On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects all PPP borrowers. The changes below are based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.

Tax Treatment. Most importantly, Section 276 of the Act reverses the prior Internal Revenue Service guidance and provides significant tax relief to all PPP borrowers. Not only does the Act confirm that any cancellation of debt income obtained from forgiveness of the PPP loan is tax exempt (as provided for in the CARES Act), but now any tax deductible expenses used to generate such forgiveness may still be taken to reduce taxable income.

Covered Period Flexibility. Section 306 of the Act provides PPP borrowers with the flexibility of setting the length of the “Covered Period” for purposes of PPP loan forgiveness and FTE representations at any length between 8 and 24 weeks. The Covered Period will begin on the date of the origination of the PPP loan, and end on the date selected by the borrower that occurs between 8 weeks and 24 weeks after origination.

EIDL Advance Does Not Affect Forgiveness. Section 333 of the Act repeals a prior CARES Act provision that said that any forgiveness would be reduced by the amount of the EIDL Advance. We understand that newly processed forgiveness remittances from the Small Business Administration (SBA) already reflect this change, but we are awaiting SBA guidance for how they will handle previous EIDL Advance-based forgiveness reductions.

What’s old is new again. 2021 will bring a new U.S. Administration and hopefully positive developments with regard to the COVID-19 pandemic, but it also is likely to see further adverse economic impacts. Various financial models are predicting differing trajectories for potential recession and economic recovery. What we do know is that 2020 has resulted in sizeable income loss and employment interruption for many. In the face of all this challenge, the CFPB is likely to focus in 2021 on consumer loss mitigation process and transparency. Getting it right is paramount for lenders and servicers as 2021 customer contact volumes will increase with the potential sunset of COVID-19 relief measures.

Recently, the CFPB announced a consent decree with Seterus, Inc. and its successor-in-interest Kyanite Services, Inc. The clear priority is helping consumers avoid foreclosure, a risk we know will continue throughout 2021.  The lengthy consent decree covers loss mitigation conduct from 2014 through 2018, years in the past. But the violations asserted and the consent Decree conclusions preview 2021 priorities and hot buttons. Transparency and accountability are two themes that should serve consumer lenders and servicers well and mitigate regulatory and litigation risk.  Importantly, the Order highlights risks associated with process automation in servicing. In addition to laser focus on requirements and process, lenders and servicers may want to consider adopting customer experience approaches like ombudspeople or “secret shoppers” to get a real sense of how employees and systems are interacting with and serving customers.

This month we begin a new series “Conversations about Banking.” The series will consist of video conversations with leaders and influencers in the banking industry about topics of current interest. We hope you will enjoy and find benefit in this new aspect of BankBCLP.

In the first installment of “Conversations about Banking” our partner and Banking practice group leader Jim McAlpin speaks with Philadelphia based entrepreneur Bobby Nix. Mr. Nix has served on the boards of several community banks over the past four decades. As an African American he has a perspective on diversity within banks and bank boards that is timely to hear within our industry. As a successful entrepreneur he is also a champion of the positive impact that community banks can have on small businesses. Mr. Nix currently serves as the chair of the Loan Committee and the ALCO Committee of Hyperion Bank, which has offices in Philadelphia and Atlanta.  

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.