Nutter Bank Report: October 2020

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  1. SBA Adopts Streamlined Loan Forgiveness Procedures for PPP Loans of $50,000 or Less
  2. OCC Issues CRA Compliance Guide for Small Banks and Other New CRA Resources
  3. Fed Publishes Guidance on Rules for Determining Control of a Banking Organization
  4. Federal Banking Agencies Issue Final Rule on Deferral of Appraisals for Real Estate Loans
  5. Other Developments: True Lender, Cybersecurity, and Bank Secrecy Act

1. SBA Adopts Streamlined Loan Forgiveness Procedures for PPP Loans of $50,000 or Less

The U.S. Small Business Administration (“SBA”) has adopted an interim final rule to streamline the loan forgiveness application process for Paycheck Protection Program (“PPP”) loans of $50,000 or less, along with a new, simpler PPP loan forgiveness application. The streamlined PPP loan forgiveness process announced on October 8 requires fewer calculations and less documentation for eligible borrowers. A PPP borrower that received PPP loans totaling $50,000 or less is eligible to use the simpler loan forgiveness application form, SBA Form 3508S, unless the total amount of PPP loans received by the borrower together with its affiliates is greater than or equal to $2 million. PPP borrowers eligible to use SBA Form 3508S are exempt from any reductions in loan forgiveness as a result of either reductions in full-time-equivalent employees, or reductions to employees’ hourly wage rates or annual salaries.  SBA Form 3508S also does not require borrowers to show the calculations used to determine their loan forgiveness amount. Under the interim final rule, PPP lenders may rely on borrower representations in connection with a loan forgiveness application, and are not required to independently verify the PPP borrower’s reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs. The interim final rule became effective on October 14. Click here to access a copy of the interim final rule, SBA Form 3508S, and the application instructions.

Nutter Notes:  The SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers on October 2. On the same date, the SBA issued guidance in the form of an SBA Procedural Notice clarifying SBA requirements for PPP borrowers that have experienced a change of ownership, including prior notice to PPP lenders. According to the guidance, a change of ownership will be considered to have occurred when at least 20% of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, the PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), or a PPP borrower is merged with or into another entity. Prior to the closing of any such change of ownership transaction, the PPP borrower must notify its PPP lender in writing of the proposed transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would effect the proposed change of ownership. If the PPP loan will not be fully satisfied prior to closing the change of ownership, then the transaction may require the SBA’s prior approval under certain circumstances. For example, the SBA’s prior approval would be required according to the guidance if the PPP borrower proposes to sell more than 50% of its assets but has not yet completed and submitted a PPP loan forgiveness application. Click here for a copy of the SBA Procedural Notice.

2. OCC Issues CRA Compliance Guide for Small Banks and Other New CRA Resources

The OCC has published a Community Reinvestment Act (“CRA”) compliance guide for small banks to support the implementation of the amendments to the agency’s CRA rule that became effective on October 1. Along with the small bank CRA compliance guide that was published on October 1, the OCC also released an initial illustrative list of qualifying CRA activities and a form that a national bank or savings association may submit to request that the OCC consider an activity for CRA credit. Under the OCC’s amended CRA rule, a small bank is defined to mean a national bank or savings association that had assets of $600 million or less in four of the previous five calendar quarters. The small bank CRA compliance guide notes that such small banks will be required to comply with the amended CRA rule’s assessment area, data collection, and record-keeping requirements by January 1, 2024. The OCC’s new list of qualifying CRA activities is a non-exhaustive list of activities that would meet the criteria for CRA credit under the OCC’s amended CRA rule. The OCC said that it would add additional activities to the list consistent with the process outlined in the amended rule. Click here to access copies (under the heading “Handbooks, Procedures, and Guidance”) of the small bank CRA compliance guide, the illustrative list of qualifying CRA activities, and the CRA qualifying activity confirmation request form.

Nutter Notes:  The OCC finalized its rule to amend the CRA framework that applies to national banks and savings associations on May 20, 2020. The rule amended the OCC’s CRA regulation to, among other things, clarify and expand the activities that qualify for CRA credit and modernize the rules governing the establishment of geographic assessment areas. The amendments updated how national banks and savings associations may define their CRA assessment areas by retaining immediate geographies around branches and establishing additional assessment areas that do not rely on branch networks to serve their customers. Reflecting the fact that many banks collect significant deposits from areas far outside their brick-and-mortar branch footprint through various digital platforms, the amended CRA regulation provides that a national bank or savings association that collects 50% or more of its retail deposits from outside of its branch footprint must delineate additional assessment areas in those areas from which it draws 5% or more of retail deposits. The amended CRA regulation also provides for the evaluation of CRA performance more objectively through quantitative measures that assess the volume and value of qualifying CRA activity. While the amended CRA regulation became effective on October 1, 2020, compliance with certain requirements of the amended CRA regulation will not be mandatory until January 1, 2023 or January 1, 2024, depending on the size and type of bank.

3. Fed Publishes Guidance on Rules for Determining Control of a Banking Organization

The Federal Reserve has issued new guidance in the form of answers to frequently asked questions (“FAQs”) about its revised framework for determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act (“BHCA”) or the Home Owners’ Loan Act (“HOLA”). The FAQs released on September 30 clarify, among other things, what actions a company should take if it has investments that predate the Federal Reserve’s revised control rule that became effective on April 1, and have been treated by the company as noncontrolling, but trigger one or more of the presumptions of control under the revised control rule. According to the FAQs, the Federal Reserve does not intend to revisit structures that have already been reviewed prior to the effective date of the revised control rule. The Federal Reserve advises companies to contact Federal Reserve Board staff to discuss any structure that has not been reviewed by the Federal Reserve Board or a Federal Reserve Bank, and what, if any, modifications may be necessary to continue to treat the structure as noncontrolling. Click here to access the FAQs.

Nutter Notes: The Federal Reserve issued a final rule on January 30, 2020 to simplify and clarify its regulations for determining control of a banking organization for purposes of the BHCA and HOLA. The final rule expanded the number of presumptions for use in control determinations by the Federal Reserve under the so-called “controlling influence” test. The revised regulatory framework uses several factors to determine whether a company is presumed to have control over a banking organization, including the company’s total voting and non-voting equity investment in the banking organization; director, officer, and employee overlaps between the company and the banking organization; and the scope of business relationships between the company and the banking organization. The revised regulatory framework describes how different combinations of these factors would or would not result in a presumption of control. If a company has control over a banking organization, the company generally becomes subject to regulation by the Federal Reserve as a bank holding company or savings and loan holding company, as applicable. Under the BHCA, control of a banking organization is determined by a three-pronged test under which a company is deemed to have control if: (i) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25% or more of any class of voting securities of the banking organization; (ii) the company controls in any manner the election of a majority of the directors or trustees of the banking organization; or (iii) the company directly or indirectly exercises a controlling influence over the management or policies of the banking organization. HOLA includes a substantially similar definition of control. While the first two prongs of the test are relatively bright-line standards, the third prong requires a facts and circumstances determination by the Federal Reserve.

4. Federal Banking Agencies Issue Final Rule on Deferral of Appraisals for Real Estate Loans

The federal banking agencies have adopted as a final rule the April 17, 2020 interim final rule that made temporary amendments to the agencies’ regulations requiring appraisals for certain real estate-related transactions. The final rule announced on September 29 allows banks to defer obtaining an appraisal or evaluation for up to 120 days after the closing of certain residential and commercial real estate loans. The final rule does not apply to transactions for acquisition, development, and construction of real estate. The final rule also clarifies that transactions for the acquisition, development, and construction of real estate excluded from the 120-day deferral period mean those loans described in the Call Report Instructions for Schedule RC-C, “Loans and Lease Financing Receivables,” Part I, “Loans and Leases,” item 1.a, “Construction, land development, and other land loans.” The agencies are encouraging banks to make best efforts to obtain a “credible estimate” of the value of mortgaged real property before closing a loan if an appraisal will be deferred, and indicating that banks must otherwise underwrite residential and commercial real estate loans consistent with the principles in the agencies’ Standards for Safety and Soundness and Real Estate Lending Standards. Click here for a copy of the final rule.

Nutter Notes:  The federal banking agencies issued an interim final rule on April 14, 2020 allowing banks to temporarily defer real estate-related appraisals and evaluations under the agencies’ interagency appraisal regulations during the COVID-19 public health emergency. The interim final rule was set to expire on December 31, 2020, unless extended by the federal banking agencies (a transaction closed on or before December 31, 2020 is eligible for a deferral under the final rule). In the preamble to the final rule, the agencies said that they have no plans to extend the final rule “at this time but will continue to consider flexibilities as needed while supporting safe and sound collateral valuation practices during and after the COVID event.” The agencies, together with NCUA and the CFPB, in consultation with the Conference of State Bank Supervisors, issued joint guidance that outlines other flexibility in industry appraisal standards and in the agencies’ appraisal regulations, and describes temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during the COVID-19 public health emergency. Click here for a copy of the joint guidance.

5. Other Developments: True Lender, Cybersecurity, and Bank Secrecy Act

  • OCC Issues Final Rule for Determining the True Lender in a Loan

The OCC has issued a final rule that determines when a national bank or federal savings association is the “true lender” in a lending relationship when a third party is involved in a partnership with the bank to make the loan. Under the final rule issued on October 27, a bank makes a loan—and is therefore the true lender—if, as of the date of origination, the bank is named as the lender in the loan agreement or funds the loan. The final rule will become effective 60 days after it is published in the Federal Register, which is expected shortly.

Nutter Notes:  The final rule also specifies that if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan. Under the final rule, the true lender of a loan retains the compliance obligations associated with the origination of that loan. Click here for a copy of the final rule.

  • State Bank Regulators Issue Ransomware Self-Assessment Tool

The Massachusetts Division of Banks, along with the Conference of State Bank Supervisors, the Bankers Electronic Crimes Task Force, and the U.S. Secret Service, have issued a self-assessment tool for banks to help mitigate ransomware attacks. The self-assessment tool released on October 13 allows a bank to assess its efforts to control and mitigate risks associated with the threat of ransomware and identify gaps that require increased security.

Nutter Notes:  According to the Bankers Electronic Crimes Task Force, incidents of ransomware across industries have been increasing in frequency. The task force said that a “global cyber insurer reported 775 ransomware incidents for its U.S. customers in 2019, representing a 131% increase from the year prior,” and that 11% of those customers were financial institutions. Click here to access the self-assessment tool.

  • FinCEN Proposes Changes to Recordkeeping and Reporting for Funds Transfers

The Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury and the Federal Reserve have invited public comments on a proposed rule that would amend the recordkeeping and travel rules under the Bank Secrecy Act (“BSA”). Under the current recordkeeping and travel rules, financial institutions must collect, retain, and transmit certain information related to funds transfers and transmittals of funds over $3,000. The proposed rule issued on October 23 would lower the applicable threshold from $3,000 to $250 for international transactions, and the threshold for domestic transactions would remain unchanged at $3,000.

Nutter Notes:  The proposed rule also clarifies that the BSA recordkeeping and travel rules apply to transactions involving convertible virtual currencies, as well as transactions involving digital assets with legal tender status. Comments will be accepted for 30 days after the proposed rule is published in the Federal Register, which is expected shortly. 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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