the transaction is for the purpose of a down payment, closing costs, or other similar home buyer assistance, such as principal or interest subsidies; property rehabilitation assistance; energy efficiency assistance; or foreclosure avoidance or prevention; [iii] the credit contract provides that it does not require the payment of interest; [iv] the credit contract provides that repayment of the amount of credit extended is: forgiven either incrementally or in whole, deferred for at least 20 years after the transaction, or until the sale of the property, or until the property securing the transaction is no longer the consumer’s principal dwelling; [v] the total of costs payable by the consumer in connection with the transaction only include recording fees, transfer taxes, a bona fide and reasonable application fee, and a bona fide and reasonable fee for housing counseling services[;] the application fee and housing counseling services fee must be less than one percent of the loan amount; [and] [iv] the creditor provides either the Truth-in-Lending (TIL) disclosures or the Loan Estimate and Closing Disclosure[.] Regardless of which disclosures the creditor chooses to provide, the creditor must comply with all Regulation Z requirements pertaining to those disclosures.”
- The BUILD Act includes a partial statutory exemption from the TRID disclosure requirements for similar transactions. To qualify for the Partial Exemption from the TRID disclosure requirements under the BUILD Act, the loan must be a residential mortgage loan, offered at a 0 percent interest rate, have only bona fide and reasonable fees, and be primarily for charitable purposes and be made by an organization described in Internal Revenue Code section 501(c)(3) and exempt from taxation under section 501(a) of that Code.
- If a housing assistance loan creditor opts for one of the partial exemptions under either the Regulation Z Partial Exemption or under the BUILD Act, they are excused from the requirement to provide the Loan Estimate and Closing Disclosure for that transaction. The Partial Exemption under Regulation Z does not excuse the creditor from providing certain other disclosures required by Regulation Z. If the creditor qualifies for the exemption under the BUILD Act, they have the option to provide the GFE, HUD-1 and Truth In Lending disclosures in lieu of the LE and CD at the creditor’s discretion.