SEC’s OCIE Examination Initiative Risk Alert: LIBOR Transition Preparedness
On June 18, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert about the scope and content of examinations that the OCIE plans to conduct of various registrant types to assess their efforts to prepare for the LIBOR discontinuation. OCIE has identified registrant preparedness for the transition away from the London Interbank Offered Rate (LIBOR) as an examination program priority for fiscal year 2020. LIBOR, which has historically been used as a benchmark for various commercial and financial contracts, is expected to be discontinued after 2021. This shift is anticipated to have a major impact on financial markets, with a more significant effect on certain market participants including SEC-registered investment advisers, broker-dealers, investment companies, municipal advisors, transfer agents and clearing agencies.
OCIE will evaluate a registrant’s transition’s probable impact on the registrant’s business activities, operations, services and investors. Plans that registrants have developed and steps they have taken to prepare for the change will also be reviewed, including registrants’ handling of LIBOR-linked contracts that extend past the expected discontinuation date, operational readiness, disclosures and representations to investors regarding preparation efforts, identification and remedying of any potential conflicts of interest associated with the discontinuation, and clients’ efforts to replace LIBOR with appropriate alternative reference rates. Registrants and investment professionals are encouraged to visit the Alternative Reference Rates Committee website for updates and to share information about the potential impact of the expected discontinuation of LIBOR via email to LIBOR@sec.gov.
SEC Extends Relief for Virtual Meetings of Fund Boards
On June 19, the SEC issued an order to extend the time for relief from the in-person board meeting requirement set forth in the Investment Company Act of 1940 until no earlier than December 31, 2020, superseding the SEC’s prior order that extended this relief until August 15, 2020. The relief only applies to the in-person board meeting requirement and not to other aspects of the prior order. Reliance on the order is subject to the same conditions set forth in the SEC’s prior order, namely, that:
- reliance on the order is necessary or appropriate due to circumstances related to current or potential effects of COVID-19;
- the votes required to be cast at an in-person meeting are instead cast at a meeting in which directors may participate by any means of communication that allows all directors participating to hear each other simultaneously during the meeting; and
- the board of directors, including a majority of the directors who are not interested persons of the fund, ratifies the action taken pursuant to the exemption by vote cast at the next in-person meeting.
CFPB Launches Pilot Program to Provide Advisory Opinions to Regulated Entities
On June 18, the CFPB announced the launch of a pilot advisory opinion (AO) program. This program allows regulated entities to seek guidance on areas of regulatory uncertainty in the CFPB’s existing regulations by emailing email@example.com for an AO. From the requests received, the CFPB will select topics based on the program’s priorities.
The pilot program will focus on (1) ensuring that consumers receive timely and understandable information to make responsible decisions, (2) identifying outdated, unnecessary or unduly burdensome regulations, (3) consistency in enforcement of federal consumer financial law, and (4) transparency and efficiency of consumer financial products and services markets. In selecting requests for a response, the CFPB will also consider whether the issue has been noted during prior CFPB examinations and warrants regulatory clarity, whether the issue is one of substantive importance or impact, and whether the issue is one never before addressed through an interpretive rule or other authoritative source. The CFPB is unlikely to provide an AO on issues that are the subject of an ongoing investigation, enforcement action, or ongoing or planned rulemaking.
The CFPB’s AO will be based on a summary of the facts presented that would be applicable to other entities in situations with similar facts and circumstances, and will be published for public consumption on the CFPB’s website and in the Federal Register. The public is invited to comment on the proposed AO program.
CFPB Proposes Termination of GSE Patch and Redefining Qualified Mortgages
On June 22, the CFPB issued two Notices of Proposed Rulemaking (NPRMs) to address the expiration of the Government-Sponsored Enterprises Patch (GSE Patch) upon the earlier of January 2021 or when the GSEs (i.e., Fannie Mae, Freddie Mac) exit conservatorship.
Currently, the Truth in Lending Act (TILA) establishes certain ability-to-repay (ATR) requirements for residential mortgage loans to be considered qualified mortgages (QM), including that a consumer’s debt-to-income ratio (DTI) be 43% or less. However, TILA also allows certain mortgage loans to be eligible as QMs for purchase or guarantee by Fannie or Freddie, even if the DTI exceeds 43% (Temporary GSE QM loans). With the impending expiration of the GSE Patch, which provides for the salability of Temporary GSE QM loans to Fannie Mae or Freddie Mac, the CFPB proposes to dispense with the GSE Patch and, in its place, institute the following two rules to “facilitate a more transparent, level playing field” and promote “more vigorous competition in mortgage markets.”
First, the CFPB proposes changing the definition of a QM, replacing the DTI with a price-based approach on the premise that a loan’s price, measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and a more holistic and flexible measure of a consumer’s ATR than DTI alone. A price threshold would be established for most loans, with a higher price threshold for smaller loans. Lenders would still be expected to consider a consumer’s income, debt and DTI ratio or residual income and to verify the consumer’s income and debts.
Second, the CFPB proposes delaying the expiration of the GSE Patch until the effective date of a final rule regarding the first NPRM to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires before the amendments in the first NPRM take effect.
SEC Grants Muni Advisors a Temporary Exemption from Broker-Dealer Registration
On June 16, the SEC granted registered municipal advisers (MAs) a temporary, limited exemption (Exemption) from broker-dealer registration for certain expanded activities. The Exemption permits registered MAs to directly solicit “Qualified Providers” (banks, wholly-owned subsidiaries of banks that are engaged in commercial lending and financing activities and federally- or state-chartered credit unions) in connection with “Direct Placements” of municipal securities, subject to several requirements and limitations. The Exemption also permits MAs to receive transaction-based compensation for services provided in connection with the Direct Placement. The Exemption is valid through December 31, 2020. For additional information on the Exemption, including key takeaways, please look for an upcoming Goodwin client alert.
CFPB Issues Interim Final Rule on Loss Mitigation Options for Homeowners Recovering from Pandemic-Related Financial Hardships
On June 23, the CFPB issued an interim final rule designed to make it easier for consumers to transition out of financial hardship caused by the COVID-19 pandemic and easier for mortgage servicers to assist those consumers. The interim final rule:
- Clarifies that servicers do not violate Regulation X by offering certain COVID-19-related loss mitigation options based on an evaluation of limited application information collected from the borrower;
- Specifies that the loss mitigation option must meet certain criteria to qualify for an exception from the typical requirement to collect a complete application. Among other things, the option must allow the borrower to delay paying all principal and interest payments that were forborne or became delinquent as a result of a financial hardship due, directly or indirectly, to the COVID-19 emergency. Servicers may not charge any fees to borrowers in connection with the option, and the borrower’s acceptance ends any preexisting delinquency;
- Provides servicers relief from certain requirements under Regulation X that normally would apply after a borrower submits an incomplete loss mitigation application. Once the borrower accepts an offer for an eligible program under the interim final rule, the servicer need not exercise reasonable diligence to obtain a complete application and need not provide the acknowledgment notice that is generally required under Regulation X when a borrower submits a loss mitigation application.
Servicers still must comply with Regulation X’s other requirements after a borrower accepts a loss mitigation offer.
CFPB Issues Interpretive Rule on Method for Determining Underserved Areas
On June 23, the CFPB issued an interpretive rule to provide guidance to creditors and other persons involved in the mortgage origination process about the way in which the CFPB determines which counties qualify as “underserved” for a given calendar year. Regulation Z states that an area is “underserved” during a calendar year if, according to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar year, it is a county in which no more than two creditors extended covered transactions secured by first liens on properties in the county five or more times. The CFPB previously interpreted how HMDA data would be used to determine which areas meet this standard using a method set forth in the commentary to Regulation Z. However, according to the CFPB, portions of this method have become obsolete because they rely on data elements that were modified or eliminated by certain 2015 amendments to the CFPB’s HMDA regulations, which became effective in 2018. The interpretive rule describes the HMDA data that will instead be used in determining that an area is “underserved” for purposes of the standard described in Regulation Z. This interpretation supersedes the outdated methodology set forth in the commentary to Regulation Z. The list of rural and underserved counties, using the HMDA data described in the interpretive rule, can be found on the CFPB’s website.
FDIC Finalizes Rule Mitigating Effects of PPP and MMLF on Deposit Insurance Assessments
On June 22, the Federal Deposit Insurance Corporation (FDIC) published a final rule that mitigates the deposit insurance assessment effects of participating in the Paycheck Protection Program (PPP), Paycheck Protection Program Liquidity Facility (PPPLF) and Money Market Mutual Fund Liquidity Facility (MMLF). The final rule (1) removes the effect of participation in the PPP and borrowings under the PPPLF on various risk measures used to calculate an insured depository institution’s assessment rate, (2) removes the effect of participation in the PPP and MMLF on certain adjustments to an insured depository institution’s assessment rate, (3) provides an offset to an insured depository institution’s assessment for the increase to its assessment base attributable to participation in the PPP and MMLF, and (4) removes the effect of participation in the PPP and MMLF when classifying insured depository institutions as small, large or highly complex for assessment purposes. To ensure that the changes are applied to assessments starting in the second quarter of 2020, the final rule will be effective immediately upon publication in the Federal Register with an application date of April 1, 2020.
Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effects of the COVID-19 Pandemic on Financial Institutions
On June 23, the FDIC, Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency and National Credit Union Administration, in conjunction with the state bank and credit union regulators, jointly issued examiner guidance to outline the supervisory principles for assessing the safety and soundness of institutions given the ongoing impact of the COVID-19 pandemic. The guidance acknowledges that stresses caused by COVID-19 can adversely impact an institution’s financial condition and operational capabilities, even when institution management has appropriate governance and risk management systems in place to identify, monitor and control risk. The guidance instructs examiners to:
- Consider the unique, evolving and potentially long-term nature of the issues confronting institutions and to exercise appropriate flexibility in their supervisory response;
- Continue to assess institutions in accordance with existing policies and procedures and may provide supervisory feedback, or downgrade an institution’s composite or component ratings, when conditions have deteriorated;
- Consider whether institution management has managed risk appropriately, including taking appropriate actions in response to stresses caused by COVID-19 impacts;
- Give consideration to the challenges involved in assessing the risk that the response presents to the institution in real time given the level of information available and the stage of local economic recovery; and
- Consider the institution’s asset size, complexity and risk profile, as well as the industry and business focus of its customers, when assessing an institution under the principles in the guidance.
As the guidance is for examiners, no action on the part of supervised institutions is required.
SEC and DOJ Antitrust Division Sign MOU
On June 22, the SEC and Department of Justice (DOJ) Antitrust Division announced the signing of an interagency Memorandum of Understanding (MOU) “to foster cooperation and communication between the agencies with the aim of enhancing competition in the securities industry.” The announcement came during a joint equity market structure discussion. The conversation covered equity market data and accompanying fees. The fees charged by exchanges, and the corresponding “fee filings” by which they are implemented, have long been the subject of industry and regulatory scrutiny, including from the perspective of whether or not the fees place an undue burden on competition—one of the standards by which the SEC must judge the fee filings.
The announcement stated: “Key provisions of the MOU facilitate both communication and cooperation between the agencies. In particular, the MOU establishes a framework for the SEC and the DOJ’s Antitrust Division to continue regular discussions and review law enforcement and regulatory matters affecting competition in the securities industry, including provisions to establish periodic meetings among the respective agencies’ officials. The MOU also provides for the exchange of information and expertise the agencies believe to be potentially relevant and useful to their oversight and enforcement responsibilities, as appropriate and consistent with applicable legal and confidentiality restrictions.”
President Nominates SEC Staffer Caroline Crenshaw to Serve as Next SEC Commissioner
On June 18, the President announced his intention to nominate current SEC staffer Caroline A. Crenshaw to serve as the next SEC Commissioner. According to the statement, Ms. Crenshaw currently serves as Senior Counsel at the SEC and as a Captain in the U.S. Army Reserve, Judge Advocate General’s Corp. Ms. Crenshaw joined the SEC in 2013 and has served in the Office of Compliance Inspections and Examinations, the Division of Investment Management, and as Counsel to Commissioners Kara M. Stein and Robert J. Jackson, Jr. Ms. Crenshaw would succeed Commissioner Jackson at the SEC. Her nomination is subject to confirmation by the U.S. Senate.
President Nominates SEC Chairman Jay Clayton to Serve as U.S. Attorney for the Southern District of New York
On June 19, the President announced his intention to nominate SEC Chairman Jay Clayton to serve as the next U.S. Attorney for the Southern District of New York (SDNY). The SDNY post is one of the most coveted and significant at DOJ, in part because SDNY’s jurisdiction covers New York City and, in particular, Wall Street. Mr. Clayton has served as SEC Chairman since May 2017. In that time, he has set one of the agency’s most aggressive and prolific rulemaking agendas in recent history, including adopting Regulation Best Interest and Form CRS and adopting several long-overdue rulemakings mandated by Title VII of Dodd-Frank. His nomination is subject to confirmation by the U.S. Senate.
Agencies Announce Disclosure of PPP Borrower Data
On June 19, the U.S. Small Business Administration and the U.S. Department of the Treasury announced that they would release certain borrower data related to the Paycheck Protection Program (PPP). For PPP loans of $150,000 or more, disclosures will include the borrower’s business name, address, NAICS code, zip code, business type, demographic data, non-profit information, jobs supported and loan amount range. For loans below $150,000, disclosures will include totals aggregated by zip code, by industry, by business type and by various demographic categories. The agencies’ announcement follows weeks of mounting public pressure seeking the release of such information.
New York Fed Releases Updated Documents for TALF and Reports Initial Subscription Results
On June 17, the Federal Reserve Bank of New York (New York Fed) released the following updated documents for the Term Asset-Backed Securities Loan Facility (TALF 2020):
The New York Fed also reported the volume (dollar value) of loans requested in aggregate, and by category, in the first subscription for the facility. The total value of loans requested was $252 million.
FHFA Extends Foreclosure and Eviction Moratorium
On June 17, the Federal Housing Finance Agency announced that, in order to help borrowers and renters who are at risk of losing their home due to the coronavirus national emergency, Fannie Mae and Freddie Mac (Enterprises) will extend their single-family moratorium on foreclosures and evictions until at least August 31, 2020. The foreclosure moratorium applies to Enterprise-backed, single-family mortgages only. The current moratorium was set to expire on June 30, 2020.
ENFORCEMENT & LITIGATION
U.S. Supreme Court Upholds, But Curtails, SEC’s Disgorgement Authority in Enforcement Actions
On June 22, the United States Supreme Court issued a decision in Liu v. Securities and Exchange Commission that ultimately upholds but limits the SEC’s ability to seek disgorgement in enforcement actions. The case, written about in a previous client alert with respect to the opening argument, is about whether and to what extent disgorgement is an available remedy in SEC enforcement actions under the SEC’s statutory power to obtain “any equitable relief that may be appropriate or necessary for the benefit of investors.” Read the client alert to learn more about the Court’s opinion on the case.
North Dakota AG Secures Agreement from Loan Debt Relief Company to Provide Refunds to Consumers
On June 11, the North Dakota Office of the Attorney General (AG) announced that it had entered into an Assurance of Voluntary Compliance agreement with a California-based debt relief company, under which the company agreed to issue refunds to North Dakota consumers and to cease doing business in North Dakota until the company is in full compliance with the state’s licensing law. Read the Consumer Finance Enforcement Watch blog to learn more about the agreement.
CSBS and CFPB Issue Joint Statement on CARES Act Mortgage Loan Forbearances
The Conference of State Bank Supervisors (CSBS) and the CFPB recently issued a joint statement concerning mortgage loan forbearances under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The joint statement signals the types of conduct that may become the focus of CFPB and state banking regulators in examinations, including in servicer and originator communications with borrowers concerning their rights under the CARES Act. Read the LenderLaw Watch blog to learn more about the joint statement.