[co-author: Stephen Kim]

REGULATORY DEVELOPMENTS

Treasury to Invest $9 Billion in Community Development Financial Institutions and Minority Depository Institutions Through Emergency Capital Investment Program

On March 4, the U.S. Department of the Treasury (Treasury) announced that it was opening the application process for the Emergency Capital Investment Program (ECIP) – a Congressionally authorized new program designed to provide long-term, low-cost equity and subordinated debt financing for participating institutions in order to support low-and-moderate income historically disadvantaged communities impacted by COVID-19. The program will invest $9 billion in capital directly to Community Development Financial Institutions (CDFIs) and minority depository institutions to support the provision of loans, grants, and forbearance for small and minority businesses and consumers in low income communities. This $9 billion investment will complement the $3 billion of grants being provided through the CDFI Rapid Response Program and the Emergency Support and Minority Lending Program. Term sheets and application materials can be found on the Treasury’s website.

Agencies Adopt Rules to Support the Emergency Capital Investment Program

To facilitate the roll out of the ECIP, the Treasury has issued an Interim Final Rule outlining certain restrictions on executive compensation, share buybacks and dividends for recipients of capital investments under the program (Interim Rule) and the Federal Reserve, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) have adopted an Amendment to the Capital Rule to Facilitate the ECIP (Amendment).

The Interim Rule provides certain restrictions applicable to ECIP recipients to ensure that ECIP funds are used appropriately and as the ECIP is designed. Restrictions include limitations on executive compensation and severance payments paid to senior executive officers, discretionary dividends, share buybacks and other capital distributions.

The Amendment provides that senior preferred stock and subordinated debt issued under the ECIP will qualify as Tier 1 Capital and Tier 2 Capital, respectively. Characteristics of the senior preferred stock and subordinated debt are similar to instruments that currently qualify under capital rules as additional Tier 1 Capital and Tier 2 Capital.

Federal Reserve Clarifies Guidance Relating to Definitions for Minority Depository Institutions

On March 5, the Federal Reserve clarified guidance on the definitions of minority depository institutions (MDIs), expanding the MDI definition to include women-owned financial institutions. Specifically, the Federal Reserve’s definition of “women’s depository institution” includes any depository institution where a majority of ownership or a majority of revenue is held by at least one woman, and a significant percentage of senior management positions of which are held by women. The Federal Reserve also highlighted resources available to MDIs through its Partnership for Progress program (PFP), which is the Federal Reserve’s national MDI outreach program that provides MDIs with resources to help them operate in a safe-and-sound manner, adhere to laws that protect consumers and meet Federal Reserve supervisory standards.

Federal Banking Agencies Update FAQs on CRA Consideration for Activities Undertaken In Response to the Coronavirus Pandemic

On March 8, the Federal Reserve, OCC and FDIC updated frequently asked questions (FAQs) relating to CRA consideration for activities undertaken in response to the coronavirus pandemic. Questions 14 through 18 of the updated FAQs clarify that:

• The agencies will not extend CRA Service Test consideration for PPP-related activities, such as loan processing and servicing. However, because PPP-related activities are responsive to community credit needs, such activities will be considered under the CRA Lending Test.
• Banks should neither report nor register PPP loans that have been rescinded or returned under the SBA’s safe harbor, and examiners will not consider such loans in their CRA evaluations of banks.
• A PPP loan in low- or moderate-income geographies or in distressed or underserved nonmetropolitan middle-income geographies will be considered an eligible community development activity.
• The waiving of ATM fees, overdraft fees, and early withdrawal penalties on CDs, and withdrawal fees on savings accounts are considered to be retail services responsive to the needs of low- and moderate-income individuals, small businesses and small farms affected by the pandemic and will be given favorable CRA consideration.
• Allowing a low- and moderate-income individual to make draws from a home equity line of credit during the repayment period could constitute a flexible lending practice eligible for favorable CRA consideration. However, allowing a low- and moderate-income individual to make a withdrawal from an IRA or to draw on a HELOC during the draw period are routine banking services and, as such, are not eligible for CRA consideration.
• As an alternative to in-person services, services provided virtually by bank representatives that have a primary purpose of community development and that are related to the provision of financial services will be considered for CRA credit.

Fed Extends PPPLF By Three Months

On March 8, the Federal Reserve announced that it will extend the Paycheck Protection Program Liquidity Facility (PPPLF) by three months to June 30, 2021. The extension will provide continued support for the flow of credit to small businesses through the PPP. The other currently active facilities established pursuant to the Federal Reserve’s emergency authority under Section 13(3) of the Federal Reserve Act — the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility and the Primary Dealer Credit Facility — have not had significant usage since last summer and will expire as scheduled on March 31, 2021.

SEC Staff Issues First Guidance Under Fair Value Rule

The SEC’s Division of Investment Management issued its first guidance in response to questions relating to the new fair value rule for registered investment companies, Rule 2a-5 under the Investment Company Act of 1940 (Fair Value Rule). The staff provided guidance on the timing for possible audit scope changes. In particular, the staff would not object if an auditor, for fiscal periods ending on or after March 31, 2021, stops looking to the guidance in Accounting Series Release (ASR 118) and instead determines the appropriate audit valuation approach by following only PCAOB standards. In connection with the Fair Value Rule, the SEC is rescinding ASR 118, which serves as the basis for the current requirement that auditors test valuation for 100% of portfolio positions. For additional information about the Fair Value Rule, please read the previous Goodwin client alert.

CFPB Clarifies That Discrimination by Lenders on the Basis of Sexual Orientation and Gender Identity is Illegal

On March 9, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule, effective immediately upon publication in the Federal Register, clarifying that the prohibition against sex discrimination under the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B includes: sexual orientation discrimination, gender identity 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.

This clarification is consistent with the Supreme Court’s ruling in Bostock v. Clayton County, Georgia, 140 S. Ct. 1731, 207 L. Ed. 2d 218 (2020), that the prohibition against sex discrimination in Title VII of the Civil Rights Act of 1964 encompasses sexual orientation discrimination and gender identity discrimination, as well as many of the public comments received in response to the CFPB’s July 28, 2020 request for information (RFI) on whether the Bostock decision should affect how the CFPB interprets ECOA. The CFPB will review and update its publications and examination guidance documents, as needed, to reflect this interpretive rule and take enforcement actions to hold financial institutions accountable for ECOA violations.