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CFPB Issues Final Rule on Small-Dollar Lending

On Tuesday, July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) formally rescinded rules implemented under former CFPB Director Richard Cordray aimed at determining a consumer’s ability to repay small-dollar loans.  In 2017, then Director Cordray instituted mandatory underwriting provisions that would have required payday lenders to assess, as part of the underwriting process, whether borrowers could afford to repay their loans without reborrowing.  Upon review of these mandatory provisions, the CFPB did not find the requisite legal and statutory guidance to further enforce these underwriting standards. 

While small-dollar loans provide for increased consumer access to capital, especially during the COVID-19 pandemic, this renewed focus on small-dollar lending is a noticeable directional turn from the consumer lending advice of prior administrations.  Under the previous presidential administration, regulators were more cautious of banks’ lending in this space and worried about risks, such as high interest rates and perceived repayment risks, associated with lending small-dollar loans to consumers.[1]  In 2013, prudential regulators, including the OCC and the FDIC, went as far to release guidance that essentially discouraged banks from engaging in small-dollar lending activity altogether.[2]   

Regulators under the current administration have signaled that they are more open to reengaging banks in the practice of small-dollar lending, so as to meet the unmet short-term credit needs of the American consumer.[3]  In its press release concerning the repeal of these provisions, the Bureau stated that “rescinding the mandatory underwriting provisions of the 2017 rule ensures that consumers have access to credit and competition in states that have decided to allow their residents to use these small-dollar loan products, subject to state law limitations,” and noted that a subset of consumers might have a particular need for products such as payday loans as a result of the economic downturn brought about by the COVID-19 pandemic.

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Georgia Passes Legislation Creating Immunity for COVID-19 Liabilities

July 6, 2020

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On June 26, 2020, Georgia’s Legislature passed the “Georgia COVID-19 Pandemic Business Safety Act” (the “Act”). The Act provides Georgia businesses with certain defenses and immunities for potential liability from claims related to the spread of COVID-19. These immunities apply broadly to the health care facilities and providers as well as other business entities and individuals.

Under the Act, no covered entity or individual will “be held liable for damages in an action involving a COVID-19 liability claim . . . unless the claimant proves that the actions . . . showed: gross negligence, willful and wanton misconduct, reckless infliction of harm, or intentional infliction of harm.” 

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SCOTUS Upholds CFPB but not its Singular Director Structure

The Consumer Financial Protection Bureau (“CFPB”) is slightly less than a decade old, created in the wake of the 2008 financial crisis to enforce the nation’s consumer financial protection laws and ensure that consumer debt products are safe and transparent for the consumers who use them.  The Bureau has had only two directors, Richard Cordray and Kathleen Kraninger, with Mick Mulvaney as Acting Director in between.  SCOTUS’s recent ruling will give the president the right to fire the director at will, unless Congress acts to change CFPB to a commission structure (like the FTC).  The ruling is important but leaves a number of unanswered questions likely to spur further litigation and CFPB challenges.

Single Director Provisions and Constitutionality

Unlike many agencies, which are governed by multimember boards and commissions, the CFPB is governed by a single director, who is appointed by the president, confirmed by the Senate for a five-year term, and may only be removed for “inefficiency, neglect of duty, or malfeasance in office.”  See 12 U.S.C. §§ 5491(c)(1),(3). This leadership structure and, by association, the constitutionality of the organization itself, was challenged in Seila Law, LLC v. Consumer Financial Protection Bureau, 591 U.S. ___, (2020) a case on appeal from the Ninth Circuit.  In 2017, the CFPB issued a civil investigative demand (“CID”) to Seia Law LLC, a California law firm specializing in debt-related legal services.  In response to the CID, Seia Law asked the CFPB to set it aside on the grounds that the Bureau’s leadership structure was unconstitutional insofar as its single director structure violated the separations of powers.  The District Court held for the CFPB and the Ninth Circuit affirmed.  See Consumer Financial Protection Bureau v. Seila Law LLC, 923 F.3d 680 (9th Cir. 2019).    

The Roberts Majority Opinion

The Supreme Court of the United States vacated the judgment of the Ninth Circuit and per Chief Justice John Roberts’s majority opinion (joined by Justices Thomas, Alito, Gorsuch, and Kavanaugh), “the CFPB’s leadership by a single individual removable only for inefficiency, neglect, or malfeasance violates the separation of powers.”  See Seila Law, 591 U.S. at 11-30.  Article II provides the president with executive powers that empower him to “take care that the laws be faithfully executed.”  See U.S. Const. art. II.  Time and again, precedent has confirmed that such executive powers permit the president to both appoint and remove executive officials.  In advancing the argument of the Ninth Circuit, Paul Clement, whom the Supreme Court appointed to defend the Ninth Circuit’s ruling, looked to Humphrey’s Executor v. United States, 295 U.S. 602 (1935), where the Supreme Court held that the structure of the Federal Trade Commission (“FTC”) – consisting of five members who could be removed only for cause – did not violate Article II of the Constitution.  Since the 1935 decision in Humphrey’s, the Court has recognized two exceptions to the president’s power to remove those whom he appoints: 

“Congress could create for-cause removal protections for a multimember body of experts, balanced along partisan lines, that performed legislative and judicial functions and was not to exercise any executive power; [and] [sic.] exceptions for inferior officers, who have limited duties and lack policymaking or administrative authority, such as an independent counsel.”  See Amy Howe, Opinion analysisCourt strikes down restrictions on removal of CFPB direction buy leaves bureau in place, SCOTUSblog (Jun. 29, 2020).

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CFPB Issues CARES Act Credit Reporting FAQs

June 30, 2020

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On June 16th, the CFPB issued a Compliance Aid Frequently Asked Questions (FAQs) addressing the CARES Act changes to the Fair Credit Reporting Act (FCRA) and clarifying furnisher reporting obligations regarding consumers who have received payment assistance or forbearance. In public remarks in connection with Consumer Data Industry Association webinar released June 19, 2020 Director Kraninger highlighted the CFPB’s commitment to consumers:  “I do want to stress that we are telling struggling borrowers to reach out to their servicers to see what options are available to them. Under CFPB regulations, servicers are required to have policies and procedures in place to ensure the disclosure of the availability of CARES Act mortgage forbearance to consumers. If a consumer has an issue with their servicer, we encourage them to submit a complaint to us if the consumer can’t first resolve the matter with the servicer.” Here are few of the highlights in the FAQ that address issues which may prove the most challenging for lenders, services and furnishers and agencies.

FAQ #5 “Constructive Work” With Borrowers Encouraged.

“Even if accommodations are not required by the CARES Act or by other applicable law, the Bureau and other Federal and State agencies have encouraged financial institutions in prior guidance (the March 22, 2020 Federal Reserve Intragency Statement) to work constructively with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.” This guidance goes to the spirit of the CARES Act to help consumers impacted by the pandemic, but also asks servicers use their best judgment in offering assistance beyond that required. Understanding borrower’s specific circumstances will be critical in assessing the reasonableness of efforts. Where personnel are applying judgment, having internal servicer guidelines for escalation to ensure uniformity and consistency may prove beneficial. Tracking and monitoring metrics and other characteristics of those loans and borrowers may also help ensure fairness.  

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OCC Continues Digital Banking Modernization

The Office of the Comptroller of the Currency’s (“OCC”) attention to modernizing regulation to better accommodate innovative products and industries is continuing full steam ahead since our recent post about a potential payments charter. In the weeks since we posted that article, Brian Brooks has become the acting Comptroller of the Currency, so it should come as no surprise that his goals are garnering some attention.

On Thursday, June 6, the OCC issued a notice of proposed rulemaking seeking public comment to update its rules for national bank and federal savings association activities and operations and an advance notice of proposed rulemaking seeking comment on rules on national banks’ and federal savings associations’ (banks) digital activities. These releases confirm that the agency is “reviewing its regulations on bank digital activities to ensure that its regulations continue to evolve with developments in the industry.”

As part of a substantial modification of the regulatory system, the OCC seeks comment on additional flexibility for banks with respect to permissible derivatives activities, tax equity finance transactions, corporate governance, anti-takeover provisions, capital stock issuances and repurchases, and participation in financial literacy programs.

In addition, the OCC seeks comment on a significant number of banking issues related to digital technology and innovation. The OCC asks whether current legal standards are sufficient flexible, whether they create undue hurdles, and whether there are other areas they should cover. Their requests for comments also touch on current questions, namely whether the pandemic has brought any concerns to light and what issues are unique to smaller institutions – which performed well with the rollout of the SBA’s Paycheck Protection Program, but may encounter hard times to come.

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CFPB Rolls Out Pilot Program Offering Advisory Opinions

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.
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CFPB Proposes Rule to Ease Transition to LIBOR for Creditors

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.         
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The Unsafe Waters of the PPP Purported FTE Reduction Safe Harbors

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.)

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PPP Loan Statistics Through June 6, 2020

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.

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PPP Flexibility Act Provides Additional Flexibility (and Potential Traps) for Borrowers and Lenders

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.

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