Nutter Bank Report: March 2021

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Headlines

  1. Federal Reserve Issues New Guidance on Managing the LIBOR Transition
  2. Federal Banking Agencies Update FAQs on CRA Credit for COVID-19 Related Activities
  3. SBA Implements Expanded Eligibility for Paycheck Protection Program Loans
  4. CFPB Expands Consumer Protections Against Discriminatory Lending Practices
  5. Other Developments: Flood Insurance and Qualified Mortgage Rule

1. Federal Reserve Issues New Guidance on Managing the LIBOR Transition

The Federal Reserve has issued guidance on how examiners will assess a banking organization’s progress in preparing to transition to a replacement rate for the London Interbank Offered Rate (LIBOR) as a reference rate to price variable rate loans, securities, deposits, borrowings, interest rate hedging transactions, and other financial contracts. According to the examination guidance released on March 9, Federal Reserve examiners will review planning for the LIBOR transition by state member banks, bank holding companies, and savings and loan holding companies during regularly scheduled examinations and in connection with other supervisory activities in 2021. Examiners will expect that the detail and scope of a banking organization’s transition planning will be commensurate with the organization’s LIBOR exposures, and examiners’ reviews will be tailored to the size and complexity of such LIBOR exposures. Banking organizations with complex products or multiple product lines tied to LIBOR will be expected to maintain plans with greater detail and a project roadmap that defines transition timelines and milestones, and examiners will expect these organizations to demonstrate progress towards moving away from referencing LIBOR in new products, according to the guidance. The guidance indicates that reviews will focus on six key aspects of LIBOR transition efforts: transition planning; financial exposure measurement and risk assessment; operational preparedness and controls; legal contract preparedness; communication; and oversight by senior management. The Federal Reserve released separate examination guidance for banking organizations with less than $100 billion in total consolidated assets and those with $100 billion or more in total consolidated assets. Click here to access the examination guidance.

Nutter Notes: The new examination guidance supplements the Interagency Statement on LIBOR Transition issued by the federal banking agencies on November 30, 2020. Entering into new contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks, according to the interagency statement, and the guidance encourages banking organizations to stop entering into such contracts as soon as practicable. In a separate joint statement issued on November 6, 2020, the federal banking agencies noted that the Alternative Reference Rates Committee—a group of private-market participants formed to help transition from LIBOR—has recommended the Secured Overnight Financing Rate (SOFR) as its preferred alternative for both cash and derivative transactions. However, use of SOFR is voluntary and, according to the November 6, 2020 joint statement, the agencies’ examiners will not criticize banking organizations solely for using a reference rate, including a credit sensitive rate, other than SOFR. A banking organization may use any reference rate for its loans and other financial contracts that it determines to be appropriate for its funding model and customer needs. The LIBOR administrator, ICE Benchmark Administration Limited, has announced its intention to end the publication of the one week and two month USD LIBOR settings immediately after the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023.

2. Federal Banking Agencies Update FAQs on CRA Credit for COVID-19 Related Activities

The federal banking agencies have published an updated version of guidance in the form of answers to frequently asked questions (FAQs) on Community Reinvestment Act (CRA) consideration that may be given by examiners for activities undertaken by banks in response to the COVID-19 public health emergency. The FAQs updated on March 8 address CRA credit for the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP) loans as community development, flexible, or innovative lending, and CRA credit for community development services provided virtually by bank representatives. According to the updated FAQs, examiners will not give CRA Service Test credit for PPP-related activities because the agencies generally consider the development of PPP lending platforms and technical assistance provided to PPP borrowers during a loan application process to be activities that banks engage in during the normal course of doing business. The agencies recognize that the PPP loan program is responsive to community credit needs, and will be considered under the CRA Lending Test when examiners evaluate flexible or innovative lending programs offered by a bank, according to the updated FAQs. Click here for a copy of the updated FAQs.

Nutter Notes: The updated FAQs also provide technical guidance on examiner expectations for CRA reporting related to PPP loan programs. According to the FAQs, banks should not report PPP loans that have been rescinded or returned under the SBA’s safe harbor, and examiners will not give CRA credit for such loans. The FAQs clarify that PPP loans of more than $1 million that are made in low- or moderate-income geographies or in distressed or underserved nonmetropolitan middle-income geographies will be considered an eligible community development activity. The FAQs further clarify that examiners will give CRA credit for certain COVID-19 related retail banking services and retail lending activities in a bank’s assessment area that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by the pandemic and that are consistent with safe and sound banking practices. Examples of such activities that qualify for CRA credit include the waiving of ATM fees, overdraft fees, and early withdrawal penalties on CDs, and the waiving of a bank’s withdrawal fees on savings accounts. Banks may also receive CRA credit for allowing a low- or moderate-income individual to make draws from a HELOC during the repayment period as a flexible lending practice.

3. SBA Implements Expanded Eligibility for Paycheck Protection Program Loans

The SBA has adopted an interim final rule that implements several changes to the PPP that were included in the American Rescue Plan Act of 2021. The interim final rule published on March 22 revised the PPP rules to conform to the expanded eligibility for first and second draw PPP loans and revised exclusions from payroll costs for purposes of loan forgiveness in accordance with the requirements of the American Rescue Plan Act’s amendments to the PPP. The interim final rule also provides that a PPP borrower that receives a PPP loan after December 27, 2020 can be approved for a Shuttered Venue Operator Grant under certain conditions, as set forth in the American Rescue Plan Act. The interim final rule clarifies that certain food services businesses (North American Industry Classification System (NAICS) code beginning with 72) that have more than one physical location and that employ no more than 500 employees per location are eligible for first draw PPP loans. Finally, the interim final rule clarifies certain payroll cost exclusions included in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act). The interim final rule became effective as of March 18. Click here for a copy of the interim final rule.

Nutter Notes: The SBA separately published an interim final rule on March 8 that implements certain provisions of the Economic Aid Act. The March 8 interim final rule allows individuals who file an IRS Form 1040, Schedule C to calculate their maximum loan amount using gross income. The March 8 interim final rule removes the eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans, and removes the eligibility restriction that prevents businesses with owners who are delinquent or in default on their federal student loans from obtaining PPP loans. The Federal Reserve announced on March 8 that it will extend its Paycheck Protection Program Liquidity Facility (PPPLF) by three months from March 31, 2021 to June 30, 2021. The PPPLF extends term credit to financial institutions that make PPP loans, and PPP loans are accepted as collateral under the program. Click here for a copy of the SBA’s March 8 interim final rule, and click here for a copy of the Federal Reserve’s PPPLF term sheet.

4. CFPB Expands Consumer Protections Against Discriminatory Lending Practices

The CFPB has adopted an interpretive rule that clarifies the agency’s position that the prohibition against sex discrimination under the Equal Credit Opportunity Act (ECOA) and its implementing rule, Regulation B, includes discrimination on the basis of sexual orientation or gender identity. According to the interpretive rule released on March 9, the prohibition covers, in addition to other forms of sex discrimination, “discrimination based on actual or perceived nonconformity with traditional sex- or gender-based stereotypes, and discrimination based on an applicant’s social or other associations.” The CFPB said that it issued the new interpretive rule consistent with the Supreme Court’s June 15, 2020 decision in Bostock v. Clayton County, Georgia, in which the Court held that the prohibition against sex discrimination in Title VII of the Civil Rights Act of 1964 covers sexual orientation discrimination and gender identity discrimination. On January 20, 2021, President Biden issued Executive Order 13988, Preventing and Combatting Discrimination on the Basis of Gender Identity or Sexual Orientation, which addresses the Bostock decision and directs federal agencies to take action to prohibit discrimination because of sexual orientation and gender identity. The CFPB said that it will review its publications and examination guidance documents and update them as necessary to reflect the new interpretive rule. The new interpretive rule became effective on March 16, 2021. Click here for a copy of the new interpretive rule.

Nutter Notes: The CFPB also announced on March 11 that it is rescinding its January 24, 2020 policy statement titled Statement of Policy Regarding Prohibition on Abusive Acts or Practices. Section 1031(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) grants the CFPB authority to declare an act or practice in the provision of a consumer financial product or service abusive if it materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or takes unreasonable advantage of a consumer’s (i) lack of understanding of the material risks, costs, or conditions of the product or service, (ii) inability to protect the interests of the consumer in selecting or using a consumer financial product or service, or (iii) reasonable reliance on a company to act in the interests of the consumer. The CFPB said that the 2020 policy statement was inconsistent with the agency’s duty to protect consumers from abusive practices. For example, the 2020 policy statement stated that the CFPB would decline to seek civil money penalties and disgorgement for certain abusive acts or practices. The CFPB said that it uses penalties to deter abusive practices and compensate certain harmed consumers, so the 2020 policy statement undermined deterrence and was inconsistent with the CFPB’s consumer protection mission. Click here for a copy of the CFPB’s rescission notice.

5. Other Developments: Flood Insurance and Qualified Mortgage Rule

  • Federal Agencies Propose New Guidance on Private Flood Insurance

The federal banking agencies, together with the NCUA and the Farm Credit Administration, have requested public comment on proposed guidance in the form of an update to their Interagency Questions and Answers Regarding Flood Insurance. According to the agencies, the proposed guidance issued on March 11 is intended to help lenders, including banks, comply with the agencies’ 2019 joint rule that implemented the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012. Click here for a copy of the proposed guidance.

Nutter Notes: The proposed guidance would incorporate a number of new questions and answers covering various subjects, including mandatory acceptance of flood insurance, discretionary acceptance, and general compliance issues related to the maximum deductible for a flood insurance policy issued by a private insurer. Comments on the proposed guidance are due by May 17, 2021.

  • CFPB Proposes to Delay the General Qualified Mortgage Final Rule

The CFPB issued a notice of proposed rulemaking on March 3 that would delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule from July 1, 2021 to October 1, 2022. The CFPB said that it is proposing to extend the compliance date to ensure homeowners struggling with the financial impacts of the COVID-19 public health emergency have as many options as possible to deal with COVID-19 related financial hardships. Click here for a copy of the notice.

Nutter Notes: In December 2020, the CFPB amended Regulation Z by replacing the General QM loan definition’s debt to total monthly income limit with a limit based on loan pricing, and made other changes to the General QM loan definition. If the proposed delay is finalized, a lender would have the option of complying with either the revised General QM loan definition or the General QM loan definition in effect prior to March 1, 2021 for home mortgage loans for which the lender receives an application before October 1, 2022. Click here for a copy of the proposed rule.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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