Nutter Bank Report: February 2022Print PDF
- Federal Court Rejects Challenges to FDIC’s and OCC’s “Valid When Made” Rules
- Boston Fed and MIT Develop Experimental Digital Currency Transaction Processor
- SBA Announces New Procedures for Review of PPP Partial Approval Forgiveness Decisions
- CFPB Issues New Guidance on Student Loan Servicers’ Loan Forgiveness Communications
- Other Developments: CECL, Equal Credit, and FDIC Regulatory Review
1. Federal Court Rejects Challenges to FDIC’s and OCC’s “Valid When Made” Rules
A federal court in two separate but related cases has rejected challenges to the FDIC’s and the OCC’s respective regulations that codified the longstanding “valid when made” doctrine—that the valid interest rate on a loan is determined when the loan is made, and that any subsequent transfer of the loan will not affect the validity of the interest rate. In the two rulings issued by the U.S. District Court for the Northern District of California on February 8, the court held that the OCC and the FDIC did not exceed their authority when adopting their respective rules in 2020. The rules were adopted in response to the 2015 decision of the United States Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, which called into question the enforceability of the interest rate terms of loan agreements following a bank’s sale or assignment of a loan to a non-bank. The FDIC’s so-called Madden-fix rule issued on June 25, 2020, which applies to state-chartered banks, provides that whether the interest rate on a loan is permissible is determined at the time the loan is made, and the validity of the interest rate on a loan is not affected by a change in state law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan. The OCC issued its own Madden-fix rule on May 29, 2020 that applies to national banks and federal savings associations and is substantially similar to the rule issued by the FDIC. Click here and here for copies of the court’s rulings.
Nutter Notes: The FDIC’s Madden-fix rule implements Section 27 of the Federal Deposit Insurance Act, which provides that a state-chartered bank may charge interest at the maximum rate permitted by the state in which the bank is located, or 1% in excess of the 90-day commercial paper rate, whichever is greater. Section 27 does not state at what point in time the validity of an interest rate should be determined in order to assess whether a state-chartered bank is receiving interest in accordance with Section 27. For example, the usury laws of the state where the bank is located could change after a loan is made, and the loan’s interest rate could be non-usurious under the old law but usurious under the new law. In addition, although Section 27 gives a state-chartered bank the right to make loans at the interest rate permitted by the bank’s home state, Section 27 does not explicitly give the bank the right to transfer the loan at that rate. The FDIC’s and OCC’s Madden-fix rules were meant to resolve marketplace uncertainty about the enforceability of the interest rate terms of a loan made by a bank when the bank transfers the loan to a non-bank, which results from the ambiguities in federal banking laws, including Section 27 of the Federal Deposit Insurance Act, and the Madden ruling. The FDIC also noted when it issued its 2020 rule that the Madden v. Midland Funding, LLC ruling had resulted in decreased credit availability for borrowers with lower credit scores.
2. Boston Fed and MIT Develop Experimental Digital Currency Transaction Processor
The Federal Reserve Bank of Boston (the “Boston Fed”) and the Massachusetts Institute of Technology (“MIT”) together have released a white paper detailing the findings of their initial technological research into a central bank digital currency, or CBDC. The white paper published on February 3 resulted from a collaborative effort between the Boston Fed and MIT’s Digital Currency Initiative, dubbed “Project Hamilton,” which focuses on technological experimentation to explore the design of CBDCs and gain a practical understanding of the technical challenges involved in creating a CBDC. According to the Boston Fed, Project Hamilton is separate from the Federal Reserve Board’s evaluation of the pros and cons of a CBDC and does not aim to create a usable United States CBDC. The white paper details findings from the first research phase of Project Hamilton, in which the researchers “selected concepts from cryptography, distributed systems, and blockchain technology to build and test platforms that would give policymakers substantial flexibility in the potential creation of a CBDC.” Click here to access the white paper and related materials.
Nutter Notes: In remarks to the 2022 U.S. Monetary Policy Forum on February 18, Federal Reserve Board Governor Lael Brainard discussed the Federal Reserve’s work to evaluate whether there is a role for a United States CBDC in the future of digital payment technologies and its potential properties, costs, and benefits. Governor Brainard noted that a United States dollar CBDC could be desirable as a reliable store of value and means of payment, which could make it attractive to risk-averse users. She suggested that this may lead to increased demand for a United States CBDC “at the expense of other intermediaries during times of stress,” and suggested that thought must be given “to tools and design features that could be introduced to limit such risks, such as offering a non-interest bearing CBDC and limiting the amount of CBDC an end user could hold or transfer.” Governor Brainard also noted the publication of Project Hamilton’s white paper and the resulting software— a “theoretical high-performance and resilient transaction processor for a CBDC that was developed using open-source research software”—as “a way of engaging with the broader technical community and promoting transparency and verifiability.”
3. SBA Announces New Procedures for Review of PPP Partial Approval Forgiveness Decisions
The United States Small Business Administration (“SBA”) has announced that it is implementing a new process that allows Paycheck Protection Program (“PPP”) loan borrowers to request an SBA loan review of partial approval forgiveness decisions issued by their PPP lenders in cases where the PPP lender did not approve the full forgiveness amount requested by the borrower. According to the SBA’s procedural notice released on January 27, the review process applies to loan forgiveness decisions submitted by PPP lenders to the SBA through both the regular forgiveness process as well as the SBA’s Direct Borrower Forgiveness process. Under the new PPP procedures, when a PPP lender receives a loan forgiveness remittance from the SBA on a partial approval decision, the lender must notify the borrower that the borrower has 30 days from receipt of the notification to seek an SBA loan review of the lender’s partial approval decision. Within five days of receipt by the lender of a borrower’s timely request for an SBA loan review, the lender must notify SBA through the PPP Platform of the request. The SBA’s procedural notice specifies that, if the SBA selects the loan for an SBA loan review as a result of the borrower’s request, the borrower must still continue to make payments on the remaining balance of the PPP loan and the loan is not deferred. Click here for a copy of the SBA’s procedural notice.
Nutter Notes: The SBA’s procedural notice also requires all PPP lenders to notify each of their borrowers on loans that previously received a partial forgiveness remittance from the SBA as a result of a partial approval decision that the borrower has 30 days to seek an SBA loan review of the lender’s partial approval decision. These notices must be sent to borrowers within 30 days after the date of the SBA’s procedural notice. Within five days of a lender’s receipt of a borrower’s timely request for an SBA loan review, the lender must notify the SBA through the PPP Platform. The lender’s notice to the SBA of a borrower’s timely request for review must include a copy of the lender’s prior notice to the borrower of the reason(s) for the lender’s partial approval decision. When the SBA selects a lender’s partial approval decision as a result of a borrower’s request, the SBA will notify the lender that the SBA is reviewing the PPP loan. According to the procedural notice, if the SBA undertakes a loan review at the borrower’s request, it may determine that the borrower is entitled to forgiveness in an amount less than what the lender decided, an amount more than what the lender decided, or the same amount as the lender decided.
4. CFPB Issues New Guidance on Student Loan Servicers’ Loan Forgiveness Communications
The CFPB has issued a new guidance regarding the servicing of federal student loans, including Federal Family Education Loan Program and Perkins loans, for borrowers who may be eligible for Public Service Loan Forgiveness (“PSLF”). The CFPB’s s Compliance Bulletin and Policy Guidance issued on February 18, which applies to all federal student loan servicers, including banks, addresses the Limited PSLF Waiver announced by the U.S. Department of Education on October 6, 2021. The CFPB’s guidance notes that the Limited PSLF Waiver significantly changed the PSLF program’s eligibility criteria for a limited period of time. According to the guidance, the CFPB recommends that each student loan servicer consider enhancing its compliance management systems to ensure that all borrowers receive accurate and complete information about the Limited PSLF Waiver and to ensure that the servicer’s employees are facilitating borrowers’ enrollment. Such enhancements might include improving employee training to make sure that employees proactively identify borrowers who may be interested in pursuing a PSLF, and that employees accurately describe the PSLF program and the Limited PSLF Waiver, the associated benefits, the process for applying for a PSLF, using the Limited PSLF Waiver, and the need to act before the October 31, 2022, deadline. Click here for a copy of the CFPB’s guidance.
Nutter Notes: In response to the COVID-19 national emergency, the Department of Education announced in October 2021 that it would temporarily ease some PSLF program requirements to help many previously ineligible borrowers receive forgiveness based on their qualifying public service employment. According to the CFPB’s guidance, this Limited PSLF Waiver allows borrowers with Federal Family Education Loan Program and Perkins loans to consolidate into a direct loan and receive credit toward loan forgiveness under PSLF for periods of repayment on earlier loans. The Limited PSLF Waiver also provides the same benefit to existing direct consolidation loan borrowers according to the guidance. The guidance explains that the Limited PSLF Waiver credits any month that a federal student loan borrower worked in public service and was in active repayment towards the 120 payments required for PSLF, and is intended to address several common problems borrowers have experienced in obtaining loan forgiveness due to COVID-19. The CFPB’s guidance on student loan servicing communications emphasizes that borrowers who could benefit under the Limited PSLF Waiver must act before October 31, 2022. Specifically, to take advantage of the Limited PSLF Waiver, borrowers without direct student loans (such as Federal Family Education Loan Program and Perkins loans) must consolidate into a direct consolidation loan and then file a PSLF form certifying their previous public service employment according to the guidance. The guidance also notes that most student loan borrowers who have direct loans and want credit for previously non-qualifying payments will need to file PSLF forms certifying their previous periods of public service employment.
5. Other Developments: CECL, Equal Credit, and FDIC Regulatory Review
FASB Declines to Further Delay the Implementation of CECL for Smaller Institutions
The Financial Accounting Standards Board (“FASB”) has rejected a proposal to delay the Current Expected Credit Losses (“CECL”) accounting standard for banking organizations and other companies that have yet to adopt it. The decision made at the February 2 FASB Board Meeting means that CECL will become effective for smaller public companies and private companies, including banking organizations, on January 1, 2023. Click here for a copy of the decision.
Nutter Notes: The federal banking agencies previously issued an interim final rule in March 2020 that provided for an optional five-year transition period for the impact of the CECL accounting standard on regulatory capital and guidance on the temporary CECL relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. No further delays of the CECL implementation date are expected for banking organizations and other companies that have yet to adopt it. Click here for a copy of that interim final rule and click here for a copy of the agencies’ accompanying guidance, which clarifies the interaction between the interim final rule and the CARES Act.
Federal Banking Agencies Provide Guidance on Special Purpose Credit Programs
The federal banking agencies, together with a number of other federal agencies, have jointly issued guidance to remind banks and other lenders of the ability to establish special purpose credit programs to meet the credit needs of specified classes of persons under the Equal Credit Opportunity Act (“ECOA”). For example, ECOA and Regulation B permit lenders to extend special purpose credit that is made pursuant to a credit assistance program expressly authorized by federal or state law or pursuant to a credit assistance program offered by a not-for-profit organization for the benefit of its members or an economically disadvantaged class of persons according to the interagency guidance that was issued on February 22. Click here for a copy of the guidance.
Nutter Notes: The CFPB has previously issued an advisory opinion on special purpose credit programs to clarify what a lender must include in a written plan that establishes and administers a special purpose credit program under ECOA and Regulation B to benefit a specified class of persons. Click here for a copy of CFPB’s advisory opinion.
FDIC Announces 2022 Regulatory Priorities
FDIC Acting Chairman Gruenberg released a summary of the FDIC’s regulatory priorities for the coming year on February 7, which include a major revision of the Community Reinvestment Act rules and a review of the bank merger process. The FDIC also plans to seek public comment on guidance that would help banks prudently manage financial risks that climate change poses, and will consider guidance to the banking industry on the management risks raised by crypto-asset activities. Click here for a copy of the summary of regulatory priorities.
Nutter Notes: The announcement of the FDIC’s intention to review the bank merger process follows the adoption of a controversial bank merger Request for Information (“RFI”) by a majority of the FDIC’s Board in December, 2021, on the 1995 joint guidelines on the competitive review process issued by the DOJ and the federal banking agencies. Significantly, the FDIC’s RFI also requested comment on the approach for evaluating the convenience and needs of the community to be served by a proposed merger, including whether an “unsatisfactory” Community Reinvestment Act record is an appropriate standard, and the extent to which the federal banking agencies should differentiate their considerations when evaluating transactions involving large versus small banks.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at Chambers.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:
Thomas J. Curry
Tel: (617) 439-2087
Christine A. Docherty
Tel: (617) 439-2107
Kenneth F. Ehrlich
Tel: (617) 439-2989
Matthew D. Hanaghan
Tel: (617) 439-2583
Michael K. Krebs
Tel: (617) 439-2288
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.
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