On November 30, 2020, the Consumer Financial Protection Bureau (“CFPB”) set forth procedures for the issuance of advisory opinions provided as interpretive rules to resolve regulatory uncertainty, effective immediately. Under this new advisory opinion schema, the CFPB concurrently released two advisory opinions: one on earned wage access products and one on private education loans.

Advisory Opinions

A request for an advisory opinion must include:

• Identity of the person or entity seeking the opinion, or the person or entity submitted a request on behalf of a third part (e.g., outside counsel, in which case clients need not be identified);
• Statement about the absence of investigation or litigation;
• All material facts about an actual fact or course of action that is (a) within the CFPB’s purview and (b) that the person or entity is engaged in or is planning to engage in;
• A description of the uncertainty or ambiguity, including (a) identification of the regulatory or statutory provision at issue; (c) a proposed interpretation of the law or regulation; and (d) an explanation of why that proposed interpretation is an appropriate resolution of the uncertainty or ambiguity;
• Identification of information that should be treated as confidential.

Each advisory opinion will be specific to the facts provided, which the CFPB will not generally investigate independently, making it important that the request include a clear description of any material facts. Where the advisory opinion permits for a safe harbor, as provided for in the Truth in Lending Act (“TILA”), Equal Credit Opportunity Act, Electronic Fund Transfer Act, Real Estate Settlement Procedures Act, and Fair Debt Collection Practices Act, that fact will be explained in the advisory opinion. The scope and terms of an advisory opinion will be set out in the advisory opinion itself.

The CFPB will weigh multiple factors in determining whether to issue an advisory opinion on a specific topic, including issues that it has previously noted that are of significant importance or where clarification would provide significant benefit, and where the CFPB has not previously addressed a highlighted ambiguity. Conversely, the CFPB may decide an advisory opinion is not the appropriate tool for responding to an inquiry. In particular, issues where the CFPB is actively investigating or enforcing a related matter or a rulemaking is proposed or being planned.

Student Lending CFPB Enforcement:
Alleging Impermissible Debt Relief Service Advance Fees

Director Kraninger has outlined in various settings, the Bureau’s focus on protecting those often most vulnerable, including the elderly, military personnel and veterans, as well as students, sometimes collectively referred to special populations. Recently, the Bureau took aim at several businesses, which according to the CFPB’s complaint were exploiting students by charging impermissible advance fees in connection with purported debt relief services.  We should expect further activity in 2021 with the change of administration, potential extension of certain COVID-19 pandemic-related student lending forbearance orders, and other potential student lending protection efforts. 

The complaint asserts five causes of action under the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§ 6102(c), 6105(d) (“TCFAPA”); the Telemarketing Sales Rule (“TSR”), 16 C.F.R. pt. 310; and the Consumer Financial Protection Act of 2010 (“CFPA”), 12 U.S.C. §§ 5531, 5536(a), 5564, 5565, in connection with the marketing and sale of debt relief services. According to the complaint, “Defendants Performance SLC, LLC and Performance Settlement, LLC, along with their owner and manager Defendant Daniel Crenshaw, are engaging in debt relief activities that have harmed consumers nationwide by charging illegal advance fees, failing to make required disclosures, and engaging in deceptive sales practices.”

Penalties & Injunctive Relief Requested

In its filing announcement the CFPB stated that “Consumers would pay between $1,000 and $1,450 in fees to PSLC for it to file paperwork with [the U.S. Department of Education], even though student loan borrowers can do this themselves for free.” The Bureau claims “that PSLC had some consumers pay this prohibited upfront fee through high-interest financing from a third party.”  The complaint seeks injunctive relief to prevent the potential on-going violations of the TSR and the CFPA; consumer “monetary relief including but not limited to the refund of monies paid, restitution, disgorgement or compensation for unjust enrichment, and payment of damages;” imposition of civil money penalties against Defendants, and an award of costs to the Bureau. The complaint alleges that “[f]rom 2016 to 2019, PSLC enrolled more than 6,500 customers in multiple states” and that certain “Trust Plan Customers paid more than $4,300,000 in fees to PSLC” and other customers “paid more than $4,900,000 in loan principal and interest” on allegedly improper loans arising from Defendants’ activities.

A recent article in the Wall Street Journal highlights renewed talk in some circles about allegedly “growing evidence” of fraud among PPP participants.  We think the observation of the former federal prosecutor who is quoted in the story is salient.  While we wouldn’t phrase it the way the ex-prosecutor does (the “scandal is what’s legal, not what’s illegal”) and we disagree with his disdain for the program, the larger point is important: Congress has spoken—twice—and may speak a third time. In adopting the CARES Act, Congress established a program with small businesses’ self-assessment of their needs as the critical component for eligibility.  Congress’s revisions to the PPP at the end of May liberalized several program rules and broadened the amount of loan forgiveness that borrowers could expect.  While the existence of fraud, as with any federal program, was predictable, particularly in the rollout of an emergency measure, the WSJ story, and the federal prosecutor, points out that prosecutions are difficult considering that potential defendants would be judged based on the regulations and law existing at the time application were made.

We also think it’s important to put the numbers discussed in the Wall Street Journal article in context.  If every one of the suspicious activity reports related to PPP loans, then less than 0.05% of loans were suspicious.  If all 500 suspects are guilty of fraud, that represents less than 0.01% of PPP borrowers.  If we round up the dollar amount involved to ten hundred million dollars (which any reporter attempting to make a story sound important (or evil mastermind transported forward in time) would round to one billion dollars), then less than 0.2% of money lent under the Paycheck Program was fraudulent.

The WSJ story comes at a time when we have seen many accounting firms and a number of lawyers circulate the draft SBA Loan Necessity Questionnaire for For-Profit and Non-Profit Borrowers. “questionnaires.”  The questionnaires state that they will be used in cases of PPP loans greater than $2 million “to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application … that economic uncertainty made the loan request necessary.”

Bryan Cave Leighton Paisner was pleased to partner with Bank Director on their first annual Governance Best Practices Survey. In my work with boards of directors over the years I’ve found that the most effective tool can be reference to what other well run companies are doing. Best practices are important in every industry, but of particular importance in the banking industry. I believe the information in this year’s survey results will be very helpful to bank boards across the U.S.

The survey focused on the areas of process, independence, oversight, composition and refreshment. You will find from reading the survey results that there is a range of approach In the banking industry to certain key aspects of board governance. For example, not all bank boards have executive committees and among those which do there is not a uniform approach to the committee’s functioning. There is also divergence of approach in whether the CEO also serves as the board chair. I tend to think that a lack of uniformity of approach in the industry is healthy. I am skeptical of those who advocate for rigid adherence to “best practices” in board governance but I agree that practices which have been effective for others can serve as a guide. 

Boards are groups of people, and no two groups of people function in the same way. In my experience, the fundamental building block of an effective board Is careful selection of directors to fill roles within a board. It’s not unlike how the best coaches recruit  for talent based on specific needs of the team. Too often I see board rooms with essentially the same director sitting in all of the seats. Differences in business experience, life experience and perspective among directors can greatly benefit the quality of the board’s collective insight and decision making. 

As previously discussed, on October 2, 2020, the SBA published Procedural Notice 5000-20057 addressing Paycheck Protection Program Loans and Changes of Ownership. Based on a review of memos on the subject by other law firms and accounting firms, four items stood out as not being regularly addressed (in addition to some expressing the mistaken belief that buyers have to assume the PPP loan in any asset transaction).

1. Any Merger Triggers the Procedural Notice. 

The definition of a change of ownership includes any merger of the PPP borrower with or into another entity.  Even if the PPP borrower is the surviving entity and there is no change in shareholder ownership, it would appear to be pulled into the SBA Procedural Notice. Accordingly, either internal reorganizations or acquisitions could trigger the obligations of the Procedural Notice if structured as a merger.

2. Stock Transfers Between Existing Shareholders Can Trigger Procedural Notice. 

Stock transfers to affiliates and existing owners are covered, not just sales to new owners. Any change in shareholder composition that results in a greater than 50% change since the receipt of the PPP loan triggers a change of ownership of ownership under the Procedural Notice.

No.

On October 2, the Small Business Administration published a procedural notice on changes of ownership for PPP borrowers. One specific area where we’ve seen confusion is whether the procedural notice requires a Buyer to assume all of the PPP Borrower’s obligations in an asset sale transaction. As discussed below, while the procedural notice does require the Buyer to assume the PPP loan obligations in an asset sale in order to obtain the SBA’s prior approval, so long as the SBA’s prior approval is not required, then the parties remain free to structure the asset transaction in whatever manner makes economic sense for the parties, including leaving the PPP loan obligations with the Seller.

Section 2.b. of the procedural notice indicates that, in connection with obtaining SBA pre-approval for a change of ownership, that SBA approval “will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.” The procedural notice goes on to indicate that the purchase or sale agreement “must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA.” Accordingly, if SBA pre-approval is required in connection with a change of control structured as an asset sale, then it would be necessary to have the Buyer assume the PPP loan. However, this obligation is limited to circumstances in which SBA pre-approval is required.

On October 7, 2020, the Small Business Administration and Treasury Department updated their Frequently Asked Questions on the Paycheck Protection Program with FAQ 52. As reflected in the question, the PPP Flexibility Act made certain changes to the terms of loans made under the Paycheck Protection Program, including an extension of the deferral period before any payments would be required. FAQ 52 confirms that these changes automatically applied to all outstanding PPP loans, and that lenders are required to give immediate effect to the statutory extension. While no formal modification of the promissory note is required (thus avoiding any need to re-execute the promissory note or an amendment), the FAQ provides that lenders “should” give notice to borrowers of the changes caused by the PPP Flexibility Act.

As the changes of the PPP Flexibility Act were 100% in the favor of the borrower, this is consistent with the approach that Bryan Cave Leighton Paisner LLP recommended to PPP lenders in advance of the publication of the new FAQ. In addition to the extension of the deferral period, the PPP Flexibility Act also provided for a permissible extension of the covered period for potential forgiveness from 8-weeks to 24-weeks, and a reduction in the percentage of forgiveness that must be used for payroll expenses.

On October 2, 2020, the SBA Office of Capital Access published Procedural Notice 5000-20057, which provides a framework to address whether SBA pre-approval is required for various changes of ownership under the Paycheck Protection Program, as well as the process for seeking that approval if needed. Any Paycheck Protection Program borrower looking at a potential change in control, whether via actions of the shareholders or direct action by the PPP borrower needs to be familiar with this guidance. In addition, anyone looking to acquire control of a PPP borrower should also review the guidance. While the guidance makes clear the possibility of preserving the potential for forgiveness of the PPP loan through a change of ownership, the Procedural Notice sets forth various approaches to obtain SBA pre-approval for the transaction (or to avoid the need for SBA pre-approval.)

Before outlining the key elements of the SBA guidance, we must note that this guidance is being published almost six months after the first PPP loans were issued, and two months after the SBA advised that guidance on changes of ownership would be issued “soon.” While one might hope that such delay at least allowed for clear and complete guidance to be published, I’m afraid the guidance may result in more questions than answers.

General Rule

Without expressing a basis for such obligation, SBA Procedural Notice provides that prior to the closing of any “Change of Ownership” transaction, the “PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.”

While only specifically requiring notification (as opposed to application or consent), this requirement would seem inconsistent with the SBA’s Frequently Asked Questions and Interim Final Rule permitting lenders to use their own promissory note and to include any terms not inconsistent with Sections 1102 and 1106 of the Cares Act, the PPP Interim Final Rules and Guidance, and SBA Form 2484. While the SBA general form of promissory note does require lender’s prior consent if a borrower “reorganizes, merges, consolidates, or otherwise changes ownership or business structure,” these terms were not defined and lender’s were expressly permitted to use other forms of note.

Changes of Ownership Defined

For purposes of the SBA Procedural Notice, “Changes of Ownership” are defined to consist of the following transactions:

• an aggregate change in 20% or more of the ownership interests in the Borrower since date of SBA approval of the SBA loan (but for public companies, only need to include sales or transfers resulting in one person owning at least 20%) (stock transfers);
• sale or transfers of 50% or more of the fair market value of the assets of the Borrower (asset sales); and
• mergers with or into another entity (mergers).

On September 21st (do you remember?), the U.S. Government Accountability Office released a report on the Federal Government’s COVID-19 response, including with respect to the Paycheck Protection Program. The GAO report provides additional statistical breakdown of the PPP loans, addresses some of the SBA’s oversight plans, and then addresses the need for further guidance on the PPP forgiveness process.

Updated Statistics

The GAO Report notes that most of the largest PPP loans (those over $2 million), were made during the first phase of the program, between April 3rd and April 26th. 75% of the loans for more than $2 million were approved in the first phase, with the report noting that this may have been due to increased scrutiny from the public, Treasury and SBA.

The vast majority of PPP loans were made to borrowers with 10 or fewer employees (73.6% of the loans) while the majority of PPP loan dollars went to businesses with 100 or fewer employees (67.6%). While borrowers with more than 500 employees were granted limited access to participate in the program, less than 0.1% of borrowers had more than 500 employees.

On September 15, 2020, the Conference of State Bank Supervisors (“CSBS”) announced the launch of a new program intended to streamline the exam process required by state regulatory agencies for the nation’s payments firms and money transmitters.  Known as the MSB Networked Supervision, the state-initiated program seeks to make the examination process more predictable and consistent for the nation’s largest payments and cryptocurrency companies—whose transactions total more than $1 trillion each year.  The initiative was an outcome of the CSBS Fintech Industry Advisory Panel, which fielded suggestions from those in the industry who collectively called for multistate examination coordination of the nation’s payment firms and money transmitters.    

By making the exam protocol consistent among the more than forty member states, regulators will be able to better understand the risks associated in each company’s payments model and address compliance issues as they arise.  Increased state cooperation will decrease the likelihood of perpetual compliance pitfalls, as all regulators will be kept apprised of a payment firm’s regulatory status.  The single exam will be led by one state that will oversee a group of examiners sourced from regulatory bodies across the country.