The devil is in the details.  The best intentioned new financial services rules and regulations can present challenges for compliance folks trying to implement the rules into their institutions’ existing systems and practices.  Requirements, which may seem simple in the abstract, sometimes create herculean challenges because of system limitations, programming challenges, or simple ambiguity when loaded into real world operations.  To hopefully overcome these compliance obstacles, on Thursday, June 18, 2020, the Consumer Financial Protection Bureau (“CFPB”) began its trial phase of a pilot program offering advisory opinions aimed at “reduc[ing] ambiguity and increas[ing] regulatory certainty, support[ing] proactive consumer protection, and enhanc[ing] the timeliness of guidance.”  The CFPB first previewed this pilot program in March 2020 so that financial services providers could solicit provisional legal opinions on matters pertaining to the interpretation of the Bureau’s rules and laws.

Joining other agencies, like HUD who have had a no action letter procedure in place for years, the CFPB pilot will focus on four stated priorities:  (1) “Consumers are provided with timely and understandable information to make responsible decisions”; (2) “Identify outdated, unnecessary or unduly burdensome regulations in order to reduce regulatory burdens”; (3) “Consistency in enforcement of Federal consumer financial law in order to promote fair competition”; and (4) “Ensuring markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.”

As the pilot program is new and untested, the CFPB will pick which company questions to answer based on a review of the various petitions, granting priority to those questions that are novel and whose answers might benefit those in the greater consumer financial services community.  The Bureau has said it will consider questions such as those arising during CFPB exams and those that have not otherwise been authoritatively addressed.  In this regard, the CFPB noted the following factors that will drive its prioritization of requests:

• The request’s alignment with the CFPB’s statutory objectives;
• The scope of the impact on consumers if the CFPB is to provide an answer or interpretation;
• In the event where two regulators share concurrent jurisdiction over a specific consumer protection measure, whether the CFPB’s advisory opinion will impact the manner in which the other regulator regulates the same measure; and
• The impact the advisory opinion would have on the CFPB’s existing resources and personnel.

On June 4, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued proposed rules and changes to the Truth in Lending Act (“TILA”) to address the anticipated sunset of the London Interbank Offered Rate (“LIBOR”) at the end of 2021.  Some market lenders currently rely on the LIBOR as an index for calculating rates for open-end and closed-end credit products.  The CFPB’s proposed rules and changes shed some light on what creditors might expect when the LIBOR is discontinued, and also include a compilation of frequently asked questions (“FAQs”) to help prepare creditors for the eventual transition.

In its proposed rule, the CFPB contemplates several amendments to Regulation Z, which implements TILA, for both open-end and closed-end credit products to address the discontinuation of the LIBOR.  Select amendments include:    

• To ensure that credit card issuers and HELOC creditors choose acceptable replacement indices for the LIBOR, the CFPB has proposed a detailed roadmap to outline specifically how these creditors may replace the LIBOR before it becomes unavailable.  Under these guidelines, credit card issuers and HELOC creditors must select a replacement index where the annual percentage rate (“APR”) for the new index is calculated similarly to the LIBOR index.  The CFPB stated that the prime rate published in The Wall Street Journal as well as certain Secured Overnight Financing Rates will be considered suitable replacements as well. 
• Regulation Z requires lenders to disclose certain terms to borrowers of open-end credit products.  Under the proposed rule, Regulation Z would require creditors to provide further disclosures, including change-in-terms notices to inform borrowers as to which new interest rate their credit product will transition.   
• The CFPB also proposes adding an exception from the rate reevaluation provisions applicable to credit card accounts.  Under current regulations, when a card issuer increases a rate on a credit account, the creditor must reevaluate the rate increase every six months until such time the rate is then reduced.  Per the CFPB’s proposal, a credit card issuer would be exempt from these requirements for increases that occur as a result of replacing the LIBOR index.         

On June 17, 2020, the SBA and U.S. Treasury published an updated form of application and instructions for borrowers seeking forgiveness of their Paycheck Protection Program loans, as well as a new “EZ” form of application and instruction. In both cases, these applications generally implement the statutory changes required by the Paycheck Protection Program Flexibility Act.

While the improved likelihood of full forgiveness due to the 24-week covered period is likely to draw the most attention, potential compliance with two of the safe harbors provided to avoid a loss of forgiveness in the event of a reduction in the number of Full Time Equivalent (FTE) employees comparing the applicable “covered period” with the applicable reference period. Under the CARES Act, while borrowers are generally eligible for loan forgiveness for certain expenditures during the covered period, actual loan forgiveness must be reduced if the borrower’s weekly average number of FTE employees during the covered period was less than during the borrower’s chosen reference period (generally, February 15, 2019 through June 30, 2019 or January 1, 2020 and February 29, 2020; or, for seasonal employers, any consecutive 12-week period between May 1, 2019 and September 15, 2019).

However, under the revised PPP loan forgiveness application, there are certain FTE reduction exceptions and two safe harbors. Each of these provide potential relief from a decrease in forgiveness due to a reduction in FTE levels… but they also provide enhanced risk for borrowers needing to rely on them. In addition, general eligibility for the use of the Form EZ loan forgiveness application is conditioned on compliance with the reduction exceptions or one of the safe harbors.

FTE Forgiveness Reduction Exceptions

As provided in the original forgiveness application, in calculating the average number of FTE employees during the covered period, borrowers are permitted to effectively add back the FTEs for: (1) any positions for which the employer made a good-faith, written offer to rehire, which was rejected, (2) any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours. (If the positions were re-filled during the covered period, than borrowers are required not to double-count such positions.)

From the launch of the Paycheck Protection Program (“PPP”) on April 3, 2020, through June 6, 2020, 5,458 lenders have approved loans to over 4.5 million small businesses for over $511 billion dollars. On June 7, 2020, the SBA published an updated Paycheck Protection Program Report with additional details.

To put some scale around the size of the program, for the last five years, the SBA has averaged annual total personal loans approved under its 7(a) small business loan program (the same umbrella under which PPP loans fall) of roughly $17.4 billion. Accordingly, in April and May of 2020, the SBA has processed roughly 29 years worth of SBA loans. While the rate of PPP loans being improved has slowed greatly, as discussed more below, this still highlights the size of the program and the strain under which the SBA has been operating.

Average Loan Size

The overall average size of a PPP loan is now approximately $113 thousand. This is down significantly from the first round of PPP funding, where the average approved PPP loan was $206 thousand. Based on the formula for PPP lending, this means the average borrower likely had monthly payroll costs of approximately $45 thousand.

Of course, the average size of PPP loan is certainly affected by a relatively small number of larger loans. As reflected above, the majority of loans made were for loans of less than $50 thousand (reflecting monthly payroll costs of less than $20 thousand). Over 85% of the total PPP loans made were for less than $150 thousand, and over 93% of the total PPP loans made were for less than $350 thousand. While significant ink (digitally and otherwise) has been spilled on larger PPP borrowers, less than 2% of the PPP loans made were for more than $1 million.

H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), was passed by the House of Representatives by a vote of 417-1 on May 28, 2020.  The Senate passed H.R. 7010 unanimously by voice vote on June 3, 2020.  President Trump signed the PPP Flexibility Act into law on June 5, 2020, making effective several modifications to the Paycheck Protection Program.

The PPP Flexibility Act causes a number of changes to the Paycheck Protection Program, including:

• An extension of the forgiveness period from eight weeks to twenty-four weeks (optional for existing PPP borrowers), which will also presumably affect the relevant covered period for measuring reductions in employees or salary and wages;
• A requirement for forgiveness to use 60% (rather than 75%) of the PPP loan proceeds on permissible payroll costs;
• An extension of the deadline to re-hire employees for an exemption to the forgiveness limitation to December 31, 2020 (from June 30, 2020);
• An additional statutory exemption for re-hiring employees based on a reduction in level of business activity due to COVID-19 and the government’s response;
• An extension of the payment deferral period until loan forgiveness is granted or a loan forgiveness application is not filed in a timely manner;
• A five-year loan maturity term for all new PPP loans (although existing loans will stay at two years unless borrower and lender mutually agree to extend; and
• Permission for all PPP recipients to take advantage of the CARES Act provision permitting deferred payment of the employer’s share of Social Security taxes due on wages paid through the end of the year.

Our Bryan Cave Leighton Paisner LLP Client Alert on the PPP Flexibility Act goes into further details on each of these changes. We anticipate further regulations and guidance from the Treasury and Small Business Administration shortly, but the PPP Flexibility Act provides a number of choices for PPP borrowers to consider.

On June 1, 2020, the Office of the Comptroller of the Currency (“OCC”) released a final rule on permissible interest on loans that are sold, assigned, or transferred, and effectively reversed the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).[1]  In our post on the OCC’s advanced notice of proposed rulemaking (“ANPR”) from November 2019, we discussed how this holding contradicted the “valid when made” doctrine, whereby an obligation is considered valid under the law that applied at the time of origination.  Effectively, a loan’s interest rate was no longer valid when resold to an entity in a state with a lower interest rate cap than where the loan was originally issued.  This week’s final published rule is the first step in addressing the tension between the Second Circuit and the federal powers granted to national banks and federal thrifts.      

Adopted in the form in which it was initially proposed, the OCC’s final rule provides that “[i]nterest on a loan that is permissible under sections 85 and 1463(g)(1), [national banks and federal thrifts] respectively, shall not be affected by the sale, assignment, or other transfer of the loan.”  Published in yesterday’s Federal Register and effective sixty days from now, the final rule reverses the Madden rule and reaffirms the “valid when made” doctrine.  Whereas the Madden decision held that subjecting credit assignees to state usury laws did not significantly interfere with the execution of a national bank’s powers, the OCC disagreed and viewed the decision as an affront to the inherent powers afforded to national banks.[2]  Credit lenders and others in the industry view the OCC final rule as an important and welcomed step in easing the uncertainty created by the Madden rule, citing the rule’s limiting of access to credit markets and propensity for instigating litigation. 

The interplay of Economic Injury Disaster Loan (EIDL) Loan Advances and Paycheck Protection Program (PPP) Loan Forgiveness is broken. Maybe there’s further guidance to come that will make the existing application and guidances makes sense, but as I’m reading the current guidance, PPP lenders could be required to “eat” the EIDL advances received by their PPP borrowers. While that’s certainly not the intent of the PPP, the existing mechanics may make that a reality.

Background

Section 1102 of the CARES Act provided that PPP borrowers who had received an EIDL loan between January 31, 2020 and April 3, 2020, could (and in some circumstances had to) increase their PPP loan amount to refinance outstanding EIDL loans. Section 1110 of the CARES Act provided that if an EIDL applicant received an EIDL advance subsequently was approved for a PPP loan, the advanced amount would be reduced from the loan forgiveness amount. (Whether Section 1110 of the Cares Act makes sense or not is also beyond this post; for now, I’m simply assuming it means what it says, at least with regard to EIDL advances related to COVID-19 existing at the time of PPP loan forgiveness.)

Note: Section 1102 only applied for existing EIDL loans as of April 3, 2020, while Section 1110 applies to subsequent EIDL advances, even if those amounts were not rolled into PPP loans.

Under the first Interim Final Rule, outstanding EIDL loans, less the amount of any outstanding EIDL advance, were rolled forward into the maximum PPP loan amount. Proceeds from any advance up to $10,000 on the EIDL loan would be deducted from the loan forgiveness amount on the PPP loan. “For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.”

We are still working on a few specific pieces of guidance for lenders as they process PPP forgiveness applications,  particularly with regard to minimizing the bank’s liability and with regard to EIDL advances. But in the meantime, I thought I would share some of the thought leadership that we’ve published from a PPP borrower perspective, since I suspect banks will also get a lot of questions from their borrowers as well.

In our view, the Paycheck Protection Program Loan Forgiveness Application answered many questions, but certainly not all of them.

The additional Loan Forgiveness And Loan Review regulations answered additional questions (but of course left more questions as well).

Another potential resource is the AICPA Loan Forgiveness Calculator available here. Given the continuing flow of ongoing guidance, the Calculator is updated regulatory. (Note: we have not verified any of the assumptions/calculations made by the AICPA calculator, but believe it can be a useful comparison tool regardless.)

The Ninth Circuit held, in a matter of first impression, that a trust created by an individual for tax and estate tax planning purposes does not lose all state and federal consumer disclosure protections when it seeks to finance repairs to a personal residence for the trust beneficiary, rather than for the trustee herself; instead, the loan transaction remains a “consumer credit transaction” under TILA, RESPA and California’s Rosenthal Fair Debt Collection Practices Act. Gillian, Trustee of Lou Easter Ross Revocable Trust v. Levine, — F.3d — (9^th Cir. 2020), 2020 WL 1861977 (4/14/2020).

Acting in her capacity as trustee of a trust created by her dead sister, the plaintiff obtained a loan to make repairs to a personal residence occupied by her sister’s daughter.  The district court held, on a motion to dismiss, that because the plaintiff borrower did not intend to live in the house, the loan was not a consumer credit transaction, which TILA defines as a loan extended to a natural person “primarily for personal, family or household purposes.” Both TILA and RESPA are inapplicable to “credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes.” The Rosenthal Act similarly applies to debt “due or owing from a natural person by reason of a consumer credit transaction,” which it defines identically to TILA.

Brian Brooks, Chief Operating Officer of the Office of the Comptroller of the Currency (“OCC”) said on Monday that he believes the OCC should investigate the viability and utility of a non-depository payments charter: “One of the things I think we have to ask ourselves as an agency is, if it makes sense to have a non-depository lending charter, which was the original fintech concept, would it also make sense to have a non-depository payments charter?”

In his talk, given as part of the Consensus: Distributed virtual conference, Brooks focused on cross-border concerns that are particularly salient to crypto companies. He notes that we may have come to a point where the traditional state-federal divisions of licensing and oversight authority are less relevant, particularly in the crypto space. Brooks says there is an argument that “crypto looks a lot like banking for the twenty-first century,” in which case a single national license may provide modern update to the current patchwork of laws, which is burdensome and time-consuming for both payments companies and state regulators.

Brooks said “one of [his] missions at the OCC . . . is to investigate the extent to which over time it makes sense to think of crypto companies like banks and to think of charter types that might be appropriate for crypto companies.” While Brooks’ comments focused on crypto in mentioning a payments charter, he noted Stripe and PayPal as non-blockchain payments companies, which would presumably also be covered by such a payments charter.