Nutter Bank Report: September 2020

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  1. Federal Court in New York Dismisses Claims Against PPP Lenders for Agent Fees
  2. FDIC Adopts Capital Restoration Plan to Restore Deposit Insurance Fund Reserve Ratio
  3. OCC Says National Banks and Federal Thrifts May Hold Certain Cryptocurrency Reserves
  4. HUD Amends Disparate Impact Rule for Claims Involving Discriminatory Housing Practices
  5. Other Developments: Main Street Lending, Final Capital and Accounting Rules, and Adverse Market Fee

1. Federal Court in New York Dismisses Claims Against PPP Lenders for Agent Fees

A federal court in New York has dismissed claims made in six class action lawsuits against several banks and other Small Business Administration (“SBA”) qualified lenders for the payment of “agent fees” for loans made under the Paycheck Protection Program (“PPP”) established by the federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The September 21 decision by the United States District Court for the Southern District of New York was made in a single ruling covering six class action cases brought on behalf of accountants and accounting firms that assisted businesses applying for PPP loans. The lawsuits claimed that the PPP lenders owed agent fees under the PPP to the borrowers’ accountants for assisting PPP loan applicants even though neither the accountants nor the borrowers had agreements with the lenders regarding the payment of agent fees. The accountants argued that the CARES Act and the SBA’s regulation that implements the PPP automatically entitle the accountants to some portion of the loan processing fees that the lenders received from the SBA under the PPP, regardless of whether the accountants entered into agreements with the PPP lenders to pay agent fees. The court held that, absent an agreement between a borrower’s agent, such as an accounting firm, and the PPP lender, the lender is not required to pay agent fees to the borrower’s agent under the CARES Act or its implementing regulations. The court also held that, even if the CARES Act did require a PPP lender to pay a borrower’s agent, there is no private right of action to enforce the CARES Act. Click here for a copy of the court’s decision.

Nutter Notes: The CARES Act requires the SBA to reimburse a lender authorized to make a PPP loan and establishes the fees that a PPP lender must be paid for making the loan. The CARES Act also provides that an agent that assists a PPP borrower to prepare an application for a PPP loan may not collect a fee in excess of limits established by the SBA. The SBA’s PPP implementing regulation provides that agent fees are to be paid by a PPP lender out of the fees the lender receives from the SBA, and prohibits agents from collecting fees from the borrower that are paid out of the PPP loan proceeds. The regulation also limits the total amount that an agent may collect from a lender for assistance in preparing a PPP application, depending on the amount of the PPP loan. The court determined that the CARES Act does not require PPP lenders to pay an agent’s fees absent an agreement to do so because “under longstanding SBA regulations, agents are only entitled to receive fees for their work in connection with securing a loan where they first execute a ‘compensation agreement’ signed by the lender, agent, and applicant.” The court also determined that the CARES Act does not have any language “that suggests Congress intended for agents—who are not even the intended beneficiary of a statute that is designed to get money in the hands of small businesses—to have a private remedy.”

2. FDIC Adopts Capital Restoration Plan to Restore Deposit Insurance Fund Reserve Ratio

The FDIC has adopted a plan to restore the Deposit Insurance Fund (DIF) reserve ratio to at least 1.35% percent within eight years without increasing assessment rates, at least for now. Under the restoration plan adopted on September 15, the DIF reserve ratio would return to 1.35% without a change to the current schedule of assessment rates before the end of the eight-year period based on “a range of reasonable (though highly uncertain) estimates of future losses and assuming a return to normal insured deposit growth.” The FDIC plans to update its analysis and projections for the DIF at least semiannually and may increase assessment rates later, if necessary. According to the FDIC, the decline in the reserve ratio was a result of unusually high insured deposit growth—estimated to be more than $1 trillion in the first half of 2020—that caused an 11-basis point decline in the reserve ratio from the end of 2019. The FDIC attributes this increase to actions undertaken by depositors, both businesses and individuals, as well as government policy actions in response to the COVID-19 public health crisis. Click here for a copy of the FDIC’s restoration plan.

Nutter Notes: According to the FDIC, the DIF reserve ratio, calculated by dividing the DIF balance by the dollar amount of insured deposits in the banking system, fell to 1.30% percent as of June 30, 2020 from its recent peak of 1.41% percent as of December 31, 2019. During that period, the DIF balance actually grew and did not experience material losses while the reserve ratio declined. The Federal Deposit Insurance Act requires that the FDIC adopt a restoration plan whenever the DIF reserve ratio falls below 1.35%, or is expected to fall below 1.35% within six months. The law requires the restoration plan to restore the DIF reserve ratio to at least 1.35% percent within eight years of the date on which the plan is implemented, though the FDIC may implement the plan over a longer period if the FDIC determines that it is necessary due to extraordinary circumstances.

 3. OCC Says National Banks and Federal Thrifts May Hold Certain Cryptocurrency Reserves

The OCC has published guidance clarifying that national banks and federal savings associations have authority to hold reserves on behalf of customers who issue certain types of cryptocurrency known as “stablecoins” that are backed by a single fiat currency—government issued currency that is not backed by a commodity, such as gold. The guidance, issued as Interpretive Letter #1172 on September 21, concludes that national banks and federal savings associations may hold reserves of currency backing stablecoins on behalf of customers who issue stablecoins that are held in so-called hosted wallets. According to the guidance, a hosted wallet is an account-based software program that stores the cryptographic keys associated with a particular unit of a cryptocurrency. Such stablecoins must be backed on a 1:1 basis by a single fiat currency, and the national bank or federal savings association must verify at least daily that the reserve account balances are equal to or greater than the number of the issuer’s outstanding stablecoins. According to the guidance, a bank that provides reserve services in support of a stablecoin must comply with all applicable laws and regulations and “ensure that it has instituted appropriate controls and conducted sufficient due diligence commensurate with the risks associated with maintaining a relationship with a stablecoin issuer.” The guidance specifically does not address whether a national bank or federal savings association has the authority to support stablecoin transactions involving un-hosted wallets. Click here for a copy of OCC’s guidance.

Nutter Notes: The OCC’s guidance provides indirect authority for any Massachusetts-chartered bank to hold reserves on behalf of stablecoin issuers, subject to the same limitations that apply to national banks and federal savings associations as described in the guidance, under the Massachusetts parity law, Chapter 167F, Section 2, Paragraph 31 of the General Laws of Massachusetts. The Massachusetts parity law permits a Massachusetts bank to “exercise any power and engage in any activity that is permissible for” a national bank or federal savings association headquartered in Massachusetts, provided that the activity is not otherwise prohibited by Massachusetts law. There is no Massachusetts law prohibiting banks from holding reserves on behalf of stablecoin issuers. The Massachusetts parity law provides that the activity will be subject to the same limitations and restrictions that are applicable to a national bank or federal savings association. The parity law also provides that the activity must be one that has been permitted by the FDIC under Section 24 of the Federal Deposit Insurance Act and the FDIC’s implementing rules at 12 C.F.R. Part 362. Section 24 and the FDIC’s rules at Part 362 generally do not restrict activities conducted as agent for a customer, including custodial services. A Massachusetts bank that wishes to exercise authority under the parity law must provide 30 days written notice in advance to the Division of Banks.

4. HUD Amends Disparate Impact Rule for Claims Involving Discriminatory Housing Practices

The U.S. Department of Housing and Urban Development (“HUD”) has released a final rule that amends HUD’s fair housing regulation to change the standard for bringing a disparate impact claim under the Fair Housing Act. The final rule issued on September 24 conforms HUD’s fair housing regulation to the 2015 U.S. Supreme Court decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., in which the Supreme Court established standards for establishing disparate impact for a housing discrimination claim that differed from the disparate impact standard that HUD had established in a 2013 rule. The final rule revises the burden-shifting test for determining whether a particular housing practice, which may include a home mortgage lending practice, has an unlawful discriminatory effect. The final rule also adds to illustrations of discriminatory housing practices found in HUD’s Fair Housing Act regulations. In particular, the final rule codifies the Supreme Court’s holding that a disparate impact claim under the Fair Housing Act may not be based on statistical disparities alone. Click here for a copy of the final rule.

Nutter Notes: The Fair Housing Act prohibits discriminatory housing practices on the basis of race, color, religion, sex, disability, familial status, or national origin. The law also grants HUD the authority to conduct formal adjudications of Fair Housing Act complaints and the power to establish regulations that implement and interpret the Fair Housing Act. In 2013, HUD adopted a rule that codified HUD’s longstanding interpretation that housing discrimination claims may be based on disparate impact. A disparate impact claim involves a housing practice that “actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns” on members of a protected class. HUD’s 2013 rule also codified a three-part burden-shifting test to determine whether a housing practice that results in discrimination violates the Fair Housing Act. However, the Supreme Court in its 2015 ruling did not rely on HUD’s 2013 disparate impact rule. Instead, the Supreme Court established its own standards for analyzing disparate impact claims that differed from HUD’s rule. The Supreme Court’s 2015 ruling also established several protections for defendants, including banks and other home mortgage lenders, that are meant to “protect potential defendants against abusive disparate impact claims.”

 5. Other Developments: Main Street Lending, Final Capital and Accounting Rules, and Adverse Market Fee

  • Federal Reserve Updates Main Street Lending Program FAQs

The Federal Reserve on September 18 updated its guidance in the form of answers to frequently asked questions (“FAQs”) about the agency’s expectations regarding lender underwriting for the Main Street Lending Program. The revised FAQs emphasize that lender underwriting should look back to the loan applicant’s condition before the COVID-19 public health emergency and forward to the applicant’s prospects once the pandemic has ended. Click here to access the updated FAQs.

Nutter Notes: The Main Street Lending program supports lending to small and medium-sized for-profit businesses and nonprofit organizations that were in sound financial condition before the COVID-19 public health emergency. To implement the program, the Federal Reserve Bank of Boston has established a special purpose vehicle to purchase participations in loans originated by eligible lenders, including banks. Click here for a copy of the advanced notice of proposed rulemaking.

  • Federal Banking Agencies Replace Three Interim Final Rules with Substantially Similar Final Rules

The federal banking agencies on August 26 finalized three rules that are either identical or substantially similar to interim final rules currently in effect. The first temporarily modifies the community bank leverage ratio (“CBLR”), as required by the CARES Act. The second makes more gradual the automatic restrictions on distributions in the agencies’ regulatory capital rules that apply if a banking organization’s capital levels decline below certain levels. The third allows banks that adopt the current expected credit losses (“CECL”) accounting standard in 2020 to mitigate the estimated effects of CECL on regulatory capital for two years. Click here to access copies of all three rules.

Nutter Notes: The final rule modifying the CBLR temporarily lowers the community bank leverage ratio threshold to 8% for the remainder of this year, as required by the CARES Act. The threshold will be 8.5% for 2021 and 9% beginning on January 1, 2022. The final rule is effective as of October 1, 2020.

  • FHFA Delays 50-Basis Point Fee on Fannie Mae and Freddie Mac Refinances

The Federal Housing Finance Agency (“FHFA”) announced on August 25 that it has directed Fannie Mae and Freddie Mac (the “GSEs”) to delay the implementation date of the 50-basis point “adverse market fee” on GSE refinances until December 1, 2020. The fee was originally scheduled to take effect September 1, 2020. Click here to access the FHFA’s announcement of the delay.

Nutter Notes: The FHFA also announced that the GSEs will exempt from the adverse market fee refinance loans with loan balances below $125,000. According to the FHFA, nearly half of the loans covered by the exemption were made to lower-income borrowers at or below 80% of area median income. Affordable refinance products, Home Ready, and Home Possible program loans are also exempt from the adverse market fee for refinances.

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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