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Lawmakers request SBA investigation of PPP lenders
On April 23, Senator Elizabeth Warren (D-MA) and Congresswoman Nydia Velazquez sent letters to the Inspectors General (IG) of the Department of Treasury and the Small Business Administration (SBA). On the same day, Senators Schumer (D-NY), Brown (D-OH), and Cardin (D-MD) also sent a letter to the SBA IG. The letters requested that the IGs investigate the administration of loan applications for the SBA Paycheck Protection Program (PPP) in order to detect any preferential treatment provided by lenders to certain applicants. The letter from Warren and Velazquez cited numbers released by the SBA, which they suggested indicated that smaller businesses have been receiving proportionally less of the PPP funds than much larger businesses. Schumer, Brown and Cardin requested that the SBA IG reply to the letter by May 8 with a recommendation on the SBA rules, regulations, and policies and procedures “to ensure small businesses get the money they need and are being treated fairly” by PPP lenders. Their letter expressed concerns that underserved, rural, minority-owned, and women-owned businesses need financial assistance immediately, and the lack of a previously-existing banking relationship should not place them lower in the lender’s queue preventing them from receiving PPP loans.
FHFA allows PPP loans as collateral for FHLB advances
On April 23, the Federal Housing Finance Agency (FHFA) announced that Federal Home Loan Banks (FHLB) will begin to accept Small Business Administration (SBA) Paycheck Protection Program (PPP) loans as collateral for advances to provide liquidity to community banks and other small lenders. FHFA issued a letter to FHLBs advising that banks may accept PPP loans from members subject to certain conditions including: (i) CAMELS rating must be at least a three, or credit rating in the top 60 percent; (ii) members downgraded after pledging PPP loans as collateral will have additional conditions placed on the collateral; and (iii) if the member does not replace PPP loans after downgrade with alternate eligible collateral, the FHLB will take possession of the collateral and impose haircuts based on member rating. The letter also sets out additional conditions regarding discounts, caps and limits. Among these conditions: (i) FHLBs must have at least a 10 percent collateral discount on 100 percent or less of unpaid principal balance (UPB); (ii) PPP collateral is capped at 20 percent of a member’s “lendable pledged collateral”; and (iii) a member may not pledge PPP loans for more than $5 billion of lendable collateral.
Fed IFR allows unlimited monthly convenient transfers and withdrawals
On April 23, the Fed issued an interim final rule (IFR) which will remove the limit on monthly transfers from “savings deposits” in Regulation D. The IFR revises Regulation D’s definition of a savings deposit so that it no longer includes the monthly convenient transfer limit of six. The IFR permits, but does not require, institutions to suspend enforcement of the six transfer limit. The IFR contains frequently asked questions and answers on the impact it will have on accounts, reporting and funds access. The Federal Register announcement is linked here. Federal Financial Institutions Examination Council reports that may be affected by this IFR will be addressed later. The IFR took effect on April 23, and the Fed will accept comments until June 22.
Fed to issue monthly reports on CARES Act loan programs
On April 23, the Federal Reserve Board (Fed) announced that in an effort to maintain transparency, it will disclose information to the public regarding recent actions it has taken to “foster economic recovery.” Among the information it will make public, the Fed plans to issue a monthly report on CARES Act liquidity and lending facilities which will contain the: (i) “[n]ames and details of participants in each facility”; (ii) “[a]mounts borrowed and interest rate charged”; and (iii) “[o]verall costs, revenues, and fees for each facility.” The Fed will provide this information on four CARES Act programs including the Main Street Lending Program (see Buckley Special Alert here).
Fed announces temporary increase of intraday credit by Federal Reserve Banks
On April 23, the Federal Reserve (Fed) announced that it temporarily increased the availability of intraday credit that can be provided by the Federal Reserve Banks. In its policy statement, the Fed stated that it will automatically suspend net debit caps and waive overdraft fees to assist primary credit institutions, which are “eligible to borrow under the Federal Reserve’s primary credit program for the discount window.” In addition, the Fed announced that its max cap procedure will be streamlined to enable secondary credit institutions—which are “eligible only for the Reserve Banks’ secondary credit discount window program”—to utilize the max cap program to “request collateralized capacity from their Reserve Banks,” and will waive the requirement to obtain a self-assessed net debit cap and board resolution before requesting a max cap. The Fed’s actions are effective as of April 24 and will terminate on September 30.
Class actions accuse banks of prioritizing existing customers and high-dollar loans
On April 23, a small business filed a class action lawsuit in the U.S. District Court for the Central District of California against a large bank for allegedly ignoring the CARES Act’s Paycheck Protection Program (PPP) “regulations for administering, processing, and handling” loan applications. The complaint claims that the bank disregarded a requirement to process loans in the order that they were submitted, and also contends that the bank made false and misleading statements to conceal the fact that high dollar loans were moved to the front of the processing queue in order for the bank to obtain higher fees. The class action seeks certification of the class, injunctive relief, disgorgement, and punitive and statutory damages, among other things.
On April 22 in a separate class action based on similar facts and allegations, a small business owner filed a motion for a temporary restraining order and preliminary injunction against a different large bank. The business owner filed the motion in the U.S. District Court for the Southern District of Texas, Houston Division to prevent the bank from applying “illegal eligibility requirement[s]” to the Small Business Administration-guaranteed PPP loans. The motion claims that the bank was only processing loan applications from the bank’s existing business customers in disregard for the CARES Act and Interim Final Rule instruction to administer the PPP loans to all customers, existing and new. In addition to the temporary restraining order and a preliminary injunction, the motion requests that the bank issue a public statement that their existing business customer eligibility requirement is no longer in effect. In an order issued on April 29, the court denied the business owner’s motion for a temporary restraining order and deferred ruling on the preliminary injunction until after a hearing.
States offer relief to student loan borrowers not covered by CARES Act
On April 23 and 21, nine states announced a multi-state initiative to provide student loan relief options for borrowers with privately held student loans not covered by the CARES Act. California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, Vermont, and Washington outlined within their announcements specific measures for borrowers with commercially-owned Federal Family Education Loan Program loans and borrowers with private student loans who are struggling to make payments due to the Covid-19 pandemic. The announcements also noted that Virginia is participating in the initiative as well. These relief options, offered in conjunction with the listed private student loan servicers, include (i) a minimum 90-days of forbearance relief; (ii) a waiver of late fees; (iii) no negative credit reporting; (iv) a 90-day moratorium on collection lawsuits; and (v) enrollment in applicable borrower assistance programs, such as income-based repayment. The states cautioned that enrollment in these relief options is not automatic, and recommended borrowers contact their student loan servicer to see what options best suit their needs.
In addition, California, Colorado, Connecticut, New Jersey, Vermont, and Washington recommended that regulated student loan servicers with limited ability to take these actions due to investor restrictions or contractual obligations “should instead proactively work with loan holders whenever possible to relax those restrictions or obligations.”
Treasury, SBA weigh in on PPP loan certification and secondary market sales
On April 23, the Department of Treasury, and the Small Business Administration (SBA) updated their frequently asked questions (FAQs) list for the Paycheck Protection Program (PPP) to address whether a business owned by a large company is eligible for a PPP loan. A small business borrower must certify, in good faith, that at the time an application was submitted for a PPP loan, the borrower believed that the economic situation created by the Covid-19 pandemic made it necessary to apply for the loan in order “to support the ongoing operations” of the company. The FAQ instructs the borrower to consider other sources of liquidity other than PPP funds that could support the borrower’s current business activity. Though lenders may rely on the borrower certification of need, the guidance points out that a borrower must have a good faith basis necessitating the loan. Moreover, the guidance suggests that a public company with “substantial market value and access to capital markets” would likely not be able to make this good faith certification. For small businesses that applied for a PPP loan before the issuance of this FAQ, the SBA will find that the borrower certification was made in good faith if the borrower’s PPP loan is repaid by May 7, 2020.
Earlier on April 17, the SBA added FAQ number 30 to its FAQ list, which asked whether a PPP loan may be sold into the secondary market. The guidance provided by the SBA and the Department of Treasury reiterated information from the interim final rule issued on April 2, which implemented sections 1102 and 1106 of the CARES Act regarding sales into the secondary market:
- “A PPP loan may be sold into the secondary market at any time after the loan is fully disbursed.”
- “A secondary market sale of a PPP loan does not require SBA approval.”
- “A PPP loan sold into the secondary market is 100% SBA guaranteed.” and
- “A PPP loan may be sold on the secondary market at a premium or a discount to par value.”
SEC announces EDGAR filing window extension for registered investment companies and business development companies
On April 22, the SEC Division of Investment Management announced that it is extending the EDGAR filing window on April 29, 2020, from 5:30 p.m. to 10:00 p.m. EDT for registered investment company and business development company filings. Ordinarily, a filing submitted after 5:30 p.m. EDT would be considered to be filed the next business day but the division is providing a one-day extension only. Any registered investment company or business development company requiring a subsequent filing window extension should submit a request.
Special Alert: OFAC encourages humanitarian aid, promises consideration of Covid-19 compliance challenges
The Department of the Treasury’s Office of Foreign Assets Control recently took two actions to address the impact of Covid-19. First, OFAC issued a fact sheet that consolidates existing authorizations and guidance permitting humanitarian, agricultural, and medical aid to six jurisdictions subject to sanctions. Second, OFAC encouraged companies facing compliance challenges due to Covid-19 to shift resources to higher-risk areas, noting that it would take this move into consideration if it leads to a violation during the pandemic. Companies facing compliance challenges may wish to consider such a shift, while documenting their risk-based rationale for doing so.
Humanitarian fact sheet
Last week, OFAC issued a fact sheet regarding the provision of Covid-19-related assistance under its Iran, Cuba, North Korea, Syria, Ukraine/Russia, and Venezuela sanctions regimes. The fact sheet made no changes to existing laws and guidance, but consolidated existing licenses, exemptions, authorizations, and related FAQs relevant to humanitarian aid and medical equipment for these regimes. The fact sheet should prove to be a valuable resource for financial institutions and other organizations confronting a wave of transactions to provide personal protective equipment to sanctions-targeted jurisdictions wracked by Covid-19, while complying with OFAC regulations.