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OCC grants first national bank charter to fintech company
On July 31, the OCC presented its first full-service national bank charter to a fintech company permitting the establishment of a new national bank. The new bank received conditional approval from the agency in 2018, as well as regulatory approval from both the FDIC and the Federal Reserve according to a press release issued by the company. According to the press release, the charter will allow the bank to offer FDIC-insured nationwide banking services, including traditional loan and deposit products, through mobile, online, and phone-based banking. The bank will be located in Utah but will have no branches, deposit-taking ATMs, or offices open to the public. Acting Comptroller of the Currency Brian P. Brooks issued a statement noting that the opening of the bank “represents the evolution of banking and a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.”
Federal legislation would apply TILA to small business financing
On July 30, Congresswoman Nydia Velázquez (D-NY), the Chairwoman of the House Small Business Committee, announced new legislation titled, “Small Business Lending Disclosure and Broker Regulation Act,” which would amend TILA and subject small business financing transactions to APR disclosures. The federal legislation would track similar state legislation enacted in California and currently pending the governor’s signature in New York, covered by InfoBytes here and here. However, unlike both California and New York, the federal legislation does not exempt depository institutions from coverage. Highlights of the TILA amendments include:
- CFPB Oversight. The legislation provides the CFPB with the same authority with respect to small business financing as the Bureau has with respect to consumer financial products and services.
- Coverage. The legislation defines small business financing as, “[a]ny line of credit, closed-end commercial credit, sales-based financing, or other non-equity obligation or alleged obligation of a partnership, corporation, cooperative, association, or other entity that is [$2.5 million] or less,” that is not intended for personal, family, or household purposes.
- Disclosure. The legislation would require disclosure of the following information at the time an offer of credit is made: (i) financing amount; (ii) annual percentage rate (APR); (iii) payment amount; (iv) term; (v) financing charge; (vi) prepayment cost or savings; and (vii) collateral requirements.
- Fee Restriction. The legislation prohibits charging a fee on the outstanding principal balance when refinancing or modifying an existing loan, unless there is a tangible benefit to the small business.
Additionally, the legislation would amend the Consumer Financial Protection Act to create the Office of Broker Registration, which would be responsible for oversight of brokers who “solicit[] and present[] offers of commercial financing on behalf of a third party.” The legislation would, among other things: (i) require commercial brokers to register with the CFPB; (ii) require commercial brokers to provide certain disclosures to small business borrowers; (iii) prohibit the charging of fees if financing is not available or not accepted; and (iv) require the CFPB to collect and publicly publish broker complaints from small businesses. Lastly, the legislation would require each state to establish a small business broker licensing law that includes examinations and enforcement mechanisms.
Relatedly, the FTC recently took action against New York-based merchant cash advance providers and two company executives for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. See detailed InfoBytes coverage on the complaint here.
FTC charges merchant cash advance provider with deceptive and unfair practices
On August 3, the FTC filed a complaint against two New York-based merchant cash advance providers and two company executives (collectively, “defendants”) for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. The FTC’s complaint alleges that when marketing and offering MCAs to small business customers, the defendants, among other things, (i) falsely advertised that MCAs do not require collateral or personal guarantees, but when consumers defaulted on their financing agreements, the defendants frequently filed lawsuits against them, including against individual business owners who provided personal guarantees, to collect the unpaid amount; (ii) misrepresented the amount of total financing in the contract that consumers would receive by withholding fees that are deducted from the promised funds; and (iii) made unfair, unauthorized withdrawals from customers’ bank accounts in excess of consumers’ authorization without express informed consent, and routinely continued to debit customers’ bank accounts after the MCAs were fully repaid. According to the FTC, the “unauthorized overpayments have been a typical occurrence for [the defendants’] customers, and have impacted at least thousands of them, in amounts ranging from hundreds to thousands of dollars.”
The FTC seeks a permanent injunction against the defendants, along with monetary relief including “rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief.”
OCC allows extensions of CIF withdrawal period due to Covid-19
On August 4, the OCC issued an interim final rule, which clarifies the rules regarding account withdrawals from collective investment funds (CIF) in response to the Covid-19 pandemic. Specifically, under the OCC’s fiduciary activities regulation (12 CFR 9.18), a bank that is administering a CIF invested “primarily in real estate or other assets that are not readily marketable” may require a prior notice period of up to one year for withdrawals. The interim final rule codifies the OCC’s interpretation of the notice requirement as “requiring the bank to withdraw an account within the prior notice period or, if permissible under the CIF’s written plan, within one year after prior notice was required,” which is known as “the standard withdrawal period.”
In addition to codifying the standard withdrawal period, the interim final rule creates an exception that allows banks to extend the withdrawal period (with opportunities for further extensions) under certain conditions and with OCC approval. The OCC notes that the extension is intended help “preserve the value of the CIF’s assets for the benefit of fund participants during unanticipated and severe market conditions,” such as those resulting from the Covid-19 pandemic.
The interim final rule will be effective upon publication in the Federal Register.
SBA issues new FAQs on forgiving PPP loans
On August 4, the Small Business Administration (SBA) issued new FAQs on Paycheck Protection Program (PPP) loan forgiveness. The FAQs note that borrowers and lenders may rely on the FAQs as the SBA’s interpretation of the CARES Act, the Paycheck Protection Program Flexibility Act (Flexibility Act), and all of the Paycheck Protection Program Interim Final Rules (available here). The FAQs cover various topics including (i) general loan forgiveness; (ii) loan forgiveness of payroll and nonpayroll costs, and types of costs that constitute payroll and nonpayroll costs; and (iii) loan forgiveness reductions. For continued InfoBytes coverage on PPP loan forgiveness see here.
FFIEC discusses additional Covid-19 loan accommodations
On August 3, the member agencies of the Federal Financial Institutions Examinations Council (FFIEC) issued a joint statement on managing loan accommodations granted to borrowers pursuant to federal, state, and local law to address Covid-19 related hardships. Specifically, the statement provides risk management and consumer protection principles to financial institutions working with borrowers that are near the end of their initial loan accommodation period. Among other things, the statement outlines:
- Risk Management Practices. The statement encourages financial institutions to institute sound credit risk management practices following an accommodation period, such as “reassess[ing] risk ratings for each loan based on a borrower’s current debt level, current financial condition, repayment ability, and collateral.” Additionally, the statement encourages institutions to provide “clear, accurate, and timely information to borrowers and guarantors regarding the accommodation” being granted.
- Sustainable Accommodations. The statement notes that the Covid-19 pandemic may have “long-term adverse impact[s] on borrower’s future earnings” and financial institutions should consider additional accommodation options to mitigate losses for the borrower and institutions by assessing “each loan based upon the fundamental risk characteristics affecting the collectability of that particular credit.”
- Consumer Protection. The statement encourages financial institutions to provide consumers with options to support repayment at the end of accommodations to avoid delinquencies and to consider offering credit product term changes to “support sustainable and affordable payments for the long term.”
- Accounting and Regulatory Reporting. The statement emphasizes that financial institutions should consider the effects of the Covid-19 pandemic in its allowance for loan and lease losses, or credit losses, estimation processes, consistent with generally accepted accounting principles.
- Internal Control Systems. The statement notes that internal control functions for the end of initial accommodation periods and for additional accommodations typically “include appropriate targeted testing of the process for managing each stage of the accommodation.” Additionally, the statement reminds financial institutions of their responsibility for ensuring service providers in charge of these functions act consistently with the institution’s policies and all applicable laws and regulations.
HUD issues mortgagee letter extending interim procedures relating to FHA Section 232 approved mortgages
On July 31, 2020, the U.S. Department of Housing and Urban Development issued Mortgagee Letter 2020-25, which extends interim procedures regarding site access issues related to Section 232 mortgage insurance applications during the Covid-19 pandemic (previously covered here). The guidance provides temporary modifications pertaining to third-party site inspections for Section 232 FHA-insured healthcare facilities with effective dates within 60 days of the issuance of the mortgagee letter. The letter also provides guidance on other aspects relating to Section 232 properties, including regarding Property Capital Needs Assessments, appraisals, Section 232 Phase 1 Environmental Site Assessments, asbestos surveys, and radon testing, among other things.
FHFA extends policy allowing GSEs to buy mortgages in forbearance
On July 31, the Federal Housing Finance Agency (FHFA) announced an extension of a temporary policy that allows Fannie Mae and Freddie Mac (GSEs) to purchase “certain single-family mortgages in forbearance that meet specific eligibility criteria” due to the Covid-19 pandemic. The temporary policy is extended for loans originated through August 31 from the original deadline of May 31. As previously covered by InfoBytes, standard policies dictate that the GSEs do not purchase loans that are in forbearance; however, due to the economic effects of Covid-19, and in an effort to provide liquidity to ensure continued lending, FHFA allowed the GSEs to buy certain mortgages that enter forbearance within the first month after loan closing, prior to delivery to the GSEs. The extension of the policy is reflected in Fannie Mae’s updated Lender Letter 2020-06 and Freddie Mac’s Guide Bulletin 2020-30.
FinCEN warns of Covid-19 cybercriminal activity
On July 30, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to financial institutions to assist in the “detecting, preventing, and reporting” of potential Covid-19 cybercriminal activity. The advisory highlights specific ways cybercriminals are exploiting the Covid-19 pandemic through “malware and phishing schemes, extortion, business email compromise (BEC) fraud, and exploitation of remote applications.” Among other things, the advisory warns that with increased remote access, cybercriminals seek to undermine weak authentication processes to gain unauthorized access to accounts. Moreover, FinCEN and law enforcement have observed increased phishing scams that use Covid-19 themes, such as payments related to the CARES Act, in the subject and body of emails to lure their victims. Regarding ransomware, the advisory notes that “[i]n almost all cases, criminals require ransomware-related extortion payments to be made in [convertible virtual currency].” Lastly, the advisory notes that due to changing business operations, cybercriminals are using BEC schemes to intercept or fraudulently induce payments in the healthcare industry supply chain. The advisory includes a specific list of red flag indicators for financial institutions to be aware of in each category.
FHA mortgagee letter issues update to effective date for previous guidance on self-employment, rental income
On July 29, the FHA issued Mortgagee Letter 2020-24, which revises the effective date for the temporary guidance on verification of self-employment and receipt of rental income published in Mortgagee Letter 2020-23, previously covered here. The temporary guidance is in effect for case numbers assigned on or after August 12 through November 30.