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Analyzing Borrower Certification Risks under the Paycheck Protection Program

As the editor of BankBCLP.com, I tend not to write a lot of posts for other blogs hosted by Bryan Cave Leighton Paisner LLP. However, the Paycheck Protection Program(PPP) has affected small business clients throughout the firm.

The shifting narratives around the government’s interpretations regarding eligibility for participation in the PPP has caused many borrowers to reconsider their own applications and to consider exiting the program by returning PPP funds by the government’s current safe harbor return deadline of May 14th.

In this post on the BCLP US Securities and Corporate Governance Blog, I describe the history and background of the PPP certification process, and suggest a three bucket risk framework for analyzing one’s certification. In discussions with corporate clients, we have found this framework to be useful for public and private companies.

As recognized in FAQ 31, this remains primarily a risk for PPP borrowers, and not PPP lenders, as “lenders may rely on a borrower’s certification regarding the necessity of the loan request.” In our experience, this has also made many lenders reasonably constrained from providing any further advice to borrowers regarding analysis of the borrower’s certification.

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The Paycheck Protection Program: Managing Fair Lending Risks

The past few weeks have seen increasing scrutiny of the lenders and borrowers participating in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), including by the Treasury Department, SBA Inspector General, U.S. Department of Justice, and Congress with the Special Inspector General for Pandemic Recovery surely soon to follow.

Against this backdrop, the Consumer Financial Protection Bureau (“CFPB”) has recently raised concerns related to fair lending for lenders participating in the PPP. On May 6, 2020, the CFPB issued guidance related to the timing for Equal Credit Opportunity Act (“ECOA”)-mandated adverse action notices under the PPP. On April 27, 2020, the CFPB published a statement in which the Bureau emphasized that lenders must comply with ECOA when extending small business credit, outlining key bases for discrimination claims under ECOA and encouraging women and minority-owned businesses who feel they have suffered lending discrimination to submit complaints to the CFPB through its complaint portal.

The CFPB’s recent focus on institutional fair lending compliance accords with that of federal banking regulators. For example, on April 27, 2020, the Office of the Comptroller of the Currency released “OCC Bulletin 2020-45,” which, among other things, encourages institutions to “prudently document their implementation and lending decisions” under the SBA’s PPP.

Given recent regulatory focus on fair lending compliance in connection with PPP lending, banks and other lenders should consider the following proactive risk mitigation steps.

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CFPB Joint Advisory Committee Meeting – COVID-19 Impact Trends

Special populations need extra support during the COVID-19 pandemic. The CFPB is committed to providing real time, easily understood consumer education materials as well as clear guidelines for financial services companies. The Bureau stands ready to prosecute bad actors for UDAAP violations in the marketplace through enforcement and referrals of UDAAP violations. These were three themes offered by Director Kathleen Kraninger in public meeting remarks. And not to bury the lead, she noted the Bureau’s on-going monitoring of consumer impacts with the Department of Justice, Treasury, the FTC and state Attorneys’ General.

On Friday, May 1, 2020, the CFPB convened a joint session of its several Advisory Committees, including the Consumer Advisory Board, the Community Bank Advisory Council, the Credit Union Advisory Council and the Academic Research Council.  The meeting involved presentations from staff focused on (1) consumer complaint analysis and trends, (2) household and market impacts and (3) special populations concerns. Public questions and comments were entertained relating to each topic. The presentation materials contain useful initial analysis on consumer complaints trends arising during the COVID-19 pandemic. 

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COVID-19 and Georgia’s Reopening, New DOL Guidance on the FFCRA, and Opening Trading Windows

The devastating impact of the Coronavirus (COVID-19) needs no introduction.  BCLP has consolidated all of its client alerts regarding Coronavirus (COVID-19) as one page of resources. On that page, you can also limit by topic area, jurisdiction and areas of practice.

In this post, we have highlighted some of the client alerts that we believe may be of specific importance to our community bank clients.

Back to Work: Georgia’s Reopening Executive Order – Risks and Guidance for Businesses

On April 20, 2020, Governor Brian Kemp signed an Executive Order which initiates the process of reopening businesses within the State of Georgia on April 24, 2020, and issued a subsequent Executive Order on April 23, 2020, providing further guidance on the process for reopening (collectively the “Orders”). These Orders, which are quite limited in scope, only grant a small subset of businesses permission to reopen. They do, however, pre-empt all local and city orders that are more or less restrictive than the state-wide Orders. 

The Orders, while limited, nevertheless shed light on what the process of reopening will look like for additional business sectors going forward. All companies with locations in Georgia would be wise to invest time planning how they may implement screening, sanitation, and social distancing at their workplace to allow for a timely, safe and compliant reopening. 

This alert examines what businesses are permitted to reopen, what restrictions exist for those businesses, and advice and guidance for companies that BCLP anticipates will be affected by similar reopening orders in the future.

As the FFCRA Goes Live, the DOL Continues to Publish Revised and New Guidance for Employers

Although the federal Department of Labor (“DOL”) declared April 1 – 17 to be a temporary period of non-enforcement of the Families First Coronavirus Response Act (“FFCRA”), the DOL was far from idle during that period. Importantly, the DOL provided key revised and new guidance for employers by: (1) issuing technical corrections to the temporary rule; and (2) posting additional informal questions and answers. The new guidance provides much-needed clarity on key issues, especially since the period of non-enforcement is now over. This post examines the new guidance and provides advice for employers to comply with the provisions of the FFCRA.

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COVID-19 CFPB Access to Credit Guidance

TRID Rescission Waiver Rule & ECOA Valuations FAQ

On April 29, 2020, the Consumer Financial Protection Bureau (CFPB) released additional information which Director Kathleen Kraninger said she hopes “will help consumers facing financial emergencies obtain access to mortgage credit faster.”  The new guidance impacts waiver of rights of rescission, good faith closing costs estimates, and ECOA valuations delivery timing requirements in connection with potential urgent consumer finance transactions.

“Temporary & Targeted Solutions.”

Mortgage lenders will need to be aware of this new interpretive rule and FAQ guidance and adjust their operations accordingly. Consumers who are accessing the COVID-19 resources center on the CFPB website likely will be aware of these potential ways to expedite transactions and will be expecting lenders to act accordingly.  Key bases for the new rules include COVID-19 pandemic related “bona fide personal financial emergency” or “changed circumstances.”  

TRID/ Reg Z Interpretive Rule – Modification or Waiver of Right of Rescission Timing

TILA RESPA Integrated Disclosure (TRID) rules protect borrowers by allowing them to receive information so they can “know before they owe.” Borrower exercise of three day rescission rights has been an issue of confusion and substantial litigation over the years. The new Rule may yield similar disputes in the future because of the evolving nature of the pandemic related financial hardship and the timing pressures involved. It also will be interesting to see how this temporary rule may influence either extension or sunset of current CARES Act foreclosure prohibitions.

The new Rule provides that “(1) if a consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency, (2) the consumer’s brief statement describing the emergency identifies a financial need that is due to the COVID-19 pandemic, and (3) the emergency necessitates consummating the credit transaction before the end of an applicable TRID Rule waiting period or must be met before the end of the Regulation Z Rescission Rules waiting period, then the consumer has a bona fide personal financial emergency that would permit the consumer to utilize the modification and waiver provisions…”

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Lessons for Community Bank Boards from the Great Recession to Apply in the Pandemic

In March, I dialed into the first ever “conference call only” meeting of a 14 year old community bank. The main office of the bank is located in Philadelphia and there was growing concern about the rapidly increasing number of Coronavirus cases in New York and New Jersey, and the spread of new cases into eastern Pennsylvania. I recalled that our board had reviewed an updated version of the bank’s pandemic policy in December but I couldn’t remember the details. Suddenly that policy had relevance in a way I could never have imagined. In April, our board held its second conference call only meeting, and we are likely to continue that pattern for several more months.

We are all aware of the circumstances that led to pandemic policies being retrieved from file folders and read with interest for the first time.  What we don’t yet know is how severe the resulting economic shock will be, and the degree to which loan portfolios of community banks will be adversely impacted.  It is clear, however, that the adverse impact on small to medium sized businesses across the U.S. has been considerable. As the CEO of one of our law firm’s bank clients in the Southwest recently remarked, we are experiencing the first ever government imposed recession.

God willing, the banking industry will remain strong and be a source of support for the nation’s economy as we recover from the onslaught of COVID-19.  In that context, the boards of community banks could benefit from recalling some hard learned lessons from the recent Great Recession. 

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COVID-19 and Business Operations/Reopening, Cybersecurity from Home, and SEC Whistleblower Activity

The devastating impact of the Coronavirus (COVID-19) needs no introduction.  BCLP has consolidated all of its client alerts regarding Coronavirus (COVID-19) as one page of resources. On that page, you can also limit by topic area, jurisdiction and areas of practice.

In this post, we have highlighted some of the client alerts that we believe may be of specific importance to our community bank clients.

U.S. Businesses Challenge Government Orders in Attempt to Continue Operations

Shelter-in-place and social distancing have become the new normal as we try to combat the spread of COVID-19 in the U.S.  Many state governments have implemented stay-home or shelter-in-place orders to try to “flatten the curve” and protect citizens’ safety. But as time passes, businesses are also concerned.  Under many such executive orders, a business that is not deemed “essential” or “life-sustaining” may be required to stop in-person operations, and we’re starting to see an uptick in local enforcement, including cease and desist letters and revocation of occupancy permits. Some shuttered businesses have started to bring their claims to court.  This post provides a summary of the prominent claims and factual allegations featured in complaints from business plaintiffs.   

Employer Guidance for Reopening the Workplace

Over the past week, increased discussion of reopening the U.S. economy has raised numerous questions as employers prepare to return their employees to the workplace. While the exact steps to reopen the economy remain uncertain, employers should begin to consider what measures will help ensure a safe, orderly return to business, particularly since President Trump’s White House issued its Opening Up America Again three phased approach for re-opening the economy, and the Equal Employment Opportunity Commission issued guidance about returning to work. This alert details the potential measures and related issues BCLP suggests clients consider in preparing to return to work, whether next week, next month, or this summer.

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Preparing a COVID-19 Reopening Plan

Five Steps to Take Right Now

While banks have remained open as part of critical infrastructure throughout the COVID-19 pandemic, and many were able to keep branches opened throughout the pandemic, we are expecting many banks to further expand branch openings in the coming weeks. Moreover, many business customers of banks will also be seeking to reopen, with their ability to generate revenue critical to the long-term return of the U.S. economy (and the bank’s asset quality).

The consensus of most business folks, including bankers, is that as the U.S. gradually re-opens, the look and feel of businesses will change dramatically. Before the world can return to its full pre-COVID-19 normal, this interim period between the lifting of shelter in place orders and the broad distribution of vaccines or effective treatments is projected by experts to last at least one, and possibly as long as two years. Colleagues at Bryan Cave Leighton Paisner have prepared an alert focusing on public facing businesses which must significantly change their operations to reduce the risk of coronavirus transmission.

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Guidance for Public Company PPP Recipients

On April 23, 2020, the U.S. Treasury published FAQ #31 for the Paycheck Protection Program, providing a safe harbor for return of funds by May 7, 2020 in cases of insufficient need by recipients of PPP funds by public companies with liquidity alternatives.

With this background, I joined several of my securities law and litigation colleagues to publish guidance for public company Paycheck Protection Program loan recipients.

PPP applications require certification that “[c]urrent economic uncertainty makes this loan request necessary to support ongoing operations.”  To the extent that public companies may have had other reliable, accessible sources of capital markets funding, the borrower’s certification of economic need could be called into question. Public companies are clearly not all in the same sitaution with regard to their ability to obtain other sources of funding, and face a number of difficult decisions.

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PPP Litigation and Regulatory Risks

With assistance from some of my litigation colleagues, Bryan Cave Leighton Paisner has just published guidance on re-evaluating practices and considering some of the litigation risks that could arise with the Paycheck Protection Program.

Prior to the PPP going live on April 3, banks scrambled to assemble teams and online application in-take and processing protocols to handle the onslaught of applications.  Over 1.6 million small businesses were approved for relief, a small fraction of the total number of small businesses in the U.S. 

For many, the Program ground to a halt on April 16, 2020, a mere 13 days after it opened, when all of the $349 billion in funding was exhausted.  The abrupt and swift depletion of the Program left many small business owners in dismay and frustrated with their banks, and pondering what recourse they might have.  A few quickly filed lawsuits.  More lawsuits no doubt are coming.  

As Congress gets set to appropriate more than $300 billion in additional funding for the Program, and lenders prepare for ramping up their PPP operations for the second round of applications, it is smart to re-evaluate practices and consider some of the litigation risks that could arise. 

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