Financial Services Regulatory

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As all lenders know by now, the Coronavirus Aid, Relief, and Economic Security Act’s (“CARES Act”) guaranteed Paycheck Protection Program (“PPP”) loans are the key piece of economic relief for small businesses during the COVID-19 crisis. Yet, in the rush to get those loans flowing into the economy, the Small Business Administration (“SBA”) issued an interim regulation that raises substantial unanswered questions about participating lenders’ compliance policies. Business Loan Program Temporary Changes; Paycheck Protection Program (proposed Apr. 2, 2010) (to be codified at 13 C.F.R. pt. 120). Those questions are starkly different yet similarly important for banks and other traditional lending institutions accustomed to operating under the Bank Secrecy Act (“BSA”) and those nonbank lenders who have never been under the BSA’s purview.

Banks and other traditional lending institutions already have AML (Anti-Money Laundering) and KYC (Know Your Customer) policies in place. For them, the SBA’s interim regulation seems, at first glance, like nothing earthshattering; it simply requires these lenders “to follow their existing BSA protocols.” In this crisis, though, nothing is as it always was. The urgency of getting these loans approved plus the importance of social distancing makes verifying the applicant’s information no easy task. Although the SBA’s regulation says that “PPP loans for existing customers will not require re-verification under applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance,” the question arises whether a PPP loan application for an existing customer is considered a new account for FinCEN Customer Due Diligence (“CDD”) Rule purposes. Fortunately, the SBA and the Treasury Department issued revised FAQs addressing that question and explaining that, for PPP loans to existing customers, lenders do not have to re-verify information that had been previously provided and verified and do not even have to collect and verify missing information in the first instance “unless otherwise indicated by the lender’s risk-based approach to BSA compliance.” Paycheck Protection Program Loans Frequently Asked Questions (FAQs) (Apr. 8, 2010). We expect the final SBA regulation to be updated to reflect this important clarification.
Continue Reading Compliance for PPP Loans: Different Questions for Different Lenders

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On Monday, November 18, 2019, the Office of the Comptroller of Currency (“OCC”) announced that it is seeking public comment on a proposed rule to clarify the “valid when made” doctrine in the wake of a decision from the United States Court of Appeals for the Second Circuit, Madden v. Midland Funding, that undermined and largely rejected it. The Notice of Proposed Rulemaking (“NPRM”) can be found here. This rulemaking could restore certainty regarding the legality and enforceability of loans that comprise a significant component of lending activity.

The “valid when made” doctrine is a longstanding rule that a loan’s interest rate remains legal and enforceable as long as it was legal when the loan was made, regardless of whether a third party ultimately ends up holding the loan. In Madden, the Second Circuit undermined, and largely rejected, the doctrine and thus called into question the legality and enforceability of a large swath of the consumer debt. The loans challenged in Madden were originated by banks and subsequently sold, assigned, or otherwise transferred to non-bank entities. 
Continue Reading OCC Seeks Comment as Part of New Rulemaking to Clarify “Valid When Made” Doctrine

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Recent interest-rate decreases have led to a resurgence in the mortgage market, with refinance activity up sharply from levels a year ago. But lenders have underwriting on their minds for reasons other than increased application volume.

The CFPB recently affirmed that it intends to allow the so-called GSE Patch to its Ability-to-Repay/Qualified Mortgage Rule to expire in early 2021. This has home loans executives and their advisors assessing their underwriting obligations in a world without this heavily utilized compliance safe harbor. In advance of the elimination of the patch, the Bureau is requesting comments regarding potential changes to the Rule and the Qualified Mortgage definition.
Continue Reading Patchless–CFPB Seeks Comment on Ability to Repay and Qualified Mortgages After Expiration of the GSE Patch

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Article 9 of the Uniform Commercial Code (“UCC”) has become highly technical, reflecting the complexity of modern secured transactions and the intricate relationships of debtors, secured parties and others who have or may have interests in a debtor’s assets.  Some of its rules, however, seem relatively easy to understand and apply.

One of those is the rule that protects buyers who buy goods in the ordinary course of business, allowing such buyers to make purchases free and clear of security interests created by their sellers. UCC 9-320.  This relatively simple concept is consistent with everyday buyers’ expectations.  When one purchases at a store and pays for goods, one expects the secured party to follow the sales proceeds rather than unfairly repossess the purchased goods. 
Continue Reading The Extraordinary Rights of Non-Ordinary Course Buyers

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Justice Kavanaugh’s first authored opinion as a Supreme Court Justice in Henry Schein, Inc. v. Archer and White Sales, Inc., No. 17-1272, 586 U.S. ____ (2019) further cements the Supreme Court’s stance on arbitration.

Over the years, the Supreme Court has consistently held in favor of arbitration and rejected attempts by parties and the lower courts to ignore binding arbitration clauses. For instance, in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (April 2011), the Supreme Court rejected state laws that attempted to prohibit arbitration for certain types of claims, holding “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the [Federal Arbitration Act (“FAA”) 9 U.S.C. § 1 et seq.].” More recently, in Epic System Corp. v. Lewis, 138 S. Ct. 1612 (May 2018), the Supreme Court held that arbitration clauses prohibiting class actions in employment contracts were enforceable and were not preempted by the National Labor Relations Act (“NLRA”), 29 U.S.C. § 151 et seq.—which guarantees basic rights of private sector employees to take collective action. The Supreme Court reasoned that the FAA and NLRA “have long enjoyed separate spheres of influence . . .” and the FAA is “a Congressional command requiring us to enforce, not override, the terms of the arbitration agreements….” 
Continue Reading The Supreme Court Remains Steadfast in Favor of Arbitration

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One of the key provisions of the Dodd-Frank Act rollback law signed by President Trump on May 24, 2018, hasn’t met its early promise for U.S. community banks. Recently proposed rules to implement simplified capital requirements have fallen short of the industry’s expectations when the bank deregulation law was enacted in May.

On November 21, 2018, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly announced a proposed rule to simplify capital requirements for qualifying community banking organizations that opt into the community bank leverage ratio framework. The agencies are seeking public comment on a proposal that would simplify regulatory capital requirements for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155 regulatory reform bill). 
Continue Reading Community Banks Disappointed with Federal Regulators’ Proposed Community Bank Leverage Ratio

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Co-Authored by Erin Fonte and Brenna McGee

Continuing from last week’s post, here is the second half of our “Top 10 List” of key issues U.S. financial institutions, non-banks providing financial services, and financial technology (fintech) entities should plan for and watch throughout 2019.

  1. OCC Fintech Charter

On July 31, 2018, after several years of discussion, the Office of the Comptroller of the Currency (OCC) announced that it is accepting applications for special purpose national bank charters for fintech companies. Long anticipated by the fintech industry and opposed by multiple state regulators, the OCC fintech charter could potentially alter the financial services landscape for nondepository financial institutions. For fintech companies serving customers in multiple states, the OCC fintech charter could reduce the administrative and compliance challenges posed by the existing patchwork of state licensing requirements. But it comes at a steep cost because fintech companies would have to meet the stricter, bank-like regulatory requirements associated with a bank charter. 
Continue Reading Crumpets, Congress, Cannabis and Crypto: Top 10 Issues for Financial Services in 2019 – Part 2

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Co-Authored by Erin Fonte and Brenna McGee

As an eventful 2018 comes to a close, we look ahead to 2019 and our “Top 10 List” of key issues U.S. financial institutions, non-banks providing financial services, and financial technology (fintech) entities should plan for and watch throughout the upcoming year. The first five items on the list are discussed below, and the remainder of our list will follow shortly in another post.

  1. Brexit

We will start the list with a couple of topics from “over the pond” that will have a continuing impact on U.S. financial services entities. The British Parliament was scheduled to vote on Tuesday on the agreement that Prime Minister Theresa May reached with the European Union (EU) for Britain’s departure from the EU, commonly referred to as “Brexit.” But in an unscheduled address to Parliament on Monday, May said that she would seek to postpone the parliamentary vote, noting that if the vote were to be held as planned, her proposal “would be defeated by a significant margin.” As a result, May’s own party triggered a no-confidence vote on May that would have seen her removed as Prime Minister if she lost. By a vote of 200 to 117, May won a vote of confidence in her leadership and is now immune from a leadership challenge for a year. 
Continue Reading Crumpets, Congress, Cannabis and Crypto: Top 10 Issues for Financial Services in 2019 (Part 1 of 2)

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After a highly publicized and controversial confirmation process, the senate voted to approve Brett Kavanaugh’s nomination to the Supreme Court this past Saturday, October 6, 2018. Kavanaugh was sworn in later that day and began hearing cases on Tuesday, October 9, 2018.

It goes without saying that Justice Kavanaugh is a conservative judge and is expected to lean to the right. It also goes without saying that Justice Kavanaugh’s appointment pushes the Supreme Court to the right with a 5-4 ratio. But what does Justice Kavanaugh’s appointment mean for the financial services industry? 
Continue Reading What Can the Financial Services Industry Expect Following Justice Kavanaugh’s Confirmation to the Supreme Court?

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In an important joint statement issued on September 11, 2018, the federal financial regulatory agencies (the FDIC, the OCC, the Federal Reserve, the NCUA, and the CFPB) clarified the role of supervisory guidance, stating that supervisory guidance “does not have the force and effect of law.” Community and regional banks and other regulated financial institutions are applauding this effort by regulators to ensure that both the regulated and their regulators have a clear understanding of the appropriate role of guidance in supervision. Financial institutions over the years have raised numerous concerns about the application of guidance in the examination process, and will likely view this as a positive step towards providing greater clarity.

The agencies said guidance can provide examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers. “Supervised institutions at times request supervisory guidance, and such guidance is important to provide insight to industry, as well as supervisory staff, in a transparent way that helps to ensure consistency in the supervisory approach,” the agencies point out in the joint statement.  
Continue Reading Federal Financial Regulators Clarify Supervisory Guidance Not “Force of Law”